Long Term Care - Basics for Beginners

On August 3rd, 2015, the Federal Long Term Care Insurance Program announced that it would be raising rates immediately for new policies. The move surprised the Federal Employee workforce and led to general questions about the program and Long Term Care insurance: What is long-term care insurance? Who needs it? What are the benefits and costs? The answer to those basic questions can help families be better informed about long term care and decisions they should make.

Understanding Long Term Care: Long-term care insurance essentially reduces the risk of financial loss in the event one can no longer perform everyday tasks and requires care. These tasks are called "activities of daily living" and include bathing, dressing, transferring, toileting, continence and eating. Long-term care insurance should be a consideration in one's financial planning, along with other types of insurance, emergency savings, and investments. Not everyone may need long term care insurance; however, everyone does need to have a plan for long-term care. The primary reason one needs to plan for long-term care is its potential cost and the threat that paying for it would pose to one's lifetime savings. National averages for long-term care are in the tens of thousands of dollars per year. Current averages for nursing home care in the U.S. are at nearly $83,000 per year; home care, which is less expensive, is still approaching an average cost of $30,000 per year. According to Kiplinger's Magazine, the average stay in long term care in 2009 was 27 to 28 months. What these numbers mean is that if you or a loved one needs such care, on average one would need to pay anywhere from $60,000 to $166,000 in care costs. Since these numbers are averages, understandably, some people will pay much less and others will pay much more.

What Are You Paying For? While much of the media buzz surrounding long-term care centers on Long Term Care Insurance, the reality is that there are several ways to obtain and pay for long-term care. The best approach is unique to each family and should be a deliberate consideration and part of a financial plan. Within that context, here are some of the options available:

  • Family provision of long-term care. Most long-term care ends up being provided by family members. While this may not be preferable, it is the choice often used, especially for those needing home health care. The Federal Commission on Long Term Care found that family caregiving was worth450 billion per year--more than twice all paid care giving.

  • Personal savings and investments. One way to pay for care is to finance it outright from personal savings and investments. This may be cost prohibitive for most families given the high costs of care cited above. However, if a family's finances support it, this is certainly a feasible and desirable course of action.
  • Borrow or finance. If one can't afford to pay out of savings and investments, another option is to borrow or finance to pay the costs. This option is least desirable because of the sizeable debt burden it may impose on the borrower.
  • Medicare and Medicaid. These two government programs may cover limited types and durations of care. Restrictions make these an option not feasible for most individuals, especially those with some assets.
  • Long Term Care Insurance. This option is the most common method for paying for long-term care. Most plans are "pay-as-you-go" (similar to auto or home insurance) and do not accumulate cash value. They typically stipulate maximum daily benefits, maximum benefit period, maximum lifetime benefit (i.e. the total the policy would pay out), type of care (home or facility) and a waiting period at the beginning during which benefits would not be payable. Other common, optional features include inflation protection and suspension of premiums while one is in long-term care.
  • Life insurance settlement. This option is available as a feature in some whole life insurance policies as a settlement option, which is worthy of consideration. When offered from insurance providers, including AAFMAA, these policies allow the policy owner to receive some or all of the policy's death benefits in advance while still alive to pay long-term care costs. While premiums for these policies tend to be higher than comparable long-term care insurance, a significant advantage is that the policies accrue cash value and have a death benefit. Any benefit not consumed by long term care costs remains in force under the life insurance policy and would be payable to a beneficiary at the time of death. Moreover, according to the Society of Actuaries, most long-term care insurance claims pays for only about 1 year and 3 months, which is less than the average length of stay. Note, that as with long term care insurance policies, these life insurance policies require the policy owner to meet certain criteria before being able to qualify for the long-term care settlement option.
  • What Does This All Mean? The bottom line is that long-term care must be a part of everyone's financial plan. For the average person or family, paying for care outright is not an option. Better alternatives include long-term care insurance or life insurance policies with long term care settlement options. The latter, although likely more costly in terms of premiums, has significant advantages in that they accrue value that will be paid to the owner or beneficiary regardless of whether consumed as long term care or paid out as a death benefit. More significantly, unlike an insurance policy that may actually pay less than the policy value, a whole life policy with a long-term care settlement option will pay the full amount of the policy.