How does long term care insurance work?


If you’re going to make a long-term financial plan, you need to at least consider long-term care insurance. Only by learning more will you learn if it’s right for you.
If you’re going to make a long-term financial plan, you need to at least consider long-term care insurance. Only by learning more will you learn if it’s right for you.

If you’re making any kind of long-term financial plan, you have to at least consider long-term care insurance as part of that plan—especially if you’re in your 50s or better now. That’s because, quite honestly, the odds of you needing care at some point in the future are stacked against you.

You probably have insurance for both your home and auto to protect you from a major financial hit, don’t you? Well, according to The National Academy of Elder Law Attorneys (as reported on LTCTREE), your comparative risk of needing long-term care is:

  • Automobile Accident: 1 out of 240 [0.4%]
  • House Fire: 1 out of 1,200 [0.08%]
  • Long Term Care: 1 out of 2 [50%]

In fact, according to the U.S. Department of Health and Human Services, almost 70% of today’s 65-year-olds will eventually need long-term care. And some 20% will need it for longer than five years.

Does that mean that long-term care insurance is the best option for you? Possibly. Possibly not. There are other options. The important thing is that you need to have a plan. And you’ll never know if long-term care insurance is the right choice for you until you know what it pays for, what choices you have, how it’s priced and what it costs.

What does long term care insurance pay for?

It may come as a surprise to you, but your existing regular insurance (no matter how good it is) and/or Medicare aren’t interested in paying for your long-term care expenses.

According to LTCTREE, “The most Medicare will cover is 20 days at 100% coverage.  Your Medicare supplement will pick up another 80 days.  Medicaid is the government welfare program that pays for your medical and long term care expenses only after you deplete your assets to basically nothing.”

That’s because private insurance and Medicare are designed to pay for medical care, whereas long-term care refers to assistance with Activities of Daily Living (ADLs). This generally includes assistance with:

  • Eating
  • Bathing
  • Dressing
  • Toileting (being able to get on and off the toilet and perform personal hygiene functions)
  • Transferring (being able to get in and out of bed or a chair without assistance)
  • Maintaining continence (being able to control bladder and bowel functions)

Although companies that provide long-term care insurance may have their own specific definitions of these terms and qualifying events, benefits are generally paid when a physician certifies that you need help with at least two or three of these ADLs.

For obvious reasons, it’s in your best interest if a policy requires assistance with two, rather than three ADLs as the trigger. Also, notice the distinction whether this determination is to be made by the company’s physician or your own. That could be important when it comes time to qualify.

To make things even more complex, many insurance companies will not pay unless you need hands-on assistance to perform an activity rather than stand-by assistance. Realize that there’s a difference between the two—and how (or whether) you’ll be reimbursed.

It is extremely important to note whether benefits will also be paid if “cognitive impairment” is discovered. You’ll want to see that terminology (or something very similar) in writing should you consider purchasing a policy. This distinction is important.

One can be cognitively impaired and be able to perform any of the above ADLs to some degree of acceptability by an insurance company. However, that doesn’t mean you would want them driving a car, making important medical decisions or managing their finances. They need a caregiver. It’s also important if the plan is to be considered “Tax-Qualified,” enabling you to take advantage of tax savings both while you’re purchasing the policy and when you use its benefits.

Where does long term insurance pay for care?

When it has been determined that you have a chronic medical condition, a disability or a disorder, long term care insurance policies may reimburse you for care given in a variety of places, such as:

  • Your own home with the assistance of a home care aide—depending upon the policy, this may only be a paid caregiver through a licensed home health agency or it could be a member of your own family (If you have a family member that may be of help, be very aware of this critical distinction)
  • An adult day care center. These programs provide daytime care to individuals who do not need to live in a nursing home. Typical benefits received in adult day care facilities include nursing or therapeutic care, social and educational activities, or personal supervision because of “cognitive impairment,” such as Alzheimer’s or a similar disease.
  • An assisted living facility
  • A nursing home
  • A memory care community

Note that this list does not include paying for you to live in an independent living facility, 55+ community, age-restricted community or any of the other names that are being used. The only thing it would pay for in either of those instances would be the personal assistance provided by a home care aide if you happen to make one of those communities your home.

