Chapter 9

Considering Your Long-Term Care Insurance Needs and Options

IN THIS CHAPTER

Bullet Discovering long-term care and your options for financing it

Bullet Looking at long-term care insurance

Bullet Financing your long-term care with personal assets

Bullet Choosing a combination policy

Many Americans in or nearing retirement have two great fears according to surveys: running out of money and needing long-term care (LTC) if they’re unable to care for themselves. These fears are related. After all, long-term care can be expensive, causing you to run out of money and placing a financial burden on your loved ones.

Fortunately, running out of money because of your need for long-term care isn’t inevitable. With a better understanding of long-term care and some planning, you can dramatically reduce the possibility of either of these fears coming true. Many people don’t plan properly, because long-term care financing options can be confusing. Also, long-term care insurance (LTCI) seems expensive, so folks put it off.

In this chapter, we define long-term care and explore the different ways to buy/finance it. We also examine long-term care policies and show you how to reduce the cost by adjusting the terms. Finally, we review alternatives to traditional LTCI.

Understanding Long-Term Care

Long-term care may mean something different to every person. Basically, the term covers any assistance you may need with your day-to-day living. The forms of long-term care depend on the level of assistance you need, which we cover in the upcoming section. Planning how to pay for LTC if you need it is an important consideration when you’re putting together your retirement plan. The following sections help by looking at when you may need LTC and how much it can potentially cost.

Naming the types of long-term care

Depending on your needs, you can receive LTC in a number of environments. In this section, we discuss the main ways of receiving LTC. The following five types show different levels of care, from least to most care:

  • Independent living: These facilities don’t offer LTC, but they’re considered by those who no longer want to live completely on their own. The facilities generally are apartments for those seniors who can live on their own and whose only needs are light housekeeping. Independent living facilities often offer a number of group activities, activity rooms, recreation facilities, and transportation to local shopping malls, doctors’ offices, and other locations. With independent living, you don’t receive any medical care and only receive minimal services, though other services often are available for additional fees.
  • Home care: Most people want to stay in their homes for as long as possible. In home care, an agency often assigns its employees to people needing care. Many people, however, receive home care from family and friends who provide unskilled assistance, often without compensation. Home care may be provided for anywhere from a few hours weekly to 24 hours a day, seven days a week. Home care can consist of personal services, such as cooking and cleaning, provided by a home health aide. It also can consist of skilled medical care, often provided by a nurse or other licensed professional.

    Warning When using home care, you need to be confident that the agency is screening employees before they’re hired and monitoring them to be sure proper care is being delivered.

  • Assisted living: Assisted living often is confused with nursing home care. Many people think they’re interchangeable, but they aren’t. Assisted living usually is delivered in an apartment-like building that has on-site services such as dining, physical therapy, and limited nursing care, along with a range of social and recreational activities. Assisted living is for those who need some help with one or more activities of daily living (ADL), but don’t need skilled nursing care or a lot of help, attention, or rehabilitation.

    Remember In most states, assisted living facilities usually are less regulated and aren’t required to have significant nursing or other medical care on the premises.

  • Nursing homes: A nursing home provides a wide variety of services ranging from feeding, dressing, and bathing residents to monitoring medical conditions and providing significant medical care. They also provide physical therapy. In addition to support staff, a nursing home has a large number of healthcare workers, ranging from nurse’s aides to registered nurses. Nursing homes usually are heavily regulated and are inspected annually by state regulators.
  • Memory care: Memory care is a hybrid of assisted living and a nursing home. Memory care is intended for someone with an advanced level of reduced cognitive function, such as dementia or Alzheimer’s disease. Memory care units can be found in assisted living facilities and nursing homes.

After considering the type of care you need and want, you also can look at the different ways care is provided. The following are three frequent ways of providing the care:

  • Continuing care communities: These multipurpose communities offer several different kinds of senior care facilities in one location, usually independent living, assisted living, and a nursing home. You pay a large fee when entering the community, plus monthly charges. As you age and more care is needed, you can shift from independent living to assisted living to a nursing home. Admission at each level of care is guaranteed when you need it.

    Tip A big advantage of continuing care facilities to married couples is that if one spouse needs to move to a higher level of care, the other is living a short walk away in the same community.

  • Group homes: For those who don’t want an institutional-like setting, a group home provides assisted living services (or less) in a single-family home or similar structure. In most states, these types of homes undergo a very low level of regulation when the number of residents stays below a maximum level, usually from 5 to 15.
  • Stand-alone facilities: These tend to be large facilities that provide one or two types of care, such as a nursing home or an assisted living facility with an independent living or memory care section. When you need a different type of care, you have to move to a different facility. For example, you may start in an assisted living facility and after a period of years need a higher level of care. You would have to move to a nursing home.

Predicting who will need long-term care

You may not need LTC, and if you do ultimately need it, LTC usually isn’t a stereotypical multiyear stay in a nursing home. In fact, the odds of needing extended, extensive LTC in a nursing home are lower than most people think — but not negligible. Yet, care at home or in an assisted living facility is more likely and will last longer than most nursing home stays. In fact, the use of these services is growing.

However, with life expectancies increasing, some experts expect that a higher percentage of today’s 65-year-olds will need extensive LTC in their lifetimes than their predecessors. The theory is that people will live longer and will need assistance during the later and traditionally frail years.

Remember The statistics regarding long-term care are useful but they’re only averages and probabilities. If you’re among the minority who do need extended LTC, the cost could rapidly deplete your savings and your estate and the averages won’t matter. So to avoid depleting your savings and other assets, you need to plan for how to finance potential LTC costs.

As averages and probabilities for the population as a whole, the numbers on long-term care needs can be misleading because they don’t tell how likely it is that you will need LTC. Also, the surveys have different ways of defining LTC. Often, a few days in a facility to receive rehabilitation or physical therapy after surgery is counted as LTC when your real concern is an extended need for care. However, statistics can still provide you with important information. Consider the following statistics:

