Long-term care (LTC) for seniors can easily wipe out a lifetime of savings. Unfortunately, Medicare pays very little of long-term care, and Medicaid usually requires you to have very little assets and income before you can qualify. If you're looking for a way to cover the risk of needing long-term care later in life, long-term care insurance can offer an additional option in a landscape of limited options. However, it is expensive.
Long-term care insurance offers to cover part of your long-term care costs if you end up needing long-term care. There are two types, traditional (also known as standalone) LTC insurance and hybrid LTC insurance. With traditional LTC insurance policies, you'll pay a monthly premium for the coverage, which you may or may not actually end up needing. Hybrid LTC insurance policies combine coverage for long-term care with whole (permanent) life insurance. If you end up needing long-term care, those costs will come out of your death benefit (the payout to your loved ones under your life insurance policy). If you don't need long-term care, your death benefit will stay intact. While traditional LTC insurance follows a use-it-or-lose-it model, hybrid LTC insurance allows you to retain at least some of what you paid. However, hybrid LTC insurance tends to be more expensive.
Is long-term care worth it? Before you decide you need long-term care insurance, it's important to understand several points:
While it is true that many people will need long-term care when they get older (and insurance agents tend to underscore this fact), the question you should really be asking when you're considering LTC insurance is: Will you need so much care that it will be worth the amount of money you spend on premiums over the years? And a related question: Would you be better off simply saving that money?
Consider this example: Naomi buys a traditional LTC insurance policy at the age of 55. The policy provides benefits of $200 per day for nursing home care and $100 per day of home care, for up to three years. Naomi pays $300 a month for this policy. Naomi ends up needing significant long-term care: one year of home care, beginning at age 75, followed by one year of nursing home care. This means she paid $72,000 in premiums (over 20 years) and got $108,000 ($36,000 for one year of home care plus $72,000 for one year of nursing home care) in benefits. This seems to be a good trade-off for Mary, but consider whether she could have done better by just putting her $300 per month premiums in secure investments over those 20 years. Assuming an investment return of 5%, she would have been better off "self-insuring"—that is, setting aside money to use in the event of needing long-term care.
(For simplicity, this example ignores rising costs of care as well as rising premiums.)
For some people—typically those with high income and significant assets—long-term care insurance may be a sound idea. This is particularly true if LTC insurance is viewed as a safety net rather than as a financial investment. But even those who can afford it should be aware of the wide variation between policies and their offerings.
Given the large variation in policies, there really isn't a one-size-fits-all rule for when LTC insurance makes sense. But some consumer and financial experts recommend that you stay away from LTCI unless you can pay the monthly premium with no more than 5% of your income. When calculating this 5% figure for future years, bear in mind that your premiums are likely to rise at least a little over the life of the policy, while at some point—for many people, when they formally "retire"—your income will probably drop.
It's helpful to be aware of the history of long-term care insurance. Historically, the performance of LTC insurance policies (such as the ones sold in the 1990s) has been quite poor:
In these situations, LTC insurance failed to live up to its promise to help people avoid using up their savings or relying on Medicaid to pay for long-term care. In other words, it was a lousy investment.
In response to pressure from consumer groups, embarrassing media exposure, and increased competition from other insurers joining the market, LTC policies have improved somewhat in recent years. These improvements include clearer terms and conditions, which give consumers a better idea of what to expect for their money. Many policies now offer extended coverage to include some types of assisted living residences in addition to regular nursing facilities. A number of policies permit elders to use a pool of benefit funds for either home care or residential long-term care, rather than only for one or the other. Requirements to qualify for benefits have also loosened somewhat, and policies now routinely permit the policy holder to "step down" to lower levels of coverage, for a lower premium, if continuing to pay for the higher benefits becomes too financially burdensome.
If you do decide that LTC insurance is worth it for you, look closely at the available options. In particular, ask the following:
With LTC insurance policies, which offer a large range of terms and benefits, it pays to comparison shop. For more detailed help in evaluating long-term care insurance, as well as understanding your long-term care options at large, Long-Term Care: How to Plan & Pay for It, by Joseph Matthews (Nolo), is a comprehensive guide.