Long-term care insurance is designed to cover expenses related to nursing homes, assisted living, and home health care. To receive benefits, most insurers require that you’re unable to perform one or more Activities of Daily Living: bathing, dressing, eating, transferring (such as moving from a bed to a chair), toileting, and continence.
The odds that you’ll need long-term care increase with age, so many people over age 50 begin planning for this possibility. Unfortunately, long-term care insurance can be expensive, especially for retirees on a fixed budget. And many people never need long-term care, so does it make sense to buy a policy?
Whether long-term care insurance is right for you depends on your situation, but here’s what you should consider.
Balancing costs and risk
The average premium for a 55-year-old is $2,007 annually, and premiums increase as you age. You can save money by purchasing a couple policy ($2,466 per year on average), but that’s still a significant investment.
What you get for your premiums is a daily allowance (often around $100–$200) to pay long-term care expenses. Benefits typically start after a 90-day waiting period and last for three to five years.
Women need long-term care for an average of 3.7 years, men for 2.2 years. If we do the math, your long-term care policy could pay out anywhere from $80,300 to $365,000 total depending on the policy you buy and how long you need care—if you end up needing it.
Since most people (89%) don’t need long-term care until 70 or older, the average 55-year-old will pay at least $30,000 in premiums over 15 years. So, if you end up needing long-term care, buying an insurance policy to cover those costs could be a good deal. But if you’re nervous about paying for benefits you may never use, you’re not alone. Luckily, you have some options.
Long-term care insurance options
If you’re considering long-term care insurance, you have two main choices: a stand-alone long-term care policy or life insurance with long-term care insurance on the side. There are pros and cons for each.
Stand-alone long-term care insurance
Buying a policy that covers only long-term care means you’ll get a tax break: you can write off your premium payments. If you’re in a lower income bracket during retirement, however, your tax liability may be quite low already, so you may not get the full value of your premiums back each year. And that’s a bummer because, as mentioned earlier, this insurance can cost upwards of $2,000 per year.
Around half (48%) of all adults over age 65 will likely need some form of long-term care in their lifetime. If you end up in the other half, however, you’ll never receive any return for your insurance premiums (except, perhaps, peace of mind). And for a lot of people, that’s a hard pill to swallow.
Life insurance with long-term care on the side
Instead of a stand-alone long-term care policy, many people buy life insurance with long-term care coverage. This can come in the form of a hybrid policy explicitly designed to cover both benefits or simply a long-term care rider attached to a regular life insurance policy.
With either option, your premiums won’t be tax deductible like a stand-alone long-term care policy would be. And, because you’re also paying for life insurance, premiums may be even higher, especially if you’re older than 65. But if you plan to buy both kinds of coverage anyway, a combination policy could be the right call.
Here’s how long-term care hybrid policies and riders work:
You choose your life insurance benefit amount when you buy the policy—let’s say, $250,000—and ask for long-term care coverage as well. If you need long-term care down the line, you can draw funds from that $250,000 death benefit. Some insurers allow you to draw on the entire $250,000, while others limit your long-term care benefits so your beneficiaries will receive at least a portion of the payout when you die.
If you pass away without needing your long-term care benefits at all, your beneficiaries could receive the entire $250,000 payout. So, whether you need long-term care during your lifetime or not, you (or your beneficiaries) will still get some value out of the policy.
The idea of shelling out $2,000 or more in annual premiums for long-term care insurance may seem like nails on a chalkboard–especially if you never end up needing it. If that’s you, life insurance plus long-term care might be right for you. If you already have life insurance or don’t need it, however, you might do better skipping long-term care insurance altogether.
Long-term care insurance alternatives
If neither of the above options sound right to you, consider these alternatives.
Life insurance with other riders
If you need life insurance but can’t afford the combined life insurance and long-term care premium, consider choosing a less expensive rider that offers similar benefits. These benefits are called accelerated death benefit riders because they allow you to get an advance on your death benefit while you’re still alive, provided you meet certain conditions. Many insurers offer them at little to no additional cost.
Chronic illness rider: You must need assistance with one or more Activities of Daily Living.
Terminal illness rider: You must be diagnosed with a terminal illness.
While these riders are similar to long-term care riders, they may vary by insurer. So talk with an independent, licensed insurance agent about your goals, and they’ll help you find the right company.
Medicaid is a government-sponsored program that covers a variety of health care benefits, including long-term care coverage. Not to be confused with Medicare (designed for people over age 65 and those with disabilities), Medicaid is for people with a low income and few assets.
If you diligently saved for retirement and can live comfortably, you likely won’t qualify for Medicaid’s long-term care benefits. Many people find they need to “drain” their personal assets on long-term care costs for a year or more before they qualify for Medicaid. If you share your nest egg with a spouse or want to leave part of it as an inheritance for your children, that’s a pretty raw deal.
For many, Medicaid is best considered as a last resort.
Lean on family and friends
There are two ways your loved ones can help contribute to your long-term care needs: they can help fund your care, or take on some responsibilities of caregiving themselves. The former may require planning ahead so loved ones can save up for your long-term care expenses. The latter can cut down on overall long-term care costs but comes with some downsides.
Many people rely on unpaid caregivers, such as a spouse, child, or friend, to provide some or most of their long-term care needs. This option works only if you receive care at home (not in a nursing home or assisted care facility), and it can be challenging for your loved ones. Not everyone enjoys or has the availability to provide this type of care, and caregiver burnout is an increasing concern. Most unpaid caregivers need plenty of breaks, so having several loved ones to lean on and paying for occasional respite care is ideal.
With the steep cost of long-term care insurance, you may be better off saving up and investing those premiums on your own. If you’re age 55, for example, you can reasonably anticipate 15 or more years before you need long-term care. If you simply leave those $30,000 premiums in an investment account for 15 years (assuming a 5% return), you could double your money.
While $60,000 may not cover all your long-term care expenses, it could help stretch your nest egg further. If you’re in great health and know you’ll have loved ones who can serve as caregivers someday, self-insurance could be a good option.
What’s right for you?
Long-term care is expensive, but long-term care insurance isn’t right for everyone. Choosing the right plan for funding long-term care isn’t easy. So talk with your loved ones. Talk to your doctor and insurance agent. And consider working with a financial advisor as well. Together, you and your team can find the best long-term care plan for you.