  • Only about 1.4 million Americans are in nursing homes, and many of those need only short-term stays for rehabilitation after an injury, illness, or surgery. One widely reported U.S. government estimate is that about 70 percent of those age 65 today will need LTC at some point. So in a married couple in which both partners are age 65, the odds are high that at least one spouse will someday need LTC.
  • One study in the healthcare journal Inquiry (that also was reported in the Wall Street Journal) concludes that during their lives 69 percent of those who reach age 65 will need LTC. The study also concludes, however, that much of the need will be for assistance with only one ADL and could be provided by a family member at home. (The six ADL are dressing, bathing, transferring/mobility, eating, walking, and using the bathroom.) The study also states that while 37 percent of 65-year-olds will need long-term care in either a nursing home or assisted-living facility, most of those stays will be for no more than two years. Only 8 percent of the group will incur the dreaded and potentially financially ruinous stay of five years or more.
  • Over the years, the length of the average stay in a nursing home has declined. About half of nursing home stays now are for 90 days or less because they’re for short-term rehabilitation after an injury or illness. About three-quarters of nursing home stays are estimated to be for less than one year. Even those numbers don’t tell the whole story, however. Though the average stay in a nursing home is declining, those who stay in a nursing home beyond a short-term stay tend to be there for a while. The average extended nursing home stay lasts more than two years. Even though two years is the average, many long-term residents are in nursing homes for longer than two years. About 9 percent of nursing home stays are for five years or more. Women dominate this group by a ratio of three to one.
  • Although little data is available on the use of home care and assisted living, experts do know that the use of these services and facilities seems to be increasing while nursing home use is declining. Assisted living and home care also tend to last longer than nursing home care for those who need them. For example, nonrehabilitative home care lasts an average of more than four years. The information also doesn’t include people who are cared for by family members and friends using their own time and resources instead of professional LTC.

Estimating how much long-term care will cost

The potential cost of LTC is a mystery to most Americans. They think that it’s expensive, but they don’t know how expensive. So when considering and planning for LTC, you want to have a good idea of how much it costs in case you (or your spouse) should need it.

In the following sections, we provide you with some information on the costs. Fortunately, the quality of cost estimates has improved in recent years. Even so, you have to use surveys and estimates of the costs carefully. We explain some strategies and tools that can help you make informed decisions based on your own situation and location.

Looking at the data with a discriminating eye

The good news is that research on the cost of LTC is available to help you with this calculation. The bad news is that the results of this research still yield only broad-based estimates. You need to refine the estimates in your final LTC planning. That’s because several factors can affect the costs in your situation. In this section, we first show you some of the data, and then we remind you of the factors you need to keep in mind when making the final calculations.

For someone turning age 65, there’s about a 31 percent probability no LTC will be needed. For those who do need LTC, about 48% will need less than one year. Another 19% will need one to two years of LTC, and 21% will need two to five years. The other 13% will need five or more years of LTC. That’s according to data from Nicolas Rapp published on the AARP website. The American Association for Long-Term Care Insurance (AALTCI) asked actuaries to estimate the percentage of people who will use the benefits of LTCI if they purchase the policy at age 60. If the policy has a 90-day elimination period (waiting period), the actuaries estimated that about 35 percent will use their policy benefits.

Each year the insurer Genworth publishes a study of the cost of different types of LTC around the country. The study reports on the daily cost of home personal care, home healthcare, assisted living, and nursing home care. The costs are broken down by the major regions or population centers within in each state.

In 2020, the monthly median cost of home personal care was $4,481, and the monthly median cost of a home health aide was $4,576. Assisted living cost $4,300 per month. A semi-private room in a nursing home cost $7,756. Remember those are national median costs. In some areas the costs are substantially higher, and in some they are lower.

Warning Now that you’ve seen the average numbers nationally, we discuss the factors that can affect them — and your LTC planning. If you don’t keep the following factors in mind, you can come up short, reserve too much, or buy the wrong amount of insurance:

  • You may incur additional costs. The averages we provide earlier in the section include only the basic daily rate. These daily rates aren’t likely to add up to the final cost. That’s because many residents in assisted living facilities and nursing homes incur additional costs beyond the basic charge. Typical additional costs are for medicines, physical therapy, medical care, and personal care expenses. On average, an LTC resident incurs additional costs equal to about 20 percent of the basic daily rate. Some of these additional costs may be covered by Medicare or other insurance.
  • Costs vary greatly around the country. If you plan for the national median cost but incur LTC costs in a high-cost area, you won’t have enough money. If you incur LTC costs in a low-cost area but plan for the national median, you will have diverted too many resources to LTC financing. Plan for LTC costs in the area you’re likely to incur them.

    You can find the average cost per state on the website for Genworth (www.genworth.com). You also can drill down to see the median cost in a particular city, state, or ZIP code. The site also lists the costs per hour, day, month, and year. There are separate reports for nursing home care, assisted living, home care, and adult day care. But keep in mind that these are median costs. Costs vary among providers.

    Remember Keep this in mind as you determine the area in which you plan for LTC: The choice of facility usually is made by an adult woman related to the LTC recipient, such as a daughter or daughter-in-law. The LTC provider is likely to be located near the decision-maker. If you don’t live near your adult children and don’t determine ahead of time where you would like to receive any needed LTC, the costs are likely to be incurred near one of your family members. The costs in that area may be very different from the costs where you’re living now.

  • Costs rise over time. Most people who plan for LTC do so years before they’re likely to need the care. One estimate is that on average the first claim on an LTCI policy is made just over 13 years after the policy was purchased. And LTC costs have been rising for some time at a rate that’s higher than the overall rate of consumer price inflation. So if your LTC plan relies on today’s cost or an estimate from years ago, you could be in trouble when you have to pay for long-term care later. If the rate of cost increases isn’t factored into your plan, it will cover only a fraction of the potential costs, and you may run out of money to pay for these costs.

Using tools and strategies to calculate costs for LTC in your area

Calculating LTC costs according to your situation and where you anticipate having any needed long-term care is an important part of your financial plan. So in this section, we provide you with some tools and strategies for doing so:

  • Call and visit different types of LTC providers in the area of your choice. Narrow down the options to the ones you would prefer, and then use their actual costs and anticipated future increases in your planning. Ask about the room choices available (studio and one-bedroom apartments, for example) and the cost differences. Inquire how often rates increased in the past and by what percent. Get details of services not included in the daily rate and your options for them. For example, does medication have to be purchased from their pharmacy, or can you choose the pharmacy? Can you select a physical therapist or must you use the therapist selected by the facility? Ask how much the typical resident pays in addition to the daily rate, and get some examples of regular charges.
  • Use insurance company websites. Each year Genworth updates its interactive website of long-term care costs. The details vary and the features of the site change regularly. In general, the site shows you the estimated costs of the different types of long-term care in the main population areas of each state for each of the different types of long-term care. It also estimates future costs after factoring in inflation.

    Remember Our recommendation of this survey isn’t a comment on the company’s LTC policies. Also, the point of this discussion isn’t to recommend that you purchase a long-term care policy from any insurer.

