Long term care: challenges and changes

Learn to navigate the costs, shifting coverage options, and insurance policy features.

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No one really likes to think about needing long term health care services. But the reality is that each year, an estimated 12 million Americans need some type of long term care.1

Are you prepared? According to the Department of Health and Human Services, the average use of long term care services is three years.2

Long term care is a key risk to your retirement plan, and you need to plan for it. It will affect you and your caregivers financially, physically, and emotionally. Having a plan to address these concerns is critical to easing the burden of this risk on you, your family, and your friends. Indeed, 51% of caregivers said providing care reduced the time they spent with their children and spouses/partners as well as time to take care of themselves.3

While it used to be that families cared for their aging relatives because there was no other option, today’s elderly increasingly rely on professional care from home health aides and nursing homes. Sometimes, long term care starts with services such as home visits, then, depending on your health and independence, may transition to additional services that require full-time nursing care. These services will increase in cost as your required care changes.

“While many people buy long term care insurance to defray these costs, there are just as many who should consider it but haven’t,” says Tim Gannon, vice president of product management at Fidelity Investments Life Insurance Company. "Moreover, having a plan for your care—meaning, who you expect your caregivers to be and how you expect to pay for your care—is increasingly important as you age, so that your lifestyle and comfort do not have to change."

Long term care is expensive, but having a plan for your care will make a critical difference in your quality of life—and your family’s—as you age. The key is weighing your personal needs against the costs and potential benefits of coverage.

The good news: New products offered by insurance and financial companies may increase your choices. Below, we discuss four long term care options, and how to weigh the pros and cons for your particular situation.

The cost of care

To decide whether you need long term care insurance and how much to buy, you need a sense of how much your care could cost.

For an estimate of potential long term care costs in your state, see the 2016 Genworth Cost of Care study or use our interactive map.

Coverage options

Essentially, there are four different ways to pay for long term care: government assistance; traditional long term care insurance; “hybrid” insurance, which offers life insurance or annuity benefits with long term care coverage; and personal savings. Which you choose depends largely on your financial circumstances and what you expect for your standard of care—both now and in retirement.

Government programs: Veterans and people with low income who can’t afford to cover long term care expenses might be eligible for long term care assistance from the federal government, through Medicaid and the Veterans Administration, or state-run assistance programs.

However, you can’t rely on Medicare to cover these costs, even if you’re age 65 or older. Medicare provides limited benefits for long term care, and would not cover an extended stay in a nursing home.

As for Medicaid, benefits kick in only after you’ve depleted your savings, and the choices for where and how you receive care could be limited. Benefits and eligibility vary from state to state, and savings and income are frequently key factors.

Traditional long term care (LTC) insurance policies. These policies are still the most widely used type of long term care insurance. You can choose the amount of coverage, how long it lasts, and how long you have to wait before receiving benefits. Typically, you pay an annual premium for life, although your premium payment period could be shorter.

However, many carriers no longer offer traditional policies and those that do may raise annual premiums after purchase. Still, the annual cost with traditional policies may be lower than other options.

Hybrid policies. One type of hybrid insurance offers life insurance with long term care coverage. “A life insurance and long term care hybrid policy will pay for long term care during your lifetime if you need it. But if you don’t use your long term care benefits, it will pay a life insurance death benefit to your beneficiary upon your death,” explains Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company.

If you had a long term care need, you would be able to draw down or accelerate the death benefit amount to pay for your care, sometimes subject to a monthly maximum amount. However, even if you used up the entire death benefit, sometimes the insurance company would still provide additional long term care coverage.

Another type of hybrid is a long term care annuity, which provides long term care insurance coverage at a multiple of the initial investment amount. The investment grows tax free at a fixed rate of return, and, if used for long term care expenses, gains will be received income tax free. If you qualify for long term care benefits, the long term care coverage would draw down both the account value and the long term care pool. Once your account value has been exhausted, the insurer would provide the remaining long term care pool benefits, which is effectively the insurance component of the policy.

