What is Long-Term Care Insurance, Anyway?

Seventy percent of people age 65 and older will need long-term care at some point, and more than 40 percent will require skilled nursing care, according to the U.S. Department of Health and Human Services. Fortunately, there are many routes to paying for it—and acting now can help ensure you have the right plan in place.

Long-term care insurance offers an alternative to out-of-pocket and Medicaid payments, helping seniors pay for assisted living, skilled nursing or specialized care in a senior living community. But it’s important to understand the costs involved before jumping in.

Offering choice

A long-term care policy can guarantee considerable protection without depleting the assets for a surviving spouse and heirs, says Ralph Barringer, a certified long-term care consultant and financial planner at Northwestern Mutual in Louisville, Kentucky.

As with other types of insurance, you pay a premium to guarantee the insurance company will cover your long-term care costs, up to the dollar amount specified (based on your preferences for length of coverage and how much you can afford). Without it, you must use your income and savings to pay all of your long-term care costs when they arise.

But it's about more than asset protection, says Wendy Rinehart, president of ClaimJockey, a company specializing in long-term care insurance claims management.  

"Everybody who wants dignity and choice at this most important time in their life needs a policy in place," Rinehart says. "People are running out of money trying to pay for their own care, and then they're left on Medicaid, which allows little choice.” 

Weighing the costs

When it comes to coverage and cost, several factors can impact the bottom line: 

• Age. Policy costs typically increase the most between the ages of 50 and 64. Rinehart says the sweet spot for purchasing long-term care insurance is in your early- to mid-50s.
• Illness. Good health keeps costs lower at almost any age, but some health conditions can put even younger adults in a higher cost category, and some illnesses can make you ineligible for coverage. For instance, some plans will not accept people with insulin-dependent diabetes, Alzheimer's disease or obesity.
• Duration. Long-term care insurance usually is a lifetime expense, but there is no guarantee that the premium you start with will not increase. Preferably, coverage should be based on a monthly benefit, not a daily limit, Barringer says. A single day's medical care easily might bump your expenses beyond a daily limit, but a monthly limit should absorb the occasional higher costs. You also can purchase inflation protection, but that increases the cost of the policy.

Another consideration is the “elimination period,” part of most long-term care insurance policies. It's similar to a deductible and dictates the amount you must spend out of pocket by establishing how many days you must receive care before your coverage kicks in. While elimination periods could be set at 90 days, you can pay more for a shorter one.

Before you purchase coverage, do your homework. Several websites provide average nursing care costs by state (the U.S. Department of Health and Human Services, for example), and you can find the financial background and history of long-term care insurance carriers online.