Planning to Pay for LTC

Putting together a clear plan for how you’re going to finance LTC is an important decision. You basically have five ways you can pay for any LTC you may need:

  • Medicare: Medicare is the healthcare financing program for those age 65 and over. Its LTC coverage is limited to short-term stays needed for rehabilitation and for some services provided in an LTC facility. Details about Medicare are in Chapter 11.
  • Medicaid: Medicaid is a program for the poor and will provide nursing home coverage only for seniors with limited income and assets. It doesn’t cover assisted living. We review Medicaid in detail in Chapter 12.
  • Private traditional insurance: A traditional LTCI policy can be an individual policy or a group policy, which usually is purchased through your employer. We discuss these in the next section.
  • Hybrid policies: Many annuities and cash value life insurance policies offer LTC riders. The annuity balance or life insurance cash value account is used to pay for LTC when needed, and the insurer pays for more care up to a limit, if that’s needed. If LTC isn’t needed, your loved ones eventually receive the annuity balance or life insurance benefit. These often are referred to as hybrid, linked-benefit, or asset-linked policies, and we discuss them later in this chapter.
  • Personal funds: These are your (and your family’s) savings and investments. Using this source to pay for LTC often is called self-financing. Any LTC not paid for by the other sources will be paid from personal funds. We review investments in Chapter 7 and self-financing later in this chapter.

In the rest of this chapter, we examine private insurance, hybrid insurance, and self-financing.

Considering Traditional LTC Insurance

One option you have to pay for LTC is through private LTC insurance (LTCI). This insurance is fairly standardized; the policy covers care under one of two events:

  • Some policies cover LTC after a licensed medical professional certifies the insured needs LTC.
  • Other policies require a certification stating that the insured needs assistance to perform at least two of the six ADL (dressing, bathing, eating, walking, transferring/mobility, and using the bathroom) or has Alzheimer’s disease, dementia, or other cognitive issues. Certification usually comes from the insured’s doctor. This is the most common coverage trigger today.

A traditional LTCI policy can be expensive, and premiums rise steadily as the insured ages. For example, a 55-year-old male paid on average $2,220 annually while a 55-year old female paid $3,700 on average in 2021 for a policy with $165,000 of benefits and 3 percent annual inflation protection, according to the AALTCI annual survey. A married couple age 55 would pay $5,025 per year. At age 65 the costs were $3,135 for a male and $5,265 for a female. A married couple paid $7,150 annually. These costs were averages. The premiums will vary by your residence, health history, terms of the policy, and the insurer selected. However, cost shouldn’t be the only issue you consider. The premiums for an LTCI policy, after all, are a small share of the potential cost of LTC.

In this section, we discuss the key policy provisions of LTCI and how you can adjust them to get the coverage you need at the best price. (In the later section “Evaluating Employer and Group Coverage,” we discuss the pros and cons of getting LTCI through an employer or other group, such as an association.)

Knowing the basic features of LTCI

In order to get a firm grasp on LTCI, you need a good understanding of what policies usually cover. The following list outlines important core features of most LTCI policies:

  • Care needed as a result of any cognitive decline is explicitly covered in standard policies.
  • Coverage kicks in even when you didn’t stay in a hospital before applying for coverage.
  • LTC is covered whether it’s received at home, in an assisted living facility, or in a nursing home.
  • Adult day care usually is covered.

There have been significant changes in the traditional LTCI marketplace since 2008. Many insurers received more claims for benefits than estimated when the policies were sold. Some insurers also underestimated the cost of LTC. In addition, the insurers earned less investment income as a result of historically low interest rates and weaknesses in prices of stocks and commercial real estate.

Many insurers have left the market and no longer offer new LTCI policies. Only a few insurers still sell traditional LTCI. Most of the insurers have imposed substantial premium increases on existing policies in the years since 2008. New policies offer lower benefits than were available before 2008, and premiums on new policies are much higher. The “gold-plated” policies with lifetime benefits that we discussed in previous editions of this book are no longer available. A consequence is that fewer traditional LTCI policies are sold. The AALTCI estimates that of the approximate 350,000 LTCI policies now sold annually, only about 16 percent are traditional LTCI policies.

Potential premium increases are an important consideration when evaluating traditional LTCI. Some insurers try to limit the premium increases imposed on existing policyholders; however, no limits are set in the policies. After a policy is purchased, premium increases aren’t imposed on an individual based on age or changes in medical condition. Instead, premiums for an entire class of policyholders may be increased based on the insurer’s claims experience or other factors. These premium increases have to be approved by state insurance regulators.

Remember Don’t automatically assume a policy with the broadest benefits available is the best option for you. It may offer more coverage than you need or can afford. Luckily, many of the key policy terms can be adjusted. By adjusting the terms, you can obtain solid coverage at a reasonable cost. Your insurance agent or broker can show you how changing the terms changes the premium.

The following sections look at key policy provisions and how you can use them to adjust both your coverage and premiums.

Daily benefit

The coverage on an LTCI is stated as a daily benefit or reimbursement, such as $150 per day of covered care. The policy usually has separate daily benefit levels for the different types of care: adult day care, home care, assisted living, and nursing home care. (Refer to the earlier section “Naming the types of long-term care.”) Nursing home care has the highest daily rate, and the others have lower rates. Sometimes the other types of care have a specified daily rate. Other times their rates are expressed as a percentage of the nursing home rate.

Remember After doing your research on the likely cost of LTC (see the earlier section “Estimating how much long-term care will cost”), you’ll have a target benefit amount in mind. Don’t forget that you’re likely to incur additional costs on top of the basic daily room rate. And be sure to consider cost inflation. After all, the cost of LTC has been rising faster than general price inflation for some time. We discuss inflation protection in more detail later in the chapter.

The insurer usually allows you to choose from a range of daily benefit amounts in increments of $25 or $50 per day. To obtain full coverage, choose a daily benefit that equals or exceeds your estimate of the likely standard daily care rate plus extra costs not included in the daily rate, as discussed earlier in this chapter. Doing so ensures that the insurer covers the entire cost of care once the policy’s coverage kicks in. Unfortunately, insuring for the likely full cost of care is often expensive.

Tip Your premium can be reduced by choosing a lower daily benefit. For example, your estimated cost may be $150 per day. You could choose a daily benefit of $125, meaning the insurer would pay that amount, leaving your personal income and assets to cover the other $25 per day as long as care is needed. You would choose this route if it appears that your income or assets could pay for that much of the care or if the premiums for a higher level of coverage are too high for you to afford.

To reduce the cost of inflation protection, you could insure for a higher daily benefit than you’re likely to incur. Insurers tend to charge more for inflation protection than for a higher daily benefit. We discuss this method in more detail later in the section on inflation protection.

Waiting period

The waiting period provision of a policy, which also is known as the deductible or elimination period, is the length of time for which you pay for your own LTC before the policy starts paying benefits. For example, suppose your policy has a waiting period of 90 days. You receive certification from your doctor that you need LTC as defined in the policy. You begin LTC, whether at home, in an assisted living facility, or in a nursing home. After you pay the full cost of the care for 90 days, the LTCI begins coverage, paying whatever the daily benefit is.

