As Americans live longer and longer, around 70 percent of people 65 or older will need some kind of long-term care. While some folks will only need part-time help at home to prepare meals and clean bathrooms, others will spend months or years in assisted living or a nursing facility. The problem is that none of us knows which fate awaits us, so we're left to plan for an old age that could either be perfectly affordable or cripplingly expensive.
If you don't already know, the cost of long-term care in the U.S. is sky-high, and it's going up faster than inflation. The average cost of a private room in a nursing home in 2019 was $102,200 a year, which is 57 percent more than it cost in 2004, according to Genworth Financial. In 2019, a year in an assisted living facility cost $48,612 on average nationwide, but in Washington, D.C., for instance, just a year of assisted living ran $135,456. Staying at home isn't necessarily cheaper, either. Hiring an hourly home health aide (based on 44 hours per week) averaged $52,624 a year in 2019, Genworth reported.
But wait, you might ask, doesn't Medicare and Medicaid pay for some of this? The short answer is no. Medicare will only pay for short stays in a nursing home (100 days maximum) after a surgery or hospital stay, and Medicare doesn't cover any unskilled home health care — help dressing, bathing, eating, using the toilet, etc. — which makes up the majority of long-term care needs. Medicaid, which is for low-income Americans, will only pay for long-term care once you have "paid down" your assets, meaning after all of your money is gone.
When you combine the high cost of long-term care with the uncertainty of growing old, it can be a very stressful, emotional and difficult thing to plan for. Just ask Paula McMillan, a certified financial planner and CPA with Stearns Financial Group.
"The No. 1 retirement worry is running out of money and one of the least controllable areas is our health," says McMillan, who also sits on the Personal Financial Specialist Committee of the American Institute of CPAs.
For people in their 50s and 60s, now is the time to make important and often hard financial decisions about long-term care. Can you simply save as much as possible for retirement and hope there's enough left over to cover nursing homes or home health aides? Or should you fork over thousands of dollars a year for private long-term care insurance for the peace of mind of knowing you'll be covered in your old age, no matter what happens? Can you even afford the premiums? Let's find you more about long-term care insurance.
Long-term Care Insurance vs. Regular Health Insurance
You buy health insurance to cover standard medical care like doctor's office visits, tests, prescription medications and hospital stays, but health insurance doesn't cover the type of long-term care provided by home health aides and nursing facilities. For that, you would need a separate policy called long-term care insurance.
Long-term care insurance and health insurance differ in some important ways. First is the matter of pre-existing conditions. Thanks to the Affordable Care Act, no American can be denied health insurance because of a pre-existing medical condition. That's not the case with long-term care insurance. If you've already been diagnosed with dementia, for example, or suffer from a host of chronic conditions (obesity, diabetes, heart disease), you can be denied long-term care insurance.
Another difference is the cost of care with or without insurance. Health insurance companies negotiate lower prices for doctor's office visits and procedures, so you will always pay more for medical care if you don't have health insurance. That's not the case with long-term care. Nursing facilities and home health aides charge the same price, whether you're paying out of pocket or with long-term care insurance.
One last difference is that once you buy a long-term care insurance policy, you're basically locked in for life, which is not the case with regular health insurance.
"If my health insurance provider jacks up my rate, I can shop around for a better policy and leave," says Allan Roth, a certified financial planner and founder of Wealth Logic. "With long-term care insurance, you can't do that."
Technically, you can cancel a long-term care policy and buy another one, but it comes at a stiff penalty. First, you lose all the premiums that you've already paid, but more importantly, your new policy will likely be even more expensive because you're older now. Which brings us to the next big question.
How Much Does Long-term Care Insurance Cost?
The price increases with age and is always more expensive for women, since women statistically live longer than men, especially in nursing facilities. The younger you are when you buy health insurance, the less you'll pay in annual premiums, because the insurance company figures that you'll have decades to pay into the system before you claim any benefits.
You also pay more or less for long-term care insurance depending on how much you want the policy to cover and for how long. For example, there's something called an "elimination period" that functions like a deductible in long-term care policies. If you have a policy with a 90-day elimination period (which is typical), then you pay all costs for the first 90 days of assisted living or home health care before the long-term care insurance kicks in. The longer the elimination period, the less you'll pay in premiums. (Some policies do allow the policyholder to use a portion of the insurance benefit to pay for care in their own homes, without having to wait 90 days. But if they do end up going to a nursing home or assisted living facility, they need to wait another 90 days to use that full benefit.)
