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All You Need To Know About Long-Term Care Insurance

All You Need To About Long-Term Care Insurance
Kevin Wenke

Kevin Wenke

Owner at Decision Tree Financial. CFP. CLU

There is no question that health care costs are skyrocketing (along with the cost of everything else…) but the cost for long-term care is accelerating even faster. Imagine if you were forced to spend more in a month to be taken care of (or have someone you care about.)

It may sound like a bad dream, but it is already a reality for some people. I have a friend whose mother is only 75 but has developed dementia. She needs care 24-hours a day and the family is spending $12,000 per month to make sure she is getting the best care!

Consider that, according to Genworth Financial, the average monthly cost of long-term care services in 2021 is as follows:

Nursing home care ($85,800 to $150,000 per year) Assisted Living ($51,600 per year) and 8-hours a day for in-home care costs ($52,620 per year)

That’s the cost of care today. Imagine what it will be if you need some form of long-term care services in 10, 20, or 30 years from now. Few people can bear that cost on their own already and all their hopes they had to leave a positive legacy are left in ruins. 

What’s more, traditional health insurance (even Medicare) won’t help.

But there are ways to prepare for the possible expense of long-term care.

Introducing Long-term care insurance…

Long-term care insurance helps cover the cost of a nursing home, assisted living facility, or home health aide if you become unable to care for yourself. It pays for the necessary care facilities.

Without this type of coverage, the cost of long-term care can quickly erode your retirement savings or your home equity. You may have to pay for care using debt, or your family may have to shoulder part of the cost.

How does long-term care insurance work?

Buying long-term care insurance is similar to buying life insurance and disability insurance both in price and process. There is an application to fill out and health questions to answer. The insurer may ask to see medical records.

You choose the amount of coverage you want. Policies usually cap the amount paid out per day and total benefits paid during your lifetime.

Once you are issued a policy, LTC insurance is guaranteed for as long as you pay the premiums, regardless of your age or health condition.

Typically, you qualify for LTC benefits if you are unable to perform 2 or more of the activities of daily living (ADL), which include bathing, dressing, eating, walking, getting out of bed, and using the bathroom.

Long term care insurance policies will pay benefits in one of two ways:

  • Expense-incurred policies reimburse policyholders for long-term care expenses they incur, up to the maximum benefit amount. The person receiving care will submit claims based on what they have spent.
  • Indemnity policies pay a set dollar amount regardless of the cost of the service you receive. You will begin receiving insurance payments once you receive long-term care, after the waiting period.

How much does long-term care insurance cost?

The cost depends on the level of benefit you purchase. The more benefits the more the cost. To give you an idea of the “average though, the American Association for Long-Term Care Insurance (AALTCI), says that the costs are:

  • $2,050 for a 55-year old male
  • $2,700 for a 55-year old female
  • $3,050 for a couple that are both age 55

These rates were for a policy with an initial pool of benefits of $164,000, which compounded annually at 3 percent to total $386,500 at age 85.

In addition to your age, health, and gender, premium rates will be based on how long the policy will pay benefits. The longer the benefit period, the more you will pay in premium. Most people who need long-term care require it for about two years, though about 14 percent need it for five years.

Another factor is the policy’s elimination period, also known as a waiting period. This is the amount of time between when you require benefits and when the first payment is made. The shorter the waiting period, the more your policies will cost.

Long-term care insurance policies also offer optional features, known as riders, that can enhance your coverage. One example is a cost-of-living adjustment rider, which increases the available benefit to take inflation into account.

Keep in mind that what you pay today may not be your premium amount of years from now.

Unlike other types of insurance where your premium stays the same for the life of the policy, LTC policy premiums can be raised after you have purchased the policy.

Insurance companies cannot single out just one or a few policies for increases, but they can raise the rates of all policies within a specific rate class with approval from state regulators.

Who needs long-term care insurance?

According to AALTCI, about 76 percent of LTC insurance buyers are between the ages of 50 and 69.

Still, one of the challenges of knowing exactly when to buy long-term care insurance. Commit too early and you could needlessly spend thousands of dollars on the early years of a policy. About half of 65-year-olds today will eventually require long-term care, according to the U.S. Department of Health & Human Services.

I am going to tell you that many “experts” will tell you that LTC insurance typically isn’t a priority at a young age. They point out statistics that only 4.5 percent of long-term care claims started in 2018 were for people under the age of 70. Over two-thirds of claims began for insureds who were at least 81 years old. That is because most young people don’t have any coverage.

However, the fact of the matter is that young people DO require long-term care services. Those who have accidents or illnesses do lose their ability to perform those activities of daily living.

I know that I personally struggled for several months in 2016 when I had esophageal cancer. I know friends who have had family members who have had motorcycle accidents and needed to learn to walk again, MS, ALS…the list goes on and on…

Ideally, though you want to figure out how to have money available for long-term care by coordinating it with other parts of your financial positioning. This is something we do in our Wealth Performance and Protection System.

If you want to think about how to handle long-term care the way everybody else tries to tell you it should be handled (i.e. – spending money out of pocket on LTC insurance) and not that you can probably have money for coverage without affecting your lifestyle today OR in the future when you understand the rules of the game, you don’t want to wait too long to buy Long-term care insurance coverage.

This is because, like all insurance, the older you are, the more expensive the policy will cost. In addition, the chances of being denied coverage increase the older you get. Insurance companies and their underwriting process filter out people they believe have a high probability of having claims so any health issues you develop will be looked at in detail.

According to AALTCI, only 16 percent of applicants under the age of 50 were denied a policy in 2019. That percentage increased to:

  • 21 percent for applicants in their 50s
  • 24 percent for those between 60 and 64
  • 32.5 percent for people 65 to 69
  • 44 percent for applicants age 70 to 74
  • 51.5 percent for those 75 and over

So you can see, the older you are, the less likely you will be underwritten for LTC coverage.

When to buy long-term care insurance

I’ll tell you that having some form of LTC even in your 20’s is a solid plan the big roadblock for people is how to do that and balance the needs of today with the needs of tomorrow.

For many who try to figure out how to do this on their own, they figure out buying long-term care insurance in their 50s is often advantageous because it’s the peak earning years they have (and kids start moving out of the house…).

If they’re on pace for retirement savings and other expenses, such as raising children or paying certain debts, are in the past, these individuals likely have the funds for LTC insurance.

People who have a family history of health issues are often more eager to buy some form of LTC coverage while those who don’t tend to wait longer using the logic that “they won’t need it” and don’t want to pay for coverage for 30 years or more on something they don’t know if they will use.  

I understand why people think like this but at the same time most people have fought their whole life to be different than their parents…and they are.

The bottom line is that there really is no ideal age to buy long-term care insurance but from a planning standpoint the sooner the better because you never know when “IT” could happen or you develop a condition that makes you uninsurable.  

I wrote a book called “Long-term care secrets” that you can check out here. One thing I explain is that you can get LTC coverage without spending a dime out of pocket when you understand the rules of the financial game, challenge the status quo and demand Maximum value from the dollars you have working for you to create the future you desire.

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