Long-Term Care Insurance Guide

According to the Administration on Aging, nearly 70% of people ages 65 and older require some form of long-term care. So whether you’re nearing your senior years yourself or caring for a parent, spouse, or other loved one, you will likely need to pay for long-term care at some point. 

 

Yet, according to the 2021 Long-Term Care Tracking Poll, fewer than 1 in 5 older adults feel financially prepared to pay for long-term care, highlighting the need for payment options such as long-term care insurance. 

 

While long-term care insurance has pros and cons, it should factor into your financial planning as another potential avenue for paying for needed care. Below, we explain the basics of long-term care insurance for seniors, including the features they offer, their associated tax benefits, and other frequently asked questions.

 

Long-term care insurance, also called LTC insurance or LTCi, provides financial assistance for many types of long-term care. You purchase a policy before you need care and pay premiums for years or decades. Then if and when you do need long-term care, such as assisted living, nursing home care, or in-home care, your policy benefit will cover some of those costs.

Some other key terms to know when looking into long-term care insurance are: 

• Indemnity Policy: Indemnity policies provide a cash benefit that you can spend on care as you see fit. So, you receive money from your policy before paying for care. 
• Reimbursement Policy: Reimbursement policies pay you back for the exact amounts you spend on approved long-term care services.
• Daily/Monthly Maximum: The highest reimbursement amount you can receive for a day/month of care expenses, regardless of the cost of care. This will be paid out until reaching the end of the benefit period or benefit pool/lifetime maximum. 
• Benefit Period: The number of years you can receive the daily or monthly maximum. 
• Benefit Pool/Lifetime Maximum: The maximum amount of money you can be paid in benefits for the entire time you own the policy. 
• Elimination Period: A period during which you must first pay for care before the insurance policy starts paying. Elimination period lengths vary, but 90 days is the most common.

Long-term care insurance policies can be traditional or hybrid. However, traditional policies have become scarce, making it more likely that your benefits will come from a hybrid plan.

Traditional LTCi policies cover only your long-term care costs. If the policyholder passes away before they need any long-term care, they do not see any amount of the policy benefit.

Hybrid policies provide a benefit regardless of whether you need care in the form of a built-in death benefit. So, if you never use the LTC benefits and never take out any loans on the policy, the death benefit will be paid in full upon your passing. Using the policy for long-term care costs will eliminate the death benefit. 

As most Americans end up needing some form of long-term care in their senior years, long-term care insurance is a good idea for anyone with room in their budget for monthly premiums and wants to save for their future care proactively. 

However, not all people qualify for long-term care insurance. Those who wait until the need for care is imminent or are already in poor health usually find it’s too late to purchase a policy. The 2022 AALTCI report also showed that in 2021, 47.2% aged 70-74 had their applications for LTCi declined. 

Insurance companies may recommend that people purchase a policy when they’re as young as 40, but buying that young may not be necessary. Most people sign up for a policy during their 50s or early 60s. 

A long-term insurance policy can cover one or several types of care. Most policies are comprehensive, allowing benefits to be used in various settings, but you’ll need to make sure you know which facilities are specifically covered. Some policies only cover certain state-licensed facilities or nursing home care, but many also cover assisted living facilities.  

Eldercare insurance may also cover: 

• In-home care
• Home health care
• Medical equipment
• Respite care
• Home modifications that facilitate in-home care
• Memory care

Most long-term care insurance policies permanently exclude benefits for certain conditions, such as some forms of heart disease, cancer, or diabetes. Other common exclusions include:

• Mental disorders, not counting Alzheimer’s or other dementia
• Alcohol or drug-related conditions
• Medical care related to intentional self-harm or attempts to take one’s own life
• Treatment in a government facility or government-paid treatment in a public facility

Like any insurance, long-term care insurance is somewhat of a financial gamble. You’re betting years of premiums against the likelihood of a long stretch of expensive long-term care. Should you decide to obtain a long-term care policy, make sure you fully understand the pros and cons.

