Every day we’re bombarded by all types of ads and commercials. Many of them are for insurance products: life insurance, auto insurance, and homeowners insurance are the “big three” when it comes to online and offline advertising by insurance companies.
Jump ahead to these sections:
- What to Consider Before You Purchase Long-Term Care Insurance
- Pros and Cons of Long-Term Care Insurance
- When Is Standalone Long-Term Care Insurance Worth It?
- When Is Federal Long-Term Care Insurance Worth It?
- When Is Hybrid Long-Term Care Insurance Worth It?
One insurance product you probably won’t see or hear advertised is long-term care insurance. Insurers know that pre-planning for long-term care is not very high on people’s priority lists, so they save those ad buys for other products.
Why is it that long-term care insurance isn’t as in demand as other insurance products? Much of it is due to financial experts having differing opinions on its value. You’ll find one expert telling you that it’s “must-have” coverage, and one of their counterparts warning you to “save your money” and invest it elsewhere to pay for long-term care you may or may not ever need.
Confusing, isn’t it? In this article, we will take some of the mystery out of the need for long-term care insurance. We’ll look at some long-term care options and at some different types of long-term care coverage, so you can decide which type would be best for you if you choose to buy a long-term care policy.
What to Consider Before You Purchase Long-Term Care Insurance
Many sales trainers teach salespeople the philosophy that “nobody likes to be sold, but everybody likes to buy.” Before you buy long-term care insurance, let’s take a look at some things you should consider before you sign an application.
One thing to consider is your family’s medical history. Genetics is a key factor in our health as we get older, making this a good time to take a look at your family tree. In general, how old were your family members when they passed away? What was the condition of their health when they were older? Does your family have a history of dementia or Alzheimer’s disease?
The answers to these questions can be helpful as you consider your chances of someday needing long-term care. For example, people in your family staying healthy and living to a ripe old age is one indicator that you may want to decline to buy long-term care insurance, while family members being ill for a prolonged period before they passed away could make you lean towards getting coverage.
Another critical consideration is your financial condition. Senior Services of America has reported that the average length of stay in an assisted living facility is about twelve months. That may not seem like a long time, but at an average monthly cost of $4,300 (according to Genworth Financial) at an assisted living facility, the cost of long-term care for twelve months is over $50,000.
That raises an interesting question: “Do you think you’ll have $50,000 in cash or investments you can liquidate to pay for long-term care when you’re 75 years old?” Some people have enough money in their retirement account to pay for care in the future, and many don’t. You need to evaluate your financial plan before purchasing long-term care insurance.
Pros and Cons of Long-Term Care Insurance
It’s a flip of the coin if you’ll ever need long-term care insurance. An American Association for Long-Term Care Insurance (AALTCI) study determined that 50% of people who buy a policy at age 65 will use their policy benefits, and 50% won’t.
Looking at the pros and cons of long-term care insurance will help you choose heads or tails.
Pros of long-term care insurance
1. It can protect your assets. It’s not a pretty picture when you imagine raiding your retirement account or losing your home equity to pay for long-term care. However, long-term care insurance covers most of the costs of nursing home or assisted living facility care costs, allowing you and your family to still enjoy everything you worked so hard to attain.
2. There are many options to fit your budget and needs. Like many types of insurance coverage, long-term care insurance offers numerous options to help you design a policy you can afford and one that will provide the financial benefits you need if you ever file a claim.
There are five major determinants that determine the rates of a long-term care insurance policy:
- Elimination Period
- Daily Benefit Amount
- How long you’ll receive benefits
You don’t have control over the first two variables, but you do have options when it comes to the last three.
For example, you can elect to receive benefits for the rest of your life when you file a claim, or you can choose to receive benefits for two years. The difference in cost is about three times more for a lifetime benefit vs. the two-year option.
3. Your premiums may be tax-deductible. Your accountant can confirm this for you (tax laws change regularly). But under the right circumstances, your premiums are deductible from your federal income taxes under these conditions:
- The policy must be tax-qualified (your insurer can confirm this for you).
