It’s easy to make a case to purchase long term care insurance. The costs of long term care can be astronomical and can drain a nest egg pretty quickly. Thankfully, long term care expenses are something you can insure against.
Think of it like your house. You carry homeowner’s insurance to protect against something devastating happening, like what if it burns down? Insurance is there to carry the burden of this scenario. Will your house burn down? Probably not, but you don’t want to risk it.
Unlike a house fire, you actually have a good chance of requiring long term care. In fact, someone turning 65 today has a 70% chance of needing long term care.
Plus, it’s expensive. Nationally, the average cost for a home health aid is over $60,000 per year while a private room at a nursing facility averages over $100,000 per year.
Insurance that will pay these bills? Sign me up! But…how much will it cost?
While it depends on how much insurance you buy, it also hinges on the type of policy you choose. Long term care insurance (LTC) can be classified into two types: a basic LTC policy and a hybrid LTC policy.
Let’s look at each type of policy and its cost.
The basic policy
You can think of this like other types of insurance—you pay a premium to receive a benefit if you go on claim (e.g. you need care). If you don’t ever need care, the insurance company won’t give you your money back. It’s a “use it or lose it” type of policy.
When you apply for a basic policy, you specify a “pool of money” that you will have available to pay for care over a specified period of time. Typically these policies will pay out a benefit for three years, after which your benefit will be exhausted.
Lastly, the premiums are not set in stone—the insurance company can raise the rates their policy owners pay. This has happened in the past as insurance companies struggled to come up with a good price for the benefits they provided. Some companies even exited the long term care business altogether.
The cost for a basic long term care policy
According to a recent survey, a 55-year-old male purchasing a basic long term care policy paid $1,700/year on average, while a 55-year-old female paid $2,675/year (women are more likely to need care, hence the higher cost).
For this example, a pool of $164,000 was used that would pay benefits for three years. In addition, this pool of money will increase by 3% annually to account for inflation.
While this was the average for this type of policy, the costs you can expect depend on the amount of coverage you would like to purchase. A long term care policy can be as basic or as complex as you want!
When comparing the two types of policies, a basic long term policy is actually the harder of the two to get. You will go through medical underwriting, which means current and past health issues can mean a higher premium or a declined application.
You will also pay more if you wait to get the insurance. These costs were for a 55-year-old. The premiums will be higher for a 60 or 65-year-old. Plus, waiting longer means you risk getting declined for coverage. For applicants between ages 65 and 69, 37% are declined. Almost half of applicants between ages 70 and 74 are declined for coverage!
The hybrid policy
The second type of policy combines both life insurance and long term care benefits. This hybrid approach is increasing in popularity because the premiums are fixed, the benefits periods are longer, and it’s not a “use it or lose it” type of policy.
The cost for a hybrid long term care policy
Let’s use the same example of 55-year-olds. To get policies that provide the same amount of monthly benefit today, the male can expect to pay $8,256/year while the female can expect to pay $9,657/year.
Whoa! That’s a lot more than the basic policy. So, what does the hybrid policy provide that the basic policy doesn’t?
First, the hybrid policy requires a premium for only 15 years, whereas the basic policy requires a premium as long as you are not on claim and receiving care.
Second, the benefit period on the hybrid policy is six years—double that of the basic policy. At age 80, the policies provide a total pool of money of over $730,000 each because of the inflation increases.
Third, this is not a “use it or lose it” policy. If a policyowner passes away without using any long term care benefit, a tax-free death benefit is paid to his/her beneficiaries. In our example, the death benefits provided by these policies are $123,843 for the male and $146,845 for the female.
Since I didn’t have an “average” cost for a hybrid policy, I ran these quotes with one particular insurance company. There are several options out there, so work with an insurance professional to find one that works for you.
One reason I prefer hybrid policies is because they don’t just provide benefits for a short LTC claim. I find that a lot of people would be fine paying for one or two years of care. It’s the longer claims—four years or even longer–that can wreak havoc on most people’s finances. Since these hybrid policies provide for longer benefit periods, I find that they can be worth the extra cost.
Lastly, a hybrid policy is much easier to get. A lot of insurance companies have simplified underwriting processes that don’t require a medical exam.
Which policy is right for you?
Before deciding on a policy (or deciding against it), think about how you would pay for care if you had to pay out-of-pocket. How long would your assets be able to pay for care if it cost $50,000 or $100,000 per year? Would you be able to keep your house and receive care in your home? Would kids have to be part of the solution? This is a good exercise because everyone needs a plan for long term care. If you think you have enough assets to self-insure, read our blog about why that might not be a good idea.
The last step is to schedule an appointment with our insurance advisor to go over your options in detail.