Understanding Long Term Care Insurance Cost and Hybrid Policies

As we age, the need for long-term care becomes a pressing concern for many individuals and families. Long-term care insurance offers a safety net, providing financial support for various care services that Medicare typically doesn't cover. Understanding long term care insurance cost and the newer hybrid policies can be crucial to making informed decisions about future healthcare needs and financial planning.

This article aims to shed light on the intricacies of long-term care insurance and its costs. We'll explore traditional long-term care policies and dive into the world of hybrid long-term care insurance, which combines life insurance with long-term care benefits. Additionally, we'll break down the factors that influence premium costs, such as age, health status, and coverage options.

What is Long-Term Care Insurance?

Long-term care insurance is a specialized type of insurance policy designed to provide financial support for various care services that you may need as you age or face chronic health conditions. This insurance helps cover the costs of assistance with routine daily activities when you can't care for yourself due to illness, disability, or cognitive impairment 1.

Long-term care insurance typically covers services that are not typically covered by regular health insurance or Medicare. These services may include:

1. In-home care
2. Skilled nursing care
3. Personal care
4. Adult day service centers
5. Assisted living facilities
6. Memory care facilities for people with conditions like Alzheimer's
7. Nursing homes
8. Respite care 2

The primary goal of long-term care insurance is to offer peace of mind and financial protection for individuals and their families when faced with the potentially high costs of extended care.

Types of long-term care coverage

Long-term care insurance policies come in various forms, each catering to different needs and preferences. The main types of coverage include:

1. Home Care Only: These policies exclusively cover care provided in your home or community settings. They typically include benefits for home health, adult day health care, hospice, respite care, personal care, and homemaker services 3.
2. Nursing Home & Residential Care Facility Only: This type of policy covers care in nursing homes or places licensed as Residential Care Facilities for the Elderly (RCFEs) that provide assisted living care. The benefits cover all long-term care services received in the facility, up to the policy's maximum daily benefit amount 3.
3. Comprehensive: These policies offer the most extensive coverage, including care in nursing homes, assisted living facilities, home care, and community care settings like adult day care 3.

It's important to note that some policies may have limitations on the settings where care can be provided. For example, some may only cover institutional care, while others may focus solely on home and community-based care 3.

Activities of daily living (ADLs)

Activities of daily living (ADLs) play a crucial role in determining eligibility for long-term care insurance benefits. ADLs are a list of general activities necessary for one to function and live independently in a household. The six standard ADLs are:

1. Bathing: The ability to clean oneself, get in and out of the shower or bath, and perform other personal hygiene activities.
2. Dressing: The ability to put on and take off clothes, including any necessary braces, fasteners, or artificial limbs.
3. Toileting: The ability to use and get on and off the toilet and perform associated personal hygiene.
4. Transferring: The ability to walk and move from a bed to a chair or vice versa.
5. Eating: The ability to feed oneself by getting food into the body from a receptacle or through other means.
6. Continence: The ability to control bladder and bowel functions or perform associated personal hygiene when unable to maintain control 4.

Most long-term care insurance policies use the inability to perform at least two ADLs without assistance as a trigger for benefit eligibility. This criterion helps ensure that benefits are provided when there's a genuine need for long-term care 4.

Average costs of long-term care

Understanding the potential costs of long-term care is crucial when considering insurance options. The expenses associated with long-term care can be substantial and vary based on factors such as location and type of care needed.

As of 2022, the average cost of a long-term care insurance policy with $165,000 in level benefits for a 55-year-old single man was $950 per year, or about $79 per month. For a 55-year-old single woman, the same policy averaged about $1,500 per year, or $125 per month 5.

For individuals aged 65, the costs increase significantly. A 65-year-old single man would pay an annual premium of $1,700, or about $142 per month, for the same policy. A 65-year-old single woman would pay $2,700 per year, or about $225 per month 5.

It's important to note that these are just averages, and actual costs can vary widely. For instance, the national annual median cost for a private room in a nursing home exceeds $116,000 6. Moreover, the combined cost of three years of assisted living plus two years of nursing home care can surpass $365,000 6.

When considering long-term care insurance, it's crucial to factor in the potential for rising healthcare costs. Historically, California nursing home rates have increased at an average rate of over 5% per year for the past two decades. At this rate, a year of care that costs $50,000 today could double to $100,000 in just 14 years 7.

Understanding Hybrid Long-Term Care Insurance

Hybrid long-term care insurance combines the benefits of life insurance with long-term care coverage, offering a unique solution for those concerned about future care needs while also providing a death benefit for loved ones. This innovative approach addresses common worries associated with traditional long-term care policies, such as the fear of paying premiums for coverage that may never be used 8.

How hybrid policies work

Hybrid policies, also known as linked-benefit policies, typically function in two primary ways:

1. Long-term care benefits: If the policyholder requires long-term care, they can use a portion of the policy's death benefit to cover qualified expenses related to everyday care, including home care or assisted living 9.
2. Life insurance benefits: If the policyholder doesn't use the long-term care benefits, their beneficiaries receive the full death benefit upon the policyholder's passing 9.

This structure ensures that policyholders or their loved ones will receive some value from the policy, regardless of whether long-term care is needed 9.

