4 things to know before buying long-term care insurance

Many otherwise financially savvy individuals may fail to consider the role of long-term care insurance in their retirement strategy—until they have a personal experience with the long-term care of a friend or relative. “The majority of long-term care insurance contract holders have had personal experience with the care of a family member or friend,” says Dean Anderson, health products sales strategist at Thrivent.

When faced with the challenge of funding long-term care, individuals and their families have options, including:

• Self-funding with savings or investment assets.
  
• Cashing in on home equity, if available.
  
• Spending down assets to receive Medicaid benefits.
  
• Long-term care insurance, or a combination of long-term care and life insurance.

With an estimated 60% of people¹ expected to need ongoing care at home or in a nursing home or assisted living/residential care facility at some point, it pays to know more about long-term care coverage. Of the options noted above, long-term care insurance can help protect your retirement income and retirement-plan assets, as well as your family’s emotional and physical well-being. Here’s what to know as you get started with your exploration of long-term care coverage options.

When a medical condition—or simply the aging process—creates the need for continued care, long-term care insurance can help pay for that level of care. Long-term care insurance contracts, sold privately by insurance companies, cover the cost of qualified daily living support (or “custodial care”) for someone who can no longer be completely self-sufficient in day-to-day tasks. This support may include assistance with:

• Bathing
• Grooming and dressing
• Eating
• Using the bathroom
• Mobility
• Cognitive impairment

You can receive care in your home, an adult daycare facility, a nursing home or an assisted living/ residential care facility.

Medicare and Medicare supplement insurance provide benefits for checkups, doctor visits when you’re ill, diagnostic testing, medication and hospital stays—preventive and curative medical expenses. They may, depending upon the particular case, also pay for temporary stays in a nursing home or physical rehabilitation facility, or the cost of certain home-care procedures. However, long-term care insurance helps to pay for the kind of qualified long-term care services and daily support you can’t get through Medicare or Medicare supplement insurance.

Medicaid is a federal program administered by state governments that pays for both medical and long-term custodial care. However, to meet Medicaid eligibility standards, you or your family must first prove that you have become “medically needy.” In most states. This requires having no financial or property assets beyond a small amount of cash, and sufficiently low income. (In New Jersey, for example, an applicant cannot receive more than $17,031 annually² from all sources.) As a result, the government requires you to first “spend down” your assets—cash, investments and real property—on your care. There may also be a “lookback” period to see if you transferred any assets to friends or family to meet medical indigence requirements.

Once you have Medicaid, you can receive custodial and medical care at an eligible nursing home or assisted living/residential care facility for life, as long as you do not accrue more than the state-allowed level of assets. Limited hours of home care may also be available, as allowed on a state-by-state basis.

If you’re familiar with life insurance, then it’s much easier to understand how long-term care insurance contracts work, in terms of applying and approval. You can pay either ongoing premiums for life, or pay larger premiums over a limited timeframe (10 years). When it’s time to make a claim for qualified services, there is usually a waiting period before your benefit kicks in.

Once you decide on a contract provider, you’ll submit an application and receive a health assessment that typically includes a medical records review and possibly a phone call with the applicant to assess your cognitive fitness. This process determines if you have any underlying conditions that could increase your need for long-term care. As part of this application process, you’ll also choose various coverage amounts and time periods, among other options.

Contracts may offer from two years to, in some cases, lifetime coverage. Ultimately, what you choose is a balance between affordability, your projected retirement income and your best estimation of your longevity. Most importantly, the premium you need to pay shouldn’t compromise your retirement plan contributions or your saving and giving plans.

It’s important to note that “years” of coverage can have a specific meaning when it comes to this type of insurance. For example, if you buy a three-year contract, this will give you 1,095 days of coverage (365 x 3), but you’re not limited to a contiguous three-year calendar period.

The maximum payout of a long-term care insurance contract is typically based on its daily or monthly benefit—the amount it pays each day towards qualified home or in-facility care. To determine your daily benefit, decide what sort of care you may want or need; nursing-home or assisted living/ residential care facility may be considerably more expensive than home care. Another factor to consider is the amount of your retirement income or financial assets you can and want to use toward your care. Talk with a financial advisor about what works best for you and your retirement plan.

If you buy a long-term care insurance contract in 2021, there’s no accounting for how much the cost of care may increase by the 2040s. However, when you purchase an optional inflation rider for your long-term care insurance contract, your benefit will adjust periodically to cover inflation.

A combination long-term care/life insurance (or annuity) contract lets you pay a one-time lump sum premium or pay over a period of years. If you do not use the long-term care benefits, your beneficiaries will eventually receive a death benefit.

Here’s a hypothetical example: Mike took out a combination long-term care/life insurance contract when he was 57 years old (the current average age people get LTC coverage). At age 86, Mike died, leaving 29 years of premium payment benefits unused. Typically, this money would be lost—just like if you bought auto insurance and never had a claim. But since Mike bought a combination contract and made his two children beneficiaries, they will receive a death benefit, subject to contract specifics.

