Last Updated on July 7, 2024
Key Information & Considerations for Evaluating the Right Choice for You
According to the U.S. Department of Health and Human Services, people age 65 or older have nearly a 70% chance of needing some type of long-term care services and supports in their remaining years, with women needing care longer than men (3.7 vs. 2.2 years). Yet, despite these statistics, the American Association for Long-Term Care Insurance indicates that only 7.5 million Americans, or about 3.3% of the U.S. population, have some form of long-term care insurance.
In my September 2023 column, I outlined long-term care insurance as one option for helping to defray the cost of long-term care. In this column, I want to take a closer look at this type of insurance that provides benefits for a range of services not covered by your regular health insurance, Medicare, or Medicare supplement insurance.
First, what does it cover?
Long-term care insurance can cover the cost of care at home, in adult day care, or in a long-term care facility, including assisted living facilities, memory care facilities, and skilled nursing facilities, for those who are cognitively impaired or need assistance with a certain number of the six activities of daily living. That includes bathing, dressing, toileting, transferring (getting in and out of bed or chair), eating and continence. Most long-term care policies will also pay, within certain limits, for modifications to your home so you can remain there and receive care.
Are all policies the same?
Long-term care insurance policies are not standardized. They vary in the types of care they cover, the daily benefit amount they pay, and the length of time the coverage lasts. There are many types of policies with many combinations of benefits available so that you can customize a policy to best serve your particular needs. You choose the benefit amount and the benefit period, which determines the maximum amount of coverage under the policy.
How do they pay?
The policies will usually pay either a fixed-dollar amount (an indemnity) or the actual costs of care (reimbursement). If the latter, there is typically a maximum daily benefit amount that will be paid. There may also be a limit on how many days the benefits will cover. You can also choose the deductible amount or elimination period, which refers to the length of time between when the injury or illness begins and when you receive benefits. The elimination period will range from zero to 180 days. The longer the elimination period, the lower the premium. Most states’ regulations require companies to offer inflation protection, which automatically increases your benefits each year by a specific percentage so benefits keep up with increasing long-term care costs over time.
How much does long-term care insurance cost?
Hefty premiums, including a history of sudden and significant rate hikes, can make long-term care insurance cost-prohibitive for many Americans. Premiums vary, depending on your age when you buy the policy, your health, the benefits provided, the length of the elimination period, and any additional options you choose, such as the inflation rider. Traditional long-term care insurance follows a use-it-or-lose-it model. If you do not make a claim for long-term care benefits, the policy does not pay out anything. Hybrid insurance allows you to retain at least some of what you paid in premiums by paying a death benefit if long-term care is not needed. Hybrid policies, which link a life insurance policy with a long-term care insurance policy have grown in popularity over the years. In fact, the American Association for Long-Term Care Insurance indicates that currently, the majority of long- term care insurance purchased is linked-benefit coverage.
How does it affect my taxes?
There can be significant tax advantages to long-term care insurance. In general, the income from a long-term care insurance policy is non-taxable, and the premiums paid to buy the insurance are tax-deductible. According to the IRS, in most cases, long-term care insurance contracts are treated as accident and health insurance contracts. Amounts you receive from them (other than policyholder dividends or premium refunds) are excludable in most cases from income as amounts received for personal injury or sickness. If you itemize income tax deductions, long- term care insurance premiums are included within your unreimbursed medical expenses and are tax-deductible to the extent your total unreimbursed medical expenses exceed 7.5% of your adjusted gross income (AGI). The amount of the insurance premium treated as a medical expense is limited to age-based numbers issued by the IRS each year.
Begin now.
If you are considering purchasing a long-term care insurance policy, be sure to do your homework. You should review what benefits the policy offers, the criteria for receiving those benefits, and the exclusions and limitations of the policy. There is no one-size-fits-all option. You decide what is best for you, given your needs and circumstances. Knowing the average cost of nursing homes in your area can help you determine the amount of benefits you may need. Since an insurance company can refuse to sell you coverage if you are in failing health, try to consider your long-term care needs while you are in good health. Advanced planning is key.
Vanessa J. Skinner is a shareholder with the firm of Winderweedle, Haines, Ward & Woodman, P.A., where she chairs the firm’s Wills, Trusts & Estates Department. She was recently named one of the Best Lawyers in America in the area of Elder Law for the third consecutive year. She is the host of The Power of Planning Podcast, anchor.fm/thepowerofplanning