Why long-term care insurance can be important

Why Long-term Care Insurance?

Since beginning this blog, I’ve had more than a few requests to address long-term care insurance. So, I think today is as good a day as any to tackle these concerns.

Here’s a sampling of the questions I’ve been asked…

  • What exactly does long-term care insurance cover?
  • Do I need it? If so, why do I need it? Won’t Medicare cover my long-term care expenses?
  • I understand that premiums may not be guaranteed and could increase in the future. Should I just self-insure?
  • I don’t like the idea of paying premiums for an insurance policy I might not ever use. What are your thoughts?

These are all important questions, and I thank my readers for asking them. While I can’t possibly say what is right or not right for a person without knowing their specific situation, I can maybe answer some of these questions and share some important points to consider today.

But first, my feelings about long-term care insurance really began due to an experience back in college. So, before we get started, let me share this story with you…

Aaron and his grandparents

why-long-term-care-content-picture400pxOne of the first students I met my junior year at San Diego State was a young man we’ll call Aaron. Like me, Aaron was a political science major. But partway through that Fall semester, his grandfather had suffered a debilitating stroke and was placed in a nursing home. This was especially difficult for Aaron because his grandparents had raised him.

With their modest retirement income, Aaron’s grandparents had also been helping with tuition. And while he didn’t mind taking up the slack with student loans or part-time work, his grandmother was barely scraping by under the circumstances. Sadly, Aaron left college to enter the workforce and did his best to help support his grandparents.

That story has always stuck with me. I felt terrible for Aaron – and for his grandparents. And I remember being shocked, as I suppose they were, that Medicare hadn’t covered all the expenses.

The truth about long-term care

A surprising number of people believe Medicare will cover all long-term care expenses. However, that isn’t at all the case. And when it does help, there are many limitations and a lot of hurdles. That is important to know, because the government’s Administration on Aging published some startling numbers in 2012:

  • Here in California, the average cost of homemaker services was $4,195, and $4,376 for a home health aide.
  • A one-bedroom quarters in California’s assisted living facilities averaged $3,710 every month.
  • And in our state’s nursing homes, semi-private rooms cost an average $6,996 monthly, and an imposing $8,152 for a private room.

Keep in mind – those costs were from 2012. Prices aren’t getting better. In fact, in that same report, the Administration on Aging predicted the monthly cost for a semi-private room in California’s nursing homes will exceed $23,000 in the next few decades. Who can afford that?

Even so, long-term care insurance may not be right for everyone, so let’s take a look at who should consider this insurance…

Who needs long-term care insurance?

Going back once more to the Administration on Aging, our government reports that “70% of people turning age 65 can expect to use some form of long-term care in their lives.”

However, there are some exceptions. Here are the three groups of people that probably don’t need to insure for long-term care:

1. The very wealthy – if you can afford to self-insure, that approach can work just fine. However, there are ways to leverage dollars that can make a lot of sense. We will look at just one example at the end here.
2. The very poor – those living below the poverty line can obviously not afford long-term care insurance, and they will be forced onto MediCal here in California.
3. Younger people – for those with good incomes, but without a lot of accumulated assets yet, protecting their income with disability insurance is often times most important. Once they get into their 50’s though, I believe they should start considering it.

So, what group should consider long-term care insurance? A very large swath of the population, actually – middleclass Americans that are retired or soon to be retired. Members of this group have already built their wealth and are rightfully more interested in preserving not only their assets, but their independence, too.

That’s where long-term care insurance proves invaluable.

It protects the policy-holder’s wealth from the heavy expenses of long-term care, and it allows the individual to retain his or her freedom by receiving care at home. I am sure there’s very few of us that want to spend time in nursing facilities away from loved ones.

I think about Aaron, and if his grandfather had been insured, how differently things might have gone.

How does long-term care insurance work?

There are really two different kinds of policies to consider here – standalone policies and life insurance policies with a long-term care rider. Both policies are usually comprehensive, meaning they cover care in a variety of settings:

  • Adult daycare,
  • Hospice care,
  • Respite care,
  • Assisted living facilities,
  • Alzheimer’s special care facilities,
  • Nursing homes,
  • and your home.

In-home care will typically include skilled nursing, personal care (such as bathing and dressing), and many types of rehabilitation.

So, is there any real advantage in one kind of policy over the other? Both have their pros and cons, but life insurance policies that allow you to add a long-term care rider have become quite popular for a number of reasons.

First, while premiums for a standalone policy can be influenced by increases to healthcare costs, this isn’t necessarily the case for a life insurance policy with a long-term care rider. Depending on the policy, premiums can be guaranteed to never increase for the life of the policy.

And speaking of premiums, the policy can be funded monthly, annually, or in a lump sum.

Finally, with this plan, the insured is essentially purchasing a pool of money. Consider an actual example from here in California, as quoted in U.S. News & World Report last year, where a couple funded a life insurance policy with long-term care using a lump sum of $114,000…

“If either or both need long-term care, the policy will pay up to $6,100 a month per person in benefits, but if the benefits go unused, their heirs will get $307,000 when the second person dies. The couple can also pull the money out at any time.”

As you’ve probably gathered, life insurance plans with a long-term care rider offer an appealing alternative to traditional standalone policies.

Now, I’m not suggesting that this is the solution for you, but I do hope I’ve addressed your questions. And before choosing a policy, I always recommend consulting with a trusted financial advisor who understands how to incorporate this type of insurance planning with your overall retirement income plan.