Long-Term Care (LTC): How to Pay For It and Do You Need LTC Insurance?

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Caring for two parents, both of whom needed at-home medical care, has since shaped my view of Long-Term Care (services the help meet the needs of people with a chronic illness or disability who cannot care for themselves for long periods) and how families can plan for it. My parents both suffered from cancer and needed various forms of care and, eventually, full-time aid. We predominantly self-funded the care for them. While primary medical coverage or Medicare can cover most of the treatments and doctors’ visits, there are still additional emotional and monetary costs.

Most people we encounter do not want to think about needing a plan for long-term care. However, for those 65 and older, there is about a 70 percent probability that they will need some form of it. In the past, families cared for aging relatives themselves. But in recent times—primarily due to longer life expectancies and the unavailability of family members due to career obligations or geographic challenges—many seniors have been using professional care services.

Four Different Ways to Pay for Long-Term Care

Today, there are four different ways to pay for long-term care. Three of which have been around for a while. The first is savings, using a senior’s accumulated wealth (typically from retirement savings such as a 401k, IRA and other types of savings and investment accounts) to pay for their long-term care needs. There can be financial restrictions to this, such as a home aid being out of budget, which would lead to using a care facility instead. That can carry financial and emotional stress, either running short of funds or moving a senior from their comfortable home.

The second is through government assistance. Veterans and those with low income can qualify for aid through the Veterans Administration, Medicaid, or state assistance programs. 

The third option is the traditional long-term care insurance policy, also known as a “stand-alone LTC policy.” While pricing and policy design has improved significantly since the first policies in 1974, there can still be an unrecoverable premium cost. This type of policy is what is known as pure risk-based insurance. Just as you would insure your car or home from an accident or disaster, you are paying for peace of mind here. Should you ever need to go on claim, many are happy to have the policy in place, but there is a chance that no claim is made. There has been a significant drop in stand-alone policy purchases. Morningstar cites that 750,000 stand-alone policies were sold in 2002, while only 56,288 were sold in 2018.

That leads us to the fourth option of a hybrid LTC policy to fund long-term care costs. These are typically designed with either life insurance policies or annuity contracts and can offer various benefit options for a lower price. Many annuity and life insurance policies even have free or low-cost riders that allow for a larger payout or access to death benefit funds if a policyholder requires long-term care. Additionally, some life insurance companies have a specific LTC rider that can mimic many features that made the stand-alone so popular, such as a cash benefit to pay for an LTC facility or home health aide. This is appealing in that you can potentially get multiple benefits out of one product that many retirees and seniors are already using. Suppose a policyholder doesn’t go on claim: In that case, they can take income from an annuity contract or life insurance policy or wait until they pass away and leave the remaining balance or death benefit to their heirs.

This is appealing in that you can potentially get multiple benefits out of one product that many retirees and seniors are already using. Suppose a policyholder doesn’t go on claim: In that case, they can take income from an annuity contract or life insurance policy or wait until they pass away and leave the remaining balance or death benefit to their heirs.

Should Seniors Consider a Long-Term Care Insurance Policy?

When the insurance industry first rolled out a policy to cover the cost of long-term care, like any new insurance product, the pricing and coverage were challenging. The actuarial data was relatively new, and there were some growing pains. Many new policyholders saw premium rate increases as they aged. Or their insurance carrier merged with other insurers, as companies weighed the costs and contractual obligations.

The original long-term care insurance policies were a “use it or lose it” type of contract. So, if someone did not go on long-term care claims, they would lose the premiums they paid. For example, the insurance company paid no claim if a policyholder passed away before the policy’s waiting period was up or passed suddenly. A typical waiting period to start benefits would be 90 days. (A “time deductible” if you will.)

So, does it make sense for you to purchase Long Term Care Insurance, use your savings, or rely on government assistance? This is really a personal preference; do you feel you need it? Are there personal circumstances that may lead you to decide one way or another? Often, we find that some people have a high interest because they don’t want to burden their families with cost or care. Others do not have local families or anyone to care for them should they need it. While other folks simply do not consider this an issue and would prefer to use their personal savings should they need it. We recommend that people have these conversations with their family members and loved ones. Get feedback, and it doesn’t hurt to check eligibility. With a hybrid policy as an example, there is a possibility that someone may have an account in place that provides retirement income already and to simply add coverage could be either free benefit or very cost effective. Speak to an advisor and become an educated consumer in this space.

There are a few ways to pay for the cost of long-term care. As with any financial decision, it is recommended that you consult a financial advisor and/or tax professional before purchasing. 

The opinions voiced in this article are for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

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