For millions of baby boomers, Gen-Xers and millennials who lack a long-term care strategy, the pandemic has sent a message: Act now or it will cost you later.
It’s a daunting task, regardless of your financial situation, to plan for the possibility of some future incapacity. But putting it off until too late can have dire consequences for your savings. The reality is that more than two-thirds of Americans over age 65 will need some kind of daily care for an average of three years during their lifetime, according to the Urban Institute.
These costs can quickly add up. Nursing home living can cost upwards of $100,000 a year, and even home care can easily top $5,000 a month or more.
This high cost explains why many people rely on family members for their care. “About 5% of the population who need long-term care live in nursing homes, another 5% live in assisted living, which means that about 90% of people receive care at home, and most of that falls on family members” , says Howard. Gleckman, a senior fellow at the Urban Institute and an expert in long-term care. If you don’t have family members willing to care for you—or if your needs end up being more than they can handle—the situation can become dire.
But if you’re not wealthy enough to pay out-of-pocket for your care, or if you’re willing to spend money to qualify for Medicaid, you’ll need to find financing—and the product many people turn to for that is long-term care. or LTC, insurance.
How LTC Insurance works
An LTC insurance policy will help cover the costs of any necessary care you may need if you end up with a chronic medical condition, disability or disorder such as Alzheimer’s disease. Most insurance policies will reimburse you whether that care is provided in your home, in a nursing home, assisted living facility, or adult daycare.
You only become eligible for benefits when you can’t do at least two “activities of daily living,” or ADLs, on your own. These usually include bathing or showering, bathing, dressing, eating, and getting in and out of bed or a chair.
Today’s LTC options
First, it’s not Medicare, despite what many people think, says Mary Ballin, a wealth advisor at Perigon in San Francisco. This federal insurance program covers a lot of things after you turn 65, but long-term care isn’t one of them. “Medicare will pay a little money for a nursing home stay for rehabilitation, but it’s only good for up to 100 days per lifetime, and you have to be in a hospital for three days before it starts,” he says.
Private LTC insurance options are limited today because insurance companies misjudged market returns in the early 2000s and the longevity of people buying the policies. As a result, insurers lost money and stopped providing coverage: The number of companies offering LTC insurance has plummeted to just a dozen in 2020, according to the National Association of Insurance Commissioners, from just over 100 in 2004.
While traditional plans are still offered today, about 90% of insurance policies sold now are what experts refer to as “hybrid” policies, meaning a life insurance policy that is either linked to an LTC policy (also called an “extension”) or has the rider, says Erik Miller, product strategist with Life Happens, a nonprofit consumer education organization in the life insurance industry.
An LTC or chronic illness rider allows you to use either part or all of your life insurance death benefit while you’re still alive to pay for long-term care expenses (otherwise that money would go to your beneficiary). These types of add-ons and bundled products appeal to many because they solve the use-it-or-lose-it problem of traditional policies—if you don’t end up needing to use that money for LTC, they still get the death benefit.
However, the insurance industry doesn’t make it easy for the consumer: Figuring out which hybrid plan to buy requires a maze of provisions and fine print for each product.
How to choose the right LTC policy
With any of these policies, you can either pay a lump sum – a common premium for an individual will fall between $50,000 to $150,000 – or pay that premium through fixed annual payments for 5, 7, 10 or sometimes 20 years.
What you can get for the cost of your policy can vary greatly due to variables such as your age, overall health and medical history, the length of time you want coverage for, and your gender (as women live longer and expected to spend more time in long-term care).
You also need to think about which aspects of a policy matter most to you. In general, Miller says:
If you are more interested in knowing that you have good LTC benefits, a linked benefits policy may be best for you as it tends to offer better LTC benefits than a whole life policy with an LTC rider. Also, only with a linked benefits policy can you add an inflation option (you’ll need to pay extra for this) which allows your benefit value to increase to at least 5 to 6 times what you paid for it.
If your main goal is to have a death benefit for your heirs, but you want the comfort of knowing you could use that money for LTC if necessary, then a life policy with either an LTC rider or something called chronic disease rider, it would probably be best for you.
A chronic illness rider typically works the same as an LTC rider, but it’s not federally regulated — LTC policies are subject to federal taxes and language rules — so it’s not standardized across insurance companies like LTC riders are, Miller cautions. . Because of this, he says make sure you go over every detail with an insurance agent before buying so you know exactly what you’re getting with it.
Whatever you do, if you’re approaching or in your 50s, now is the time to figure out what kind of plan will work best for you, because the healthier and younger you are, the less your policy will cost in the long run, Ballin says.
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