Most insurers offer waiting periods from 90 to 365 days, though a few offer longer waiting periods. Few insurers now offer a waiting period less than 90 days. The most frequently selected waiting period appears to be 90 days.

Remember Selecting a long waiting period is similar to selecting a high deductible on an auto or homeowner’s insurance policy. The longer the waiting period, the lower your premiums will be. If you want a low-cost policy that protects you only from a long-term catastrophic claim, select a long waiting period. In this case, your personal assets and income must be able to pay for all your required care during the waiting period. A long waiting period also can be used to enhance the other policy terms, such as the daily benefit or lifetime benefit limit, without dramatically increasing premiums.

But consider the trade-offs involved in a long waiting period. One estimate was that on average a 90-day elimination period reduced annual premiums by $750 compared to no elimination period. But when a nursing home costs $150 per day, the 90-day elimination period means you pay $13,500 in care before insurance kicks in, unless Medicare or some other coverage picks up part of the tab. At a premium savings of $750 annually, you have to own the policy for 18 years before needing coverage to break even on the longer elimination period.

Benefit period

The benefit period is the length of time the insurer will pay the daily benefit, which we describe earlier in the chapter. It used to be possible to obtain a “gold-plated” LTCI policy that guaranteed to pay the daily benefit for life. In the changes following the financial crisis of 2008–2009, most insurers eliminated this unlimited coverage. This type of policy was a tremendous solace for those unfortunate folks who worried they would end up spending many years in LTC, and it protected the assets of those who did. But only a minority of people need lifetime LTC or even LTC longer than five years (see the earlier section “Predicting who will need long-term care”), so choose wisely.

Remember When an unlimited waiting period was widely available, with most insurers, reducing the benefit period from unlimited to five years cut the premium by 25 percent annually. A three-year benefit period made the premium about half of the unlimited lifetime benefit period. Most insurers now offer benefits periods of from one to five years.

The potential disadvantage of the shorter benefit period is that you may end up being in the minority of those needing extended LTC. If so, after the LTCI benefits are exhausted, personal and family income or assets must be used to pay for the care. The only consolation in this situation is that after exhausting personal assets, you would qualify for Medicaid, as described in Chapter 12.

Tip One strategy is to coordinate your LTCI with Medicaid. You must give away or transfer assets more than five years before applying for Medicaid if you want to preserve them for your family instead of spending them on LTC (check out Chapter 13 for more information on this strategy). You can select a five-year benefit period and assume you would be able to spend or rearrange your assets about the time you begin LTC. Then, when the policy benefits are exhausted, you can apply for Medicaid.

Inflation protection

The cost of LTC rises steadily, and for years it increased at a rate about twice that of the Consumer Price Index (CPI). Fortunately, LTCI policies offer inflation protection clauses, and they’re key to making the policies valuable.

Remember The younger you are, the more important strong inflation protection is. Most policies now allow you to select a fixed rate of inflation protection of either 3 percent or 5 percent. A few policies used to offer inflation protection tied to the CPI, but that rarely is available now. Inflation protection should be pegged to changes in the cost of LTC or medical expenses.

LTCI policies generally offer the following two types of inflation protection:

  • Simple interest protection: This method is cheaper, but it’s much less effective, especially for younger people. Suppose you have simple interest protection and inflation is 5 percent each year. Your daily benefit limit is $100. Because 5 percent of $100 is $5, your daily benefit increases by $5 each year. The cost of LTC, however, increases at a compound rate. If the $100 daily charge increases by $5 each year, the cost is $105 after one year, $110.25 after two years, $115.76 after three years, and so on. After a number of years, the difference becomes significant.
  • Compound interest protection: This method is more expensive but more beneficial, because it matches the compound increases in actual costs.

Remember Although the difference between simple and compound interest is small initially, after many years the difference amounts to thousands of dollars annually in potential benefits.

Warning Most insurers limit inflation protection to a maximum of 5 percent annually. You can select a lower inflation cap to reduce premiums, but you shouldn’t unless you anticipate being able to make up the difference with your personal assets or income or want to bet that cost increases in LTC won’t exceed 5 percent.

A better way to enhance inflation protection may be to increase your daily benefit limit. This is especially true if you’re older, say around age 70. Have your broker compare the cost of inflation protection to a higher daily benefit — around the daily cost you expect in 10 or 15 years. With some insurers, you’ll find that a significantly higher daily benefit limit is cheaper than compound inflation protection.

Covered care and expenses

You’re likely to find that most types of LTC are covered and that the definitions of covered care are less subjective than 15 or more years ago. Even so, you still need to understand what’s covered and what’s excluded. When comparing policies, you should review the coverage sections for important differences.

The good news: The coverage limitations tend to be similar among the major insurers now. Make sure your policy covers the following:

  • Medically necessary care: You want to ensure that the policy you choose covers medically necessary long-term care. The term medically necessary basically means that a doctor or other health professional certifies that the insured needs help with two or more of the six ADL. A written plan of care also may be required for coverage to kick in.

    Warning You don’t want a policy that lists the specific diseases or conditions that result in coverage. In such policies, too often care is needed but not covered; or sometimes it’s easy for the insurer to decline coverage and force the insured to appeal the decision.

  • Skilled and custodial care: You want to be sure the policy covers both skilled and custodial care. The need for LTC may be the result of a physical or medical condition, which would require the skilled care of healthcare professionals. However, most of the care needed is nonmedical, so it doesn’t require skilled nursing care. Instead, the person may need help with ADL or may simply need to be observed to prevent accidents and injuries. These types of care are custodial.
  • Adult day care: This type is a relatively new covered care. It generally gives adults a place to be during the day where they are fed, have activities available, and are observed. That gives a family caregiver, such as a spouse or adult child, a break or allows him or her to work at a job during the day. Usually no medical and limited custodial care is offered. Decide whether you want this coverage.
  • Home care: This care is standard in today’s policies; however, if possible, try to avoid a policy that limits home care to “professional home-care services” or something similar. Someone who needs custodial care that can be provided in the home likely needs help with basic daily chores such as cooking and cleaning, as opposed to medical services.

    Tip A member of your family or a trusted person outside the family may be able to provide nonmedical home care. If the policy doesn’t limit the source of care, the family member or friend can be paid from the insurance for the services. But if the policy limits covered care to that which is provided by a professional, only someone with a professional certification, such as a nurse’s aide or registered nurse, can be reimbursed. Likewise, a policy may limit coverage to care by a state-licensed provider, which also would preclude paying a family member.

  • Cognitive impairment: People used to run into problems receiving coverage for care resulting from Alzheimer’s disease or other forms of dementia. There is no test for these conditions, and they usually develop gradually. Most policies now say coverage is triggered when a licensed medical professional diagnoses cognitive impairment and establishes a plan of care. A hospital stay isn’t required before coverage is triggered.

