Humanity has made large strides in the medical field over the past century. While this gives us more time to spend with loved ones, it also increases our likelihood of needing medical care as the years pass. Meanwhile, the care we need is becoming more expensive: Physician services, hospital care, and prescription drug costs all grew by more than 4% per year from 2012 to 2022! For comparison, the overall inflation rate for the U.S. dollar over that same period was almost 2.50%, according to the Bureau of Labor Statistics.
Most of us have already felt the effects of rising healthcare costs and have adjusted our day-to-day planning accordingly. However, medical expenses in our advanced ages are unlikely to be the same as today. Notably, it’s become increasingly common for senior citizens to use a subset of healthcare known as long-term care. In the United States, you would have almost a 70% chance of needing long-term care services in your lifetime if you turned 65 today.
Long-term care is a more expensive and intensive form of healthcare than most care the average person would have received up to that point. Insurance options exist to help you offload some of the cost of care, but they can be expensive and are not achievable for everyone. Understanding the potential long-term care insurance cost and planning for it is essential to help ensure you can pay for the type of care you want and need.
The Cost of Long-Term Care
Long-term care involves the assistance provided to those who can’t perform daily activities independently. It is most commonly needed by seniors, those with chronic illnesses, and individuals with disabilities.
The type of long-term care you receive depends on your needs. And the cost varies based on the level of care and geographic location. Below are the national medians in several categories of care:
In-Home Care: Homemakers help complete household tasks that cannot be completed alone, and home health aides can travel to you to provide medical care.
Community and Assisted Living: Living arrangements provide an intermediate level of care, including supervision and health care services, but not yet reaching the need for round-the-clock care.
Nursing Home Facility: As the highest level of care, people can receive 24/7 skilled nursing care, supervision, and therapies while being a resident of the facility.
Some of the major metropolitan areas in the country have considerably higher care costs than average. For example, the monthly cost for a private room in a nursing home in Washington, D.C., is $13,688. That is 41% more expensive than the national average! On the other end of the spectrum, the same level of care in Kansas City, MO, is $7,756, which is 20% less than the national average. You’ll want to consider where your roots will be planted in retirement when planning for the potential cost of care.
We also can’t ignore the COVID pandemic’s impact on long-term care, especially in-home care services. As people became more concerned about contracting the disease from others in care facilities, home health aides have become more in demand than ever. The median annual cost for these care providers has increased rapidly, by almost 38% since 2020:
Now that we have an idea of the cost of care, we can see why planning is so important. Most people do not have enough guaranteed sources of income in retirement to fully cover the cost of care and may need to dip into retirement savings. Another option to help manage the cost is long-term care insurance.
Overview of Long-Term Care Insurance
Long-term care insurance provides a benefit pool that can be used to pay for eligible long-term care expenses. To qualify for benefits, you must not be able to perform two activities of daily living (see below) or be suffering cognitive impairments such as Alzheimer’s or dementia. You will receive benefits either as a set monthly amount or as reimbursement for expenses already incurred.
When discussing insurance, one of the first questions you may have is the cost. You are likely already paying for health, home, and auto insurance. If you still work, you may also be paying for disability and life insurance. All these premiums can add up! While health, home, and auto insurance are not going away for most people, disability and life insurance needs decrease as you approach retirement. This allows you to redirect the premiums you were paying to a long-term care policy.
Premiums for long-term care policies vary depending on age and gender. Women generally pay more for long-term care insurance due to longer life expectancies, which makes them more likely to use the benefits.
Single Male, Age 55: $2,075-per-year premium for a $165,000 benefit policy
Single Female, Age 55: $3,700-per-year premium for a $165,000 benefit policy
The older you are, the more expensive policies are, following the same reasoning of you being more likely to use the policy.
Single Male, Age 65: $3,135-per-year premium for a $165,000 benefit policy
Single Female, Age 65: $5,265-per-year premium for a $165,000 benefit policy
If you are married, there are some cost-saving benefits to getting a joint policy for most ages.
Couple, Age 55: $5,025-per-year premium for a $165,00 benefit policy each
Couple, Age 65: $7,150-per-year premium for a $165,00 benefit policy each
Factors Affecting Long-Term Care Insurance Costs
While age and gender are important factors in long-term care insurance costs, they are not the only ones.
Health: If you are unhealthy or have a pre-existing condition, you can expect to pay a higher-than-average premium. You may not be eligible for insurance for some pre-existing conditions.
Benefit Period: You can choose how long you want your insurance policy to pay benefits for (three years, five years, etc.), which has a notable impact on premiums. The longer your benefit period, the higher your premium.
Inflation Rider: Benefits can be static or have an inflation rider built in, which will increase the policy value annually. This is valuable inflation protection since, as mentioned, certain medical expenses have increased at a rate greater than 4%, which is more than inflation on regular goods and services.
One factor I feel is important to highlight is the elimination period (also known as the waiting period). This dictates how long you must receive care before you can receive benefits and is typically 30 to 90 days. You can save a lot on premiums by increasing your waiting period. However, the downside is you won’t be covered for the first few months after a health event, which is when you will most likely need care the most.
Example: Let’s say you are otherwise healthy but injure your knee, require surgery, and cannot perform two ADLs. You may need care for only 90 days but cannot collect any benefits if your elimination period is also 90 days. In terms of a $165,000 policy, this is potentially $40,000 in benefits that you would not be eligible for.
While the premium savings for a longer elimination period are tempting, it would be prudent to make sure you can pay for your own expenses during that period. If not, lowering the elimination period and paying a higher premium may be more beneficial for you.