Also be aware that depending upon the policy, it may pay for any of the above options or a limited number of them. By limited, I mean one. I’ve seen older policies that limit benefits to a “healthcare facility.”

That definition can be quite nebulous when defined by an insurer and may only refer to a nursing home, which would mean the claim would be denied for assisted living. You’ll want to read any policy very carefully to know exactly what you’re getting.

How does long term care insurance pay for care?

While the answers to the first questions are fairly straight forward, this is the tricky question. That’s because it all depends on the options you select when you purchase the policy—or, conversely, how much risk you’re willing to assume. As a result, everybody’s policy is going to be different. In short, it all depends on how much you want to spend. And that doesn’t mean just today. As insurers are allowed to raise premiums even after you purchase a policy, you have to factor future prices increases in—which can easily be in the double digits.

Start with your current age and health

The sooner you purchase a policy, the less it will cost you—and you’ll be able to afford greater coverage. The industry suggests beginning to look at long-term care insurance in your mid-50’s to make it economically worthwhile. Generally, the cost increases with each passing year. And any pre-existing health condition you develop as you age may cause you to be “rated” (meaning you’ll pay more). Or, you may not be able to qualify at all.

According to the American Association for Long-Term Care Insurance 2010 Sourcebook:

The percentage of applicants who qualify for long term care insurance:

Ages 40 to 49: 62.0%

Ages 50 to 59: 46.0%

Ages 60 to 69: 38.0%

The percentage of applicants who did not qualify for the insurance they applied for:

Ages 50 to 59: 14.0%

Ages 60 to 69: 23.0%

 Eleanor Laise of Kiplinger notes thatBuying while still in good health has become more important as insurers tighten underwriting standards. Some companies have added blood-test requirements and started scrutinizing family health history for conditions such as heart disease and dementia.”

Determine an elimination period

When selecting a policy, you will have the option of choosing an elimination period of 0, 30, 60 or 90 days. The longer the period of time you select, the less you pay for the policy. In fact, according to James Glickman of LifeCare Assurance in Kiplinger, that could be 40% less than a zero-day deductible.

Think of this time period as your deductible. You don’t start receiving benefits until you have paid for those days out-of-pocket. If you’re looking at skilled nursing, that could be $7,000 to $8,000 a month. By choosing an elimination period of 90 days, you would pay $21,000 to $24,000 out-of-pocket before the policy kicks in.

While that may give you a bit of sticker shocker, there’s are a couple other things to consider: While men who need nursing-home care will spend on average less than 11 months in care and women will spend about 17 months, half of men and nearly 40% of women who require nursing-home care will never have a stay exceeding three months.

If these individuals had paid for a policy before passing away, they might have never received any benefits—after dutifully making payments for, perhaps, decades.

On the other hand, if you have the assets to wait out a long elimination period but not enough for a catastrophic hit (such as an Alzheimer’s diagnosis, requiring years of care), you could look for an elimination period as long as 365 days—but then also select a plan that pays benefits for an unlimited period of time (see below), although more and more insurers have stopped offering this benefit or made it unaffordable.

Choose a daily or monthly benefit

This is the amount of money you wish to receive for your daily or monthly cost of care. Your policy’s total benefit amount or “pool of money” is calculated by multiplying your daily benefit by the number of days in your benefit period. For example: A $6,000. monthly benefit x 3 year benefit period x 365 days = $216,000 pool of money.  (600 x 3 x 12)

How much coverage should you plan for?

Genworth Financial maintains a website that can give you an accurate estimate for where you live, but the annual national median costs in 2017 were:

  • Homemaker Services:     $3,994 mo./$47,934 yr.
  • Home Health Aide:           $4,099 mo./$49, 192 yr.
  • Adult Day Health Care     $1,517 mo./$18,200 yr.
  • Assisted Living:                 $3,750 mo./$45,000 yr.
  • Nursing Care

Semi-Private Room:              $7,148 mo./$85,775 yr.

Private Room:                        $8,121 mo./$97,445 yr.

