Know Your Long-Term Care Insurance Options

by Drew Snider, CFP®

Director, Financial Planning, Coastal Credit Union, Financial Advisor, CUSO Financial Services, L.P.

Member Tips

In a recent Financial Webinar, we took a poll of attendees and found that 81%1 had experienced a Long-Term Care need with a family member or other loved one. As Americans are living longer and receiving more life-saving care, we are needing Long-Term Care more and more.

How Long-Term Care is Different from Health Care

Health care is acute care, like when you are sick or injured and you seek medical care to treat the illness or injury. Or, it can also be preventive care like an annual physical or getting vaccinations.

Long-term care, on the other hand, refers to the ongoing services and support needed by people who have chronic health conditions and cannot care for themselves due to physical limitations or cognitive impairments like dementia. There are three levels of long-term care:

  1. Skilled care: Generally round-the-clock care that’s given by professional health care providers such as nurses, therapists, or aides under a doctor’s supervision.
  2. Intermediate care: Also provided by professional health care providers but on a less frequent basis than skilled care.
  3. Custodial care: Personal care that’s often given by family caregivers, nurses’ aides, or home health workers who provide assistance with what are called “activities of daily living” such as bathing, eating, and dressing.

Long-term care is not just provided in nursing homes — in fact, the most common type of long-term care is home-based care. Long-term care services may also be provided in a variety of other settings, such as assisted living facilities and adult day care centers.

The Cost of Long-Term Care Can Be Expensive

Some of the average costs in the United States for long-term care* include:

  • $74,820 per year ($6,235 per month) for a semi-private room in a nursing home
  • $83,580 per year ($6,965 per month) for a private room in a nursing home
  • $3,293 per month for a one-bedroom unit in an assisted living facility
  • $21 per hour for a home health aide

*U.S. Department of Health and Human Services, December 1, 2016

What are your options for paying the costs of long-term care? You can self-insure and use your personal savings or buy a long-term care insurance policy. The major advantage to using income, savings, investments, and assets (such as your home) to pay for long-term care is that you have the most control over where and how you receive care. But because the cost of long-term care is high, you may have trouble affording extended care if you need it. You can also consider a long-term care insurance policy. 

Like other types of insurance, long-term care insurance protects you against a specific financial risk–in this case, the chance that your long-term care need will cost more than you can afford. In exchange for your premium payments, the insurance company promises to cover part of your future long-term care costs.

Long-term care insurance can help you preserve your assets and guarantee that you’ll have access to a range of care options. However, it can be expensive. So before you purchase a policy, have a financial plan in place to make sure you can afford the premiums both now and in the future.

The cost of a long-term care insurance policy depends primarily on your age (in general, the younger you are when you purchase a policy, the lower your premium will be), but it also depends on the benefits you choose. If you decide to purchase long-term care insurance, here are some of the key features to consider:

  • Benefit amount: The daily benefit amount is the maximum your policy will pay for your care each day, and generally ranges from $50 to $350 or more.
  • Benefit period: The length of time your policy will pay benefits (e.g., 2 years, 4 years, lifetime).
  • Elimination period: The number of days you must pay for your own care before the policy begins paying benefits (e.g., 20 days, 90 days).
  • Types of facilities included: Many policies cover care in a variety of settings including your own home, assisted living facilities, adult day care centers, and nursing homes.
  • Inflation protection: With inflation protection, your benefit will increase by a certain percentage each year. It’s an optional feature available at additional cost but having it will enable your coverage to keep pace with rising prices.

The type of policy you buy will also impact the costs. We will discuss the two primary policy options: Traditional Long-Term Care Insurance (LTCi) and Asset Based LTCi.

Traditional Long-Term Care Insurance

Traditional Long-Term Care insurance has been issued for decades and has insured many Americans. With this policy, if the insured cannot perform 2 out of 6 activities of daily living, the policy benefits can be activated. The premium amount is not guaranteed so the insurance company can increase the premium. The past decade has seen many insurance companies raise their premiums for most policy holders. If you are considering a traditional LTC policy, you must consider your ability to pay higher premiums in the future.

Advantages: The primary advantage traditional policies have over asset-based policies is the cost. Typically, traditional policies have initial lower premiums.

Disadvantages: The potential for premium increases is a major disadvantage because they often come when the policy holder is retired living on a fixed income making the higher premium difficult to absorb in their budget. Traditional long-term care policies are “use it or lose it” meaning if you don’t use the policy benefits in your lifetime, the premium dollars were “wasted”. Many types of insurance work this way and give policy holders piece of mind just knowing the protection is in place.

Asset Based Long Term Care Insurance

Asset-based LTCi has been on the insurance market for over 10 years but has become more popular recently as a result of traditional insurance carriers raising their premiums. Also, Americans were becoming less interested in a “use it or lose it” insurance structure. Similar to Traditional LTCi, you decide how much long-term care benefit you want and the policy is triggered by the inability to perform 2 out of 6 activities of daily living. 

Advantages: The primary advantages to Asset-based LTCi come from the fact that the coverage is built on a life insurance policy:

  1. If you pass away and don’t use the policy benefits, there is a death benefit for your beneficiaries.
  2. The premium is guaranteed not to change and, as long as you make the premium payments, the policy benefits will be in place.
  3. Another advantage related to the premium is the various premium modes you can choose based on the insurance company’s policy offering. Some offer a single premium or 5, 10, 15 and 20 annual payment options.
  4. Some companies offer a return of premium option. At any time, if you choose not to continue the policy before going on a claim, you can get your full premium back.

Disadvantages: The primary disadvantage is the amount of Long-Term Care coverage you get for the premium paid. Because there is a death benefit built into the policy, the premium is typically more than a traditional policy.   

Deciding which policy is right for you will likely be determined by your premium preference. In particular, how much you want to spend and if you want it guaranteed not to increase. The other key decision point will be if you want a death benefit with your policy. Either way you go, Traditional or Asset-Based, you will have the piece of mind knowing you are protecting your assets and giving your loved ones options to help with your care. Long-term care insurance isn’t for everyone, but everyone should have a plan for long-term care!

Considering Long-Term Care Insurance? Let’s talk.

We’re here to help you develop your plan and stay on track for a comfortable retirement. As a Coastal member, you can connect with one of our CFS* Financial Advisors to schedule your free retirement plan review. We can assess your current retirement income strategies to see if you are on track to meeting your financial goals.

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1. Acccording to a recent Wealth Webinar of 100 attendees, 2021.

© 2021 Broadridge Investor Communication Solutions, Inc.

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Coastal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

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