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Nursing Homes & Nest Eggs: What is Long-Term Care Insurance? Part I

No one likes the thought of spending his or her last months or years of life confined to a nursing home, but as life expectancy continues to rise, more and more Americans are being forced to face the harsh realities of such a situation, as well as the financial repercussions that come with it. The cost of long-term care has risen dramatically over the past few decades, creating financial hardship for millions of Americans and their families.

As the cost of care continues to increase, so too does the need for a sound strategy for managing these potential costs. Purchasing long-term care insurance is one such strategy.

This two-part series will delve into the structure of long-term care insurance, its advantages and drawbacks, and some key points to consider when deciding if long-term care insurance should be a part of your broader financial plan.

Long-term care (LTC) refers to the assistance that people with disabilities, chronic illnesses, or other conditions require on a daily basis. It can include various types of care, ranging from part-time in-home assistance to full-time round-the-clock residential nursing home care. Patients may pursue such care for a variety of reasons, including both physical and cognitive infirmities. Caregivers help patients with routine daily activities, such as eating, dressing, bathing, health care, and many other day-to-day activities.

Approximately 68% of all Americans who reach age 65 will need some sort of LTC during their lives. At an average nationwide rate of ~$200 per day, LTC costs can add up to rather daunting sums of money quite quickly, creating a grave financial burden that many people are ill prepared to bear.[1] Many Americans incorrectly believe that Medicare covers LTC and therefore fail to properly prepare for the eventual costs associated with such care.

While Medicaid does cover some LTC costs for the poor, Medicare has no such provisions, leaving middle and upper class Americans to fend for themselves when it comes to covering these costs.

This backdrop certainly argues for a modicum of planning with regard to the potential for needing LTC, and purchasing LTC insurance coverage is one possible method of mitigating this risk. However, making an educated decision on whether or not to purchase such coverage requires a thorough understanding of the nature of long-term care insurance; beyond that, the type and scope of such LTC insurance also requires significant analysis.

LTC is expensive, and an extended stay in a residential facility (or extensive use of skilled care in any setting) can quickly erode a patient’s investable assets. LTC insurance is specifically designed to protect against this type of risk. While these policies come in all shapes and sizes and include a variety of coverages, they are all designed to help ease the financial impact that extended LTC may impose on a policyholder.

Like most other types of insurance products, LTC insurance policies can be customized to fit practically any situation, and, therefore, no two policies are exactly alike. However, in almost all cases, LTC insurance policies are likely to include four primary elements that can then be adjusted to fit the policyholder’s specific needs:

  • Maximum Monetary Benefit
    The maximum monetary benefit is the amount that the policy will pay for LTC, and it is generally quoted as a daily rate (typically between $100 and $500 per day). If approved by the LTC insurance carrier, the policyholder can expect to receive up to this amount per day for care received. Charges incurred beyond this daily amount would be the responsibility of the policyholder. In most cases, once benefits commence, premiums cease. If the policyholder subsequently leaves LTC treatment, then premiums resume.
  • Maximum Life of a Policy
    The maximum life of a policy is the period of time over which the policy will pay the stated daily coverage rate. The time period for most policies ranges from one to five years. However, while the maximum life of the policy may be stated in years, the total dollar amount is what really matters. For example, a policy with a maximum life of three years and a maximum monetary benefit of $250 per day will cover a total of $273,750 in long-term care costs.[2] In reality, a policyholder is buying a total pool of benefits that can be used over a certain period of time.
  • Elimination Period
    The elimination period refers to the period of time between when a policyholder files for LTC benefits and when the policy actually begins paying those benefits. This period essentially serves as the de facto deductible for a long-term care policy, and it can range from zero to 365 days. The most common elimination period in LTC insurance policies is 90 days, meaning that a policyholder would have to wait 90 days from the time that he or she qualified for benefits to when the policy would begin disbursing benefits.

  • Inflation Adjustment
    As the name implies, inflation adjustments increase the total benefit pool to which a policyholder is entitled over time in order to ensure that benefits keep up with increases in the cost of care due to inflation. Assuming that future inflation is in line with historical levels (roughly 3% annually) and LTC costs increase with broader inflation, a person who enters LTC twenty five years from now will pay more than twice as much as she would pay for the same care today. However, it is important to note that adding options such as inflation adjustment to a policy can materially increase the cost of the policy, possibly by 50% or more.

    The purpose of these policies is to provide the policyholder with benefits in case LTC is needed, and most LTC insurance policies serve this purpose well. However, it is important to fully understand the primary benefits and drawbacks of LTC insurance, as well as the key factors that should drive your decision, before determining if LTC insurance is right for you. This is where the rubber hits the road, and we will cover these areas in detail in Part 2 of this series on LTC insurance.

[1] https://www.genworth.com/dam/Americas/US/PDFs/Consumer/corporate/130568_032514_CostofCare_FINAL_nonsecure.pdf

[2] Three years x $250/day x 365 days/year = $273,750

This information is prepared for informational purposes only and should not be considered investment advice.  The views expressed are those of the author as of the date of this report, and are subject to change at any time due to changes in market or economic conditions.  Investing involves risk, including loss of principal.  There is no guarantee that the investment strategy discussed will outperform any other strategy in the future.

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