Paying for long-term care can be expensive. 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 counting on Medicare to cover future long-term care expenses, you may want to think again: Medicare is not designed to pay for long-term care. In fact, it only covers some long-term care costs for the first 100 days, but after that, there is no coverage.
So what other options are there?
- Hybrid life insurance/long-term care insurance
- Individual long-term care insurance
- Paying for long-term care out of pocket
- Relying on family members
Before we explore these alternatives, let’s go over a few basic facts about long-term care and long-term care insurance:
- Long-term care supports your daily health and personal needs, such as getting dressed or using the bathroom, if you can no longer meet these needs without help.
- Health insurance and long-term care insurance cover different parts of the wellness spectrum. Health insurance is designed to pay for treatment to help you get better, while long-term care insurance is designed to provide assistance that helps you get through the day.
- You generally must be certified by a doctor as being chronically ill to receive benefits from long-term care insurance. Chronically ill means you need assistance to perform at least two activities of daily living (bathing, dressing, using the toilet, controlling bladder/bowel movements, moving around or eating) due to a loss of function, or you need supervised protection due to severe cognitive impairment.
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 also referred to as asset-based LTC or linked-benefit policies.
How hybrid life/LTC insurance works
A hybrid life/LTC plan typically includes two basic components:
- A base life insurance policy with a guaranteed face amount and death benefit. If you1 die before needing care, your family will receive the face amount of your policy as a tax-free death benefit.
- An agreement that provides LTC benefits. If you2 need LTC and qualify for benefits, this agreement would allow you to access your death benefit and use it to provide your initial LTC benefit pool.
Some policies may also offer an optional agreement that allows you to extend your LTC benefits. If you exhaust your initial LTC benefit pool, this coverage extension would provide additional benefit payments.
Plans generally offer a single or multiple payment option for premiums, so you can either pay your premium all at once or over a period of years. Typically, plans guarantee premium payments will never increase and benefits will never decrease.
Additionally, these plans use a reimbursement or cash indemnity method to provide LTC benefits. Once you have qualified to receive LTC benefits, a reimbursement policy would reimburse you dollar per dollar for actual expenses incurred, while a cash indemnity policy would automatically send you a monthly cash benefit regardless of actual expenses.
Like many life insurance products, hybrid life/LTC insurance plans require applicants to demonstrate their health and undergo an insurance carrier evaluation before being approved for a policy.
What hybrid life/LTC insurance covers
Hybrid life/LTC plans tend to be fairly robust in their coverage. 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 cost of care. In addition, most plans offer a return of premium feature so if you decide you no longer want coverage and are fully vested in your policy, you can get 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 long-term 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.
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 increased existing premiums to account for a variety of factors, such as the low interest rate environment and high expense of benefits being paid, which have exceeded the insurance companies’ projections.
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.
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 professional.
- 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.