How does long-term care insurance work?

As you prepare for a long and full life, planning for a time when you may not be able to fully care for yourself should be part of that big picture.

Around 56% of Americans will require some form of long-term care during their lifetime.¹ These services can rack up high costs and reduce the savings you've built.

Long-term care insurance can help ensure your loved ones have choices about how and where you receive care, should the need arise. How does long-term care insurance work? Here's a look at this important planning tool for you and your family.

Long-term care insurance can help cover your needs if you become disabled or severely ill. This might happen through the natural aging process or due to a medical condition or unexpected event that leaves you needing dedicated daily support.

When you're dealing with these changes, choice can feel like the greatest gift. Long-term care insurance can allow you to stay in charge of when and how you'd like to receive care, the level of independence you'd like to maintain and what role your family will play in your care—as long as they are prepared and willing to do so.

Depending on your preferences and needs, long-term care insurance can provide coverage in these settings:

• Home care
• Assisted living/residential care facilities
• Nursing homes
• Adult day care
• Hospice care

Offsetting long-term care expenses with insurance can serve as a critical financial safety net, considering that many government programs have limits on eligibility and coverage.² For example, Medicare is mainly available to adults 65 and older. It typically only reimburses for stays up to 100 days in a skilled nursing facility and only if it follows a qualifying hospital visit. Medicaid may cover longer stays, but only if you meet its financial requirements—you may feel like you have to spend down your hard-earned nest egg to qualify. With Medicaid, you're also limited to facilities that accept it, which may leave you with few or no choices.

Even with long-term care insurance, you'll still need to rely on health insurance to cover your medical costs, such as doctor visits and prescription medications. Long-term care insurance also won't pay for charges that are eligible through Medicare or would be if you paid the deductible or co-pay.

As with other insurance products, you keep your coverage in force by paying the premiums. Depending on your contract, you may have the option to spread them throughout the rest of your lifetime—resulting in lower monthly payments—or pay a set amount for a specific number of years.

If you receive qualified long-term care services in your home or at a facility, you'll pay costs out of pocket until you reach the elimination period, typically 30-90 days. After that, your long-term care plan will reimburse for the remaining covered costs. Most policies only require you to reach the elimination period once during your lifetime.

Long-term care policies may have a daily or monthly cap on how much they'll cover and a lifetime limit on total payouts. Insurers often have separate limits based on whether you receive care in your home or in a facility.

Long-term care policies are sold privately through insurance companies. To determine your long-term care premium,³ you'll go through a medical records review and possibly a cognitive assessment. Some factors that may affect your premium include:

• Your age
• Your health history
• The amount of coverage limits, if applicable
• The length of the elimination period
• Whether the contract has benefits that increase with inflation

Age is one of the most important factors in creating a quote. Some policies are available to adults as young as 18 while some have older age limits. You'll typically get a lower premium the earlier you apply for coverage. You'll also get a better rate if you're in good health because there's a lower probability that you'll need significant levels of care in the first few years of owning the contract.

Besides personal factors, the level of coverage is another key determinant of your premium amount. The longer your elimination period and the lower your daily or monthly coverage caps, the lower your premium is likely to be—and vice versa.

Many long-term care policies can be tailored to fit your expected needs. Some may provide supplemental benefits, including equipment and home modifications that allow you to remain comfortably in your home. Your insurance also may offer coordination of care services, where a licensed professional develops a formal plan of care and regularly reviews your needs.

You often can pay to add additional benefits to further customize your long-term care plan. These optional contract features, known as riders, can help to further minimize your financial risk. The menu of available riders can vary from one carrier to another. Some of the more common add-ons include:

This rider provides you with a separate cash benefit when you receive eligible care in your home or in a facility. You can use those proceeds to pay informal caregivers or for any other financial needs you may have.

If you or your spouse die after your contract has been active for a certain length of time—typically 10 years— the surviving spouse no longer has to pay premiums to continue coverage. This feature is more common among younger applicants, who have a greater chance of going a decade or more before filing a claim.

Should you pass away more than 10 years after purchasing your contract, the insurer will pay a lump sum to your estate. The payout will be equal to the premiums you've paid less any benefits and accumulated dividends you received.

The shared care benefit rider enables couples with identical long-term care insurance policies to share their benefits. Should one insured individual reach their reimbursement limit, for example, they can access their spouse's remaining benefits.

Adults in their 30s or 40s typically aren't focused on buying long-term care insurance. Understandably, this age group may be prioritizing their financial strategy around caring for children or investing heavily in their retirement. But it's worth noting that you often receive the lowest premiums when you buy insurance earlier, in part because you'll potentially be paying premiums for a longer period of time than older applicants. The younger and healthier you are, the easier it usually is to qualify for insurance.

Many people find that their early 50s to early 60s is the sweet spot for applying for long-term care insurance, when they're young enough to receive an affordable rate but may have more room in their budget to make payments. That way, they're still putting coverage in place well before they're likely to need care.

If a full long-term care contract doesn't feel like the right fit yet, you can explore combined life and long-term care insurance.⁴ These hybrid policies pay a death benefit to your beneficiaries if you don't use your available long-term care benefits. After all, there is a possibility that you may not ever need extended care. This solution can position your family to still receive a payout of the benefit since you paid all the insurance premiums.

If extended care is needed, you'll want to have the important conversations squared away ahead of time. Considering the scope of a caregiver role, it's worth a discussion with your loved ones to determine if they'd be up for it. It's also wise to examine your own long-term care preferences⁵ and visualize your ideal plan if you were to need this care one day.

A financial advisor can help to weigh your long-term care insurance options, see how the costs stack up against other possibilities (such as dipping into your retirement income) and gauge when it would make sense for you to consider a contract. With long-term care insurance in place and knowing you'll be well cared for if something happens, your family can worry less about finances and more about spending time together.