By Barbara O’Neill, Ph.D., CFP®, firstname.lastname@example.org
With an average U.S. life expectancy of 78.7 and many people living longer, the cost of long-term care is an increasing financial risk. The term “long-term care” refers to a wide range of services ranging from limited assistance at home with daily activities to admission to a nursing home for intensive medical care and support.
Everyone needs a long-term care plan. The risk of long-term care can be dealt with in three ways: retain it (people with a sufficient net worth can self-insure), avoid it (practicing healthy lifestyle habits is the best method but, unfortunately, there are no guarantees), or transfer it (i.e., pay an insurance company to handle the risk).
In the 1990s, more than 100 insurers sold long-term care (LTC) policies. Today, due to uncertainties about the cost of future claims, less than a dozen insurance companies sell LTC policies. The average annual premium for a 55-year old couple was $3,050 in 2019, with costs rising as people get older.
Do you need long-term care (LTC) insurance? Below are some guidelines to consider:
- A good rule of thumb, according to Kiplinger’s Retirement Report, is that no more than 10% of your annual income should be spent on premiums (e.g., $3,500 premium with a $35,000 income).
- The best time to purchase a policy is generally before age 60. If you wait too long, premiums increase and/or you could become uninsurable through some type of pre-existing condition. If you buy in your 40s or 50s, however, you could be paying premiums for a long time before coverage is actually needed.
- Couples often need long-term care insurance more than singles because, if one spouse ends up in a nursing home, it can greatly reduce the amount of assets left for the well spouse.
Below are some additional tips for purchasing long-term care insurance:
- Understand how you qualify for benefits. Coverage generally begins when a person is unable to perform a certain number of “activities of daily living” or ADLs (e.g., bathing, dressing).
- Purchase inflation protection to increase the amount of benefits over time. A “compound” inflation rider results in a larger benefit increase than a “simple” inflation rider, but it also costs more. The difference is that a simple inflation rider is calculated on the original benefit amount, while the compound inflation rider is based on the (inflation-adjusted) amount paid during the previous year.
- Choose an elimination period based on the number of days of care you can afford to pay for out-of-pocket. An elimination period is the amount of time between when care begins and when benefits are paid. Elimination periods can range from zero to 90 days to a 365-day waiting period for people who can afford to pay for a full year of care in exchange for a lower premium.
- Two additional key decisions are the length of time you will receive benefits (the range is one year to an insured’s remaining lifetime) and the benefit amount (often a specific number of dollars per day). The longer the benefit period, and the higher the policy benefit, the higher the cost.
- Contact your local SHIP (State Health Insurance Assistance Program) office for information and counseling about available LTC policies that are available in your state. In some states, this program has a different name such as SHINE in Florida and South Dakota. SHIP offices also have information about available Medicare supplement insurance.