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What You Need to Know About Long-Term Care Insurance

July 29, 2016
  1. You should not rely on Medicare to pay for your long term care expenses.  Many people believe they can rely on Medicare to pay for any long-term care services they will need. However, Medicare only pays for long-term care if you require skilled services or recuperative care for a short period of time. Medicare does not pay for what comprises the majority of long-term care services - nonskilled assistance with Activities of Daily Living.
  2. Many of you cannot count on Medicaid. Medicaid is the joint federal and state program that pays for the largest share of long-term care services, but only if you meet financial and functional criteria. Other federal programs such as the Older Americans Act and Veterans Affairs pay for some long-term care services, but only for specific populations and in specific circumstances.  On an aggregate basis, the biggest share of long-term care, 49 percent, is paid for by Medicaid. On an individual basis, however, "who pays for long-term care" can look very different. This is because people with their own personal financial resources do not qualify for Medicaid unless they use up their resources first paying for care, so-called "spending down." If you have reasonable income and assets, most likely you will be paying for care on your own.
  3. How much is the average cost of care today? Based on Genworth 2016 Cost of Care Survey, conducted by CareScout®, April 2016, the following are monthly costs in Minneapolis Area for Homemaker Services ($4,767), Home Health Aide ($5,529), Assisted Living Facility ($3,990), Nursing Home Care ($6,813 for Semi-Private Room and $7,442 for Private Room).  The average nursing home stay is about 3 years and many people need care at home or at assisted living facility before they even get to a nursing home.  The average cost of care today can be more than $363,000 if you spend two years in an assisted living facility and three years in a nursing home.  If the inflation is 5% per year, total cost for a 55 year old today would be $963,147 in twenty years.  As the timing of needing long term care is hard to predict, having the right type of long term care insurance can help mitigate the negative consequences.
  4. Long-term care insurance pays more than just nursing home care.  Some insurance policies pay for home health care, care coordination, caregiver training, home modification, durable medical equipment and an adult day care center with a 0-day elimination period.  Typical policies have a 90-day elimination period for a nursing home facility, assisted living facility, facility hospice and international benefits. Even if you do not plan to go to a nursing home, the right policy will provide you the flexibility to choose how to receive care, perhaps at home.
  5. The main determining factors in what long-term care insurance will cost are:
    Age - The risk generally increases as you get older.
    Marital Status - Single people are more likely to need care from a paid provider.
    Gender - Women are at a higher risk than men, primarily because they tend to live longer.
    Lifestyle - Poor diet and/or exercise habits can increase an individual's risk.
    Health and family history also impact an individual's risk.
  6. Assessing Long-Term Care Benefits.  If you are unable to perform at least 2 of the 6 Activities of Daily Living – bathing, continence, dressing, eating, toileting, and transferring (to and from bed, wheelchairs, etc.) – or are severely cognitively impaired, requiring supervision to prevent yourself from harm for a period of at least 90 days, contact your insurance company and a licensed health care practitioner will provide certification to get on a claim.
  7. Types of long-term care policies: Traditional (Reimbursement and Indemnity) and Integrated Life Insurance/Long-Term Care Policies.  Most policies are traditional reimbursement policies that will reimburse qualified expenses up to the benefit amount stated in the policy (i.e. $5,000 per month for 5 years).  The benefits are income tax-free.  Some policies are indemnity policies that provide you the benefit regardless of your bills.  Most traditional long term care policies can change future premiums if the insurance companies get approval from the states to raise premiums for the entire risk class of policy owners.  This is the drawback of the traditional long term care policy as future premiums can go up in the future, causing the costs to be uncertain.  The integrated life/long-term care policy requires one-time premium payment.  Under this method, the insured avoids the possibility of paying large long-term care insurance premiums and dying without needing long-term care.

    I have seen the popularity of integrated life/long-term care policies increase over the past several years because these reasons:
    a. One-time premium payment guarantees your policy’s long-term care benefits, death proceeds, and return of premium benefit for the life of the policy.
    b. If you pass away, tax-free death proceeds paid to beneficiaries.
    c. If you want your money back, surrender policy at any time for return of premium benefit (i.e. Pacific Life PremierCare® Advantage).

    For example, a female (age 54), nonsmoker, with Couples Discount, 5 year benefit duration, 5% simple interest inflation benefit option.  One-time premium is $100,441.20.  Day 1: monthly maximum benefit of $5,000 and total long-term care benefits of $330,000.  At age 80, monthly maximum benefit of $11,500 and total long-term care benefits of $720,000.  The death benefit is $144,017 initially and goes down to $120,000 at age 80 and after.  If she uses the maximum long-term care benefits at age 80, the internal rate of return (IRR) is 7.2%, which is very hard to beat as all benefits are income tax-free.  Compared to investing the $100,441 in a taxable portfolio which realized gains and interest are subject to income taxes each year, required rate of return may need to be at least 9% to 11% depending on tax rates and turnover rate.  If she dies before using long-term care benefit, at least $120,000 will be tax free to her beneficiaries.

    Depending on your personal situation, your insurance agent or advisor can help you choose the right type of insurance to help you maintain the quality of life you’ve come to expect and the freedom of choice you want to protect.  Based on my experience with our wealth management clients, more and more prefer the one-time premium product because they want to find the most tax-efficient way to pay for the potential long-term care costs by repositioning a portion of current assets from a taxable portfolio to a potentially tax-free portfolio.


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