LONG-TERM CARE INSURANCE BASICS
Trey Fairman, J.D., LL.M. August 31, 2015
Expert Interview: Long Term Care Insurance
November 10, 2020
As you prepare for retirement, long-term care insurance picks up where your disability
insurance policy ends. Long-term care insurance provides funds to cover extended
health care costs so your retirement accounts can be preserved.
Who should you consider this type of insurance?
Anyone nearing retirement should consider if long-term care insurance is
appropriate. You want to consider it earlier; research shows that long-term care
is not just a concern for those over age 65. The Family Caregiver Alliance
estimates that 40 percent of the 13 million people receiving long-term care are
between the ages of 18 and 64.
Why should you learn about long-term care?
You likely spend hours discussing and developing plans for your retirement.
Long-term care may be the largest risk to your retirement and could dramatically
alter those plans. A long-term care claim lasting for three years or more could
cost over $325,000.
What exactly is long-term care?
Long-term care refers to a variety of medical and non-medical services provided
to those who don’t have a life-threatening condition but can’t live independently.
Most long-term care is designed to assist people with the basic activities of daily
living (called “ADLs”) such as eating, bathing, dressing, toileting, transferring, and
Long-term care can be provided at home or in professional facilities such as
nursing homes and is usually not covered by employer provided health insurance.
Government programs such as Medicare and Medicaid only cover the first 100
days of long-term care expenses or are only available to those willing spend down
to a meager amount of assets.
How much coverage is appropriate?You should begin with a basic understanding of average costs and length of care
in your area. There is plenty of information available on-line.
In California, the average cost of a semi-private room in a nursing home is nearly
$7,817 a month, while the average monthly rate in an assisted living facility is
$3,500, according to the 2015 Cost of Care Overview done by Genworth
Financial. Care provided in the home may be more or less expensive, depending
on the amount and level of care required.
Though a long-term care claim could last over ten years, many experts suggest
purchasing a policy with a benefit period of three to five years. Statistics show it
is unusual for someone to need care for more than five years 1 and the majority of
claims, if they last more than one year, will last approximately 3.9 years. 2
Statistics to consider
For people aged 65 and older, the lifetime probability of requiring long-term care
services is 68%. 3
Since 2004, the cost of long-term care has increased by 31-47% depending on the
type of care. 4
In Southern California, the average cost of a room in a nursing home is
approximately $300 per day and this cost is inflating at an average of 5% per
Though long term care could last for 10 years or more, approximately 13.1% of all
long term care claims last longer than 3 years 6
According to the U.S. Department of Health and Human Services, an individual
reaching the age of 65 has a 40% chance of entering a nursing home. Upon
entering a nursing home, that same individual has a 20% chance of staying there
for at least five years.
Long-term care is not just a problem for the elderly. The US Government
Accountability Office and the Family Caregiver Alliance estimate that 40% of the
13 million people receiving long-term care currently are between the ages of 18
and 64.Types of long-term care policies“Traditional” policies
These are pay-as-you-go policies (no lump sums allowed) with plenty of
design options. You can customize the monthly benefit amounts, the benefit
periods, the elimination periods and whether or not you want inflation
The policy is guaranteed to renew however, the premium may be subject to a
These policies typically have no surrender value if cancelled and often no
residual value if not needed to pay for care
These are annuity or life insurance policies allowing access to the death
benefit to pay for long-term care
Policies built on a life insurance chassis provide a death benefit if the long
term care benefit is never used
Premiums can be guaranteed to remain constant
These policies may work well if you have liquid assets not needed for
retirement that can be used to pay premiums
They may be funded with premiums for life, premiums for a set period of
years, or with a lump sum
These policies are less custom than traditional policies; however some allow
options as to the monthly benefit amounts, the benefit period, and inflation
protection at the time of issue. The waiting period is typically fixed at 90 daysHow are the monthly benefits paid?
Regardless of the type of policy, you should understand the differences between
how benefits are paid at claim time. There are two methods: reimbursement and
Reimbursement Method: Under this method, the insurer will pay all or a portion
of the actual expenses incurred, up to the maximum stated in the policy. The
insured will likely have to submit expense receipts and may be limited to the type
of eligible service. Most policies are of this type.Indemnity Method: Under the indemnity method, the company will pay the full
amount specified in the policy, regardless of the expenses incurred. This type of
policy will usually have a higher premium but may minimize hassles at claim time
because no monthly bills or receipts need to be submitted.
Which method is better?
Almost everyone agrees that once you enter a long-term care facility, there is
little difference between a reimbursement and an indemnity policy because the
service provider will typically administer billing with the insurance company.
The real difference between indemnity and reimbursement is apparent when
examining how service provided in the home is handled. The reimbursement
policy often requires care to be provided by a licensed individual but the
indemnity policy allows the client to hire unlicensed caregivers, or have informal
care provided by family or friends. The indemnity policy may be ideal for those
looking for flexibility and for those living in rural areas far from assisted living
facilities and nursing homes.
Long-term care may be the single greatest uninsured risk facing Americans
today. Unfortunately, many have not prepared financially for long-term care
expenses, often wrongly assuming government programs or health insurance
policies will cover the costs for these services. Long-term care insurance is an
excellent way to protect yourself and your retirement funds from these