What You Need To Know About Long Term Care Insurance Before You Retire

by Gary Foreman

What You Need to Know about Long Term Care Insurance photo

Once you reach age 65, the chances are 50-50 that you will need long term care before you die. And the average cost of that care is currently $137,000. A long term care policy can help you cover such an expense, but here’s what you better know before buying.

We were relaxing at a baseball game when my wife of 40 years dropped this in my lap. “Honey, you’ll be 59 1/2 next month so you can withdraw money from your IRA without penalty. I want to use some of that money to buy long term care insurance.”

Being the typical male who doesn’t want to think about dying, I tried to put her off. Being a responsible wife, she wouldn’t let me. She shared some of the following facts.

Some Long Term Care Insurance Basics

If you’re 65, the chances are 50-50 that you will need long term care before you die. And, if you do, on average you’ll spend about $137,000! That was an expense that we couldn’t afford to cover.

Many people are under the impression that Medicare covers any medical expense you incur after age 65. That’s simply not true. Many services, like in-home help, are not covered or are only covered for a specific period of time under specific circumstances.

In its basic form, long term care insurance is a little like medical or auto insurance. You pay a premium and you’re reimbursed if you incur certain covered expenses. For instance, you may pay an annual premium, and if you have a nursing home stay after a medical issue, the costs of the nursing home would be paid for you.

There are also some hybrid policies similar to ‘whole life’ insurance. They’ll provide certain long term coverages, but if you don’t use them, the account balance will go to your heirs.

Since these are long term care policies, most require a ‘waiting period’ during which you’ll be required to cover the expense. Only after that time will the insurance pay.

Long term care coverage is not cheap. And it’s cost puts it out of reach for many. But there are some creative ways to make it more affordable, which I will share with you later in this article.

Let’s first learn more about long term care insurance (LTCI).

What Does Long Term Care Insurance Cover?

There is no single LTCI policy that’s offered by many firms. Each insurance company offers their own policy. But there are many coverages that are common to most, if not all policies. These are coverages that you need to be aware of when you compare policies. They are:

  • home care
  • assisted living
  • adult daycare
  • respite care
  • hospice care
  • nursing home
  • Alzheimer’s facilities
  • home modification to accommodate disabilities

Some policies include home care coverage, which will pay for home care from the first day that it’s needed.

What Does Long Term Care Insurance Not Cover?

Most LTCI policies have an exclusionary period during which pre-existing conditions are not covered. Generally a number of months. During that period, care related to that illness would not be covered by your LTCI policy, but may be covered by Medicare or Medicaid.

Does Long Term Care Insurance Cover Assisted Living?

Your LTCI policy should cover assisted living. Either mentioned directly in the policy or through the ‘home care’ coverage. Some policies are limited to assisted living or skilled nursing facilities and are known as ‘facility-only’ policies.

Does Long Term Care Insurance Pay for In-Home Care?

Many, if not most seniors, would like to stay in the home that they’ve known for years. For them, in-home care would be an option that would allow them to maintain their independence and stay in the family homestead as long as possible.

What services are included in home care? They can cover a wide variety of needs. Everything from basic homemaking, meal prep, medication reminders and companionship.

Activities of daily living (ADS’s) like bathing, dressing and grooming are included. Often, whether the insured needs help with these tasks will be a determining factor of qualifying for LTCI benefits.

Some home care policies can include skilled nursing services like checking vital signs and coordinating with doctors and other healthcare professionals working with the individual.

Home health agencies typically also provide any temporary skilled nursing services.

Home care services provided through an agency will vary in price. Expect to pay between $20 and $30 per hour. On average, individuals will use home care services for about six months and average 20 hours per week of care. Keep this in mind when you decide which LTCI policy is right for you.

Does Long Term Care Insurance Cover Pre-Existing Conditions?

Companies that issue long term care insurance will take your current medical status into consideration when deciding whether to issue a policy to you. Naturally, they want to know if you’re likely to cost them money.

Some medical conditions will likely make it difficult to find a company to issue you a LTCI policy. If you:

  • use a walker
  • have had certain cancers
  • have Alzheimer’s or Parkinson’s disease
  • have other diseases that affect mobility or mental awareness
  • have certain combinations of illnesses – for instance someone with diabetes who is overweight and smokes

Not all carriers weigh risks the same. So if you’re turned down by one, try another issuer.

How Does Long Term Care Insurance Work?

Long term care insurance is designed to provide you cash to pay for needed help with activities of daily living (ADLs) when that help is required for an extended period of time.

These activities are:

  • bathing
  • getting dressed
  • toileting
  • transferring
  • continence

How well the patient can perform these daily tasks will determine what type of coverage (Medicare, Medicaid, long term care insurance) is available to them. Most LTCI policies will pay when the patient needs help with two or more ADLs or if they are cognitively impaired.

What Are ‘Waiting Periods’ and How Do They Affect My Coverage?

Most LTCI policies have a waiting period. Typically between 30 and 120 days.

A ‘waiting period’ is the length of time that you are eligible for coverage before you can access any payment from the insurer. For instance, if you showed that you needed help beginning on January 1st and your waiting period was 60 days, you’d begin to collect on your insurance policy 60 days after January 1st.

It’s important to know that before you select a policy. Make sure that you have a way to pay for help during that waiting period.

How Long Does Long Term Care Insurance Last?

