Everything You Wanted To Know About LTCI Policies

If you haven’t looked at the cost of nursing homes and assisted-living facilities in your area lately, prepare yourself for sticker shock.

According to a recent study conducted by LifePlans, released by John Hancock Financial, the average annual cost of a private room in a nursing home is now $85,775 (or approximately $235 per day.) The average outlay for a semi-private room is a hefty $75,555 per year. Assisted living may be a less expensive option that still provides some skilled nursing services, but the average price for permanent residents in such facilities nears $40,000 a year, and paying piecemeal for additional services can add significantly to monthly bills. And these are only average costs. In some parts of the country, a year in a nursing home can easily run six figures.

An extended stay at such a facility could wipe out almost anyone’s life savings. If you have to come up with, say, $100,000 a year for five years, that’s half a million dollars. What’s more, Medicaid, the joint federal-state heath care program that pays for most long-term care in this country, won’t kick in until most of your savings is gone.

One way to defray at least part of the cost of a nursing home stay is through long-term care insurance (LTCI). But this market has mushroomed in recent years, and the policies can be complicated, with widely varying terms and prices. Here are some key factors to consider.

Coverage. This insurance may provide benefits for different types of care, ranging from daily skilled care in a nursing home to custodial care at home. The wider the coverage, and the higher the maximum daily benefit, the more expensive premiums are likely to be.

Eligibility. To receive LTCI benefits, a physician generally must certify that someone needs assistance with a specified number of “activities of daily living”—bathing, eating, dressing, toileting, walking, and the like.

Waiting period. Although some policies won’t provide benefits until a deductible has been met, most take effect after a waiting period described in the policy. It can be as short as a few weeks or as long as six months.

Limits on benefits. Beyond specifying a maximum daily benefit, policies will state how long coverage will continue. Sometimes, there’s a dollar cap on benefits; other policies specify a time limit. Or a policy may combine both kinds of limits and stop providing benefits either when the maximum amount has been spent or the cut-off date arrives.

Costs. Prices vary widely, with premiums based on factors including the type of care that’s covered, the amount of the daily benefit, how long benefits will be paid, and the waiting period, as well as the current age and health status of the person who’s being insured. Age is particularly important, with much lower premiums available to someone who takes a policy years or decades before it’s likely to be needed.

Other considerations could also come into play. If you decide to buy insurance:

  • Avoid policies that require hospitalization immediately before entering the nursing home. Only about half of all nursing home admissions follow a hospital stay.
  • Get an inflation rider to protect against future increases in the cost of care.
  • Look for a policy that is “guaranteed renewable” and will continue coverage if your medical condition changes. This is the gold standard for LTCI policies.
  • Make sure you buy from a reputable insurer that has a proven track record with this kind of insurance. This is a relatively new field, and inexperienced companies that underestimate future payouts may not be around to provide the benefits you’ve paid for.

While LTCI, like other kinds of insurance, can provide a degree of financial protection, deciding when or whether to purchase a policy may involve complex calculations weighing the cost of a range of coverage options against other possibilities for financing long-term care. Some people, for example, “self insure,” setting money aside that could be used to fund care if needed. And some life insurance policies let you tap their value to pay for nursing home care.

Like any other major financial commitment, this one needs to be considered in the context of your overall financial situation and goals. Knowing that you’ve protected your family against potentially devastating costs can be worth a lot, but saving for retirement, education, and other long-term objectives is also important. We can help you consider your options and make a choice that works for you.

This article was written by a professional financial journalist for G.W. Sherwold and is not intended as legal or investment advice.

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