- You itemize your deductions.
- Your medical expenses must exceed 7.5% of your adjusted gross income.
That’s good news. But there are limits to how much of your long-term care premium can be used to qualify for the medical expense deduction, starting at $450 when you’re age 40 or under and gradually increasing as you get older (topping out at $5,640 if you’re age 71 or older).
4. You can keep your coverage for life. As long as you keep paying your premium, the insurer can’t cancel your policy, regardless of your age, health, or dollar amount of the claims you’ve submitted.
Cons of long-term care insurance
1. It can be expensive. AALTCI reported in their study that in 2020, a survey of insurance companies that sell long-term care insurance charged 55-year-old males an average of $1,700 a year, and the premium for a female that was the same age was $2,675 for the same benefits.
2. The insurer can increase your premiums. The insurance company providing your coverage can’t cancel your coverage, but they can make it uncomfortable to keep by raising the rates. They can’t single you out for a rate increase; all policyholders in the same “block” as yours must also be raised. You do have a small measure of protection in that your state’s insurance commissioner must approve the insurer’s request to raise your rates.
3. It’s difficult to predict the amount of coverage you may need in 10, 20, or 30 years. Most people buy long-term care insurance in their 50s or early 60s. But what if you don’t need it until you’re 85 years old? As we’ve seen, the cost of care is already very expensive, and nobody knows how much that same care will cost when they use their coverage.
4. You may never use your policy. People today are living longer, healthier lives than any previous generation. Some won’t ever lose their ability to care for themselves, or they may get some assistance from a family caregiver and never use their policy.
But the same can be said for other types of insurance as well. You have to carry auto and homeowner’s insurance, but you may never use those policies, either.
When Is Standalone Long-Term Care Insurance Worth It?
A standalone (individual or couple) long-term care policy is worth it under several circumstances.
First, if your employer offers group long-term care insurance as an employee benefit, you may think a standalone policy isn’t necessary. However, what needs to be taken into consideration is the non-portability of group long-term care insurance, meaning that if you leave that employer for any reason, you can’t take your coverage with you. All of the premiums you paid will have been for naught.
If you have a standalone policy, you can keep it for as long as you’d like (as long as you pay your premiums on time).
Second, don’t forget the considerations we looked at before. If your family has a history of needing nursing home care or having dementia or Alzheimer’s disease, a standalone long-term care insurance policy is likely worth it.
When Is Federal Long-Term Care Insurance Worth It?
Federal long-term care insurance is a program that offers coverage to most federal employees and U.S. Postal Service Employees, as well as active and retired members of the uniformed services.
If you qualify to enroll by virtue of being one of the above, it’s worth it to enroll in the plan if you intend on staying with an eligible group until you retire, and at that point, you can take your coverage with you.
You wouldn’t want to enroll in the federal plan if it’s a short-term career position for you since the benefit isn’t portable when you leave.
When Is Hybrid Long-Term Care Insurance Worth It?
Hybrid long-term care insurance combines long-term care insurance with another type of insurance product, like life insurance or an annuity.
Hybrid long-term care insurance is worth it if you don’t think you’re ever going to need long-term care. You’re still paying a premium for the long-term care insurance portion of a hybrid policy, but your heirs may get most of it back as an inheritance.
Some insurance experts believe that hybrid long-term care insurance isn’t worth it because it’s the most expensive way to buy long-term care insurance. They recommend purchasing a standalone policy instead.
Don’t Fall Victim to the “Paralysis of Analysis”
There’s no shortage of information or opinions about long-term care insurance. You could study the coverage for months and still be scratching your head.
The best time to buy insurance is when you’re younger and healthier because you’ll get lower rates and find it easier to qualify medically for coverage. If you’ve decided to buy a long-term care insurance policy for yourself or long-term care insurance for your parents, talk with an agent as soon as possible. You’ll have a 30-day “free look” period when your policy is issued, and you’ll be able to decide whether or not to keep your policy.