How long your coverage will last is a key question when choosing a policy. Policies have a limit to the amount of benefits you can collect. Generally that’s stated in a total dollar amount for a specific need, a total dollar amount for the lifetime of the individual covered or the number of days/months/years that a service will be covered. Policies may also limit how much they’ll pay per day for a specific service. Often benefits will be limited to three to five years.

The length of coverage may also be tied to the length of the waiting period. Often a longer waiting period will mean that the coverage will last longer. This should be spelled out clearly in the policy.

Naturally, policies that pay for a longer time will be more expensive. The cost of the policy is always an issue. But a less expensive policy that doesn’t provide the benefits you need could be a waste of money.

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Do I Really Need Long Term Care Insurance?

As we live longer, there’s a natural concern that we’ll need long term care at some point. While health and circumstances will determine if you will need help, it’s wise to consider what you would do if it becomes necessary.

Naturally, when we hear the phrase ‘long term care’ we think of extended stays in a hospital, nursing home or rehab center. But LTCI can cover much more than that. Typically, a long term care policy covers a variety of medical and non-medical services that help meet the needs of people who are not able to fully care for themselves for long periods. Much of that care occurs in the insured’s home.

Also, long term care needs aren’t always needed until the end of life. The average length of need is two years or less. Only about one quarter of those who need care exceed two years.

When Should I Buy Long Term Care Insurance?

There are two reasons to apply for long term care insurance at a younger age. First, the premiums are lower than when you’re older. Second, given your health, you’re more likely to be accepted for insurance.

One strategy worth considering is to wait until you’re 59 1/2. At that time you can withdraw funds from your retirement accounts (IRA, 401k, etc.) without penalty. Use those funds to pay for long term care insurance.

How Much Does Long Term Care Insurance Cost?

Long term care insurance costs vary widely. Often by as much as 100%. In part because there are a number of important variables involved. So it pays to get quotes from a number of insurers. Make sure that you’re comparing policies with similar coverages.

Rates can also vary by state. So if you have two residences, you’ll want to get quotes for both states. Also check for any discounts for which you might qualify.

Lately rates have seen significant price increases. So any estimate is soon outdated. But to give you a rough estimate, someone aged 55 in preferred health looking for a policy with a $150 maximum daily benefit and a three year benefit period would pay an average of $2,200 per year. A couple aged 55 would find the same policy priced for an average of $5,027 per year (source: SmartAsset.com)

Is Long Term Care Insurance Worth the Price?

Only you can answer that question. But here are a couple of things to keep in mind when you make your decision.

The median cost of home care services is $27 per hour. On average, those using agencies consume 20 hours per week for about 6 months. That’s $12,960 at $27 per hour.

The cost of providing long term care is expected to increase over our lifetimes. In 30 years, it’s estimated that a home care aide could cost $300,000 per year with assisted living or a nursing home even more expensive. Very few of us have the resources to cover that type of expense for any period of time.

What If I Can’t Afford Long Term Care Insurance?

Once you’ve priced LTCI, you may wonder how anyone can afford to pay for it. Or if you already have a policy, you may struggle to keep up with annual premium increases. So what can you do if you can’t afford long term care insurance?

There are a number of options available to you. But Medicare is not one of them. Typically Medicare will only pay for nursing home, assisted living and ongoing home health care for a limited time after a hospital stay.

Consider using one or more of these options:

Short term care insurance. They cover many of the same expenses that LTCI policies cover. But generally only for one year. Some are also available for people who can’t get long term coverage because of existing medical conditions.

Combination life/long term care insurance. Some life insurance policies will include a long term care option. One policy offered by the American Armed Forces Mutual Aid Association (a nonprofit for military members, veterans and their spouses) allows the insured to receive 2 percent of their death benefit every month for up to 50 months. Other specialty policies, known as life-LTC hybrids, are also available. Ask your life insurance agent.

Health savings accounts. If you have money in your HSA account, you can use that to pay your long term care premiums.

Long term care annuities. Like other annuities, they require a big upfront payment. But long term care annuities can pay for home health, assisted living and nursing home costs. There are some drawbacks so ask an insurance agent or financial planner to explain them to you.

Life plan communities. Also known as continuing care communities, they allow for someone to come into an independent living facility and get increased care as the need arises. Eventually you may move to an assisted living, memory care or a nursing home operated by the community. They require a large upfront payment, often $100,000+.

Veterans benefits. If you have a service-related disability, you may have access to long term care services through the VA. The program requires you to be 70% or more disabled or have a disability and been exposed to Agent Orange. Contact the Veterans Administration if you think that you might qualify.

Home equity. Your most valuable asset could be your home. You may use that equity in your home to pay for LTCI. There are three ways to do that: take out a line of credit, get a reverse mortgage or sell your home.

Pensions or Social Security. Your Social Security or pension benefits may be enough to pay for long term care insurance.

Medicaid. As a last resort, if you’ve largely depleted your assets, Medicaid will step in and pay for nursing home and, in some states, home health care. Assisted living is not covered. Also be aware that if you receive Medicaid, federal law requires the state you live in to recover any amount they can from your estate when you die.

The Final Word

After shopping around, we did buy long term care insurance policies for both of us using money from my IRA. I think that her policy is a little more generous than mine, but that’s a story for another time!

Reviewed May 2023

About the Author

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.

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