For Laurie Craigen, the realities of senior medical costs hit hard when her grandmother needed hospice care.
“It was a stressful time for the family because we were trying to figure out how to keep her comfortable and at home without running out of funds,” recalls Craigen, an associate professor in the mental health counseling and behavioral medicine program at Boston University’s Chobanian & Avedisian School of Medicine.
The family used the equity from Craigen’s grandmother’s home to cover the cost of hospice care, but if she had lived just a little longer, the money would’ve run out. That was a turning point for Craigen.
“If I can’t take care of myself, I don’t know if there are people who feel a responsibility for me in the same way I did for my grandmother,” she says.
Craigen’s solution: investing in long-term care insurance.
[READ: What Is an Aging Plan and How to Make One]
What Is Long-Term Care Insurance?
Long-term care insurance policies, sold by private insurance companies, are designed to cover the costs of long-term care needs and services you may incur later in life.
“Most long-term care is not medical in nature but includes help with the tasks of daily living, like bathing or dressing or preparing meals,” explains Whitney Stidom, vice president of sales enablement with eHealth Inc., a health insurance broker and online resource provider headquartered in Santa Clara, California. “Long-term care services can be extremely costly, and many individuals and families cannot afford to pay for them without assistance.”
Assisted living, for instance, averages $70,800 annually, according to Genworth and CareScout’s 2024 Cost of Care survey. A home health aide costs about $77,800 per year, and a private room in a nursing home runs just over $127,750 annually.
[READ: How to Make the Transition to an Assisted Living Community Easier]
What Does Long-Term Care Insurance Cover?
Most long-term care insurance policies include some coverage for services such as:
The keyword here is “some,” as no long-term care insurance policy will cover all the expenses you’ll encounter in retirement.
For example, long-term care insurance won’t cover rent at a care facility like assisted living unless have a health-qualifying need, such as dementia, cancer, cardiovascular disease or another chronic condition, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance in Westlake Village, California.
[READ: 9 Steps to Plan Ahead for Long-Term Care]
What Long-Term Care Insurance Doesn’t Cover
Depending on the policy, long-term care insurance may not cover:
— Rent, unless you have a qualifying medical need
— Care provided by family members
— Expenses that Medicare or a private health insurance plan pays for, such as a hospital stay or surgical procedures
[READ: 7 Signs It’s Time to Move to a Senior Living Facility]
Types of Long-Term Care Insurance Policies
There are two main types of long-term care insurance policies: traditional and hybrid. Here’s what to know about these two approaches.
Traditional long-term care insurance policies
Also called stand-alone long-term care insurance, these policies pay out when the bearer needs support and care related to chronic illness, aging or disability. It covers the expenses of home health services, assisted living and nursing home care.
These policies have a set benefit amount, which is the maximum amount the policy will pay per day or month for the long-term care services covered. Some policies include inflation protection so that benefits can keep pace as costs increase year over year.
These policies also have a set benefit period during which the benefits will be paid. The longer the benefit period, the higher the premiums typically run. There are also usually elimination or waiting periods before benefits kick in. In a sense, this is like a deductible in that you’ll be responsible for the full cost of care during the waiting period, which is usually between 30 and 90 days.
Stand-alone policies usually have a “use it or lose it” rule, which means if you don’t end up needing long-term care, the money you’ve paid into the plan is forfeited.
Some top providers of stand-alone long-term care insurance include:
— Northwestern Mutual
— Genworth Financial
— Mutual of Omaha
— Bankers Life
— State Farm
— New York Life Insurance
Hybrid insurance policies
Hybrid long-term care insurance — also known as a link benefit policy — covers long-term care but also pay a benefit to your family or another designee after you die. They can be written as riders that attach to a life insurance policy or as fully hybrid policies that include both long-term care and life insurance benefits.
Unlike conventional long-term care insurance which doesn’t allow you to get any money back on the policy if left unused, hybrid policies offer a death benefit to beneficiaries if they die without needing long-term care.
Hybrid policies tend to have higher premiums than conventional stand-alone policies and are less likely to have inflation protection options.
There are many different types of hybrid plans, and exactly how they work and what they cover can vary greatly depending on the specific policy. Some of the top providers of hybrid long-term care insurance include:
— Northwestern Mutual
— MassMutual
— Pacific Life
— Lincoln Financial
— Nationwide
— Fidelity Investments
If you’re comparing companies and policies, Marc Cohen, co-director of the LeadingAge LTSS Center at UMass Boston and a professor of gerontology at the University of Massachusetts, Boston, recommends looking at the company’s Standard & Poor’s rating — a credit rating assessing the company’s creditworthiness.
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How Much Does Long-Term Care Insurance Cost?
The cost of long-term care insurance policies depends on the plan you purchase and other factors, such as your age at the time of purchase.
Long-term care insurance costs vary widely based on age, gender, health and coverage level. Costs increase with age, and women typically pay more due to longer life expectancies and higher likelihood of needing care. For example, average premiums for a 65-year-old single male can be around $1,700 to $3,280 annually, while a 65-year-old single female might pay $2,700 to $5,290 per year.
