What do you know about Long Term Care (LTC) insurance?
You’ve probably heard this: don’t bother. It’s too expensive and doesn’t cover much, and you’d be better off self-insuring and hoping for the best.
Or maybe you’ve heard the opposite: LTC insurance will give you peace of mind. It’s worth the cost to know you won’t be overburdening your children if you ever require care.
Knowing nothing about LTC insurance beyond those competing snippets of advice, I set out to learn the ins and outs.
Now 59, I hope to maintain my health, and my marbles, for many years to come. But what if I don’t? What if illness or dementia render me incapacitated?
Most of us will need care at some point. According to the U.S. Department of Health and Human Services, someone turning 65 today has a 70% chance of needing some form of care in their remaining years.
This stat looks shocking in graphic form:
So what if I end up as one of the 70%?
Under NO circumstances do I want to be a burden to my children. I’d rather die than have them responsible for my day to day care, or have them risk their own financial health to pay for my home health aid or nursing home stay.
So I have a choice, as I’m working to pay down debt and put myself on solid financial ground in preparation for eventual retirement:
I can spend a lot of money on LTC insurance, or
I can invest that money instead, and hope for the best.
One option is to instruct my kids to sell my house if I end up needing care, and use the proceeds to put me in a studio apartment with round-the-clock care (my house is currently worth somewhere around $1 million and my mortgage will be paid off in seven years, or less if I can find more money to throw at it – maybe the money I would otherwise spend on LTC insurance).
If, God forbid, I need more specialized care that only a nursing home can provide – something I really, really, REALLY hope to avoid (don’t we all) – they’ll blow through the proceeds of the house and other assets, and then rely on Medicaid, with all its limitations.
Hopefully I’ll die first.
Still, you never know. What if I develop Alzheimer’s and at-home care isn’t sufficient? What if I end up with complicated medical needs?
What if, what if, what if …
And that’s the crux of it, of any insurance. What if something bad happens? Does Long Term Care insurance make sense?
Since I knew next to nothing about LTC, I decided to dive in and learn the basics.
Working With an LTC Insurance Agent
I started my educational journey simply by googling “Long Term Care Insurance.” That search brought me to the American Association of Long Term Care Insurers, where I found a link to Mary Ann DeKing at Plan and Care.
Mary Ann is a broker specializing in LTC (you can’t buy an LTC policy independently – you need to go through a broker). Her website describes her as “the nation’s leading expert on LTC insurance.”
She’s licensed in every state in the U.S., and as an independent agent, she represents the 15 or so companies that currently offer LTC (in the 1990’s, 144 companies sold LTC insurance; now only 15 do).
I had two conversations with Mary Ann for a total of 2 1/2 hours. She was awesome – she explained everything, showed patience with me and my many questions, and gave me options by running numbers for different scenarios.
Note: I do NOT have an affiliate agreement with Mary Ann or her company. I just thought she did a great job.
Here are the basics of what I learned.
Two Types of LTC Policies
There are two kinds of LTC insurance: the Cadillac version and the Chevy. For people with considerable assets, hybrid policies cost more and provide benefits beyond those of traditional plans. For people like me, with less available money for premiums, traditional policies make more sense.
At the higher end, hybrid policies cost a significant upfront amount. They work like a combination of LTC insurance and whole life. If you never need the care, your heirs get the amount you paid in as a death benefit. As life insurance only, that would be a terrible choice, as you could invest the money and end up with a whole lot more.
However, if you end up needing nursing or other care, the policy pays way more than what you paid in premiums.
Given my financial situation, with most of my net worth in my home and not all that much in liquid assets, Mary Ann steered me toward a traditional LTC policy – the Chevy option.
A traditional policy is more like term life insurance. You buy a term – say, three years – and you pay your premium every month in exchange for the promise of a certain amount of benefits.
If you need the care, you get the benefit, and you (or your kids) will be happy you bought the policy.
If you don’t end up needing it, oh well.
As with most insurance, if you don’t use it, you don’t get your money back. Just be happy you’re healthy!
Let’s say your plan provides a $3,000/month benefit for three years. If you require an in-home aid a few hours a day, costing less than $3,000/month, you can keep getting the benefits after three years, until the total amount is used up.
You can’t spend more than the $3,000/month, however. So if care ends up costing $4,000, you pay the extra $1,000 out of pocket.
The rest of this article will focus on traditional plans; contact Mary Ann or another broker if you want to learn more about hybrids.
Tax Benefits of Traditional Policies
With traditional policies, you can deduct the premium from your tax return if all your medical expenses, including the LTC premiums, exceed 10% of AGI (adjusted gross income).
If you’re self employed, as I am, you don’t have to meet that 10% threshold for deducting the premiums (with some age limits).
Also, if you need the care and receive benefits, they are not taxed.
What Periods of Time Does LTC Cover?
Before talking to Mary Ann, I had this vague idea that LTC policies lasted a long time, providing, say, 10 years of coverage or more. But most traditional policies are for a much shorter term of two or three years.
