In Focus – SCCCU Blog

Long-Term Care (LTC) Insurance is a policy that helps cover costs for home health aides, assisted living, nursing homes, adult day care, and rehab services, to name a few — services that aren’t covered by traditional health insurance or Medicare. An LTC policy can be one piece of your retirement planning puzzle, but it comes with trade-offs. Whether or not it’s right for you depends on your health situation, your financial situation, and how much risk you want to take as you age. After all, long-term care insurance is still insurance: protection you pay for but hope never to need. Here’s a rundown on the numbers.

A traditional LTC policy generally pays a daily or monthly benefit for a defined period (e.g., up to 3 years). You usually select an “elimination” period, which is a waiting period that must expire before the policy starts repaying you for what you’ve spent on the sort of care covered by the insurance. Your plan may also have limits on whether and how much it adjusts for inflation, as well as lifetime payment maximums.

Overall, the idea with LTC policies is that when/if you eventually need care, you’ll have a layer of protection without having to spend down a lifetime of savings. But they are often costly, especially if you purchase them later in life. Some hybrid policies can be more affordable. Let’s talk about both.

Why is Long-Term Care Expensive?
You may know people with traditional long-term care policies that seem affordable, but they probably bought them years ago (before underwriting tightened and costs rose). Since then, insurers that offered these policies have found that care is pricier and claims last longer (and occur more frequently) than expected. It became more difficult for them to make a profit. The result was big premium hikes pretty much across the board.

In terms of average cost, a 65-year-old woman seeking a traditional long-term care policy with $165,000 in benefits will pay $2,700 per year in premiums, or $225 per month. But if she wants a policy that adjusts for inflation (and pays more over time), she'll pay more. According to data from the American Association for Long-Term Care Insurance (AALTCI), that same $165,000 policy with benefits that grow at 5% annually costs approximately $6,700 per year, or nearly $560 per month. Additionally, you must keep in mind that the older you are when you apply for a long-term care policy, the more expensive it will likely be (and the harder it is to qualify).  According to the AALTCI, nearly half of all applicants between ages 70-74 are rejected, and if you wait to apply at age 65 compared to age 55, the same initial coverage will cost you 49.9% more.

Because of all of these challenges, many financial planners and insurance companies have pivoted toward hybrid policies, which are generally more expensive, but they come with guarantees that allow you (or your heirs) to recoup the money you’ve spent.

Hybrid Long-Term Care Policies: A More Affordable Option 
Hybrid long-term care is essentially a two-in-one policy: it pairs life insurance or an annuity with long-term care coverage. In the case of life/long-term care, if you need care, the policy can help pay for it. But if you don’t (or if you don’t use up the full value of the policy), your heirs will get a life insurance payout when you die — so it’s not “use it or lose it.” In the case of an annuity/long-term care policy, you purchase an annuity with a long-term care rider (a rider is a separate ride-along policy). If you need care, the rider provides a way to access a portion of the annuity’s value to pay for it; it may also increase your regular payouts if and when care is needed.

The cost of hybrid policies is also more predictable than traditional long-term care. Premiums on the latter can go up in the years after you buy the policy. With a hybrid, you’ll generally know in advance what you’ll be spending for the benefits you’ll get. Still, these policies aren’t cheap. What you’ll pay depends on your age, health, and how much coverage you want.

What Do You Need?
You do not need to insure every possible hour of care you might ever need. If you try to buy the “kitchen sink,” it will end up being prohibitively expensive and often unnecessary. The average amount of time someone actually needs long-term care isn’t usually very long at all. According to research from LongTermCare.gov, men need an average of 2.2 years of care, while women need an average 3.7 years, and only about 20% of all people will need care for five years or more. Given those numbers, you might decide you only need coverage for two to three years of care. Electing to buy a smaller slice of coverage will dramatically reduce your premium.

The fact remains that many people don't need a long-term care policy. They may have enough to cover a few years of care in savings, or they may have a built-in cash reserve in the form of a home. Many people hold enormous wealth in real estate, and home equity can be tapped into when needs arise.

Questions to Ask When Shopping for a Policy
When evaluating any long-term care policy (traditional or hybrid), consider the following questions:

• What’s the benefit period and benefit amount? How many years or months will it pay? What is the daily or monthly benefit amount, and will that cover the local home health or nursing home rates in your area?
• What’s the elimination (waiting) period? Most policies require you to pay for your own care costs for a period of time before your policy kicks in.
• Is there any inflation protection? Does coverage grow over time? How aggressively?
• Can my premiums increase, or can I hit a lifetime cap? With traditional long-term care policies, many insurers will have premium hikes. Also, some policies cap the total amount that they’ll pay for your care.

Weigh Your Own Risks and Needs
Long-term care insurance can be a useful tool that offers peace of mind, but it’s not the only path. For many people, the smarter move is to think in layers: perhaps a policy to cover a portion of your potential costs, or a hybrid policy, or maybe simply relying more on your savings and home equity. The goal is to strike a balance — protecting yourself enough to avoid panic, without overspending on coverage you may never use.