Checking out two more important LTCI factors

When you’re thinking of obtaining an LTCI policy, you also need to contemplate two additional factors that aren’t part of the policy but need careful consideration before choosing a policy. The following sections explain.

The insurer’s financial stability

An LTCI policy is a long-term commitment. You want to be confident that the insurer will be able to pay for covered care when you need it — even if that means decades from now. Theoretically you can switch policies if the insurer has financial problems, but you can’t rely on that option. Changes in your health status or the market may make it difficult to obtain a new policy (or at least an affordable one). Instead of taking those risks, choose an insurer that appears to be financially stable, even if the policy doesn’t have the lowest premiums.

So what can you do to ensure that an insurer is financially stable? Examine the following about the insurer:

  • The insurer’s ratings from major ratings firms: Four firms are recognized for their ratings of the financial stability of insurers: A.M. Best Company; Fitch IBCA, Moody’s Investor Service, Inc.; Standard & Poor’s Insurance Rating Services; and Weiss Ratings, Inc. Each of these firms has a website. Any agent or broker offering you a policy also can and should provide the financial ratings. Ratings often are available in public libraries and from state insurance commissioners. The ratings aren’t guarantees or free from error, but they’re the best tool you have. Each firm has its own rating scale, so you have to understand each firm’s system to know what a rating means. Make sure the insurer has only top ratings from more than one service.
  • The insurer’s underwriting process: The underwriting process is the medical screening process that the insurer uses to assess eligibility. Experienced LTC insurers conduct a medical review and don’t offer policies to people with health conditions or histories that indicate the potential for high or early claims. Other insurers that have little experience or that are trying to boost market share conduct superficial or no medical screenings. Those are the insurers who are most likely to run into financial trouble or to significantly increase premiums because claims are higher than they anticipated. If the insurer doesn’t conduct a meaningful medical screening before offering you a policy, consider that a red flag about the quality of its underwriting process.

    Of course, if you desire an LTC policy but have some medical issues, you may be able to only get coverage from an insurer that does a less thorough screening. (Another option is a group policy through your employer, which required to take everyone regardless of current health conditions.) That said, answer all questions honestly because if the insurer can show that you lied on your application, you can later be denied coverage.

  • The insurer’s premium compared to other insurers: Significantly lower premiums than the competition are most likely the result of inexperience or an effort to boost market share. Expect significant future premium increases on policies with low initial premiums. It isn’t unusual for the premiums to become so high that most policyholders let their policies lapse.

Remember Most insurers who have been issuing LTCI for a while are financially sound. Even in the financial crisis of the late 2000s, the insurance companies issuing LTCI policies didn’t run into trouble paying claims. That’s because insurers must have reserves of a certain level available to pay claims, and state regulatory agencies inevitably step in to merge failing insurers into healthy ones.

The history of premium increases

Some of the long-time LTC insurers boast, or at least used to, that they haven’t increased premiums or rarely increase them. What they mean is they don’t increase premiums on individual policyholders because they’re older or their health has changed. They generally do increase the premiums on an entire class of policyholders, however. The better LTC insurers historically kept these increases low.

LTCI has been less profitable than many insurers expected. In recent years, a number of insurers have stopped issuing new LTCI policies, and there have been significant premium increases by most insurers. Even insurers who had histories of few or low premium increases sought significant increases to compensate for low investment earnings, longer life spans, and fewer people letting their policies lapse. For each insurer, examine the history of premium increases in recent years.

Warning If the increases are frequent or large over a period of years, it means the insurer isn’t good at estimating its future claims experience or is mismanaging its investment portfolio. Insurers that do poor jobs in those two areas have a history of inflicting regular double-digit percentage premium increases on their LTC policyholders.

Tip You don’t want to let an LTC policy lapse because the premiums become so high they’re unaffordable. To avoid this situation, check the premium increase history of the insurer. You want to see the history both for the class of policy that you’re buying and for the portfolio of LTC policies the insurer has in force. The insurance company or broker should provide a history of rate increases for the type of policy being considered. The state insurance department also can provide a premium increase history.

Using Hybrid Insurance Products

People generally have two complaints about LTCI. It can be expensive, and if they never need LTC, they don’t receive any benefit from all the premiums they paid, except for the peace of mind. LTCI is a use-it-or-lose-it product.

Hybrid insurance products can overcome those objections, though they can have their own disadvantages. A hybrid insurance product can be an annuity or a permanent life insurance policy with an LTC rider.

Congress enhanced the attractiveness of these policies with the Pension Protection Act of 2006. This act provides the following:

  • Funds withdrawn from qualified policies in 2010 or later to pay for LTC won’t be taxable, regardless of when the policies were purchased.
  • Life insurance will retain its tax advantages even when combined with LTCI.

The issue for you as a potential consumer is how to evaluate one of these combination policies when evaluating stand-alone LTCI is complicated enough. The following sections point out what you need to know.

Exploring annuities to finance LTC

A deferred annuity is a contract between you and an insurer. You give the insurer a lump sum deposit. This deposit is credited to your account. Each year the insurer credits interest to the account, increasing your account balance. There usually are restrictions on your ability to access the account without paying a penalty before a minimum time has passed, usually seven to ten years. The deferred annuity can be a safe, conservative, tax-advantaged way to save and invest.

Some deferred annuities offer a long-term care rider. If you opt for the rider, the insurer will begin paying you a monthly amount should you need LTC. The need for LTC usually is determined the same as under an LTCI policy. It is when you need help with at least two of the ADL or have cognitive impairment. The annuity contract specifies the maximum monthly payment. The payments initially are subtracted from your account balance. If your account is exhausted, the insurer makes additional payments up to a limit specified in the contract.

One annuity with a long-term care rider with which co-author Bob is familiar works like this. Harry deposits $100,000 with the insurer. The insurer will credit Harry’s account with interest each year. Harry also now has up to $300,000 of long-term care benefits, three times his deposit. If Harry or his wife, Linda, needs LTC, he files a claim with the insurer and it begins making monthly payments. The maximum monthly payment is about $4,200. That provides up to 72 months of LTC payments from Harry’s $100,000 deposit before the coverage limit is reached.

As Harry and Linda receive payments for LTC, the payments first reduce the annuity balance. Once the balance is zero, the insurer pays the additional amounts until the contract limit is reached. Harry and Linda’s children inherit the annuity balance if Harry and Linda never need LTC or don’t need enough LTC to use the balance.

Remember The LTC coverage isn’t free under this or any other annuity with an LTC rider. The annuity is credited with interest annually at a rate that is 0.25 percent to 0.50 percent less than would be credited to an annuity without the rider. Also, Harry and Linda receive no LTC benefits from the insurer until their account balance already is spent on LTC.

