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It inevitably happens to all of us. As we grow older, our bodies simply don’t work quite as well. Our joints become less flexible, our reaction times increase, and our vision is not as keen. At some point, many of us will need assistance with everyday tasks of life. More than 70 percent of people in the U.S. over the age of 65 will need some form of long-term care assistance during their lives, according to the U.S. Department of Health and Human Services. That’s why long-term care insurance enters the minds of many people. But only 13 percent of people actually purchase LTC insurance. Are they making the right decision? Here are some considerations.
1. Long-term care insurance can be expensive. Rates have been increasing recently, as insurance companies have found they’ve been paying out more than they expected, partly because people have been living longer. For example, John Hancock requested and received approval for a 46% premium increase on 8,600 policies in Connecticut in 2014.
The actual rates vary by state, the beneficiary’s age, and amount of benefits purchased. For a 55-year-old beneficiary and a policy paying out $150/day for three years with inflation coverage, the average cost of LTC insurance in 2012 was $2,007 per year. The cost ranged from $1,764 to $3,446 depending on health status. On the other hand, LTC insurance is less expensive than a stay in an assisted living facility, which typically costs $77,000 per year. Meanwhile, the cost of an in-home health aide averages $19 per hour. An extended period of needing long-term care without insurance could wipe out a family’s life savings.
2. An individual’s chances of needing long-term care for an extended period are lower than widely believed. Many people believe, and the insurance industry reinforces this belief, that the majority of seniors eventually need long-term care for years. In fact, One third of people age 65 and older never need long-term care. This includes two-thirds of men and one-third of women. Forty-two percent of people who turn 65 will have no out-of-pocket costs for LTC during their lives. Another 27 percent will have total out-of-pocket costs of $25,000 or under. Only 16 percent will have costs of $100,000 or more.
The average length of a nursing home stay is about 2.5 years. Only 10% of people who enter a nursing home stay there for five or more years. Thirty-eight percent of nursing home residents are eventually discharged to go home or to another location.
3. Medicare might pay some long-term care costs. If you are eligible for Medicare benefits, it will cover up to 100 days of skilled care in a nursing home, per benefit period. Medicare pays the full cost for the first 20 days and then you are required to make a copayment for the rest of the time.
4. Medicaid will pay long-term care expenses for eligible people with low incomes. To qualify for Medicaid, your income and assets must be below certain thresholds. Many people pay for long-term care with their own money until they become eligible for Medicaid. Although Medicaid is not exclusively a program for seniors, many seniors are Medicaid clients. Medicaid is a federal program but administered by individual states. There is more information about Medicaid and state assistance programs at the senior services page.
Therefore, if your total savings are below a certain level, LTC insurance may not be right for you, since you will likely pay for long-term care out of pocket until you become eligible for Medicaid. A rule of thumb is if your assets are below $500,000 then LTC insurance may not be advantageous for you.
Conversely, if your assets exceed a certain level, around $2 million, then LTC insurance may also not be right for you since you will be able to finance the costs of care yourself.
5. Long-term care insurance becomes more expensive the older you get. The most common age at which LTC insurance is purchased is the mid-fifties. This is when beneficiaries are in relatively good health and premiums are less expensive. The average annual cost of LTC insurance for a 55-year-old couple in 2012 with a $150/day benefit, three year benefit period, and 3% inflation option was $2,466. For a 60-year-old couple in 2012, the average cost for the same insurance was $3,381.
6. Even with inflation protection, a LTC insurance policy may not keep pace with costs. The average cost of a private room in a nursing home increased by 4.35% between 2013 and 2014, which was faster than the overall rate of inflation.
Your decision of whether to buy LTC insurance may consider other factors:
Do you want to leave a substantial amount to your heirs? If so, LTC insurance may help prevent the costs of care from depleting your inheritance.
Do you have relatives who could care for you? Eighty percent of long-term care is provided by unpaid caregivers at home. However, caregiving is time-intensive and tiring, and requires considerable sacrifice on the part of the caregiver in terms of time, energy, giving up employment, and possibly moving to be close to the patient. Sixty-seven percent of people plan to have a relative provide long-term care but haven’t asked.
What is the quality of long-term care in your area? Even if you have LTC insurance, could you obtain quality care where you live? If you use Medicaid-provided services, will the quality of care you receive be acceptable?
A common reason for purchasing long-term care is to protect a spouse from financial ruin. The costs of long-term care can be enormous and leave a spouse in dire financial straits.
In addition to LTC insurance and self-financing, there are other options for financing long-term care. For example, some life insurance policies include an accelerated death benefit provision, in which you can receive part of your death benefit while you’re living, to meet expenses such as long-term care. You may also be able to purchase a provision for your life insurance policy or annuity that covers long-term care.