Long-Term Care Insurance: Understanding Its Role in Retirement Planning

As we age, the likelihood of requiring assistance with daily activities or medical care increases. In fact, according to data compiled by Morningstar, 70% of people turning age 65 will need some type of long-term care in their lifetimes, potentially presenting a significant financial challenge.

For many retirees, long-term care insurance can be a strategic solution, helping to cover the costs of services that traditional health insurance or Medicare may not. However, navigating the complexities of long-term care insurance and understanding how it might fit into a broader retirement strategy can be daunting.

In this blog article, we’ll explore the intricacies of long-term care insurance, including what it covers, how much it costs, and its potential role in your retirement plan, so you can make an informed decision that brings you peace of mind in your golden years.

What Is Long-Term Care Insurance?

Long-term care (LTC) insurance is a specialized type of insurance designed to meet the needs of individuals who require assistance with daily living activities due to chronic illnesses, disabilities, age-related conditions, or other long-term health concerns.

Unlike traditional health insurance, which primarily covers medical treatments, surgeries, doctor visits, and short-term care for illnesses or injuries, LTC insurance provides coverage for the ongoing assistance individuals may need with basic personal tasks. These tasks are often referred to as Activities of Daily Living (ADLs), such as bathing, dressing, eating, and moving around.

LTC insurance covers in-home care, including support services like housekeeping, meal preparation, and transportation. It also covers care in community organizations, such as adult day care centers, and can include residential care in assisted living facilities or nursing homes.

In general, these policies reimburse a daily amount (up to a pre-determined limit) for services to assist with ADLs. Moreover, LTC insurance typically includes specific criteria, or “benefit triggers,” that determine when the policyholder is eligible to start receiving benefits. These often relate to the number of ADLs an individual needs assistance with or the presence of cognitive impairments.

Many long-term care insurance policies offer flexibility in terms of the types of care they cover and where you can receive care. This allows you to choose the care that best fits your needs and preferences, offering a personalized approach to healthcare.

How It Works

Consider the following example illustrating how a long-term care insurance policy might work in practice:

Suppose you’re 60 years old and decide to purchase a long-term care policy. You’re currently in good health but recognize the potential need for long-term care services in the future, especially considering your family’s history of chronic conditions.

After researching various options, you select a policy that offers a broad range of coverage, including in-home care, assisted living, and nursing home care. Your policy has a daily benefit amount of $200 and a benefit period of up to five years.

There’s also a 90-day elimination period, meaning you’ll need to cover the cost of care for the first 90 days before the insurance benefits kick in.

When you turn 80, you’re diagnosed with a progressive neurological condition that makes it increasingly difficult to perform ADLs without assistance. Your condition has reached a point where you require in-home care services to help with bathing, dressing, and meal preparation.

You contact the insurance company to file a claim for long-term care benefits. Here’s what happens next:

  1. The insurance company requires an assessment from a licensed healthcare professional, who confirms that you need assistance with multiple ADLs.
  2. You arrange for in-home care services to start immediately, paying out of pocket for the first 90 days of care.
  3. After the 90-day elimination period, your policy begins to pay out benefits. You receive $200 per day to cover the cost of in-home care services, significantly offsetting the expense.
  4. As your condition progresses, the need for care increases. You transition from in-home care to an assisted living facility that better suits your changing needs. Meanwhile, the daily benefit from the insurance continues to help cover the cost of care at the assisted living facility.

The Cost of Long-Term Care Insurance

The cost of long-term care insurance policies varies widely, depending on factors such as your age and health at the time of purchase, the extent of coverage, and the specific benefits it provides. Generally, the younger and healthier you are when you buy the policy, the lower the premiums.

Premiums can range from hundreds to thousands of dollars annually and can increase over time. According to the American Association for Long-Term Care Insurance, on average, a 55-year-old single man would have paid $950 per year, or $79 per month, for $165,000 of coverage in 2022. Meanwhile, a 55-year-old single woman would have paid an average of $1,500 per year, or $125 per month, for the same coverage.

The cost of long-term care insurance can indeed be substantial. Nevertheless, it can be a crucial planning tool for many families concerned about the high and rising cost of healthcare in retirement.

Qualifying for a LTC Policy

Despite its potential benefits, not everyone qualifies for long-term care insurance. A variety of factors can disqualify you from obtaining coverage, including:

  • Age
  • Pre-existing health conditions
  • Recent health events
  • Cognitive impairments
  • Functional limitations
  • Terminal illnesses.

In some cases, a history of substance abuse or mental health disorders can also disqualify, as can a criminal background. Since the percentage of applicants denied insurance tends to increase with age, it’s best to plan early, securing coverage while you’re relatively young and healthy.

Long-Term Care Insurance and Your Retirement Plan

Including long-term care insurance in your retirement strategy can offer peace of mind and financial security in your golden years. By defraying the potential cost of future care, you can preserve your financial resources for other uses in retirement, such as daily living expenses, travel, or philanthropy.

Furthermore, securing coverage may give you more flexibility as to where and how you receive care as you age. It can also provide reassurance that you won’t be a burden to family members who may have to care for you otherwise.

However, it’s important to note that long-term care insurance may not make sense for everyone. Premiums can be expensive, and there’s a chance you may not need long-term care during your lifetime.

In some cases, it may make sense to self-fund your long-term care expenses by accounting for these potential costs in your retirement budget and planning accordingly. This is especially true if your background or current health renders you ineligible for LTC insurance.

Ultimately, planning for long-term care requires a careful assessment of your healthcare needs and preferences, financial goals, and family dynamics. Whether you purchase LTC insurance or pursue an alternate path, taking steps to prepare for your future healthcare needs now can help pave the way for a financially stable retirement.

Milestone Asset Management Group can guide you through the intricacies of long-term care insurance and help you determine if a LTC policy makes sense within the context of your broader retirement strategy. We encourage you to take the first step toward securing your future by scheduling a call with a member of our team.