What is long-term care insurance?
How it works and if it’s worth it
Long-term care insurance is a type of insurance policy that covers services provided as part of in-home care or care at an adult day care, assisted living community, memory care facility or nursing home. Long-term care insurance is useful for adults who develop cognitive impairment or difficulty performing activities of daily living (ADLs), like bathing, getting dressed and using the bathroom.
How does long-term care insurance work?
Long-term care insurance covers expenses related to custodial care that most people need as they get older. Because Medicare has very limited coverage for these services, having long-term care insurance helps protect your savings and assets while giving you better options for care.
There are two types of long-term care insurance policies:
traditional and hybrid.
Getting a long-term care insurance plan starts with filling out an application. Long-term care insurance providers request details about your medical records and health history to evaluate how likely you are to need benefits. You usually cannot purchase long-term care insurance after you receive certain diagnoses, including Alzheimer's disease, so it’s smart to purchase a policy early.
If approved, you'll start to pay premiums. Once you have a policy and meet the criteria for receiving benefits, known as “benefit triggers,” there is typically a 30- to 90-day waiting period, also known as an “elimination period,” before you can start getting reimbursed for care expenses. Benefit triggers differ by policy, but they often include needing assistance with a certain number of ADLs or having a cognitive impairment. Keep in mind that you must pay out-of-pocket for long-term care that you receive before your policy is active.
If you’re approved to receive benefits, your long-term care insurance provider will issue a plan of care, which describes in detail how you are covered.
Most long-term care insurance policies impose maximum policy benefit limits on the daily amount the insurer will pay and how long it will make payments. Very few long-term care insurance companies continue to pay for services for as long as you need them. You can purchase an inflation rider with some policies so your benefit doesn’t lose value over time.
Types of long-term care insurance
There are two major types of long-term care insurance policies:
- Traditional policies: These are policies that provide coverage for long-term care only and have “pay-as-you-go” premiums. Rates for traditional policies are not expected to increase, but they are not guaranteed. These policies generally don’t return premiums if you decide to cancel.
- Combination or hybrid policies: Hybrid policies combine life insurance with long-term care insurance benefits. These policies are more expensive but give you the assurance that they will return some benefit, whether you need long-term care or don’t.
Traditional long-term care insurance policies tend to pay for more benefits per premium dollar, but they have a use-it-or-lose-it benefit. Hybrid policies typically require a large one-time payment or payments in installments for up to 10 years. The underwriting requirements are not as strict as they are for stand-alone long-term care insurance.
As you compare long-term care insurance plans, be aware that certain policies have tax-friendly benefits. You may be able to deduct some or all of the cost of premiums from your taxes. It's a good idea to ask an insurance agent whether or not the plan you are considering allows this, or you can ask a tax professional.
Some policies also offer a “shared coverage option,” which you buy with your spouse. This enables sharing of benefits with your spouse in case either of you reaches the limit on your policy.
What does long-term care insurance cover?
Long-term care insurance covers costs of medical and nonmedical care for people who receive in-home care or who live in a memory care community, assisted living facility, nursing home or hospice care facility. Coverage is mainly for services related to ADLs, like bathing, getting dressed, using the bathroom and eating.
For some, it also covers occupational therapy, speech therapy, physical therapy, rehab therapy and skilled nursing care. Depending on the policy, it may also cover in-home modifications that make your home safer, like wheelchair ramps and grab bars.
Long-term care policies vary, but coverage usually gives you a wide range of options for care. The table below shows what is usually covered and not covered by long-term care insurance.
- In-home skilled nursing care
- Adult day care
- Assisted living
- Nursing home care
- Memory care
- Occupational therapy
- Speech therapy
- Physical therapy
- Rehab therapy
- Care coordination
- Home modifications
- Respite care
- Hospice care
- Not covered
- Doctors’ appointments
- Preexisting conditions
- Drug and alcohol abuse
- Mental illnesses
- Self-inflicted injuries
- Certain types of cancer
- Telephone, cable and internet bills
Pros and cons of LTC insurance
As with most insurance products, long-term care insurance comes with its share of pros and cons.
- Customizable coverage
- Tax-free benefits
- Affordable long-term care
- Benefits may go unused
- Premiums can rise over time
Benefits of long-term care insurance
- Customizable coverage: Most LTC insurance policies can be customized to fit unique needs. You can choose things like a policy limit, the daily or monthly benefit and the length of the elimination period. You can also add inflation protection and shared care in order to share your benefit with your spouse.
- Tax-free benefits: The money you receive when you use long-term care insurance is usually tax-free. In addition, you may be able to deduct some or all of your premiums from your taxes.
- Affordable long-term care: Without long-term care insurance, you could end up spending thousands of dollars more out of pocket for in-home care or long-term facility costs.
Drawbacks of long-term care insurance
- Unclaimed benefits: There’s a chance that you may pay a significant amount of money in premiums and never need to use the insurance. About three in 10 people who turn 65 today will not need long-term care services, according to the U.S. Department of Health and Human Services.
- Premiums can rise over time: When you have a long-term care insurance policy, the premium you pay may go up over time. Before purchasing coverage, ask the insurer about its history of premium rates.
Frequently asked questions
- Is long-term care insurance tax-deductible?
- It’s possible. The premiums you pay for long-term care insurance may be tax-deductible, depending on the type of policy you have. Ask your insurance agent or consult a tax professional for more information.
- Does long-term care insurance cover in-home care?
- Yes, most policies provide coverage for in-home care, but it's always a good idea to check in with your provider about your specific plan.
- Are long-term care insurance and long-term disability the same thing?
- No, they are not the same. Long-term care insurance provides reimbursement for in-home care or care at an assisted living facility or other long-term care facility. Long-term disability insurance replaces part of your lost income if you get sick or injured and can’t work.
Is long-term care insurance worth it?
Buying long-term care insurance can be beneficial. According to the U.S. Department of Health and Human Services, someone 65 years old today has a 70% chance of needing long-term care services at some point in their life.
Long-term care insurance costs depend on various factors, like your current age, the maximum amount the policy pays per day, how long the policy lasts and any optional coverages you add. On average, the annual cost is about $2,000 to $2,500, with daily benefits around $150. The earlier you buy long-term care insurance, the lower your premium is. Shared policies, where you and your spouse can share coverage benefits, can come with discounts.
If you’re thinking about purchasing long-term care insurance, let your financial situation guide your decision-making. Consider how much you can afford to pay in premiums and what you can afford to spend out of pocket for long-term care. Explore plans from different companies, and resist sales pressure. Don’t be afraid to ask for help from a financial professional.
- AALTCI.org. Long-Term Care Insurance Facts. Accessed Dec. 4, 2020.
- CMS.gov. National Health Accounts Historical Info. Accessed Feb. 4, 2021.
- ASPE.HHS.gov. Long-term Services and Supports for Older Americans. Accessed Feb. 4, 2021.
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