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.

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What Is Long-Term Care Insurance?

Long-term care insurance is a method of protecting yourself from the high cost of daily care that you may need in the future. Like life insurance or car insurance, you pay premiums for your policy each month, and the benefits only kick in as you need them. When you find that you can no longer care for yourself thoroughly and you require assistance to get through day-to-day life, your long-term care policy kicks in and covers some of your costs associated with that care. You may wonder, does long-term care insurance cover in-home care? What about assisted living?

Long-term care insurance can cover:

  • Nursing home care
  • Home-health care or an at-home nurse
  • Adult daycare
  • Assisted living facilities
  • Resident care
  • Alternative care
  • Respite care
  • Private rooms
  • Spousal rooms
  • Personal care
  • Choice in care homes
  • Occupational therapy
  • Rehabilitation

Long-term care insurance does not often include medical care such as doctor’s visits or hospital stays, but it covers most of the in-home or nursing home care costs. Your insurance will pay these costs when you've suffered an injury, developed a debilitating illness or disability or lost mobility as a result of aging. This coverage is for custodial care specifically and is not likely to cover the costs of your medical needs. For instance, prescription drugs, visits to the ER or surgeries would not be covered. Long-term care insurance protects seniors and those with disability and illnesses from the depletion of their savings and financial stability by providing the funding they need to get through each day with care.

Long-term Health Insurance for Medical Assistance

How does long term care insurance work for medical assistance? Long-term care services include medical and non-medical assistance, and it's essential to understand if the long-term health care insurance you’re considering covers these services. Long-term health insurance for medical aid will cover activities known as Activities of Daily Living or (ADL). As we mentioned above, the loss of the ability to complete two or more ADLs is often the trigger for your long-term care insurance coverage to kick in and start covering some costs. ADLs covered by long-term health insurance for medical assistance are:

  • Using the toilet
  • Bathing yourself
  • Transferring or moving yourself from one place to another (i.e. from the kitchen table to your couch)
  • Dressing yourself
  • Feeding yourself
  • Getting yourself enough water
  • The ability to control bodily functions

These activities measure a person's ability to care for themselves. It's easy to see how the inability to complete any of these activities means an individual needs help to get through their day. The level of care you may require depends on how many of these activities you cannot complete on your own. As such, an assessment of your ability to handle these ADLs might be necessary to determine what your care should look like. Long-term care insurance is there to cover costs when you cannot complete at least two ADLs, and no matter what level of care you require.

Long-term Health Insurance for Non-Medical Assistance

Long-term care services that are deemed non-medical are determined by activities that are referred to as instrumental activities of daily living or IADLs. IADLs include tasks that are a little bit more difficult but just as necessary to get through day-to-day life independently. These activities include:

  • Answering and dialing your phone (this is crucial in times of emergency)
  • Caring for your pets
  • Shopping for food and other necessities
  • Taking and managing medications
  • Cooking and cleaning up afterwards
  • General housekeeping
  • Taking care of your personal finances
  • Using transportation to get around town

These tasks aren't always necessary every day, but they are just as crucial as ADLs when it comes to taking care of yourself. Your ability to complete these tasks is an indication of how well you are able to take care of yourself. When someone is unable to take care of these themselves, care is needed. That care can come in many forms, including in-home care, care in an assisted living facility or care in a nursing home. All of these different types of care are extremely costly but can be covered by your long-term care policy.

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Who Needs Long-term Care Insurance?

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.

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Costs of Long-term Care Without Insurance

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.

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When To Buy Long-term Care Insurance

Long-term care insurance premiums become more expensive the older you get, but you also don't want to purchase a policy in your forties and pay into it for 30 years. Statistics show that 95% of all long-term care insurance claims are made by seniors over the age of 70 however, if you wait to purchase your policy at 70, your premiums will be much higher than if you did it sooner. Further, some insurance companies that offer this form of insurance require at least some health information before insuring you for long-term care. By the time you're 70 years old, your health may not be what it used to be, and you may not meet the health requirements to qualify for long-term care insurance.

So, When Should You Buy Long-term Care Insurance?

Experts recommend the best age for when to get long-term care insurance is between the ages of 55 and 65. Couples purchasing a joint policy may get the best prices and the most peace of mind from purchasing their long-term care insurance policy when they are between 55 and 60 years of age. Single seniors tend to get the best price and coverage between 60 and 65 years of age. This seems to be the perfect age range when it comes to getting long-term care insurance, and that will allow you to purchase an insurance policy that isn't going to break the bank, ensure you'll pass any health exams and get the coverage you need.

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Types of Long-term Care Insurance

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.

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State Partnership Plans for Long-term Care Insurance

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.

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Overviewing Costs and How to Get Long-term Care Insurance

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.

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Long-term Care Insurance Tax Advantages

When an individual or couple purchases long-term care insurance, there are significant federal tax advantages. So, how does long-term care insurance work in regards to tax advantages that benefit the insuree? There are two main ways to benefit from the tax incentives for purchasing long-term care insurance.

  1. When you pay your premiums, they can be counted as tax deductions. If you're a couple insured for long-term care, that's at least $2000 worth of tax-deductible spending.
  2. Benefits paid out by your long-term care insurance policy are non-taxable as well. Similar to how the Internal Revenue Service treats health insurance, any benefits paid out as a result of a long-term care insurance policy can be excluded from your income and will not be taxed as such.

For these tax incentives to apply, your long-term care policy must reach specific requirements:

  • Your policy must be guaranteed renewable
  • Your policy must not have a cash surrender value
  • Your policy cannot cover or reimburse costs that Medicare would cover

If your long-term care insurance policy meets these qualifications, you're looking at some pretty significant tax benefits when you're insured and yet another advantage to insuring yourself with long-term care coverage.

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Is Long-term Care Insurance Right 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.

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Our content is created for educational purposes only. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Everdays encourages individuals to seek advice from their own investment or tax advisor or legal counsel.


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