Comprehensive Guide to Long-Term Care Insurance

Most of us will need help with daily activities as we age. Long-term care insurance can cover those costs so you don't drain your savings. This guide covers the basics to help you decide whether it makes sense for you.

• What is long-term care insurance?
• The importance of long-term care planning
• Costs of long-term care
• Who should consider long-term care insurance?
• How does long-term care insurance work?
• Cost of long-term care insurance
• Tax advantages of long-term care insurance
• Considerations before buying long-term care insurance
• Conclusion

What is long-term care insurance?

Long-term care insurance pays for services that regular health insurance doesn't cover: help with daily tasks like bathing, dressing, and getting around. It covers care in your home, assisted living, nursing homes, or adult day centers.

You'd use this coverage if you develop a chronic condition, disability, or illness like Alzheimer's that requires ongoing help with daily activities.

The importance of long-term care planning

About 70% of people 65 and older will need long-term care at some point. Women typically need it for 3.7 years on average, men for 2.2 years.

Regular health insurance doesn't cover long-term care. Medicare covers only short nursing home stays or limited home health care in specific cases. Without coverage, you pay out of pocket.

Costs of long-term care

Costs depend on your needs, the type of care, and where you live. A semi-private nursing home room runs about $94,900 per year. Home health aide services average $61,776 per year.

These bills can quickly wipe out a retirement nest egg. Think about the potential cost of long-term care when planning your finances, especially in your 50s and beyond.

Who should consider long-term care insurance?

Long-term care insurance isn't for everyone. If you have low income and few savings, premiums may be unaffordable. A common rule: don't spend more than 5% of your annual income on a policy.

If you have substantial savings or assets, the insurance can protect them. It helps you afford care without draining your resources or burdening your family financially.

How does long-term care insurance work?

You'll complete an application with health questions. The insurer may ask for medical records or require a medical exam.

You choose a daily benefit amount and lifetime maximum. Then you start paying premiums.

The policy pays out when you can't perform at least two of six "activities of daily living" (ADLs)—bathing, managing incontinence, dressing, eating, toileting, and transferring—or if you develop dementia or cognitive impairment.

The insurer will review your medical records and may send a nurse to evaluate you before approving a claim. Most policies have an "elimination period"—the time you pay for care yourself before reimbursement starts.

Cost of long-term care insurance

Premiums depend on your age, health, gender, marital status, and the coverage amount you choose. A healthy 55-year-old man might pay about $2,100 per year for a policy with $165,000 in benefits. A woman the same age would pay roughly $3,600 per year.

Be aware that premiums often increase over time. Insurers regularly raise rates as claims experience changes.

Tax advantages of long-term care insurance

If you itemize deductions, you can deduct part or all of your long-term care premiums as medical expenses (if they exceed the threshold). Deduction limits increase with age.

Considerations before buying long-term care insurance

Before buying, assess your finances. Can you afford the premiums? How important is it to leave money to heirs?

Compare options from multiple insurers. Work with a financial advisor who can help you fit long-term care insurance into your overall plan.

Consider your age and health. The older you are and the more health problems you have, the more it costs—and it may become unavailable.

Think about how you'll pay. You might use a health savings account, or convert a life insurance policy or annuity into long-term care coverage for tax benefits.

Conclusion

Long-term care insurance can protect your savings from care costs. Before you buy, research what different policies cover, understand how they work, and think honestly about your situation and priorities.