We used the long-term care calculator at Genworth to come up with some representative figures. A 55-year-old man in Chicago, for example, would pay a little less than $2,000 a year for a policy that covers up to $200 in benefits a day (a private room in a nursing facility costs $280 a day) for up to three years. A woman of the same age would pay around $2,400 each year for the same coverage. Those quotes include a 90-day elimination period.
If the same woman waited until she was 70 to buy long-term care insurance, she would pay $6,798 a year. (For a man at 70, it would be $4,490.) That's because the insurance company knows it has less time to collect premiums before it might have to start paying out benefits.
The Pros of Buying Long-term Care Insurance
Roth of Wealth Logic says that he doesn't carry long-term care insurance for himself, but he understands why people do it, namely peace of mind.
One of the big reasons that people with children buy long-term care insurance, Roth says, is to make sure that their kids inherit something after they die. Even people with substantial retirement savings worry that a prolonged stay in a nursing home by one or both parents could deplete all of their assets, leaving nothing for the kids and grandkids.
And then there are legitimate worries about being a burden on a spouse or child who has to function as a caregiver.
"If I get diagnosed with Alzheimer's and I don't have long-term care insurance, the burden may fall on my wife or family to be the primary caregiver, and that's very difficult," says Roth.
And if you don't have anyone who can function as a caregiver for you, you might be more inclined to buy this policy. It ensures you have another way to help pay for expensive nursing home or home care.
The Cons of Buying Long-term Care Insurance
As with any type of insurance, the odds are good that you're going to lose money with long-term care insurance. According to statistics from the RAND Corporation, around 56 percent of Americans will need at least one day of long-term care — in home or in a dedicated facility — before they die. That means 44 percent won't need any long-term care at all.
For women, 64.1 percent will enter a nursing home at some point with an average stay of 301 days. For men, the numbers are lower. Only 50.6 percent of men will stay in a nursing home with an average length of 141 days. Again, this is due to the fact that women, in general, live longer. But the median stay in a nursing home (for a man or woman) was just one week.
A very small percentage of Americans, just 5 percent, will require the type of extended nursing home care — four years or more — that long-term care insurance is really designed to cover, according to RAND.
Another strike against long-term care insurance is that premiums aren't fixed — they can go up. McMillan says that's exactly what happened over the last decade or so.
"There used to be a lot of companies that sold long-term care policies, but now there's only a handful," says McMillan. "That's because they priced it wrong in the beginning."
When it became clear that long-term care insurance companies had underestimated long-term health care costs, they either went out of business or petitioned states to let them raise their premiums. Roth says he had clients whose annual premiums increased by 50 percent and even doubled in some cases. This is less likely to happen nowadays as insurers must get approval from their state's regulators to raise rates.
Should You Buy It?
"Long-term care is a very difficult subject and it's very emotional," says Roth, "So a lot of insurance agents will play to your emotions. They'll say, 'I know this person who was in a nursing home for 12 years and it put such a hardship on their family.' But you have to look at the data and the probabilities that you'll need it."
So, unless you are unlucky enough to be one of the 5 percent who land in a nursing home for years and years, you will probably be able to cover your long-term care costs with a solid retirement savings plan.
McMillan says it's "definitely a case by case basis" as to whether a client of hers should buy long-term care insurance. Her major factors for determining whether to buy it or not are:
- Health, both your existing health conditions and the genetic risk of acquiring a chronic illness (For instance, does Alzheimer's run in your family?)
- Financial status (Can you really afford it without sacrificing retirement savings? Do you have your retirement savings already set?)
- Psychology (How comfortable are you with uncertainty?)
Alternatives to LTC Insurance
Some people, like Roth, plan on "self-insuring." That's a fancy way of saying they plan on paying any long-term care costs out of their retirement savings. Since the cost of long-term care is the same whether it's being paid by insurance or "out of pocket," people like Roth would rather invest the money that would go toward a long-term care premium and hope that it's more than enough to cover long-term care costs down the road.
As we mentioned earlier, state-run Medicaid programs will also cover long-term care services if you meet certain eligibility requirements, namely that your income and assets are below certain thresholds set by each state. For middle- to high-income earners, that means depleting all of their retirement savings before Medicaid kicks in. And not all nursing facilities and services accept Medicaid.
There are also a number of "hybrid" policies available now that combine the benefits of long-term care insurance and life insurance. McMillan says that these products are actually far more common today than traditional long-term care insurance, but that buyers should beware. Yes, hybrid policies include some cool perks like the ability to withdraw funds from the policy or collect an annuity, but they also cost a lot more than traditional long-term care insurance, so read the fine print.