I have received a number of questions about long-term care insurance. More and more people are coming to the realization that Medicare does not cover their long-term care needs. This is a massive concern for those at or nearing retirement.
To help our subscribers learn more about this important topic, I put together this top 10 list of questions people have voiced.
1. How does long-term care insurance work?
To buy a long-term care insurance policy, you fill out an application and answer health questions. The insurer may ask to see medical records and interview you by phone or face to face. You choose the amount of coverage you want based on the coverage periods offered by the insurer. Today’s policies have limits on the time period benefits can be paid (e.g., 1 to 5 years) and the amount paid during your lifetime (e.g., $165,000).
Once you’re approved for coverage and the policy is issued, you begin paying premiums.
Under most long-term care policies, you’re eligible for benefits when you can’t do at least two out of six of what are called “activities of daily living,” or ADLs, on your own or you suffer from dementia or other cognitive impairment.
The activities of daily living include:
Bathing
Caring for incontinence
Dressing
Eating
Toileting (getting on or off the toilet)
Transferring (getting in or out of a bed or a chair)
When you need care and want to make a claim, the insurance company will review medical documents from your doctor and may send a nurse to do an evaluation. Before approving a claim, the insurer must approve your plan of care.
Under most policies, you’ll have to pay for long-term care services out of pocket for a certain amount of time, such as 30, 60 or 90 days, before the insurer starts reimbursing you for any care. This is called the “elimination period.” 90 days is the normal period. The policy starts paying out after you have passed the elimination period and you’re eligible for benefits. Most policies pay up to a daily limit for care until you reach the lifetime maximum.
Some companies offer a shared care option for couples when both spouses buy policies. This lets you share the total amount of coverage, so you can draw from your spouse’s pool of benefits if you reach the limit on your policy.
2. What age should you buy long-term care insurance?
The optimal age to shop for a long-term care policy, assuming you're still in good health and eligible for coverage, is between 60 and 65. Some people purchase coverage at younger ages based on risk aversion or family medical history.
3. What is the cost of long-term care insurance?
The rates you pay depend on a variety of things, including:
Your age and health
Gender
Marital status
Insurance company
Amount of coverage
You can find example premium costs by going to the website of the American Association for Long-Term Care Insurance. One major concern with long-term care insurance policies is the price could go up after you buy a policy; prices aren’t guaranteed to stay the same over your lifetime. Many policyholders saw spikes in their rates in the past several years after insurance companies asked state regulators for permission to hike premiums. They were able to justify rate increases because the cost of claims overall were higher than they had projected. Regulators approved the rate increases because they wanted to make sure the insurance companies would have enough money to continue paying claims.
4. How much (and when) can long-term care insurance premiums be increased?
It depends upon the type of the policy you buy. There are different types of long-term care policies with each having different provisions as to when premiums can be increased.
In most states, rate increases on long-term care insurance policies cannot be implemented without approval by the state’s regulators. Some states have very strict requirements that must be met in order for a rate increase to be implemented. Some states have stricter requirements than others. If your long-term care insurance policy does have a rate increase, in most cases, you have the option to keep your premium the same by decreasing your benefits.
5. Are there any tax advantages of buying long-term care insurance?
Long-term care insurance can have some tax advantages if you itemize deductions, especially as you get older. Federal and some state tax codes let you count part or all of long-term care insurance premiums as medical expenses, which are tax deductible if they meet a certain threshold. The limits for the amount of premiums you can deduct increase with your age.
Only premiums for tax-qualified long-term care insurance policies count as medical expenses. Such policies must meet certain federal standards and be labeled as tax qualified. Ask your insurance company whether a policy is tax-qualified if you’re not sure.
6. How to buy long-term care insurance?
You can buy directly from an insurance company or through an agent.
You might also be able to buy a long-term care policy at work as part of your benefits program. Usually when you buy coverage this way, you’ll have to answer some health questions, but it could be easier to qualify than if you buy it on your own.
Get quotes from several companies for the same coverage to compare prices. That holds true even if you’re offered a deal at work; despite the group discount, you might find better rates elsewhere.
The American Association for Long-Term Care Insurance advises working with an experienced long-term care insurance agent who can sell products from at least three carriers.
7. What are state long-term care ‘partnership’ plans?
Most states have what are called “partnership” programs with long-term care insurance companies to encourage people to plan for long-term care. These programs allow people who buy these partnership coverages to protect more of their assets if they use up all the long-term care benefits and then want help through Medicaid.
Here’s how it works. Normally in most states, for instance, a single person would have to spend down assets to a certain level, usually $2,000 to be eligible for Medicaid. If you have a partnership long-term care plan, you can qualify for Medicaid sooner. In most states, you can keep a dollar of assets that you would normally have had to spend to qualify for Medicaid for every dollar your long-term care insurance will paid out.
To find out whether your state has a long-term care partnership program, check with your state’s insurance department.
8. Can I use the ‘living benefits’ on a life insurance policy to pay for long-term care?
These provisions are formally known as an “accelerated death benefits.” This feature is available on most permanent life insurance policies such as universal and whole life. It lets you take a portion of the life insurance payout while you’re still alive to pay for medical expenses, including long-term care. The policy’s total death benefit is reduced by the amount used for long-term care.
9. Can I sell my cash value life insurance policy to pay for long-term care?
You can sell your life insurance policy and use the proceeds for anything you want, including long-term care expenses. There are tax ramifications to doing this that should be reviewed with a tax professional before selling the policy.
10. What is a combination life/annuity long-term care policy?
These policies, also called asset-based or hybrid policies provide a pot of money for long-term care if you need it or a death benefit/annuity accumulated value to your beneficiary if you don’t fully utilize the long-term care benefits. These policies can provide some needed long-term care protection at reasonable cost.
Summary
People have many questions about long-term care insurance. This post was focused on the most frequent questions that are asked. The need for having savings designated or insurance protection in place for long-term care needs is the “elephant in the retirement planning room” for most households. Not enough thought is going into providing for this likely cost. The more you learn about this topic the better you are preparing yourself for a secure and rewarding retirement.
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