Let’s face it: paying for long-term care can be expensive. And as costs continue to rise, it’s important for you to identify how you’ll pay for care, should you need it.
If you’re nearing retirement age, you may think Medicare will pay for care if you become chronically ill and require custodial care. However, Medicare and other government programs can only cover part of the cost, as they either do not cover custodial care or will only cover it under certain circumstances.
To ensure you can get the care you want, where you want it, you may want to consider these alternatives:
- Hybrid life insurance/long-term care insurance
- Individual long-term care insurance
- Paying for long-term care out of pocket
- Relying on family members
Hybrid life and long-term care (LTC) insurance
Hybrid life and LTC insurance products combine a life insurance policy with “living” benefits for long-term care. These products are sometimes referred to as asset-based LTC or linked-benefit policies.
How hybrid life/LTC insurance works
With a hybrid life/LTC plan, when you become eligible for benefits, you first use the death benefit as your initial long-term care benefit pool. When purchasing coverage, you may also have the option to extend your LTC benefits. This coverage extension can provide additional benefit payments if you exhaust the life insurance portion of your policy.
Plans generally offer a single payment option for the premiums. Many also offer the ability to pay for a limited period, such as 5 or 10 years, along with guaranteeing that your premiums will not increase. Like many life insurance products, hybrid LTC insurance plans require applicants to demonstrate their health and undergo an insurance carrier evaluation for approval.
What hybrid life/LTC insurance covers
Most plans pay for expenses associated with informal care from a family member or non-professional caregiver, or care received at home or in a facility.
Benefits generally range from one to seven years, and most plans offer optional inflation benefits, for an additional cost, to help protect against the rising costs of care. In addition, after a period, if you decide you no longer want coverage, most plans offer a return of premium feature, providing a refund of up to 100 percent of all premiums paid.
At death, if you have not used your long-term care benefit, your beneficiaries will receive a guaranteed death benefit. If you have exhausted your long-term care benefits, your beneficiaries will still receive a minimum death benefit, which can be used to help cover basic funeral costs or other unpaid medical expenses.
Individual long-term care insurance
Individual long-term care insurance is a private insurance plan that offers a pool of benefits you can purchase to help cover custodial care costs.
How individual LTC insurance works
Individual LTC insurance benefits are a fixed amount calculated daily or monthly, with benefit periods ranging in years — generally from two to seven years, with some companies offering lifetime coverage.
These policies typically pay benefits using a “reimbursement” method, meaning that for every dollar of care you receive, you receive one dollar of benefits from the plan.
Similar to hybrid life/LTC insurance plans, individual LTC insurance carriers require applicants to provide information about their health and complete an exam before potentially receiving coverage.
What individual LTC insurance covers
Individual LTC insurance plans offer a variety of standard benefits, including coverage in a nursing home or assisted living facility, or at home. They also offer optional benefits, such as inflation riders, to help protect against rising care costs.
Trends in individual long-term care insurance
In recent decades, the LTC insurance marketplace has adapted to address changing consumer needs.
Buyers wanted more variety in plan designs, prompting insurers to develop additional features, including:
- Coverage for informal care at home
- Zero-day elimination periods, allowing policyholders to receive benefits right away after becoming eligible
- Lifetime benefit
- Coverage outside the United States
- Additional inflation options, which increase LTC benefits on an annual basis to help keep up with growing costs
Individual LTC costs
It is important to note that unless you pay a lump-sum single premium when purchasing individual LTC insurance, your premium rates are not guaranteed.
In recent years, several carriers have raised premiums to help account for the low interest rate environment, a lack of individuals lapsing their coverage, and to help cover the benefits being paid, which have exceeded the insurance companies’ projections.
Paying for long-term care out of pocket
If you choose not to purchase an insurance policy, your third alternative is to pay for long-term care expenses using your existing assets. Individuals commonly choose to pay for care out of pocket for a few reasons:
- They have sufficient assets to cover both the cost of care and provide supplemental income.
- They are unaware of alternative options, particularly if they have not worked with a financial advisor.
- They assume government programs or family will cover the type of care they may need or want.
- People choosing to pay for care on their own generally are willing to assume the cost of care.
If you’re considering this option, you should assess your current financial situation, including:
- The value of your current assets
- How much you expect your assets to grow in value over time
- How easily you can access your assets
- Tax implications for liquidating your assets
- Future income needs
Relying on family members
A fourth long-term care alternative is to enlist the support of your family.
It’s important to make sure your loved ones are willing and able to care for you when you need it. Unpaid caregivers may have to reduce their work hours, take unpaid leave, experience declines in personal health and well-being, and put their own retirement funds at risk to provide care.
In addition, informal caregivers may require specialized training to administer care, or additional equipment or modifications to your home may be required in order to maintain your comfort and well-being.