Like home, life, health, and auto insurance, LTCi can prevent financial hardship by proactively planning for future expenses. Other upsides of long-term care insurance include: 

• Prevents emotional, physical, and financial stress: Having an LTCi policy makes it more likely you can get the professional long-term care you need, helping limit the stress placed on family caregivers. It also helps prevent seniors from worrying about becoming a burden to their families.
• Helps ensure loved ones get the care they need: If you have aging parents or other loved ones who don’t live nearby, you may worry about who will provide care for them, the quality of the care they will receive, and how they will pay for it. Long-term care insurance alleviates these concerns by placing them in control of the care they receive.
• Preserves financial security for spouse and other family members: The high cost of long-term care can quickly deplete even a healthy nest egg and other assets, such as a family home, burdening families with the care costs. LTCi provides the means to get care without tapping other resources, protecting other family members from financial hardship related to paying for or directly providing care.

 Despite the many pros of long-term care policies, consider these drawbacks as well:

• Long-term care insurance is expensive: If you have limited income or assets, long-term care insurance may not be financially feasible. If you decide to purchase a policy anyway and then later can’t afford the premiums, you risk losing coverage (and your investment). 
• Premium hikes could be frequent and/or substantial: Since the policyholder will likely pay premiums for 10, 20, or even 30 years, you must be prepared for rate hikes over those years, due to inflation and changing market standards.
• The industry is volatile: Many insurance companies have dropped out of the LTCi market, adding uncertainty to your investment. Always research an insurance company’s financial health through Moody’s Investors Services or Standard & Poor’s insurance rating services before signing a policy. Also consider working with an experienced broker with industry knowledge.

The cost of a long-term care insurance policy is determined by several factors, including:

• Applicant age
• Benefit amount paid per day
• Benefit duration
• Waiting period before benefits begin
• Types of care covered
• Applicant's health at the time of signing
• The amount of inflation protection
• Cost of long-term care in the state/region where the applicant lives
• Miscellaneous provisions

According to the AALTCI’s 2023 Price Index, the average annual premium for a policy with a benefit of $165,000 for a single, 65-year-old policyholder was $1,700 per year for a male and $2,700 per year for a female. If purchased at 55, the same policy’s annual premiums are $900 for a male and $1,500 for a female. 

Rates vary between insurance providers, so the same policy could have vastly different premiums. Compare prices for the types of policies available for your situation.

If affordability is one of the concerns keeping your parents or other loved ones from investing in a long-term care insurance policy, consider the tax benefits. Some ways to save on your taxes with an eldercare insurance policy include: 

• If you buy a tax-qualified policy, you can itemize the premiums with your other medical expenses. Only the portion of total medical expenses that exceed 7.5% of your adjusted gross income can be used as a deduction.
• If you’re self-employed or belong to a C-Corporation, you can claim your entire premium amount as a self-employed health insurance deduction. 

Always consult an accountant or tax attorney to learn which tax benefits apply to your situation.

American Association for Long-Term Care Insurance. “2022 Long-Term Care Insurance Statistics Data Facts.” Www.aaltci.org, 2022.

---. “2023 Long-Term Care Insurance Statistics Data Facts.” Www.aaltci.org, 2023.

---. “Tax Deductible Long-Term Care Insurance Tax Limits-LTC Federal Tax Limits State Deductions for Long Term Care.” 

IRS. “Topic No. 502 Medical and Dental Expenses | Internal Revenue Service.” Www.irs.gov.

Kagan, Julia. “Insurance Inflation Protection: What It Is, How It Works.” Investopedia, 30 Apr. 2021.

The Associated Press-NORC Center for Public Affairs Research. “Long-Term Care in America: Americans Want to Age at Home.” 

U.S. Department of Health & Human Services. “How Much Care Will You Need? | ACL Administration for Community Living.” Acl.gov, 18 Feb. 2020.