Tip There are many variations of annuities with LTC riders. The benefits under the riders and their cost vary. You need to review a number of choices or work with an insurance broker who is in contact with many insurers before making a choice.

Financing LTC with life insurance

When a life insurance policy is combined with LTCI, it’s a permanent life policy and not a term life policy. The LTCI is a rider that provides that a portion of the death benefit is available as an accelerated benefit during the insured’s life if LTC is needed.

Some policies, like the annuity described in the previous section, offer an additional LTC benefit if the policy death benefit is exhausted. But some insurers place a limit on the amount of the death benefit that can be withdrawn to pay for LTC. Any amount used to pay for LTC is subtracted from the death benefit. The premiums for the LTCI rider can be paid either as a lump sum or periodic premiums. The life insurance benefits are paid to the owner’s beneficiaries when LTC isn’t needed or doesn’t deplete the benefit.

Of course, the LTC rider isn’t free. The LTC benefits may be paid for by having less interest credited to your cash value account, receiving lower life insurance benefits for the premium dollar, or a combination of these and other methods.

Assessing the LTC hybrids

The most attractive feature of the hybrids to many people is they are assured of receiving some benefit. Either the hybrid helps pay for LTC or the unused balance goes to their children or other loved ones. The insured also has access to the annuity balance or cash value of the life insurance if money is needed before LTC is. Another potential benefit is that the medical underwriting for a hybrid may not be as rigorous as for an LTCI policy. Someone whose health is too poor to qualify for LTCI may be able to obtain coverage under a hybrid. Before purchasing a combination policy, consider these questions:

  • What is the cost of the coverage? You’ll likely find that the cost of an LTC rider is substantially less than the cost of a traditional LTCI policy. The cost also is likely to be hidden, such as by crediting you with a lower yield on an annuity, instead of requiring you to write a check each year. But if you don’t really need an annuity or permanent life insurance, then the cost of maintaining the policy needs to be considered. You’ll have less access to your money and may earn a lower return than you could find elsewhere.
  • Is there enough coverage? The LTCI portion of a combination policy may have lower maximum benefits than stand-alone LTCI. The limit is determined by the amount of life insurance you buy or your deposit for the annuity. First, determine the amount of LTC coverage you need, and then evaluate whether that coverage is available through a combination policy at a reasonable cost.
  • Is there inflation protection? Inflation protection generally is available on most hybrid policies today, though it may be at an additional cost. You need to know this information when deciding whether the combination policy will provide sufficient coverage and to properly compare it to a stand-alone LTCI policy. Refer to the earlier section “Knowing the basic features of LTCI” for more on this type of protection.
  • Is each segment of the policy satisfactory? You should review the same terms of the LTC coverage in a hybrid as you would in a traditional LTCI policy. Compare the features of a combination policy to those of separate policies using the discussion earlier in this chapter.
  • Can the cost of the LTC coverage be increased? Some hybrid policies say they won’t decrease the LTC benefits or increase its cost during the life of the policies. Others reserve the right to change the terms at any time. (See the earlier section “Checking out two more important LTCI factors” for more information.)

Remember With a hybrid policy, your own money pays for LTC first. The insurer pays only after your account balance is exhausted. In the meantime your money will be tied up in the hybrid policy and may be earning less than it could elsewhere. Be sure the additional benefits the insurer will provide are worth these costs.

Reimbursement versus Indemnity Coverage

When it’s time for an LTCI policy to pay benefits, the payments are made in one of two ways.

In a reimbursement policy the insurer reimburses you for your covered LTC costs. You or the provider of LTC sends a bill to the insurer. The insurer reviews the bill, determines the amount of covered care, and sends a check for either that amount or the daily coverage limit, whichever is lower. You or your loved ones may have to pay the LTC provider first, send paperwork to the insurer, and wait to receive the insurer’s check.

In an indemnity policy the insurer begins paying you the monthly benefit amount after you trigger the LTC coverage. The monthly amount is sent for as long as you need LTC, until the policy coverage limit is reached. You can use the money however you like. You can pay a family member to provide care at home, or you can pay an LTC provider. If the cost of care is less than the monthy payment, you can invest the excess or spend it on other things. Once you’ve established that you need LTC, you don’t have to keep sending invoices and proof of payment to the insurer.

The different payment methods can be found in both traditional LTCI and hybrid policies. It’s a factor you want to consider when choosing among competing policies.

Financing LTC Yourself

After considering government programs, such as Medicare or Medicaid, private insurance, and hybrid insurance products, your final option is self-insurance. Self-insurance means paying for all the care out of your income and assets as the costs arise. Financing your own LTC isn’t for everyone though. The following sections identify whether this option is right for you, and, if so, a couple options you may consider.

Figuring out whether you can finance your own LTC

Before you drop large amounts of money to pay for your own LTC, make sure doing so is a wise decision. We create two broad categories of people in this section to help you make this determination:

  • Individuals of very modest means: If you’re in this group, paying for your own LTC probably isn’t feasible and isn’t the best way to spend your limited amount of funds. The cost of LTCI would take too much of your annual income for it to be affordable. The good news: Medicaid was created to provide LTC for this group. The members of this group will spend their modest assets until they qualify for Medicaid, and then they rely on the government to pay for the rest of their care.
  • Individuals on the opposite end of the wealth spectrum: The wealthy may not need LTCI because they can pay for any needed LTC comfortably out of income and assets and still have enough to provide an inheritance for loved ones.

Of course, life isn’t as black and white as these two categories, so you may find yourself somewhere in the middle. Where are the dividing lines for these two groups? That’s a tough question. You need to look at the following factors when considering whether you can self-finance your LTC:

  • Where the LTC will be received: The cost of care differs greatly between New York City and Wichita, for example. A person worth $2 million may be able to fund several years of LTC easily in Wichita but not in New York City.
  • The type of assets you own: A significant portion of your wealth should be easily converted to cash for self-insurance to be feasible. Someone who owns a business or some types of real estate has valuable assets, but these assets aren’t easy to convert to cash. The person’s liquid assets may be relatively low and may be depleted quickly when LTC is added to the other demands on the budget. In order to pay for the care in this situation, the person may be forced to sell the business or real estate — and sell it in a hurry. Selling in a hurry often means selling for less than full value. An alternative is to assume debt.
  • Inflation: During retirement years, when most folks are investing more conservatively, the cost of LTC likely is rising faster than their net worth. You may be able to finance LTC today without much of a problem, but what about 15 years from now? If the cost of LTC increases at recent rates, it could be a much higher percentage of your net worth than it is today. (Refer to the earlier section “Estimating how much long-term care will cost” for more information.) After the investment market downturns, the worst of which tend to coincide with recessions (for example, 2008–09, 2020), you should realize your current net worth may not be the minimum you’ll always have available. Events out of your control could cause a decline in your assets over a number of years. The declines could be temporary, but that doesn’t help if you need LTC when asset values are low.
  • Dependents: Who else is depending on your assets? You may have enough assets to pay for your own LTC, even in a worse case when you spend years in a nursing home. Are you married? Do you have enough assets to support your spouse while paying for your LTC? What if your spouse also needs LTC at some point? You may need enough assets to pay for LTC for two. Your assets also may seem less adequate if you are supporting other loved ones, such as parents, siblings, or children with special needs. Be sure to assess all the demands on your assets before concluding you are able to self-finance any LTC needs.

