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Understanding the Benefits and Risks of Long-Term Care Insurance

Posted by Seton McAndrews | CFP®, Vice President Investments
July 2, 2014

Benefits Risks of Long Term Care InsuranceResearch shows that at least 70 percent of people over 65 will need long-term care services and support at some point in their lifetime.1 Does that mean you should purchase long-term care insurance?

Long-term care insurance can be a significant retirement expense, but it can also help protect your nest egg in the event you need additional health care. It’s an important financial decision for you which you should discuss with your financial advisor in addition to a long term care insurance expert who will help you decide on the plan itself.

To help you get started, here is a general overview of some potential benefits and risks of long-term care insurance.

How Does Long-Term Care Insurance Work?

Long-term care insurance typically provides custodial care needed in the event the policyholder needs help with “activities of daily living.” The insurance is meant to help you pay for these services, which can be quite costly.

What are Some of the Benefits of Long-Term Care Insurance?

The benefits depend on how the policy is structured, but an example might be that you receive $250 per day for a period of 3 years, meaning your lifetime “pool” of benefits is $273,750 that you can put towards needed care. Other benefits:

  • Insurance payouts could help you avoid tapping your retirement savings to pay for care

  • If you have a policy that reimburses you for services rendered, you will not have to pay tax on those insurance payouts.2

Won’t Medicare Pay for My Long-Term Care Needs?

Somewhat, but not as much as you might think. Medicare can help cover short-term nursing care if you are hospitalized for 3 days and need skilled care. In that case, Medicare will pay your costs for the first 20 days. Between days 21 – 100 you are responsible for $148 per day, and then Medicare runs out. For detailed descriptions of what Medicare does and does not cover, this is a good resource: Medicare & You.3

Assuming I Don’t Have Long-Term Care Insurance, How Much Does Care Typically Cost “Out of Pocket”?

Genworth Financial has an excellent resource that details the cost of care by state, which you can find here: How Much Will Care Cost in Your State? Costs vary widely by state – for example, in California the annual cost of having a Home Health Aide is $52,624, while in Texas you can receive a similar service for $41,184.1

How Much Will a Long-Term Care Insurance Policy Cost Me?

A 55 year old single adult can expect to pay $2,065 per year for a policy that provides a pool of $162,000, with a 3% compound inflation protection. The inflation protection means the benefits grow every year you don’t use the policy, in this case meaning the pool of benefits grows to $330,000 in 25 years. Premium costs vary widely by insurer, so it’s important to shop around – according to a study the most expensive policy found cost 87% more than the comparable cheapest policy.

What Happens to the Premiums I Pay if I Never Use My Policy?

You could lose that money.3 Many long-term care policies are structured like homeowner insurance policies – if nothing happens there is no payout. There are some long-term care insurance policies that allow for return of premium in the event you do not need care, but it could cost significantly more to have that feature. There are however potential tax incentives associated with long-term care insurance premiums – ask your financial advisor for more information.

Are the Premiums I Pay Constant or Can They Change?

They can change. There have been some cases where premiums have increased 45% to 85% while you own the policy. This could leave you with an unpleasant decision of whether to walk away from the policy and lose the premiums you’ve already paid. It’s important to check the insurance company offering the long-term care insurance, to see if they have a history of rate hikes in your state.

Does Long-Term Care Insurance Makes Sense for You?

In addition to reviewing your options with a long term care expert, you should run a cost-benefit analysis before purchasing long-term care insurance and see how it fits into your investment plan. One our Wealth Managers can help you with this. Give us a call today at 1-800-541-7774 to get started, or send us a note to wealth@wrapmanager.com.

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1 Genworth

2 Genworth

3 The Wall Street Journal

4 Forbes

Healthcare in Retirement