“A couple buying an average policy would save $1,000 a year by buying at age 50 versus waiting until age 60,” Slome points out.
Craigen pays $425 per month, which is automatically deducted from her account. It is expensive, she says, but because she started paying in her early 40s, she’ll be finished with the term payments by the time she’s about 65. She views it as an investment in her and her family’s future.
Here are some average annual premiums and cost projections based on age as calculated by the American Association for Long-Term Care Insurance. These figures are based on Illinois pricing, but keep in mind that pricing can vary by state. Policies with a higher benefit level will also likely cost more.
[CHART]
Is Long-Term Care Insurance Worth It?
For Craigen, the answer to this question is a resounding yes. Witnessing how challenging it was for her grandmother and her parents to face the expenses of increasing health care needs motivated her to find a way to take care of herself.
“It’s comforting to know that I’m prepared,” she says.
Your priorities, needs and potential challenges could look quite different, but for many people, having a long-term care insurance safety net can help them feel ready to face whatever life throws at them.
Who Needs Long-Term Care Insurance?
Long-term care insurance can help individuals who are concerned about how they’ll take care of themselves later in life.
If you have a chronic health condition, it’s even more important to make a plan to ensure you have the money to care for yourself later in life.
If your financial situation puts you in the middle — you probably won’t be able to save enough money to cover the rising costs of care, but you’re also unlikely to qualify for Medicaid — you may also benefit from taking out a long-term care insurance policy.
Determining whether long-term care insurance makes sense for you is highly personal, and you should discuss this option with your family and a financial advisor.
Who might not qualify for long-term care insurance?
The National Council on Aging reports that not everyone should expect to be approved for a long-term care insurance policy, as these policies often have age and health restrictions.
Because the benefits such policies pay out can be so high, the companies providing them take pains to verify eligibility criteria for each applicant. Disqualifying factors include:
— Health conditions. Preexisting medical conditions and disabilities, such as Alzheimer’s disease, Parkinson’s disease, multiple sclerosis, kidney failure, obesity, cancer, diabetes, high blood pressure and other chronic conditions, can make it challenging to get coverage.
— Age. The older you are, the more difficult it becomes to purchase a long-term care insurance policy. According to data from the AALTCI, only 12% of applicants aged 40 to 48 were denied or deferred in 2021, but 47% of applicants aged 70 and older were declined coverage.
— Risk factors. Substance use issues, such as drug dependence, smoking and a history of alcohol use disorder, can disqualify an applicant. Individuals who have mild cognitive impairment or those who need assistance with the activities of daily living may also be denied as high-risk candidates.
When to Buy Long-Term Care Insurance
As mentioned, if long-term care insurance sounds like the right plan for you, then “yesterday” is the simple answer for when you should buy it.
“You’re much better off buying the policy when you’re younger because it’s a policy that has what’s called an age-rated premium,” Cohen emphasizes. “It’s priced so that the premium stays level as you age,” provided the assumptions that went into calculating the price were correct.
However, it is possible that your rates could increase in the future, depending on the specifics of the policy. Be sure to double-check the fine print to understand how your policy and premium payments might change over time.
How to cancel a long-term care insurance policy
Traditional long-term care insurance policies are typically structured as “use it or lose it,” meaning that if you stop paying your premiums, you forfeit the money you’ve accrued and the policy is effectively canceled. But some hybrid policies offer the option to cancel the policy and receive some or all of the money you’ve paid in, depending on how the policy is written.
If you anticipate that you might want to cancel your policy at some point in the future, or your financial situation changes and you’re no longer able to meet your premium payment, contact the company that issued the policy to find out what your options are for canceling or selling the policy.
[Read: Assisted Living Costs: A Guide to Expenses and Payment Options]
Pros and Cons of Long-Term Care Insurance
There are plenty of pros to long-term care insurance, including peace of mind, Craigen says. She knows that as long as she keeps making her monthly payments, she will be able to afford whatever care she needs down the road, and her policy has an option to tap into funds if she needs them before retirement.
However, there can be some cons to long-term care insurance. Plans can be pricey, and keeping up with monthly payments may be difficult if your employment situation changes or you face other financial challenges.
You also have to make sure you fully understand what’s covered by the policy you’re purchasing. There can be a wide range of costs and benefits, so compare each policy and make sure you know what you’re signing.
Are there any tax advantages to long-term care insurance?
Some items related to long-term care may be tax deductible, but there are specific rules about when and how tax deductions can be taken.
If you’re going to deduct an expense, it must be medically related, such as doctors’ visits. You can’t deduct, for instance, the food you’re eating at an assisted living facility.
In addition, medical-related tax deductions apply only to your out-of-pocket costs. That means you can’t deduct any expenses covered or reimbursed by Medicare, Medicaid or any other kind of insurance, including expenses you pay with the proceeds from a long-term care insurance account.
But there can be some tax advantages. Tax-qualified long-term care insurance benefits come to you tax-free.