There are three reasons why long-term care insurance may be worth your time and consideration: It makes good financial sense; it can give you the long-term care flexibility you want and it helps keep the rest of your family happy and healthy. Here’s more on these points:

Extended care costs are rising: In 2019, the average cost of an unskilled or semi-skilled home health aide³ hired through an agency was $20 to $22, or $3,200 to $3,520 monthly, based on a 40-hour work week. In 2019, an assisted living/residential care facility was priced at an average of $4,240 monthly, while one month in a nursing facility came in at $9,240.

If you’ve succeeded in creating a solid financial legacy for your family, investing in a long-term care insurance contract can help in maintaining its intended purpose: “One of the largest threats to an otherwise finely turned retirement plan isn’t a market plunge. Rather, an unanticipated healthcare expense not covered by Medicare or your supplemental plan which can impact your retirement lifestyle,” says Anderson. Whether you want to pass along investments, cash or perhaps the family vacation retreat, having this protection against unanticipated long-term care events can help you do these things.

Your changing state of health over time may require location-dependent care. But with long-term care insurance, you gain some flexibility in this area for eligible care.

Among Americans age 50 or older, 76% want to remain in their homes⁴—and long-term care can be there for them. “Especially due to what’s happened in nursing homes during the pandemic, more retirees may be uncomfortable discussing their potential long-term care at all. For these people especially, aging in place is something to discuss,” says Anderson. In fact, more than half ⁵ of long-term care insurance claims begin—and end—in the home. Care ranges from everyday assistance with bathing, dressing and mobility, to skilled in-home nursing services. Without this coverage, you must pay in full for a home health aide, at the prices noted above.

In some cases, daytime caregiving may be part of the overall care plan. This may be necessary because a primary caregiver works during the day, or simply to give the caregiver a respite from taking care of their loved one around the clock. An adult daycare center encourages social activity and intellectual stimulation, while also providing essential daily care support. There may also be provisions for working with someone with dementia and other conditions.

When the level of your care demands 24/7 assistance, you may need to live in a residential care facility. In fact, close to half of long-term care insurance contract holders⁵ are filing claims for such care. Without the daily benefit provided by a long-term care insurance contract, you may ultimately pay in excess of $100,000 annually for nursing home care. For most retirees, that type of expense is unsustainable for the long term.

The number of unpaid caregivers now totals 41.8 million⁶, with millions of family members among them. What’s more, many adult children who fulfill the caregiver role also care for their children simultaneously—the so-called “sandwich generation.” A long-term care situation can affect your extended family in these ways:

• Emotionally. Caregiving can become a full-time job. But what if you already have one?
• Physically. Daily caregiving, especially for those not used to giving this sort of support, can be exhausting.
• Financially. The expense of care may compromise your family’s future care, as well as your legacy plans.

“These situations can induce a level of stress within a family. By developing a long-term care strategy, your family can focus on you. And the people you care about can focus on being a family, instead of the details of your care,” says Anderson.

*Subject to eligibility

The majority of long-term care insurance applicants are between 55 and 64 years old⁷. However, starting a discussion and locking in a lower premium early on, preferably in your early to mid-40s, is a great idea. Here’s why:

Like other insurance contracts, the younger and healthier you are at the time of application, the more likely you are to be approved and the less you’ll pay. Most contracts offer lower premiums for preferred health.

Insurability is based on your overall health status. As we age, our health may decline. Waiting to apply can mean higher premiums or ineligibility for coverage. For 70- to 74-year-olds, it’s almost half (44%).⁸

Other conditions that determine contract costs are:

• Location. Healthcare costs vary greatly by state.

• Requested benefit amount and term. Many contracts pay for a certain length of time, such as one, two, or five years of care, though this varies by carrier.

Be sure to evaluate how long-term care coverage will affect your retirement plan, as well as current essential budget items. Talking with a financial advisor can help you decide on a start date that works for you.

Whether you plan on relying on help from your spouse or other family members—or plan on getting long-term care insurance—creating a strategy now gives you the time to have conversations. Sharing your thoughts now with your family and your financial advisor can be better than keeping your thoughts to yourself. Be sure to ask yourself:

• Where do you want to receive care—at home or in a skilled facility?
• What role do you see your family taking on in your care, and are they in agreement with your plans?
• How will you pay for your long-term care?

When you leverage long-term care insurance, you’re taking an important step towards greater financial security when you’ll need care the most. With careful planning that takes your assets, your extended care options and your potential health issues into account, you can look forward to your later years, knowing you’ll get the care where and when you need it.

Get guidance on your long-term care—or extended care—strategy. To learn more about coverage options, connect with a Thrivent financial advisor to discuss your situation.

Thrivent is committed to helping clients achieve financial clarity and live lives full of meaning and gratitude. A key aspect of financial clarity is helping clients navigate the challenging journey of extended care planning. At Thrivent, we believe everyone should consider the impacts of extended care as part of their overall financial strategy.