Understanding Long-Term Care Insurance
People today are living longer than ever, which means the odds of requiring some sort of long-term care are higher than they once were. What is long-term care? Most people associate long-term care with the elderly, but it applies to the ongoing care of individuals of all ages who can no longer independently perform basic activities of daily living (ADLs) – such as bathing, dressing or eating – due to an illness, injury or cognitive disorder.
As the financial costs of private home care, assisted-living facilities, adult day-care centers, hospices and nursing homes continue to rise, you may be wondering how you will ever be able to afford long-term care. One solution that is gaining in popularity is long-term care insurance (LTCI).
Why do you need long-term care insurance?
Even though you may never need long-term care, you'll want to be prepared in case you ever do. Long-term care is often very expensive. Although Medicaid does cover some of the costs of long-term care, it has strict financial eligibility requirements – you would have to exhaust a large portion of your life savings to become eligible for it. And since Health Maintenance Organizations (HMOs), Medicare, and Medigap don't pay for most long-term care expenses, you're going to need to find alternative ways to pay for it. One option you have is to purchase an LTCI policy.
How does long-term care insurance work?
Typically, an LTCI policy works like this: You pay a premium, and when benefits are triggered, the policy pays a selected dollar amount per day (for a set period) for the type of long-term care outlined in the policy.
Most policies state that specific physical and/or mental impairments must be identified to trigger benefits. The most common method for determining when benefits are payable is based on your inability to perform certain activities of daily living (ADLs), such as bathing, dressing, eating, continence, toileting (moving on and off the toilet) and transferring (moving in and out of bed). Typically, benefits are payable when you're unable to perform a set number of ADLs.
Some policies, however, will begin paying benefits only if your doctor certifies that the care is medically necessary. Others will also offer benefits for cognitive or mental incapacity, demonstrated by your inability to pass certain tests.
Comparing long-term care insurance policies
Before you buy LTCI, it's important to shop around and compare several policies. The cost depends on many factors, including the type of policy (e.g., size of benefit, length of benefit period, care options, optional riders). The cost is also based in large part on your age at the time you purchase the policy. The younger you are when you purchase a policy, the lower your premiums will be.
You’ll also want to read the Outline of Coverage portion of each policy carefully and make sure you understand all of the benefits, exclusions and provisions. Once you find a policy you like, be sure to check insurance company ratings from services such as A. M. Best, Moody's and Standard & Poor's to make sure that the company is financially stable.
When comparing policies, pay close attention to these common features and provisions:
- Elimination period: The period of time before the insurance policy will begin paying benefits (typical options range from 20 to 100 days); also known as the waiting period.
- Duration of benefits: The limitations placed on the benefits you can receive (e.g., a dollar amount such as $150,000 or a time limit such as two years).
- Daily benefit: The amount of coverage you select as your daily benefit (typical options range from $50 to $350).
- Optional inflation rider: Protection against inflation.
- Range of care: Coverage for different levels of care (skilled, intermediate and/or custodial) in the setting specified in policy (e.g., nursing home, assisted-living facility, at home).
- Pre-existing conditions: The waiting period (e.g., six months) imposed before coverage will go into effect regarding treatment for pre-existing conditions.
- Other exclusions: Whether or not certain conditions are covered (e.g., Alzheimer's or Parkinson's disease).
- Premium increases: Whether or not your premiums will increase during the policy period.
- Guaranteed renewability: The opportunity for you to renew the policy and maintain your coverage despite any changes in your health.
- Grace period for late payment: The period during which the policy will remain in effect if you are late paying the premium.
- Return of premium: Return of premium or nonforfeiture benefits if you cancel your policy after paying premiums for a number of years.
- Prior hospitalization: Whether or not a hospital stay is required before you can qualify for LTCI benefits.
Your next steps toward long-term care planning
Long-term care insurance is an important, but often overlooked, piece of your overall financial plan. A financial advisor at RBFCU Investments Group will help you compare long-term care insurance products and answer any questions you may have. You may also wish to consult an attorney or accountant for more information.
Article prepared by Ameriprise Financial Services, LLC. Copyright 2021; September 2021
Before you purchase long-term care insurance, be sure to consider the policy’s features, benefits, risks and fees, and whether it is appropriate for you, based upon your financial situation and objectives.
Third-party companies mentioned are not affiliated with Ameriprise Financial, Inc.
All guarantees are subject to the claims paying ability of the issuing insurance company.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial is not affiliated with the financial institution.
RBFCU Investments Group is a financial advisory practice of Ameriprise Financial Services, LLC. The initial consultation provides an overview of financial planning concepts. You will not receive written analysis and/or recommendations.
Investment advisory products and services are made available through Ameriprise Financial Services, LLC, a registered investment adviser.