One option to pay for such services is long-term care (LTC) insurance. But before you sign up for a policy, you have a lot to learn. The market has changed greatly in recent years.
Most notably, many of these policies have gotten more expensive for both new and existing policyholders, and the options have changed. More people are choosing policies that combine long-term care with other benefits.
Here’s what you need to know.
Why plan for long-term care?
About 49 percent of men and 64 percent of women reaching age 65 today will need significant long-term care during their remaining years, according to a 2022 study from the federal Department of Health and Human Services (HHS). Although many people will get by with unpaid care from family members and others, nearly half will need some paid assistance.
Long-term care insurance
About 14 percent will need more than two years of paid care. The average cost will be $120,900, HHS says.
But individual costs will vary greatly, depending on how long you require care, where you live and how intense your needs are. The ways to pay for services vary too.
Traditional Medicare, the public health insurance program for people 65 and older and disabled individuals who are younger, doesn’t cover long-term care beyond some skilled care right after hospitalization for an injury or illness. Some Medicare Advantage plans from private insurers offer limited supplemental coverage for services like meal delivery and rides to medical appointments.
Veterans may access long-term care through the U.S. Department of Veterans Affairs.
Who pays for long-term care?
Confusion about who pays is common: Nearly half of adults age 65 and older incorrectly think Medicare would pay if they needed a long stay in a nursing home, according to a survey from the nonprofit KFF, formerly known as the Kaiser Family Foundation. In the same survey, 90 percent of adults said paying for one year of nursing home care would be impossible or very difficult for them or their families.
The gap between potential needs and ready money is where long-term care insurance comes in. But it’s not the only solution.
Data the National Association of Insurance Commissioners (NAIC) collected from insurers shows that in 2022 traditional long-term care policies covered about 6.1 million Americans. The number includes people who bought the policies decades ago.
These traditional LTC policies work much like policies for auto or home insurance: You pay premiums, usually for as long as the policy is in effect, and make claims if you ever need the covered services.
Because the premiums are ongoing, they can, with the permission of state regulators, rise over time.
But if you stop paying the premiums before the need arises, you usually lose the coverage. And if you never use the coverage, the insurance company keeps and invests your money to pay for other people’s claims and earn profits.
What is a hybrid policy?
The majority of long-term care policies sold since 2010 combine coverage for long-term care with another benefit, usually life insurance or, less often, an annuity, according to the Congressional Research Service. These are known as hybrid or linked-benefit policies. Combination policies covered nearly 900,000 Americans in 2022, according to NAIC.
While in some cases, you’ll pay an ongoing monthly premium for such policies, many work like this: You pay one lump sum or a fixed amount broken into several annual payments, eliminating the risk of rising premiums.
In return, you get long-term care coverage, along with some amount of life insurance that will go to your heirs if you never use the long-term care benefits. The life insurance payout is reduced or eliminated if you do use long-term care benefits.
The policy may also allow you to take back your full payment within the first few years if you decide you no longer want the coverage.
The hybrid policies “address a nagging concern for a lot of people, … which is that I could pay into this thing for years and never need it,” says Christine Benz, director of personal finance at the Chicago-based financial services firm Morningstar. One way or another, you get a benefit.
But that guarantee costs you. Hybrid policies are more expensive than traditional.
And the life insurance payouts tend to be modest unless you attach long-term care to a larger, more expensive permanent life insurance policy, Altfest’s Graham says.
How does long-term care insurance work?
LTC policies may limit what conditions they cover. For example, denying care for alcoholism, drug addiction or war injuries is not unusual.
A preexisting condition, such as heart disease or a past cancer diagnosis, may not stop you from getting a policy. But the policy may not cover care related to that condition for some period after it goes into effect.
Generally, you are eligible for benefits once you can no longer perform a set number of the so-called activities of daily living — such as bathing, dressing, eating, using the toilet, getting in and out of bed and chairs, and managing incontinence — or become cognitively impaired.
One more hurdle to clear: a waiting period that starts when you first need or use care. Benefits most commonly start after 90 days, but you might pay higher or lower premiums to adjust the waiting, or elimination, period.
Once coverage kicks in, it’s typically capped at a certain amount daily or monthly, up to a lifetime maximum or a certain number of years. Different amounts may be allowed for care in your home, a nursing home or elsewhere. You pay more for higher benefit levels or for benefits that rise over time to protect you from inflation.
For example, a policy that pays $200 a day for five years and grows benefits at a compounded 3 percent a year will cost more than one that pays $100 a day for two years with no inflation protection.
Once you are getting benefits, premiums typically are waived.
The bumpy history of long-term care insurance
The earliest LTC insurance policies, sold in the 1980s, covered only nursing home care. But through the 1990s and early 2000s, insurers started covering home care services, assisted living, adult day care and other options. Some promised lifetime benefits.
Insurers underestimated how much they would pay in claims and overestimated how much they would earn in investments. The result: They got into financial trouble and, with the permission of state regulators, substantially raised premiums on existing customers.
Many companies stopped selling traditional long-term care insurance. Just a few companies sell the policies today with more limited coverage periods at higher prices.
Historically, 70 percent to 80 percent of people with traditional policies have seen premium increases, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance (AALTCI). Companies selling newer policies have retooled them to avoid repeating that history.
What to know if you have a policy
People who already own traditional policies should know that if they face a premium increase, they have options. One possibility is to pay the increase and keep the benefits you signed up for — an often-attractive choice for people who can afford the price hike and have generous older policies, says Jodi Cirignano, a managing director and wealth adviser at Peapack Private Wealth Management, based in Bedminster, New Jersey.
Another option is to accept reduced benefits at your old premium rate. Dropping a policy and seeking out new coverage when you are older and less healthy will almost certainly cost you more, experts say. As long as you keep paying, insurers can’t legally drop you.
Graham says clients with decades-old policies continue to see premium increases. “Most of our clients decide to keep their insurance,” he says. But some accept fewer benefits or less inflation protection to keep costs in check.