Remember Because of these factors, financial advisors differ on who should consider self-insurance. Self-insurance means deciding to retain risk instead of shifting it to an insurer. If you decide to retain risk instead of buying an LTCI policy, you need to do the following:

  1. Consider how much LTC would cost.

    Review the previous sections of this chapter about estimating the cost of LTC. After estimating the daily cost, compute how much a year or two would cost. Then, consider inflation over 5, 10, and 15 years. Are these amounts you’re comfortable self-insuring?

  2. Assess the probability of needing LTC and its total cost.

    Maybe you could easily absorb the entire cost of one year of LTC without significantly damaging your net worth or diminishing what’s left for your loved ones. But what if you’re among the relatively small number of people who need LTC for five years or more?

    Some advisors believe a wealthy person always should buy LTCI instead of self-insuring, because the cost of the insurance is so low compared to the potential damage extended LTC could do to that person’s net worth.

    Regardless of which end of the wealth spectrum you’re nearest to, read Chapter 12 carefully before choosing self-insurance. In that chapter, we explain how to qualify for Medicaid. We also give some reasons you may not want to rely on Medicaid to fund your LTC. Also, be sure to head to Chapter 3 to determine how long your assets may last in retirement.

Deciding when to buy LTCI

People interested in buying LTCI understandably have trouble deciding the best age to buy a policy. Trade-offs abound in this decision, so it’s difficult to quantify the differences between them. In this section, we offer the main points to consider when making the decision.

Remember The basic trade-off is this: The younger you are, the lower your annual premiums will be; but the younger you are, the longer you’ll pay premiums before receiving any benefits. An early purchase increases the lifetime cost of the insurance because of the many years spent paying premiums. A similar trade-off applies if you buy a hybrid policy. At a younger age you’ll have to put less into the annuity or life insurance to obtain the LTC benefit. But you have to leave the money locked up in the policy longer before claiming benefits.

Another reason to consider waiting is you may be able to invest the money that would have been paid on premiums to earn a return higher than the increases in premiums — or at least a high enough return for the delay to make sense.

Having said all that, the following points favor buying a policy sooner rather than later:

  • Each year you wait, the initial premiums are higher simply because you’re older and more likely to need LTC.
  • Each year you wait, you risk paying higher premiums for other reasons. Insurers change and modify their policies every few years. The changes tend to result in higher premiums for the same level of benefits as the previous policies. So you pay higher premiums not only because you’re older but also because insurers paid higher claims than expected on older policies and make up for it by raising premiums on new policies.

    Advisor Insurance Resource, an insurance broker, estimates that the product life cycle increases costs about 3 percent every three to five years. As Baby Boomers age, if insurers find they’re paying substantially more in claims than they estimated, premiums for late purchasers could soar.

  • Each year you wait, you take the risk that an adverse change in your health makes you uninsurable or insurable only at a substantially higher premium.
  • Each year you wait, you risk developing a need for LTC without having a policy in place.
  • Each year you wait also means that because of inflation you’ll be buying a higher daily benefit limit than you would have in the past. This increase in the daily benefit limit raises the initial premium.

Tip You can construct a matrix or spreadsheet to quantify most of these factors. Advisor Insurance Resource has done exactly that, and the analysis is on the company’s website at https://advisorinsuranceresource.com/ltci-cost-waiting/ . The analysis found that in most cases, if you’re 50 or older and won’t be able to invest the premium money to earn at least 5 percent annually after taxes, it makes sense to buy the policy now rather than waiting. Even if you’re able to invest the money profitably, it still makes sense most of the time to buy now. The analysis doesn’t include the nonquantifiable factors, such as higher than historic premium increases and insurability. It does show the probability of being denied coverage or being charged a higher premium because of health problems if you wait, and it considers other trade-offs.

Comparing tax-qualified and nonqualified policies

When buying individual LTCI, you can choose between tax-qualified and nonqualified policies. The following highlights these two types of policies:

  • Tax-qualified policy: Under a 1996 law, premiums on tax-qualified policies became deductible as medical expenses up to an annual limit that’s indexed for inflation. The law, which still holds today, clearly states that any benefits received under a tax-qualified policy are tax-free. A policy must have certain terms and provisions to be tax-qualified. Key terms are discussed later in this section.
  • Nonqualified policy: This is any LTC policy that doesn’t meet the definition of a tax-qualified policy under the 1996 law. The 1996 law didn’t clear up the tax status of nonqualified policies. The ongoing assumptions of most advisors are that premiums on nonqualified policies aren’t deductible as medical expenses but that benefits are tax-free.

Tax-qualified policies provide a few advantages not generally available through nonqualified policies. Tax-qualified policies were only created in 1996, so we don’t have a lot of experience with them. However, here are some factors you want to consider about qualified policies:

  • The tax deductions are limited by the insured’s age. In 2021 the maximum premium deductions were as follows:

    • Age 40 and under: $450
    • Ages 41–50: $850
    • Ages 51–60: $1,690
    • Ages 61–70: $4,520
    • Age 71 and over: $5,640

    The amounts are indexed for inflation, and the most recent amounts can be found in IRS Publication 502 or on its website each year.

  • The premiums are deductible only by those who itemize expenses on Schedule A. The premiums also are lumped in with other medical expenses, meaning that only the total medical expenses exceeding 10 percent of adjustable gross income are deductible. Because of passage of the Tax Cuts and Jobs Act, which took effect in 2018, most taxpayers don’t itemize expenses on their federal Form 1040.
  • Qualified policies have less flexibility. They have certain required terms and provisions. A qualified policy must pay benefits only if the insured can’t perform at least two of the six ADL (dressing, bathing, eating, transferring/mobility, walking, and using the bathroom) or is suffering from cognitive impairment. In addition, a doctor must certify that care will be needed for more than 90 days. A nonqualified policy, on the other hand, also may pay benefits if the insured has a “medical necessity,” and a minimum need period of 90 days isn’t required.

    Remember Because of the restricted terms of qualified policies, a nonqualified policy generally costs 5 percent to 20 percent more than a comparable qualified one. Insurers supposedly expect to pay 20 percent to 40 percent fewer claims under the tax-qualified policies, so they charge lower premiums.

