How Does Long-Term Care Insurance Work?

Those looking to the future and preparing for potential medical costs may question how does long-term care insurance work, and do I need it?

Long-term care insurance is a form of insurance that helps cover your costs if you have a medical condition that needs round-the-clock care. Such illnesses and injuries often require nursing home care, in-home health care, or adult daycare, and all of these services can be pretty costly, cutting into your retirement fund and savings. Long-term care insurance can prevent that by providing much of the funding you need to manage your condition while at the same time offering more options and coverage than Medicare.

For instance, if you develop severe arthritis, and it impedes your ability to bathe yourself, cook food, or even get out of bed, you would require constant support to get through your day. A long-term care home or a home nurse might be necessary. These are expensive services, especially when you want to have some say in how you receive your care. Public assistance programs like Medicaid aren't accepted in all long-term care homes, so your choices are limited if you don't have long-term care insurance. With a good long-term care insurance policy, most of your costs for long-term care are covered. Long-term care insurance usually kicks in when you can no longer do at least two activities of daily living (ADL), which we’ll discuss in more detail below.

If you're 65 and older, you have a 70% chance of requiring long-term care at some point in your future. Most Americans will face the need to pay for long-term care in their lifetime, and 1/5th of Americans will require long-term care for longer than five years. Five years in long-term care is an astronomical expense, especially when you consider the fact that the average month of care in the USA costs over $7,000. After five years, your bill is well into six figures and can cripple any financially stable family without insurance.

Who needs long-term care insurance and why? The truth is, you'll never know when you need such care as these services aren't just reserved for retirees and seniors. Accidents, illness and injury can happen to anyone at any age, and it can result in the need for long-term care as you recover or adjust. As such, few Americans won't benefit from obtaining long-term care insurance. Some hereditary conditions may further incentivize individuals to get long-term care insurance, so if you have a family history of stroke, dementia, Parkinson’s disease, osteoarthritis or other genetic diseases, long-term-care insurance can especially be a source for peace of mind. There is no way to determine who might need long-term care in the future and who might not. The need for long-term care insurance affects us all. This type of insurance is beneficial no matter your medical background, gender, race or profession.

Long-term care costs without insurance are enormous, but can public assistance programs like Medicaid help cover the costs? While the answer is yes, there's a pretty big caveat: Medicaid is a system designed to benefit those who don't have the resources to pay for these services. If you have a savings and retirement fund that you worked hard to build, Medicaid will count that as an asset. Unfortunately, your assets would have to be close to nil to qualify for this coverage. That means that to benefit from Medicaid long-term care, you'd have to spend all you have before you are even eligible.

So, if long-term care can cost an average of $7,000 per month, as we established above, and you need long-term care for five years, you're dishing out $420,000 by the time all is said and done. This enormous amount of money is enough to destroy your retirement plans and rely on public assistance for the rest of your life. Purchasing long-term care insurance is the best way to ensure this doesn't happen and to have your care covered and assets protected at the same time.

Long-term care insurance policies come in two main types, Traditional and Combination or Hybrid policies.

Traditional long-term care insurance policies are for long-term care alone and function like most other insurance policies you have for your house, your car, and medical/dental. Premiums are paid to the insurance company until such time as the benefits of long-term care health insurance are needed. If the benefits are never required, the insurance company keeps the premiums. In some cases, a death benefit may be paid out to a beneficiary in the event the insured passes away before using all of their insurance coverage.

Hybrid or Combination policies offer a pairing of long-term care insurance with annuity or life insurance. Life insurance policies with long-term care benefits mean that you're not just paying premiums into a policy you may never use. Those premiums turn into a death benefit when you pass away whether you use your long-term care coverage or not. Similarly, an annuity paired with a long-term care rider ensures your premiums are not wasted and lost to the insurance company if you don't need long-term care. Whatever coverage you don't use turns into a death benefit for your beneficiaries.

State partnership plans for long-term care insurance are a way that you can combine and benefit from both private long-term care insurance and Medicaid. In some states, Medicaid and private insurance companies have partnered up to promote the purchase of long-term care policies. Partnership policies can offset Medicaid's asset limit to determine if you qualify for long-term care coverage. For instance, you can purchase a qualified long-term care policy that pays out $150,000 in long-term care benefits. With this payout, you will have qualified to add $150,000 worth of assets to Medicaid's asset limit for qualification in their long-term care coverage. If you benefit from Medicaid’s long-term care insurance during your life, once you pass, Medicaid can seek repayment from the deceased's estate of any funds paid out for long-term care. Through this partnership program, the asset protection you earn extends past death and blocks Medicaid from using said assets for repayment. These state partnership programs aim to increase the number of people who purchase long-term care insurance coverage while at the same time relieving some of the financial burdens of long-term care faced by Medicaid. If you're ready to start looking for long-term care insurance, this is a great option that makes coverage of this sort more accessible and affordable for anyone.

Long-term care insurance can be costly depending on the age at which you purchase it. The younger you are, the lower your premiums will be. Annual premiums will be different, as well, depending on your marital status, your health, which insurance provider you have chosen and the details of your coverage. The price of your long-term care policy can also change in your lifetime and will likely increase from time to time to adjust for changes in long-term care trends and pricing. If you're a 55-year-old male, unmarried and you're in good health, you're looking at an average annual premium of about $1500-1800. Coverage like this should give you approximately $160,000 in benefits, depending on your policy. Your coverage will compound each year by 3%. Once you add a spouse into the equation, you can expect to pay just under double the average for a single man. A single, 55-year-old woman could pay around $2500. The cost of your annual premium rises with age and health considerations, but it's still a worthwhile price to pay for the peace of mind long-term insurance affords you.

The question is now, how to select long-term care insurance. The first step we recommend for finding the right long-term care policy for you is to look into whether or not your state has a state partnership plan. These partnerships are a great way to save money on your long-term care insurance. From there, do your research on different insurance providers, compare and contrast the coverage they offer vs. the cost and choose the policy that makes sense for you.

You’ll have to weigh the costs vs. benefits of long-term care insurance, as well as your unique situation to determine the need for long-term care insurance, and if it's right for you. Long-term care insurance buys you peace of mind, especially if you're a senior with assets to protect. It's a great way to prepare for the unknown and ensure that you get the care you need should you need it.