Select a benefit period

The benefit period is simply that—how long your policy will pay once you meet the elimination period. You can also determine how much you will pay for the policy by how many years you think you will need its benefits.

Long term care insurance companies will typically offer the options of 2 years, 3 years, 4 years, 5 years, 10 years, or even unlimited benefit periods. The longer the period of time you select, of course, the more you’ll pay. The industry suggests 3 to 5 years.

Keep in mind, however, that policies do not limit you by “time.”  If you buy a 5-year policy, your coverage does not end after you need care for 5 years.  There is no time limit on your policy.  Instead, your policy has a dollar limit. In effect, this means that it could be shorter than 5 years, too.

If you’re looking at assisted living (which may have been preceded by several months of care at home), the average length of stay is around two and one-half years. Nearly 60% of these people will then transfer into a nursing home for an average length between nine months and a little over two years.

Depending upon where you live, this means that your total cost of that care could exceed $300,000, according to Brad Breeding of MyLifeSite. This doesn’t even take into consideration the actual cost of any medical care you may require—which Fidelity Investments estimates to be some $260,000 (in 2016) for the average retired couple.

Consider inflation protection

Much the same as an elimination period, you have the choice of selecting inflation protection for the costs associated with purchasing a long-term care policy. The lower the level of inflation protection, the lower the cost. You could opt to forego inflation protection altogether. But, as the old saying goes, “You pays your money (or not) and you takes your chance.”

According to the American Association for Long-Term Care Insurance and Kiplinger, “A 60-year-old couple, for example, can together pay $2,170 a year for a policy with a $150 daily benefit, three-year benefit period, 90-day elimination period and no inflation protection. That benefit is worth about $164,000 per person — and has the same total value at any age.

“Or they can pay $3,930 a year for the same policy with 3% annual inflation protection, and the value of their benefit will grow to $325,000 per person at age 80, for example, and $365,000 per person at age 85.”

The challenge here is that inflation protection of 3% or less may not keep up the rising cost of long term care. According to Genworth, the national median hourly rate for a home care aide has grown 1% a year over the past five years. On the other hand, the rate of a private room in a nursing home has seen a 4% five-year annual growth rate.

According to LTCTREE, common options for inflation protection include:

  • 5% Compound Inflation Protection (Ages under 75)
  • 3% Compound Inflation Protection
  • 5% Simple or Equal Inflation Protection (Ages 75+)
  • Consumer Price Index (CPI)
  • Future Purchase Option

If you select a policy with a future purchase option, you will forego inflation protection for the time being—allowing you to enjoy a lower premium today. That future purchase option allows you to boost coverage to cover any inflation in the future.

However, by waiting to boost your coverage, you’ll be paying more based upon your age at that time. As a result, you may find that your new payment is unaffordable.

There’s also a critical distinction between a simple inflation adjustment and a compound inflation adjustment. Writer Paul Solman of NextAvenue notes:

“Unfortunately, a simple inflation adjustment adds 5 percent of the original benefit per year and does not compound like actual inflation. A daily benefit of $150 per day will go up by 50 percent to $225 in 10 years with a simple inflation policy, but the actual cost will increase 63 percent (at 5 percent annual compounded inflation) to $245. However, the added cost for moving from a simple inflation adjustment to the more accurate compounded adjustment would add 25 percent to the cost of a policy for a 65-year-old person.”

If you’re under 75 or if your life expectancy is beyond 15 years, compound inflation protection will make a big difference in the dollar amount of benefits you’ll receive over the years. On the other hand, if you’re over 75, simple inflation protection may be your best solution.

Study your other options

Known as “riders” within the industry, there are a variety of other options available to you. The website LTCTREE gives a good overview of each, what they offer and how much they can add to the cost of a policy.

As they caution, “like any insurance, there’s a chance you’ll never use your plan at all. Finding the balance between too much and too little coverage is key to saving money.”