Finally, it’s important to note that your long-term care insurance premium may not be static, no matter the riders you add to it. Every day until 2030, 10,000 baby boomers are projected to turn 65. As more of the population reaches retirement and advanced ages, policy benefits are being claimed more often.
Medical care has advanced so rapidly that policies have been unable to keep up with the claims without increasing premiums. Many people with traditional long-term care policies have seen multiple premium increases over the past several years, with some being more than a 50% jump!
Types of Long-Term Care Insurance
You may have noticed I mentioned “traditional” long-term care policies when discussing premium increases. There are actually two main types of private policies, traditional and hybrid:
Traditional (aka Stand-Alone): You pay an annual premium indefinitely for a set long-term care benefit (assuming no other riders). The policy is “use it or lose it,” meaning you will not receive any return on the premium if you do not make any claims on the policy.
Hybrid (aka Linked-Benefit): You pay a set premium for one to 10 years for a set long-term care benefit (assuming no other riders). You also have life insurance and cash value components, which can pay out if you do not use up the long-term care benefit during your lifetime.
Traditional policies tend to have lower premiums than hybrid policies on paper. Still, we find they do not always work that way in reality since there is no guarantee of a set annual premium for traditional policies. While hybrid policies may give you more initial sticker shock, comparable traditional policies can cost more over the long term.
Alternative Options for LTC Planning
You may be asking if there are other options to pay for care besides purchasing a policy—like Medicare or Medicaid. Unfortunately, Medicare does not provide long-term care benefits, but that’s not to say your coverage will be useless if something happens. Medicare will still help cover your hospital care, doctor’s services, drugs, and medical supplies while you receive care.
Medicaid, on the other hand, can provide benefits for long-term care. The downside is that eligibility for Medicaid is based on income and personal resources, so you may not qualify for benefits if you are affluent. Additionally, Medicaid is not guaranteed to provide you with your preferred nursing home facility or other care service.
One source of long-term care benefits to keep an eye on is state-mandated long-term care funds. Washington state was the first to implement a program in 2023, which requires employers to withhold 0.58% on employee wages to pay into the WA Cares Fund. If residents pay in for at least 10 years, they are eligible to receive $36,500 (inflation-adjusted) in lifetime benefits. While this program is not designed to pay for all of a resident’s care needs, it is a non-negligible supplement that could impact one’s insurance plans.
Of course, don’t forget that self-funding is an option. While the cost of long-term care can be daunting, proper planning can put you in a position to pay for an average care need. On average, women will need care for three to four years, while men will need care for two to three years. If you take the appropriate steps beforehand, you can build and maintain a nest egg that will help cover an average cost of care.
Planning Considerations
No matter how you intend to cover a long-term care need, you need to plan for it. The earlier you start planning, even if you aren’t sure what type of care to aim for, the more likely you will be able to pay for the care you need. Below are some considerations we believe are important when planning for long-term care:
Timing: The earlier you purchase long-term care insurance, the lower your premiums will be. However, since most claims occur near the end of life, buying a policy early could mean you pay premiums unnecessarily for years. While there is no perfect age to purchase a policy, you want to make a decision before you have any health complications that make you uninsurable.
Exclusions and Conditions: Just because you cannot perform two ADLs and are receiving care does not necessarily mean you will receive benefits from a policy. We have already discussed how the elimination period can impact the benefits received; how your medical event occurs also matters. Most policies will not provide benefits for self-inflicted injuries, alcohol or drug addiction, and mental illnesses (not including Alzheimer’s and dementia).
Taxes: It’s worth noting that you can deduct your long-term care insurance premium from your taxes based on your age. If you are 61 to 70 years old, you can deduct up to $4,710 of the premium you paid in 2024. In addition, benefits received from policies are not taxable.
Family Support: Some families are eager to support their elderly members. Others cannot, whether because of life circumstances or because the ones who need care do not wish to be a burden. Some long-term care policies provide benefits if you receive care from a family member, but most only pay if you receive care from a licensed healthcare professional. When planning, it is important to consider family willingness and how they may be compensated for their time.
Peace of Mind: Does having a policy on hand provide you and your loved ones comfort when considering a potential care need? Long-term care policies typically have plans of care to follow, which can help alleviate the stress when a health event occurs. Even if you’re unsure if you need a policy for financial reasons, there can be an emotional benefit to having a policy.
Leaving a Legacy: While you may be able to self-fund for your care needs, are you comfortable potentially spending down your assets to do so? If you intend to leave an impactful legacy to loved ones and charities, buying an insurance policy will help you offload some of that risk.
Conclusion
Long-term care is not most people’s favorite subject, but it is important to plan for even while you are young. People are living longer due to medical advancements, increasing the demand for long-term care services. On average, 70% of people will need long-term care in their lifetime, and women will need care longer than men.
The cost of this care is increasing at a rate greater than normal goods and services (more than 4%), while long-term care insurance policies are also getting more expensive every year. There are a few types of policies, like traditional and hybrid, that can help cover your cost of care; however, confidently purchasing a policy requires decades of foresight to make sure your finances and life circumstances make sense for the policy. You need to keep track of several important riders and exclusions that can impact the benefit you receive from a policy and may add to the cost you pay.
Planning for long-term care is not simple or straightforward, and it requires you to recognize that we don’t know exactly what will happen in the future, with costs or our own health needs. We’ve been referencing averages throughout this post; however, it’s also possible for you to need eight-plus years of long-term care, or none. We encourage you to consult with a financial professional about long-term care planning to understand the risks and tailor a plan that fits your unique situation.
Discuss your situation with a fee-only financial advisor.