Why pay all that money in premiums for just two or three years of coverage?
We’ve all heard stories about elders suffering from Alzheimers and needing years and years of nursing care. On average, though, if you do need care, you’ll need it for a shorter period of time.
Women (of course!) need more care – 3.7 years on average vs 2.2 years for men.
Looking at that another way, though, women generally need only 3.7 years of care – not ten or fifteen – and men need only 2.2.
So if you take out a Long Term Care policy with a term of two years, a lot of your care is covered. If you take out a policy for four years, you’ll be all set (on average – you or I could be unlucky and require care for longer, or we could hit the health jackpot and not need it at all).
Unlike term life insurance, there’s no end date on LTC. You can pay your premiums for the rest of your life. The benefit period begins when you need it to.
When Can I Tap Into My LTC Benefits?
Mary Ann tells me that you can tap the benefits if you need help in two or more areas of daily living: bathing, dressing, and cooking, for example.
I’ve heard horror stories about people paying out the nose for LTC insurance only to be denied coverage. Mary Ann says she’s seen benefits denied only when paperwork for the claim was done incorrectly.
I’d like to know more about that – how complicated the process is for submitting claims, how often they’re denied, and what it takes to correct paperwork if denied. Something to ask in my next conversation with Mary Ann!
What Does LTC Insurance Cover?
You can use the funds to pay for an in-home aid, in-home nursing, or nursing home care – from someone to help you clean and grocery shop all the way to round-the-clock dementia care.
Running the Numbers
After I got a primer on LTC and began to understand the basics, Mary Ann reviewed my health history (LTC insurance will be harder to get if you smoke, drink to excess, or have a history of cancer, heart disease, or other illnesses), and my family history.
Then she plugged my info (including age, gender, income, where I live, and more) into a handy-dandy calculator she can access on her website, and ran some numbers.
There are all sorts of variables you can plug in that change the cost.
Do you want inflation coverage, so as the cost of care rises, the amount of your benefits rise by 2%, or 3%, or whatever percentage you plug in? This makes so much sense, because we all know the cost of nursing or other long term care isn’t going down.
But ca-ching, more money out in premiums each month.
Or what if you want a longer term of coverage, and therefore more overall in benefits? Plug it in, see the higher premium.
If I bought the bare minimum plan – $125/day of coverage ($3,750 month), for a term of 730 days, I would pay $99.63/month in premiums.
This includes no inflation rider, so even if the costs of care increased significantly by the time I needed them, the benefit would remain the same.
Well, $125/day won’t cover the cost of nursing home care, but it would go a long way towards defraying the cost of an aid coming to the house a few hours a day.
If I increased the benefit to $4,000/month for a term of 2.4 years, with a 2% inflation rider, the cost rises to $203.73/month, or possibly, if the company determines that my health is very good, I might get a preferred rate of $173.18/month.
That’s double the cost of the bare bones plan for not all that much more coverage – except for the inflation protection.
There’s also something called a Professional Home Care rider, for an extra $5/month. If I use care at home instead of in a nursing facility, the benefit increases from $4,000 to $8,000/month. This rider kicks in only if I hire a nurse or other skilled professional. It doesn’t cover home health aids.
Cost of LTC Insurance vs. Investing the Premium Amount Instead
So let’s do some comparisons.
If I need care, say 15 years from now, for two years, I will pay a total of $17,993.40 in premiums:
$99.63/month x 15 years = $17,993.40
My benefits will total $91,250:
$125/day for 730 days = $91,250
If I invested $99.63 a month at a presumed 8% return, after 15 years I’d have a total of $33,951.76.
So $73,256.60 (total benefits of $91,250 less total premiums of $17,993.40) vs. $33,951?
A good deal if I need it. Money out the window if I don’t.
State by State Benefits
LTC insurance changes significantly depending on where you live. In low cost of living areas your premiums will be less. If you live, like I do, in a high cost of living city, your premiums will rise.
Because I live in Massachusetts, there’s another reason I should consider buying a policy.
Massachusetts is the only state in the nation protecting policy holders from having to first sell their home before receiving Medicaid benefits for nursing home care.
The policy must meet certain requirements, including a minimum of 730 days of care with a benefit of $125/day (hence my barebones policy).
The only problem is you can’t use those benefits for home care first, just for nursing home care.
Check the regulations in your state. Several are “partnership states,” which protect a portion of policy holders’ assets.
Premium Rates Aren’t Guaranteed
One thing to consider in making an LTC decision: the premium you’re quoted could possibly rise.
According to Mary Ann, this doesn’t happen often, but it’s possible. That doesn’t make me feel secure!
To Buy LTC Insurance or Not?
I still haven’t made my decision.
I’m currently in pay-down-debt-aggressively mode. And paying tuition for my older daughter and thousands in dance training costs for my younger.
So money is tight, and I’m not sure an LTC plan of two years with no inflation protection will give me all that much peace of mind – even with the home protection provided by Massachusetts law.
On the other hand, defraying the costs even somewhat would be a huge help.
What would you do?