Optional riders include:

  • Restoration of Benefits: This restores your policy benefits to the original maximum value if you come off claim for 180 consecutive days and no longer need Long Term Care assistance.
  • Survivorship Benefit: When both partners have held their Long Term Care Insurance policies for at least ten claim-free years and one partner dies, the surviving partner’s premium is waived for life and they have full benefits.
  • Waiver of Home Health Care Elimination Period: this waives the deductible or elimination period for Home Health Care coverage.
  • Return of Premium Benefit: if you don’t use your Long Term Care Insurance plan, your estate can get all of your money back upon death
  • Shared Care Rider: his option gives you and your spouse/partner the option to use each other’s Long Term Care Insurance benefits when one of your policies runs out.
  • Non-forfeiture Benefit: Included with some group long term care insurance plans, If your policy lapses, this rider will give you access to all the premiums paid if you need Long Term Care on down the road.

Options included with most long term care insurance policies

  • Respite care: care provided to give the primary caregivers time off.
  • Equipment and home modification benefit: modifications could include everything from an emergency alert system to widening doorways to accommodate a wheelchair or renovations to your shower to make it usable.  The amount of money you’ll get can vary from policy to policy, so be sure you’re comparing even the nuances of policies.
  • Alternate care benefit: if you, your doctor, and the insurance company all agree that items such as in-home safety devices, home-delivered meals, or medical alert devices, for example, are necessary for your plan of care, your Long Term Care Insurance policy will pay for them.
  • Bed reservation: should you leave for a short period of time, your facility bed can be reserved, and paid for by the insurance company.
  • Waiver of premium: your Long Term Care Insurance company will waive your premium immediately once you begin to receive benefits from the insurance company.
  • Homemaker and chore services: help with chores like cooking, cleaning, light housekeeping, and shopping.
  • Recovery period benefits: care after a stay in a hospital or other facility.
  • Caregiver Training: training if there is a particular person whom you would like to take care of you but who needs education.  Family members are often trained with this benefit.

When does long term insurance pay for care?

The simple answer that anyone selling a policy would tell you is that long-term care insurance will begin paying for your care when a physician certifies that you meet the needs of needing assistance with two or more ADLs (as defined above).

As with long-term care insurance in general, however, the real explanation is much more complex. In fact, there’s a very good chance that the real answer may actually be “never.” This, after you’ve made payments amounting to tens of thousands of dollars.

According to Joseph Matthews of,

  • About half of all LTC policies lapsed before any benefits were paid; policy-holders were unable or unwilling to continue paying their premiums.
  • Of those people who bought insurance and later entered a nursing facility, about half never collected a dollar from their LTC policies.
  • No benefits were ever paid to the many people who bought nursing facility coverage but instead received home care or entered a residential facility not covered by the insurance.
  • When LTC benefits were paid, they were usually far below the actual cost of care.
  • For many of the longest-term residents, benefits were used up before the nursing facility stay ended.

Author Matthews further notes that:

“The relatively slight chance that an elder will need three or more years of nursing facility care means that insurance companies do not pay out on their policies to nearly the extent that they suggest when they sell the policy.

“When the policies’ conditions, exclusions, and benefit limits are figured in, the performance of these policies has been quite poor—at least in the decade of the 1990s, for which complete statistics are available.”

In short, he calls the purchase of long-term care insurance a “lousy investment.”

How do I buy long term care insurance?

If you are still interested in purchasing a policy, it’s important to take advantage of tax deductions, as well as federal and state programs to leverage your purchase.

You’ll also want to take your time, do your research and shop multiple companies.

In addition to the diverse variety of products and options offered, NerdWallet reports that The American Association for Long-Term Care Insurance found that rates varied among insurers by as much as 94% in its 2016 price comparison.

Joseph Matthews of advises that you, “Check the latest analysis of LTC policies by Consumer Reports, a consumer information magazine that regularly does comprehensive studies and comparisons of particular policies.”

Then, you might also want to consider online comparison shopping through a website such as LTCTREE to help you navigate your options and simplify your search.

Finally, should you not choose to purchase insurance online, the American Association for Long-Term Care Insurance advises working with an experienced long-term care insurance agent who can sell products from at least three carriers—not an investment counselor with little to no experience in the industry.


If you’re making any kind of plan for your future journey along the gray mile, you have to at least consider long term care insurance. And realize that putting off your decision until tomorrow because you don’t want to deal with it today may mean the opportunity to protect your future is lost forever.

Tom Text


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