The Internal Revenue Service requires insurance companies that pay long-term care insurance benefits to provide claimants with a 1099 LTC form. It’s important that you give this and any other forms you receive related to your LTCI policy to your accountant for accurate completion and filing.
[SEE: How Life Insurance Can Pay for Long-Term Care]
Additional Long-Term Care Funding Options
Life insurance settlements
While not exactly a long-term care insurance product, certain life insurance policies can help cover the cost of long-term care. Usually associated with permanent, whole life or universal life insurance policies, you can sell these policies to a third party for a cash amount less than the face value of the policy.
That third party continues to make premium payments on the policy, and when you die, the buyer collects the death benefit from the insurance company. If they’ve calculated it correctly, they make a profit, and you get cash from the policy that you can use while you’re still alive.
“This means you get at least some value out of that policy during your lifetime,” Cohen explains.
Individual vs. group policies
You can purchase a long-term care insurance policy directly from a carrier, but some employers, professional organizations, alumni groups and other associations also offer such coverage.
Generally speaking, insurance products offered by an employer or other large group cost less than purchasing an individual policy directly from the company. This is because more individuals are paying into the pool, which disperses risk.
However, that’s not always true with long-term care insurance; the size of the employer or association makes a difference in prices. Larger employers with 500 or more employees typically offer so-called “true group” policies from either Prudential or Genworth. These policies are more likely to accept individuals with risk factors that might otherwise disqualify them for individual policy coverage, such as HIV/AIDS, a history of substance use or insulin-dependent diabetes.
Smaller groups may offer a multi-life package, which provides participants a discounted buy-in for policies similar to individual policies available directly from an agent. Transamerica, Mutual of Omaha, John Hancock, MedAmerica, Genworth and Prudential offer these policies.
According to the American Association for Long-Term Care Insurance, employer-offered long-term care insurance is almost always the best option if you have health issues that could render you ineligible for individual coverage as an individual or would be unreasonably expensive. An individual policy may be more cost-effective for nonsmoking, married individuals in good health.
When considering a group policy versus an individual policy, it’s important to carefully compare your options to find the best deal for your situation.
Government-sponsored partnership programs
You can also check to see if your state has a partnership long-term care option. This joint federal-state policy initiative, which launched as a four-state pilot program in the 1990s and expanded under the Deficit Reduction Act of 2006, promotes the purchase of private long-term care insurance by helping seniors protect some of their assets while retaining Medicaid eligibility.
Now available in all states except the District of Columbia, Alaska, Hawaii, Massachusetts, Mississippi, Utah and Vermont, the program allows seniors to retain a higher value of assets than usual and still qualify for Medicaid coverage.
In most states, there’s a $2,000 asset limit to be eligible for Medicaid ($3,000 if you’re a married couple), but if you have one of these partnership policies, you can shelter an amount of assets equal to the dollar value of the policy.
For example, if you have a $200,000 long-term care insurance policy, you’ll likely be able to retain up to $202,000 in assets and still qualify for Medicaid coverage, rather than having to spend down to $2,000. The program also protects those assets after you die from being claimed by Medicaid through its estate recovery process.
There are many rules, and it can get complicated fast, so work with a qualified attorney or advisor if you want to purchase a partnership-qualified long-term care insurance policy. Contact your state’s Department of Insurance to learn whether you may be eligible for a partnership program.
Do Medicare or Medicaid Pay for Long-Term Care?
Supportive care — the kind of long-term services people need to live independently in their homes or an assisted living community — is not typically covered by Medicare or Medicaid.
“There’s no federal insurance program to pay for that,” Cohen says. “These policies are filling a gap in our current medical insurance system.”
Medicare
Medicare also does not cover most costs associated with long-term care, Stidom says.
“Medicare is primarily designed to cover medically necessary services, such as hospital stays, doctor visits and certain skilled nursing care, but only for a limited period of time and under specific conditions,” she adds.
Medicaid
A joint federal and state health insurance program for low-income families, people with disabilities and older adults, Medicaid can help cover certain long-term care services, such as nursing home care and home-based care for eligible individuals.
However, Medicaid may not kick in until you’ve spent down all your assets, which means that you’ve liquidated any assets to help pay for care.
“People spend down their life savings on medical and supportive services in the community, and then they qualify for Medicaid. It’s like it’s insurance with an infinite deductible; you spend yourself into impoverishment, and then Medicaid will pay for nursing home care,” Cohen says.
There can be lengthy waiting lists for Medicaid, and the spend-down process is complicated. The rules to qualify for Medicaid also vary by state.
Dual-eligible beneficiaries
Some people who meet specific requirements may be enrolled in both Medicare and Medicaid simultaneously. Often referred to as “dual eligible,” these individuals have lower out-of-pocket costs and access to special benefits.
Most dual-eligible people have an annual income of less than $20,000, and about 20% of Medicare beneficiaries are dual-eligible. These folks will also find most of their long-term care costs covered, Stidom says.
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