Long-term care, or LTC, coverage is not exactly medical insurance. It doesn’t pay for medications, surgery, or doctor’s visits. What it does pay is for the cost of aid you need with daily living. Basically this means nursing home stays, home care aids, and the attendant equipment and actual nurses. Usually people who need this care are the elderly, but you’ll need to have the insurance before then if you want to use it when the time comes.
So how does it work?
As with all insurance, the amount you pay will depend on the risk you represent. This means the price goes up the more coverage you want, the older you are when you buy the policy, or if you’re single. If you’re married (married people are healthier in general, and can take care of each other for a little while before needing outside help), younger when you start paying (because you’ll pay in more before you are likely to need it), or male, (men die younger than women, so the company doesn’t have to pay for their care for as long) it will be cheaper.
You have to buy this before you need it – if you wait until you need the care, you won’t qualify, because you won’t have paid your share in. Most people start buying in their 50s.
In the unfortunate event that living at home normally is difficult for you, you can make a claim. Generally you have to pass the nominal elimination period of 90 days after starting the care before making any claims, and show that you can’t perform at least two activities of daily living (or ADLs) on your own. These are items such as bathing, dressing, going to the bathroom, or eating. Having met these criteria, you will be able to pay for someone to come to your home to help you or if necessary, for a facility where more constant care is given.
How much does it cost?
The price can vary widely by age and coverage, but healthy people in their 50s might expect to pay $2,000 to $3,000 a year for this coverage, and the price goes up for more age and less health. Another thing to note – there is no guaranteed schedule. The premiums can be – and have been – raised at any time, for any reason. So might have coverage and see the premiums you expected change over time.
LTC is expensive. But if you go bankrupt paying for care, then Medicaid has to pick up the tab. Since the states don’t want to pay for you, there are Medicaid partnership plans in many states. This means that if you pay for a private LTC plan that meets the given state’s standards, therefore keeping you out of the Medicaid system for longer and saving the state money, the state will be more forgiving if you use up all your private coverage. Generally speaking, for the state to pay for your long-term care you have to have used up everything you own and have only a couple of thousand dollars left to your name. But the state will allow you to keep more if you went through private insurance for LTC first, because you saved them buckets of money by doing it.
An interesting trick – you can actually use HSA money to pay for LTC premiums, which doesn’t reduce the expense but the money is tax-free.
An additional tax advantage for seniors is to deduct the annual cost of the premiums from taxable income. This really only takes effect in a person’s 60s and 70s, but a 70-something-year-old can deduct about $5,000 a year in LTC premiums from their taxes as of 2019.
Is it worth it?
This is the big question. A $5,000 tax deduction means that people can expect to be paying thousands of dollars a year to have the insurance they hope they will never use. Year after year, this adds up to tens of thousands of dollars, especially if the insurance was first purchased in a person’s 40s or 50s.
The common argument for buying long-term care coverage is three-fold. One, that the cost of care without it is even worse. Two, that if you can’t afford the care on your own, you’ll lose all of your life’s savings, your house, and your care before you are poor enough for Medicaid to kick in. Three, that more than half of people over 65 will need help with some aspect of daily life.
What are the risks?
There are a couple of big risks involved with relying on this insurance. One is whether you will actually get coverage. Private coverage has lots of rules that can deny payment, and on average 40% of claims made by people in their seventies are denied. Going along with this is the risk that premiums will continue to rise – if you are paying and then have to stop because you can’t afford it anymore, you lose everything you paid in and have no coverage to show for it.
The other problem is simply the existence of the LTC company and the current laws. If you pay for coverage over 20-30 years – starting in your 50s – then you are relying on the company existing for all that time without going bust. You are also relying on the healthcare system in the US staying the same. What if a reform changes the way this is paid for after you’ve already put $25,000 into premiums for an insurance that no longer matters?
How much help will you need?
While you hear numbers like half or two-thirds of people needing help with daily living, this is not the same thing as people needing nursing homes or nurses coming to their home. Most people will have minor needs with only one thing – getting dressed, say – and will get help at home from family. Only about a third of people will need a nursing home or assisted living. Most of those that do will stay less than the 90-day period before TLC coverage kicks in, and almost everyone stays less than 2 years. Only a small percentage of people stay 5 years or more in a nursing home.
Do the math
Let’s say you pay for long-term care Insurance starting at 55, until you use it at 85. You pay $1,700 a year until 60, $2,100 until 70, $2,600 until 80, and $3,000 until 85. You have spent a total of $73,500 by age 85.
By contrast, if you invested that same money in an index fund each year for those 30 years, at 4% growth you would be projected to have about $132,000 by age 85.
About half of people will incur $0 in long-term care costs, and about 85% will have to pay less than this $132,000, given the numbers for how many people need a stay longer than a year.
The risks of making such a specific long-term bet – choosing one company to buy coverage from, and paying them tens of thousands of dollars over decades – is too high for me. You are relying on the company to still exist in 30 years, and planning that the healthcare rules will still be the same at the end of that time. What if the company goes under? What if you have financial trouble one year, and can’t pay the premium, losing your membership? What if healthcare becomes public in that time and the money was wasted?
Instead, I recommend pumping as much money as you can into your investments. It will likely exceed the costs you have to pay for Long-term Care, if any, and you will still have the money if you never need LTC. And if you do end up in a worst-case scenario, you can always fall back on Medicaid.