When you imagine your retirement journey, you likely picture trips to the beach, leisurely days with the grandkids and lots of time for hobbies. A lengthy stay in a nursing home probably isn’t part of that vision. Yet nearly 70% of Americans turning 65 will need some long-term care and support.
“Everyone thinks they’ll be in the 30%, but the numbers say to plan otherwise,” says Beth Ludden, senior vice president of long-term-care product development at Genworth. The costs of long-term care can be shockingly high. The median cost of a home health aide was $5,148 per month in 2021, while a private room in a nursing home was $9,034 per month, according to Genworth. Ludden expects these costs will continue to rise.
While Medicaid can pay for long-term care, it generally only kicks in after you’ve spent down virtually all of your assets. Before then, you typically have three options. “You can either pay for everything yourself, a family member can take care of you, or you can buy long-term-care insurance,” says Jesse Slome, executive director of the American Association for Long-Term Care Insurance.
Long-term-care (LTC) insurance can protect your assets so all of your lifelong savings don’t go to a facility or home health care service. However, these products are expensive and have other limitations. Here’s what to know:
1. It pays out a set benefit
When you buy LTC insurance, you decide how much coverage you want. It’s usually a maximum daily or monthly benefit, such as up to $6,000 per month for a nursing home or a home health care worker. Some policies will only reimburse you for what you spend on care, while others will send you cash for the value of the benefit once you start needing care, regardless of the actual cost.
You also pick a waiting period, when you need to cover costs before the coverage begins. Ninety days is most common. For an added charge, your coverage amount can increase over time so your coverage keeps up with rising costs.
2. Insurers cap your lifetime benefit
Insurers used to offer unlimited benefits for long-term-care policies, but today, they usually limit payments to three to five years. You also pick the maximum possible payout from the policy. For example, a policy might pay out $165,000 total for care. If you spend past the policy limits, you’ll be back on your own.
The policy limits fit the needs of most retirees. Men on average need 2.2 years of long-term care, while the women on average need 3.7 years. About 20% of 65-year-olds end up needing care for five years or longer. Ludden ran into this situation with her mother. “After four years, her policy ran out, and she had to use her funds to cover the facility for two months.”
3. Insurance can enhance government benefits
If you have long-term-care insurance, you could use the policy to pay for a better facility that wouldn’t accept Medicaid. If your policy runs out and you do end up going onto Medicaid, some state governments consider whether you bought insurance beforehand, says Genworth’s Ludden.
For example, say you buy $250,000 of LTC insurance coverage and spend down the entire policy, forcing you to pay for care with your personal savings. Depending on the state, the government might let you qualify for Medicaid benefits before you spend the last $250,000 of your other assets.
4. Premiums are expensive, especially for women
Long-term-care insurance is not a cheap product. The cost depends heavily on your age and gender. A 55-year-old male in standard health would pay $2,100 a year for a policy offering $165,000 of total lifetime coverage with a 3% inflation rider, according to a 2023 survey of insurers by the long-term-care association. A 55-year-old female would pay $3,600 per year. Women pay more than men because they typically live longer and are more likely to need extended long-term care.
A 65-year-old male would pay $3,135 per year for the same coverage, while a 65-year-old female would pay $5,265 per year. If you’re married or in a committed relationship, you can qualify for a discount on a joint policy that covers both of you.
Long-term-care insurance policies use level premiums, meaning that after you sign up, the insurer cannot increase the cost based on your age and health. Buying younger can lock in a better deal. Insurers can increase rates for all policyholders but only if they can prove to the government that it’s needed to support future payouts, not for extra profits.
5. Prices for newer policies have stabilized
When LTC insurance first came out, companies didn’t properly understand this market and charged too little versus the payouts. As a result, they ended up repricing and raising rates for existing policyholders.
“The new policies sold today have factored in the things that caused issues with older policies. While no one can guarantee you won’t face a substantial rate increase due to a market adjustment, it’s very unlikely,” says Slome of the long-term-care association.
6. You can use partial protection
LTC insurance doesn’t have to be an all-or-nothing proposition,” says Slome. If you’re concerned about the cost, he suggests getting a policy for a lower amount with the plan to cover the remaining costs with your savings. For example, if you think long-term care will cost you about $6,000 a month, you could get a policy for $3,000 and pay the remaining $3,000 out of your assets.
There are also short-term care policies that only pay out benefits for one year but cost much less than long-term-care insurance. These policies charge both genders the same prices, making them a better deal for women. Medicare provides short-term care in a facility for a stay of up to 100 days, but not beyond that.
7. You must pass health underwriting to buy
LTC insurance companies do not accept every applicant. You must meet the health underwriting standards and apply while still reasonably healthy. “You can’t wait until you’re in a facility and need help paying bills to apply. By then, it’s way too late,” says Slome. People aged 55 to 69 in reasonably good health are generally the best fit for LTC insurance, says Slome. Eighty is the maximum age to apply at most companies.
Once you qualify for LTC insurance, the coverage is usually guaranteed renewable for your entire life as long as you keep paying the premiums. If you let the policy lapse and reapply, you would need to pass health underwriting again.
8. There are alternative ‘hybrid’ products
You can buy a life insurance policy that includes long-term-care policy coverage. If you need care, the policy pays out some or all of the death benefit while you’re still alive. If you pass away without needing long-term care, your heirs receive the full policy death benefit. “There’s a payout either way. It’s not a use-it-or-lose-it scenario like stand-alone long-term-care insurance,” says Jordan Mangaliman, chief executive of Goldline Insurance and Financial Services in Fullerton, Calif.
You could qualify for life insurance into your seventies if you’re in good health, says Mangaliman. Life insurance policies usually pay a lower total benefit for care versus similarly priced LTC insurance policies. You must also read the fine print for when your life insurance would pay.
Another option is to buy an annuity. You pay for the annuity upfront and in exchange it gives you future income payments that can be guaranteed to last your entire life. Some annuities offer a long-term-care benefit. For example, an annuity might double your monthly payment for several years when you need long-term care, says Mangaliman. In exchange, adding this benefit could reduce your starting monthly annuity payments.
9. It pays to compare insurers before buying
Each insurance company has its own rates and health underwriting standards. Before signing up, you should get a few quotes from different companies. Mangaliman suggests using an insurance broker representing multiple insurance companies to speed up the process. When comparing, consider each insurance company’s A.M. Best rating for financial stability to pay future claims and J.D. Power score for customer satisfaction.
The long-term-care insurance market is small, with only six insurers selling stand-alone policies: Mutual of Omaha, Thrivent, National Guardian Life, New York Life, Northwestern and Bankers Life. In terms of quality, insurers tend to offer similar levels of coverage, and the main difference is the price they quote for you. “It’s not like one company will sell you a Mercedes while another is a Honda. With LTC insurance, they’re all Hondas,” says Slome.
10. LTC insurance gives you more options for care
If you have a long-term-care insurance policy, you have more flexibility to decide how you receive treatment and where. For example, you could spend the money on a home health care worker rather than go into a nursing home under Medicaid.
Slome finds that people with insurance are more willing to pay for better care and get help sooner, whereas those without insurance tend to hold off. “If an earthquake destroys my house, I won’t cheap out on the repairs because I have homeowner’s insurance. People do the same when they have long-term-care insurance,” he says.
Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.
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