June 24, 2024
What Is Long-Term Care Insurance?

How does long-term care insurance work?

Long-term care insurance works in much the same way as health insurance. You pay a premium, in this case as either a lump sum or in regular installments, and the insurer guarantees a payout or reimbursement amount to cover the costs of care when you need it.

 

Unlike health insurance, however, LTC insurance benefits are generally triggered when you are diagnosed with a cognitive impairment or require assistance to perform two or more activities of daily living (ADL). These include:

 

Dressing

Bathing

Eating

Toileting (or using the bathroom)

Transferring (like moving from a bed to a wheelchair)

Walking or ambulating

Benefits may be paid daily, weekly or monthly, depending on the plan. The mode of payment also varies. For example, some policies work on an indemnity model, where the plan sends you a check for the fixed benefit amount and you pay for the services you want. Other plans work on a reimbursement model or pay the care facility or provider directly.

Most LTC policies cover skilled care by licensed professionals, which can take place at home (home health care), in assisted living facilities, nursing homes or adult daycares. Some policies also cover custodial care (where the caregiver doesn’t need to be licensed).

The best long-term care insurance policies may also cover alternative care options such as hospice care, respite care, home modifications, medical equipment and even custodial care training for family members.

 

Types of long-term care insurance policies

There are two main long-term care insurance options: stand-alone long-term care insurance and hybrid life and long-term car insurance. While they have some common elements, they each work differently and are priced accordingly.

 

Stand-alone long-term care insurance

With stand-alone LTC policies, your premium payment is ongoing and goes toward maintaining the policy, which will provide a maximum benefit during a benefit period (typically lasting two to five years). Once you require care, you’ll need to wait a certain number of days (called the elimination period) before benefits are paid out.

 

Here are some general details about stand-alone policies:

 

Premiums are generally more affordable, as the policy offers no other financial benefit. However, they may be subject to rate increases.

If you end up not needing long-term care, the policy lapses and you don’t get a return on your investment.

Similarly, if you can’t keep up with premium payments, the policy is canceled.

You may add insurance riders such as inflation protection, which increases your benefit each year by a fixed percentage.

Hybrid life and long-term care insurance

Hybrid or linked benefit policies combine a life insurance policy — most commonly universal life insurance — or an annuity with long-term care benefits. Most policies guarantee a percentage will be paid out to the policy’s beneficiaries upon the policyholder’s death, even if they used the policy to cover long-term care.

Here are some general details about hybrid LTC policies:

 

With hybrid policies, you pay a fixed premium for a predetermined number of years, typically 10 to 20. After that period, you can start using the benefit to pay for care.

Because of this long-term care component, hybrid policies tend to be the more expensive option.

As these are generally life insurance policies, you can always surrender the policy and get a cash surrender value (your cash value minus surrender charges) if you can no longer afford your premium.

Pros and cons of having long-term care insurance

As with any type of policy, there are pros and cons to buying long-term care insurance.

 

From the costs of premiums to the waiting periods before the policy kicks in, each factor will play a role in figuring out if LTC insurance is the right choice for you.

 

Pros of long-term care insurance

There are several benefits to having long-term care insurance. These include:

 

Paying for care: Most people who live into their 70s, 80s and beyond expect to need some form of long-term care, and having LTC insurance can help cover a variety of costs related to that care. That includes the costs of in-home care, adult day care, assisted living and nursing home care.

Protecting your assets: An LTC policy can help protect money and assets, such as a home or investments, from being depleted to cover long-term care costs.

Safeguarding your family’s assets: In addition to protecting your own assets, long-term care insurance can also help protect your family’s assets if you run out of money and need financial assistance to pay for the care you need.

Reimbursing family members: Some policies offer reimbursement for family members who provide care. This is an excellent option for those who choose to have family members serve as primary caregivers.

Cons of long-term care insurance

There are also several potential downsides to buying an LTC policy. These include:

 

Elimination period: Stand-alone policies have a waiting period or elimination period before the policy begins to pay out. That means there will be a time when you are receiving long-term care but the policy won’t cover it.

Cost: Premiums for LTC policies may be cost-prohibitive for some. According to AALTCI, a 55-year-old in great health can expect to pay between $950 and $1,500 in annual premiums for a level-benefit LTC policy worth $165,000.

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