Types of Long Term Care Insurance: A Primer

At least 70% of people over 65 will need long-term care services and support at some point. Medicare and most health insurance plans, including Medicare Supplement Insurance (Medigap) policies, don’t pay for this type of care.”   ~ 2015 Medicare & You, National Medicare Handbook

Long Term Care (LTC) is the assistance or supervision you may need when you are not able to perform some of the basic activities of daily living (ADLs) such as bathing, dressing, eating, using the toilet and moving in or out of bed.  A need for LTC can be temporary or permanent.  It can arise from an accident, an illness, advanced aging, stroke, or other chronic condition such as Alzheimer’s.  According to the U.S. Department of Health and Human Services, about 70 percent of individuals over the age 65 will require at least some type of long-term care services in their lifetime.  Below is quick overview of the average cost of care in the state of TN, where I am based.   

Type of Care

Annual Cost

5 Year Annual Growth

Nursing Home / Semi-Private Room

$70,080

3%

Assisted Living Facility

$40,740

2%

Home Health Care

$41,184

1%

Adult Day Care (5 days a week)

$16,120

5%

 

                Source:  Genworth 2015 Cost of Care Survey of Home Care Providers, Adult Day Care Facilities, Assisted Living Facilities & Nursing Homes.

Since Medicare will only cover the cost of LTC for rehabilitative services (typically less than 22 days), having a plan for how you will cover LTC costs should be a vital part of your financial plan.  In addition to understanding the costs of LTC, you should understand the various ways you can insure against the risk of having to pay out of pocket for all of your LTC needs.  Below I have summarized the three kinds of LTC insurance coverage and pointed out the key characteristics of each type.  I highly recommend that you meet with someone to discuss your plan for LTC costs and see if insurance makes sense for your particular situation. 

(1)  Traditional Long Term Care Insurance

Traditional long term care insurance (LTCi) is designed to protect individuals, their families, and their assets from the expense associated with a long term stay in a nursing home or assisted living facility. Traditional LTCi policies operate similar to an auto insurance or home insurance policy.  The insured pays a premium for coverage, which is typically a nominal amount relative the coverage provided. According to LIMRA International, the average first-year premium for individual LTC coverage purchased in 2013 was $2,359.  If coverage is not needed, the premiums paid are forfeited.  It is this “use it or lose it” mentality that prompts many individuals to forego coverage, even in light of the alarming statistics and costs of coverage. 

Key Characteristics of Traditional Long Term Care Insurance

  • “Use it or lose it”.
  • Premiums are typically partially tax deductible as a medical expense.
  • Biggest bang for your buck – if LTC is needed, the value of the benefits relative to the premiums paid is the highest with traditional LTCi.
  • Many policies qualify for home health care in addition to a skilled nursing facility and assisted living facility care.
  • You must be insurable.  The underwriting process for traditional LTCi typically includes a physical and a review of your prior health history.

(2)  Long Term Care Annuity 

Another way you can seek long term care coverage is by purchasing a non-qualified, deferred annuity that also provides long term care benefits.  These hybrid products, sold by insurance companies, allow you to use your annuity proceeds for long term care if it is needed.  If LTC is not needed, you can access the annuity proceeds via typical annuity options (i.e. annuitization, redemption at maturity, proceeds pass to a named beneficiary at your death).

Key Characteristics of a Long Term Care Annuity

  • You must fund the annuity with a lump sum
  • The annuity must be non-qualified (e.g. IRA funds or 401(k) cannot be used)
  • Makes great sense for old annuities that have fully matured
  • While terms vary greatly between products, most LTC annuities pay a fixed rate of interest and offer a LTC benefit equal to two or three times your annuity cash value
  • Avoids the “use it or lose it” mentality; allows the owner to find comfort in the fact that if LTC is not needed, the funds are not forfeited.
  • You will pay a fee for the LTC component (generally ranging from 0.5% to 1.5% of the annuity cash value annually).
  • The underwriting process is less stringent than Traditional LTCi and usually consists of a questionnaire and a phone interview.
  • LTC annuities, like most deferred annuities, come with surrender charges and tax penalties if the funds are withdrawn before age 59 ½.  Please consult with a Certified Financial PlannerTM before deciding an LTC annuity is the best fit for your needs.

(3)  Life Insurance with a LTC Rider 

A third type of LTC coverage comes in the form of a life insurance policy that combines a death benefit with a rider that allows you to “pull forward” the death benefit to be used for LTC expenses should the need arise.  The amount of death benefit and LTC “bucket” is based on your age, health, gender and premium at the time you purchase the policy.  The policies are typically funded with a lump sum payment or via a 1035 Exchange.  (A 1035 Exchange occurs when you transfer existing cash value from a current life insurance policy to a new policy. You can do this through a tax-free exchange. However, be sure you are approved for the new policy before canceling your old one).

Key Characteristics of a Life Insurance Policy with a LTC Rider

  • The appeal of this type of LTC coverage is that you either use the funds for LTC costs, or your beneficiaries will receive a tax-free death benefit when you pass.
  • To decide if this type of policy is right for you, you must first ask yourself if you need life insurance.
  • It is typically wise to review your existing life insurance policies with your financial planner to see if there is sufficient cash value in an existing policy that can fund a new life insurance policy that also offers LTC benefits.
  • You must be insurable.  The underwriting process for a life insurance policy with a LTC rider typically includes a physical and a review of your prior health history.

Let us know if you would like additional information on long term care costs or your options for coverage.