Benefits of hybrid policies

Hybrid long-term care insurance offers several advantages over traditional policies:

1. Estate planning tool: The death benefit provided by hybrid policies can serve as an effective estate planning tool, potentially passing on tax-free income to beneficiaries 9.
2. Simplified long-term care funding: These policies offer a straightforward way to set aside money for potential long-term care needs without the risk of "wasting" premiums 9.
3. Flexible premium options: Unlike traditional policies, hybrid policies often allow for lump-sum payments or payments over a set number of years, after which no further premiums are required 9.
4. Rate stability: Hybrid policies typically come with guaranteed premium rates, providing peace of mind against potential future rate increases 10.
5. Cash value: Many hybrid policies build cash value over time, which can be accessed for expenses other than long-term care 10.
6. Easier qualification: Underwriting for hybrid policies can be less stringent compared to traditional long-term care insurance, making it easier for some individuals to qualify for coverage 10.

Hybrid long-term care insurance policies offer a unique solution that addresses many concerns associated with traditional long-term care coverage. By combining life insurance with long-term care benefits, these policies provide flexibility and peace of mind for those planning for their future care needs. However, it's essential to carefully consider the pros and cons of hybrid policies in relation to individual financial goals and circumstances before making a decision.

Factors Affecting Long-Term Care Insurance Costs

Long-term care insurance costs can vary significantly based on several key factors. Understanding these factors can help individuals make informed decisions about their coverage and financial planning.

Age and health

One of the most significant factors influencing long-term care insurance premiums is the age at which an individual purchases a policy. Generally, the younger a person is when they buy coverage, the lower their premiums will be 11. Industry experts recommend purchasing long-term care insurance during one's working years to access lower rates, although this means paying for the plan over a longer period 11.

The American Association of Retired Persons (AARP) suggests that the "sweet spot" for single individuals to buy coverage is in their early to mid-60s. For married couples, the optimal age is around 55 11. While premiums may be slightly higher at this age range compared to purchasing in one's late 40s or early 50s, the overall amount paid in premiums until age 80 is typically lower 11.

Health status also plays a crucial role in determining premiums. Individuals with pre-existing conditions or a history of health issues may face higher premiums or even be denied coverage 12.

Coverage amount and duration

The amount of coverage and the duration of benefits significantly impact the cost of long-term care insurance. Policies with higher daily or monthly benefit amounts and longer benefit periods will naturally come with higher premiums 12.

As you age, the cost of long-term care insurance typically increases. Additionally, higher benefit growth rates lead to significantly higher annual premiums 12.

Inflation protection options

Inflation protection is something to consider when purchasing long-term care insurance. This feature helps ensure that the policy's benefits keep pace with the rising costs of care over time 13.

There are several inflation protection options available:

1. Automatic annual increase: This option automatically increases the policy's benefits each year, typically by a fixed percentage such as 3% or 5% 14.
2. Compound inflation: This provides better protection than simple inflation, as it applies "interest on interest," resulting in a more significant increase in benefits over time 14.
3. Simple inflation: This option increases benefits by a fixed percentage each year, but without compounding 14.

The impact of inflation protection on premiums can be substantial. For example, a 55-year-old applicant with a $200/day benefit and 5% compound inflation would see their benefit grow to $677/day at age 80. With 3% compound inflation, the same benefit would reach $418/day at age 80 14.

While inflation protection increases premiums, it's particularly important for those purchasing long-term care insurance in their 40s, 50s, and 60s 13. For older individuals, especially those in their 70s, a plan with a larger monthly benefit and lower inflation protection might be more suitable, particularly if budget constraints are a concern 13.

When considering long-term care insurance, it's essential to weigh the costs and benefits of different policy options carefully. Factors such as age, health, desired coverage amount, and inflation protection all play crucial roles in determining the overall cost and value of a policy.

Conclusion

Long-term care insurance plays a vital role in financial planning for future healthcare needs. The exploration of traditional and hybrid policies sheds light on the various options available to individuals and families. Understanding the factors that have an impact on costs, such as age, health status, and coverage options, is crucial to make informed decisions about long-term care insurance.

Long-term care insurance offers a way to protect your assets and ensure quality care in later years. Whether opting for a traditional policy or a hybrid one, it's essential to weigh the pros and cons carefully. By considering personal circumstances and future needs, individuals can choose a policy that provides peace of mind and financial security for the years ahead.

If you have any questions about long term care please get in touch with us and we can walk you through it in detail.

FAQs

1. How do hybrid insurance policies incorporate long-term care coverage? Hybrid insurance policies offer dual benefits. Primarily, if you require long-term care, you can allocate a portion of the policy's death benefit towards covering both medical and non-medical expenses associated with daily care needs, such as qualified home care or assisted living facilities.

2. Can premiums for hybrid long-term care policies be deducted from taxes? Premiums for hybrid LTC policies might be tax-deductible, or you could be eligible for a tax credit. However, this is generally true for traditional LTC policies and only a few hybrid policies that have a clearly identifiable LTC premium component.

3. What is a major disadvantage of purchasing long-term care insurance? A significant disadvantage of long-term care insurance is the potential loss of all the premiums paid if long-term care services are never needed. This means if you do not use the services, you cannot get any coverage benefits or refunded premiums. For this reason, we see more people option to go with a hybrid policy which does have a death benefit in the event you do not need to LTC benefit.

This commentary reflects the personal opinions, viewpoints and analyses of the Seaside Wealth Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Seaside Wealth Management, Inc. or performance returns of any Seaside Wealth Management, Inc. client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Seaside Wealth Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.