America is going gray at an unprecedented rate. According to the U.S. Census Bureau, the number of Americans ages 65 and older measured 58 million in 2022 and is expected to rise to 82 million by 2050 (a 47% increase). Unfortunately, the downside of advancing age is that it is often accompanied by declining health, hence the heightened need for long-term care planning. More people than ever before are expected to require long-term care services and rely on those services for an extensive period. In addition, healthcare costs tend to rise more quickly than general inflation, which raises the question of how to pay for long-term care services. Can you self-insure, or should you purchase insurance coverage? How will you manage a long-term care need?

What Is Long-Term Care?

Long-term care services are those that are important for the quality of your life as you age. You might find yourself needing help with activities of daily living, such as bathing, dressing, eating, transportation, medical care or any activity that you cannot perform on your own. These services are usually offered through home care providers, nursing homes, assisted living facilities, respite care programs and adult daycares.  

What Are the Costs?

The cost of care depends on the location and extent of the care. Assisted living facilities, full-time nursing homes and full-time in-home care are the costliest options. According to Genworth’s Cost of Care Survey, by 2040, the national average cost for an assisted living facility is projected to be $93,195 per year, with a private room in a nursing home facility expected to cost up to $191,177 per year. The expenses could be much higher or lower based on where you live.

How to Pay for Long-Term Care?

Those in need of care usually turn to family for help. As of 2020, approximately 41.8 million Americans were providing unpaid care for a family member.1 Those who do not wish to or cannot rely on family for help may seek support from their health insurance; however, health insurance (including Medicare) will not cover long-term care services. As a result, you more than likely rely on your financial assets, long-term care insurance or Medicaid. Medicaid is a needs-based program that is viewed as a last resort as the eligibility requirements are very stringent. To meet the eligibility requirements for Medicaid, you more than likely relinquish most of your assets prior to receiving benefits. Each state has its own exemption amount; however, most states allow patients receiving Medicaid benefits to exclude only $2,000 of their assets to qualify.

Long-Term Care Insurance

One way to cover the gap between the high costs of care and available money is to purchase long-term care insurance (LTCI). For individuals seeking to purchase coverage, the American Association for Long-Term Care Insurance recommends that individuals purchase long-term care policies while in their 50s or early 60s. While this is potentially two or more decades before you may actually use the policy, you are more likely to receive favorable underwriting and have more coverage and policy options, which can include important riders—insurance policy provisions that often expand coverage—such as inflation protection, increased benefit pools, shared care and return of premiums. In addition, aging comes with unexpected health issues that could cause you to become temporarily or permanently uninsurable. It’s best to purchase LTCI while you are healthy. 

Types of LTCI Policies

Traditional Policies:

Traditional policies (“pay-as-you-go” policies) require annual premium payments and do not accumulate a cash value. The advantage of this type of policy is that the cost per unit of benefit is very low. So, if you go “on claim” soon after purchasing the policy, you can immediately recoup your premium outlay. In addition, these policies are generally considered “qualified” for tax purposes, and the premiums may be considered a medical expense for tax deductions. 

The primary risk is that your premiums can be increased by the insurance company if approved by the state’s insurance commissioner. The premium increase puts policyholders in a tough position. Do they continue paying the premiums with the risk of the premiums being increased again, let the policy lapse, or agree to reducing benefits or removing key features such as inflation riders that adjust benefits based on the rising costs of care? 

Hybrid policies:

Hybrid policies are typically life insurance policies with a long-term care benefit rider. The life insurance portion is minimal, but the long-term care benefits can be three to five times the death benefit, depending on age, health, and insurability. The primary advantage is that the premium is fixed and cannot be increased, so there are no premium increase surprises down the line. Additionally, there are annuity options, currently with limited medical underwriting for insured persons with medical conditions. 

The primary disadvantage is that there are two types of riders: a traditional long-term care rider and a critical illness rider. The riders are very similar in nature; however, the premiums are not “qualified” on a critical illness rider. Previously, most hybrid policies had to be paid upfront in a large single payment to receive the highest benefit limits. However, current policies now feature multiple premium structures such as single pay, limited pay (paid over a fixed number of years), and life pay (paid for as long as the policyholder is alive). In the past, this substantial outlay could be cost-prohibitive for many individuals with modest resources who had to allocate their capital toward other priorities such as retirement, real estate, education, or debt repayment. However, given the new premium structures, hybrid policies have become very popular recently.

Partnership policies:

Partnership policies are comparable to traditional policies and are designed for those with modest resources who will likely rely on Medicaid for long-term care. Partnership policies allow you to keep a portion of your financial assets based on the asset pool reserved for long-term care services in your policy and still qualify for Medicaid.

Reimbursement vs. Indemnity

Another factor to consider when choosing a long-term care policy is the payment of long-term care benefits. There are two payment types: reimbursement and indemnity. Understanding the difference is important when selecting a policy, as it could lead to additional responsibilities and expenses, as well as increased tax liability.

Reimbursement policies:

Reimbursement policies are generally less expensive but require the insured to pay the expense once “on claim” and then submit receipts to the insurance carrier for reimbursement. This method ensures that only qualified expenses are reimbursed, which reduces the potential for misuse of the funds and eliminates the need for extra tax filing by the insured. However, reimbursement can be slow, with a long lag between incurring the long-term care expense and repayment.

Indemnity policies:

Indemnity policies while generally more expensive, send funds directly to the insured once “on claim” without having to submit receipts with the insurance carrier. This expedites the usage of the policy benefits but places the onus of tracking bills and payments on the insured or caregiver, increases the potential for misuse of the funds, and requires additional annual tax reporting. 

What to do Next?

Planning for long-term care is personal, and the information shared above is only a sample of what’s available. Your next step is to learn more about long-term care and coverage options. The Shopper’s Guide to Long-Term Care Insurance and 100 Must-Know Statistics About Long-Term Care are excellent places to begin your research. If you have any general questions about long-term care insurance or would like us to review your current policy, please contact us at your earliest convenience. If purchasing a new long-term care policy is appropriate for you, please reach out to your adviser.

  1.  https://www.morningstar.com/personal-finance/100-must-know-statistics-about-long-term-care-2023-edition ↩︎

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