However, today’s low-interest-rate environment has made it challenging for insurers to provide annuities with long term care coverage. So, it’s important to note that these products have yet to gain any significant traction in the market, and, as a result, may be not be available through your insurance company.

Personal savings. Not everyone needs insurance. “The very wealthy may have enough assets to cover their income and lifestyle needs, and still be able to carve out enough assets to fund their potential long term care expenses,” says Gannon. And if you have accumulated wealth, you may appreciate how long term care insurance can help protect your assets from the cost of long-term care and allow you to pass your wealth on to your loved ones. However, for many people who would not consider themselves wealthy, the cost of long term care has risen so high in recent years that it may be prohibitively expensive in your state, making this the option of last resort.

Understanding your options

If you’ve decided you want long term care insurance, you need to think about when to buy it, how much coverage you want, and the types of features that make sense for your situation. How does someone actually figure out whether long term care insurance is right for him or her?

When to buy

The older you are, the greater the chance you’ll have a medical event that requires long term care or you’ll develop a health issue that will keep insurers from approving your policy application. People typically buy long term care insurance when they’re in their 50s or they are reviewing their retirement plan with their financial advisor. At that point in your life, Ewanich says, “you’re old enough to think seriously about long term care, but young enough for your premiums to be affordable, and you’re less likely to have medical issues that disqualify you for coverage.”

In addition to the risk of your health deteriorating as you age, the financial cost of waiting to purchase a policy should be considered. Depending on the type of long term care insurance policy you are interested in, it will become more expensive to purchase each year you wait.

When do benefits begin?

Typically, you become eligible for your long term care benefits when you can no longer perform a certain number of “ADLs,” or activities of daily living (e.g., eating, bathing, dressing) without help. Then, most policies have a waiting period (“elimination” or “deductible” period), during which you pay for your care separately from your policy until your waiting period is completed and you can start long term care benefits.

How much coverage?

Most long term care policies cover the same types of costs, from nursing home stays to home health aides. You have to decide how much coverage you want, both in terms of the dollar amount of your benefits and how many years you want those benefits to last. As Ewanich points out, buying long term care insurance is like purchasing a pool of money that you can use for daily coverage (e.g., $200 per day) or monthly coverage (e.g., $6,000 a month).

Importantly, don’t buy more coverage than you can afford. Instead, consider reducing the amount of coverage to balance your financial situation with your long term care needs. Also, recognize that there are different ways to pay for your policy. While some are single-payment-premium policies that you pay in one lump sum, other policies, like traditional long term care coverage, can be paid for through periodic premium payments. Keep in mind, however, that when you choose periodic premium payments, often your premium payment amount isn’t guaranteed, and it could increase if the insurance company raises rates.

Sustaining your coverage

If you’re going to spend the money on long term care insurance, make sure your benefits will be sufficient—and available to support you. Since medical costs will likely continue their upward climb, you might consider adding inflation protection.

Also, choose an insurance carrier with a strong track record and solid financial health. You want to make sure the carrier has the longevity to be around years after you buy your policy, so it can pay your benefits when you need them.

Making it personal

Your long term care insurance should fit your personal situation. An individual may need a different level of coverage than a married couple because he or she has to consider the long term care needs of only one person. For couples, consider the effect on your spouse’s financial situation if you have an extended long term care situation. It’s also important to factor in your family medical history and know the risks you face. Certain hereditary diseases in your family—like Alzheimer’s or diabetes—could make it more likely that you’ll have a long term care event in the future.

A thoughtful long term care coverage decision is all about balance—weighing what you can afford, the kind of care you expect, and the risks you might face. It is not just a financial decision but using insurance may help relieve the emotional and physical burden for caregivers such as family members and friends. Made carefully, it’s a decision that may help avoid financial catastrophe and provide you with peace of mind for your retirement.

Learn more

  • Read Viewpoints: "How to grow old in your own home."
  • Speak with a knowledgeable Fidelity professional at 866-616-0215 to learn more about long term care insurance.
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2. Based on the Department of Health and Human Services National Clearinghouse for Long-Term Care Information as of September 2012, "How much care will you need."
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