LONG-TERM CARE INSURANCE 101

Many of my fellow Gen-Xers feel like they’ve checked off all the boxes on their financial to-do list if they’ve done financial planning and have life insurance and estate planning documents in place.  These things are crucial – but there is another item that should be addressed - and it is often ignored or misunderstood.

That item is long-term care insurance (“LTCI”).  If you don’t know about LTCI, or if you haven’t looked into it recently, you owe it to your future self and your family to learn about it, as a prolonged care event can upend even the strongest financial plan, and it can be very difficult physically and emotionally for everyone involved. We’re living longer than ever, and 56% of people 65 and older will need some form of long-term care.

In order to understand LTCI, you first need to know that Long-Term Care (“LTC”) refers to care that helps you get through the day safely when you’ve had an accident or illness or perhaps because of advanced age or cognitive impairment. The things that you used to do easily to get ready in the morning - getting out of bed, going to the bathroom, taking a shower, getting dressed, eating, as well as maintaining continence throughout the day - can become difficult and/or unsafe. These are referred to as the Activities of Daily Living (“ADLs”). If you are in this situation or have a cognitive impairment, and the need for care is expected to last for at least ninety days, that would be considered a “long-term care event.”

The care that’s involved isn’t medical in nature. You don’t need a doctor or nurse to help you get out of bed or take a shower if you’ve broken both legs in a skiing accident.  You just need another person who is able and willing to help you.  Because this type of care isn’t medical, it isn’t covered by health insurance or Medicare. Medicare will only cover short-term rehabilitation after certain conditions are met.

For purposes of LTCI, there are six ADLs:  

• Transferring

• Bathing

• Toileting

• Dressing

• Eating 

• Maintaining continence

  
  

If a person can’t safely perform two or more of the ADL’s without supervision or stand-by assistance, or if they have a severe cognitive impairment, they would likely be eligible to receive benefits if they had an LTCI policy. The benefits come either as reimbursement for expenses incurred or in cash.

Many different scenarios can cause the need for LTCI.  It is not based on age.  While many people assume that LTCI is just for folks who are elderly or at the end of their lives, quite a lot of claims are submitted for people under 65.  Anyone could find themselves temporarily incapacitated by a car accident, other injury or illness – and reliant on someone to help them get through their day safely.

HOW MUCH DOES LONG-TERM CARE COST?

The cost of care varies greatly based on the level of care needed and where you are located.  In the Washington DC metropolitan area, home care costs about $40/hour – or about $7,000/month for 44 hours per week of care, and assisted living can cost $12,000 - $15,000 per month. This tool shows you the average cost of care based on your zip code for different levels of care.  

Regardless of location or level of care needed, you will see that care is extremely expensive, and it inflates at a higher level than your other expenses.  Most people don’t have enough extra cash available to be able to afford an extended care event.  As a result, they may be forced to liquidate assets, such as investments, retirement accounts and real estate if they or their loved one needed care.  If their assets are limited, they may have to rely on family members to provide care.

 A long-term care policy provides leverage – making your dollars go farther- and liquidity – a readily available, dedicated source of funds when care is needed. This can make a big difference for you and your loved ones physically, financially and emotionally.

HOW DOES LONG-TERM CARE INSURANCE WORK?

LTCI is a dedicated source of funds available to cover part of the costs associated with an LTC event.  Like all types of insurance, you are transferring the risk of a catastrophic event to the insurance company.  For each dollar you pay in premiums, you would get a multiple of that dollar for care – depending on how your plan is structured. On average, initially you could expect approximately $4 - $6 available to pay for care for every $1 you pay in premiums, with potential growth over time. This is leverage.  Funds paid out from the policy for LTC are tax-free. If you meet the requirements to qualify for coverage to commence, the policy will pay benefits to cover some of the cost of your care, depending how you’ve designed the policy. 

You may have to wait to begin receiving payments from the insurance company. Many policies have a 90-day elimination period. This is like a deductible - and the elimination period has to be met before payments will start. Your policy will state how the elimination period is calculated. Some policies count calendar days, some count service days and some will give you credit for seven days as long as you have care at least once during a seven-day period. Some policies have a zero-day elimination period, another has a zero-day elimination period for home care and a 90-day elimination period for facility care. A few policies have 90-day elimination periods but reimburse you retroactively at the end of the waiting period.

Some policies (typically Traditional) reimburse you for care provided by licensed caregivers, up to a daily or monthly maximum amount. Some Hybrid policies will send you a check for your monthly benefit regardless of the cost incurred and even if the caregiver you hire isn’t licensed (they can be a friend or relative).

Some government programs can pay for LTC. In certain circumstances, retired military members and their spouses may be eligible for assistance with some of the cost of LTC.  Medicaid will provide LTC for people needing care and who have spent their assets down to a small amount – often to $2,000. 

WHAT TYPES OF CARE ARE COVERED BY LONG-TERM CARE INSURANCE?

Today’s LTCI policies are comprehensive – they provide coverage for all of the following types of care:

• Home health care

• Adult day care

• Assisted Living

• Memory Care

• Skilled Nursing

  
  

The various types of care will be addressed in a future article.  In the meantime, this is an excellent primer that does a great job explaining LTCI in a way that is easy to understand.