Long-Term Care insurance is a bit of a misnomer, because its typical coverage duration is two to six years. It is designed to cover disabling situations beyond traditional disability insurance or standard health insurance, usually toward the end of your life.
Most health insurance provides limited -- if any -- long-term care coverage. And disability insurance merely covers the lost income you would have earned during your disability — an amount generally far below the associated medical costs. This is the gap that is filled by long-term care insurance.
The essence of long-term care insurance is to create a pool of money that's available to you if you are incapacitated or disabled in some way — through an accident, illness, chronic or degrading medical conditions, or the normal effects of aging. The need for long-term care is usually defined as needing assistance with at least two standard functions of daily life (such as difficulty bathing, eating/fixing meals, toilet assistance, getting out of bed, etc.). The typical care programs are:
- In-home Care – help with household tasks such as cleaning, cooking, and running errands.
- Adult Day Care – activities during the day (therapies, social activities, etc,) while continuing to live at home.
- Assisted Living – maintaining independence in your own apartment or home with support in a community environment.
- Nursing Homes – full time, in-facility, intensive care
Anyone can purchase long-term care insurance and should at least consider it. But how you purchase this specialized protection depends on your situation.
The major downside is that it is expensive. Many insurance companies are leaving this market because of skyrocketing costs (at this point, the Affordable Care Act does not address long-term care insurance). Insurers require state permission to raise rates, and those who are staying in the market are adjusting their rates as they can. As with any insurance, costs rise with risk — so the older you are, the more expensive this insurance will be.
Long-term care costs vary significantly by state, but total costs are often in the hundreds of thousands of dollars. Insurance companies that still carry long-term care insurance should have a calculator on their website to help you estimate the costs where you live.
When purchasing this insurance, you will make three choices:
- Daily Benefit - For the type of care you may need, what is the daily amount that will cover the costs? For example, nursing home costs are far more than in-home care costs.
- Length of Coverage - Again, typically 2-6 years. The daily benefit times the length of coverage determines your pool of money. Your actual coverage may be shorter or longer depending on the amount you actually use compared to what you anticipated.
- Inflation Protection - The trickiest, and most important, part of determining your benefits. This increases your benefits over time to cover inflation. A typical increase percentage is 3-5%. Of course, it costs more to purchase a greater inflation hedge.
There will be a "deductible" of sorts — a period of 60-120 days after care has commenced, but before care coverage begins. So when assessing options, do not forget to include your costs during this gap.
A solid alternative to purchasing insurance is to self-fund a long-term “care pool” with suitable investments that can be liquidated over time to meet your medical needs. It is possible to create a tax-advantaged Health Savings Account (HSA) for this purpose, which permits you to write-of the amounts deposited into your HSA each year, up to statutory limits, just as in your 401(k) or IRA. Like these retirement accounts, your HSA grows tax-free. But unlike a 401(k) or IRA, whose eventual withdrawals are taxed, you may withdraw money from your HSA at any time -- tax-free -- to pay for medical expenses, including your health insurance policy deductibles and co-payments.
Another alternative to long-term care insurance, for those with low incomes, is to qualify for assistance through Medicaid. Other options to check are state assistance programs for rural areas and low incomes, or long-term care partnerships (ways to blend or complement insurance benefits with Medicaid assistance). Finally, if you are a qualified Federal employee, you can join the Federal Long Term Care Insurance Program.
As you can see, there are numerous ways to protect yourself and your family from the potential economic ravages of long-term care expense. So consider these options, and if you can, take preparatory action long before need arises.