Tip You must decide whether the trade-offs make a tax-qualified policy or a nonqualified policy the better choice. Our advice is to shop for a policy with the terms you want and buy it. If it’s tax-qualified, that’s a nice bonus. But you may find you want a nonqualified policy because of its broader coverage and freedom to choose all the terms.

Opting for life insurance instead of LTCI

Self-insuring doesn’t necessarily mean that your loved ones will be left without an inheritance if you need extended LTC. You can choose to buy life insurance instead of LTCI. Life insurance is much cheaper than LTCI for most people, even when you buy permanent insurance instead of term insurance.

Remember One advantage of life insurance for many people is they know it will pay benefits. LTCI pays only if you need LTC that’s covered by the policy. You may pay premiums for decades and never file a claim. On the other hand, you know that someday the life insurance policy will pay benefits to your beneficiaries. If you don’t have LTCI, end up needing LTC, and the cost depletes your estate, your loved ones inherit the life insurance benefits. If you don’t need LTC, your loved ones inherit both your estate and the life insurance benefits. (Chapter 2 provides more information on life insurance.)

Warning Think twice about this strategy of buying life insurance instead of LTCI if you’re married. LTC could dissipate your income and assets, leaving your spouse in financial difficulty before any life insurance benefits are received. Another possibility, though a slim one, is that you could spend all your assets on LTC, recover, and be able to live independently. Then, at that point you would have no assets and would depend on welfare, Medicaid, and your loved ones.

Taking advantage of the reverse mortgage

Another way you can finance your own LTC is with your home equity. Home equity can pay for LTC without your having to move or sell the home. In a reverse mortgage, also known as a home equity conversion mortgage, a homeowner who has little or no debt on the residence receives a loan. The loan can be a lump sum, annuity, or line of credit. No payments are due during the owner’s lifetime as long as they own the home. After the home is sold or the owner dies, the lender is paid from the proceeds of the sale. (See Chapter 8 for a deeper discussion of the reverse mortgage.)

In one scenario, you can set up a reverse mortgage line of credit instead of taking out LTCI. When you need LTC, you write checks against the line of credit to pay for the LTC until exhausting the line of credit limit.

Under another scenario, after beginning LTC, you can take out a reverse mortgage to pay for the care.

Either scenario means you or your spouse can live in the home for life. The value of your home wouldn’t be available for your heirs to inherit, but it could mean your other assets are preserved. Reverse mortgages can be guaranteed by Fannie Mae and the Department of Housing and Urban Development. Private, nonguaranteed reverse mortgages also may be available.

Warning Although reverse mortgages may help finance your LTC, they’re quite expensive. The fees and other expenses are steeper than for conventional mortgages and home equity loans. Because the lender doesn’t know how long you’ll live, it estimates your life expectancy plus a cushion when deciding how much to lend. As a result, the older you are, the greater the percentage of the home’s value you’re able to borrow. The expenses and interest will compound during your lifetime, limiting the amount of the loan you receive in cash.

Evaluating Employer and Group Coverage

Another option you may have for obtaining LTCI is to look at what your employer offers. Some employers offer group long-term care policies. Employers rarely pay the premiums for you, but they use their purchasing power to negotiate favorable terms and premiums. If your employer offers this option, carefully compare the employer or other group policy with individual policies before choosing.

The following are some advantages of going with an employer-sponsored plan:

  • You’re less likely to be denied coverage for health problems under a group policy. Usually requirements of the plan are that all employees who apply must be accepted and must pay the same premium (or the same premium as everyone in their age group).
  • Premiums for an employer or group policy are likely to be lower than for comparable individual policies. That’s the advantage of group buying power and lower sales costs for the insurer. Also, with some plans, the premiums may be paid on a “pre-tax” basis, which can reduce your costs.
  • The employer checks out the insurer and negotiates the basic policy provisions. The employer also negotiates prices for optional terms and riders. You’re saved a lot of work, and the employer probably can negotiate better terms.

Group policies aren’t without disadvantages, though:

  • Your choices are limited. Earlier in this chapter we examine policy terms you can change to reduce premiums or fit your needs (see the section “Knowing the basic features of LTCI”). Those options usually are limited in a group policy. The limited choices are one way the cost of group policies is reduced. The reduced choices aren’t a problem unless you want or need a term that isn’t available.

    For example, the group LTC policy offered (at one time, at least) to federal government employees automatically set a reimbursement rate for home healthcare of 75 percent of the nursing home daily rate. That may not accurately reflect the differential between home care and nursing home care in your area.

  • Group policies aren’t always less expensive. All applicants must be accepted. A workforce may have higher risks than the general population, or the group policy may attract people who have difficulty qualifying for individual policies. Those factors can raise the premiums. A healthy or younger person may be able to get cheaper rates through an individual policy.

Tip Employees who are offered LTCI through an employer’s group policy might be accepted without any evidence of insurability. This means that even if you have a terminal illness, you can’t be denied coverage. This is extremely valuable for those with serious or chronic illnesses because such individuals would not be able to get LTCI through an individual LTCI policy.

Remember A married couple buying two individual policies from the same insurer often gets a premium discount of up to 20 percent. That discount isn’t available under most group plans.

Combining LTCI and Self-Insurance

A good strategy for many people is a combination of government programs, LTCI, hybrid policies, and self-insurance. Many people don’t have enough current income to pay for a benefit-rich LTCI policy. They also usually don’t have enough assets and income to self-insure all the potential costs of LTC. If you’re in this situation, using all the strategies can help you cover your needs in most cases.

Here are two ways to decide how to combine all these tools:

  • You can decide the amount of LTCI you can afford or are willing to pay for. Adjust the policy terms to receive the best coverage for your premium dollars. After you determine the coverage, you’ll know how much of your assets and income must make up the difference in the cost of LTC through a hybrid policy and self-insurance.
  • You can estimate how much you would have in assets and income to pay for LTC. Project your savings, investment returns, and other sources of income. After you make your estimates, try to structure an affordable LTCI policy that will cover the LTC that couldn’t be covered by your personal resources.

Tip Your insurance and assets don’t have to cover all possible LTC expenses. Remember that Medicaid is a possibility after assets and insurance are exhausted. Chapter 12 gives details of how to qualify. Generally, if LTCI and personal assets have paid for five or more years of LTC, Medicaid will likely take over.

Remember One strategy used by some married couples is to purchase LTCI only for the wife. Statistics indicate that women live longer than men, most wives are likely to outlive their husbands, and women are much more likely than men to need extended LTC. These couples decide that the best strategy with limited resources is to self-insure or have limited LTCI for the husband and purchase comprehensive LTCI covering the wife.

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