Long-term care insurance and retirement

As life expectancies increase, so does the need for long-term care. It may surprise you to realize that more than one-half of older adults are projected to need some form of long-term services and support after turning 65.

The median cost of a private room in a nursing home can exceed $100,000 a year, depending on where you live. The costs of long-term care can take a big bite out of your retirement income or deplete the assets you may want to leave to your beneficiaries. In fact, in many cases, mounting long-term care expenses can require your heirs to pay for your care. This is one of many potential risks you face managing your income in retirement.

Long-term care insurance

You may never need long-term care, but if you do, having a long-term care insurance policy can help protect your retirement assets from being drastically depleted over a short period of time.

Most long-term care policies provide a daily or monthly benefit amount that can be applied to a variety of settings, including:

• Home health care
• Senior day care services
• Hospice or respite care
• Assisted living facilities (also called residential care facilities or alternate care facilities) possibly including Alzheimer’s special care facilities
• Nursing Facilities

Comprehensive long-term care polices may also cover some at-home services such as:

• Skilled nursing care
• Occupational, speech, physical, and rehabilitation therapy
• Assistance with personal care such as with bathing or dressing
  

Coverage generally starts when a licensed health care professional certifies that you suffer from a cognitive impairment or you are no longer able to perform two of six activites of daily living (ADLs), such as eating, bathing, getting dressed, toileting, mobility and continence. 

Long-term care insurance is not for everyone. To decide whether it's right for you, keep the following parameters in mind:

If you have sufficient assets to set aside a large amount to pay for 3 to 5 years of care - whatever those costs may be in your area - then you may not need insurance coverage. Keep in mind, however, that those assets will need to be set aside specifically for long-term care use, that is not used for retirement income and allowed to grow to match the growing cost of care. 

Also realize that some people need long-term care due to the effects of disease (such as Alzheimer's or a stroke), not old age. This can mean starting care at a younger age and needing care for more than the average length of time. When considering purchasing a policy, look at your family's health history and ask yourself how likely you are to need long-term care.

Types of long-term care insurance policies

Generally there are four types of long-term care insurance policies. These can be categorized as: stand-alone long-term care insurance, asset-based long-term care insurance, life insurance with long-term care or chronic illness riders, and annuities with long-term care benefits. Another key factor to consider is how long-term care benefits are paid, either reimbursement of costs incurred or cash indemnity. Reimbursement benefits are the most common and pay for the actual care by a qualified care provider. Often carriers allow the provider to bill them directly (subject to policy limits). Cash indemnity or indemnity style benefits does not require a qualified care provider for benefits to be paid. Once you qualify for benefits the full monthly benefit is paid to you regardless of long-term care costs incurred (some carriers may require monthly proof of needing assistance with two out of six activities of daily living to continue benefits).

Each is examined below:

Stand-alone long-term care insurance.

These policies provide a pool of long-term care benefits to reimburse you for qualified long-term care expenses incurred when receiving care. These policies are designed to provide  benefits for long-term care events only, meaning no death benefit is paid nor is cash accumulated within the policy. Most policies require premiums to be paid for life (except while on claim) and the premium amounts are not guaranteed, meaning they can be subject to future increases. Premiums for "qualified" long-term care policies may qualify as a medical expense and be partially tax-deductible up to age-based maximum limits. Generally these policies provide the most amount of long-term care benefits for the premiums paid. These policies also allow for the most customization of features and benefits versus other types of policies. You can choose if your benefits are adjusted for inflation, customize how much and for how long benefits are paid, and if your benefits cover yourself or cover your partner as well to name a few. Generally, they provide reimbursement style benefits.

Asset-based long-term care insurance

These policies are designed to primarily provide long-term care benefits but also  provide a life insurance death benefit (less long-term care claims) to your beneficiaries all within the same policy. This type of policy typically provides long-term care benefits for one person and can be customized when selecting the long-term care benefit amount, how long coverage lasts, as well as adding inflation protection. Premiums can be paid either as a lump sum, over a period of time and are guaranteed not to change. Reimbursement or indemnity style benefits are available (pending carrier & product availability).

Life insurance with long-term-care or chronic illness riders

These policies are designed primarily to provide life insurance death benefit protection, and the long-term care rider or chronic illness riders allow the death benefit to be accelerated (accessed during lifetime) to pay for care expenses if needed. Depending on the underlying life policy you can design a policy to build cash value over the long term or to provide premium or death benefit guarantees. These policies do not have inflation riders, the monthly benefit amount is typically a percentage (2% or 4%) of the death benefit. The rider designs on these policies can vary widely, so it is important to examine the specific coverage offered. Reimbursement or indemnity style benefits are available (pending carrier & product availability).

Annuity with long-term care benefits

These policies are annuities funded with a single premium to leverage long-term care benefits. When used for qualified care expenses the benefits are income tax-free. Maximum benefits still apply. If not used for long-term care, any gains will be taxed at ordinary income rates when withdrawn by owner/annuitant or beneficiaries.

How much will it cost?

Regardless of policy type, all long-term care policy premiums increase depending on your age when you begin the policy. The older you are, the more your premium will likely be.

The annual cost of long-term care insurance also depends on a number of other factors, including:

Duration of benefits: This is the length of time the policy will pay for the care required. The shorter your benefit period, the less expensive the premiums will be. The average duration of long-term care services is three years. Opting for a three-to-four-year benefit period rather than a lifetime benefit may be a consideration depending on your specific situation.

Daily or monthly benefit: This is the dollar amount the policy will pay for the care required. If the actual daily or monthly care expense is greater than the daily or monthly benefit amount paid by the policy, you would pay the difference. The amount you choose will depend on what sort of care you want, where you'll receive it, and your ability to cover any excess expenses. 

Elimination period: This is a waiting period before your policy begins paying benefits. It can range from 0 to 365 days, and you will have to pay out of pocket until it ends. The shorter your wait, the higher your premium. Typically, 90 or 100 day elimination is chosen to co-ordinate with medicare if there is a qualifying hospital stay prior to needing care.

Inflation rider: This allows the benefit you choose today to grow by typically a compounded rate of return each year (3% or 5%).  If benefits likely won't be needed for 15 to 30 years, inflation may  be a concern.

Other issues that will affect the cost of your long-term care coverage include the range of care you choose, any pre-existing conditions, and provisions made for guaranteed renewability of your policy. Before choosing any provider or policy, you should carefully review your options and the policy's terms and conditions.