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Long Term Care Insurance Explained

Long Term Care Insurance Explained

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Matthew Collister
Updated November 17, 2022
9 Min Read

Long term care insurance is intended to help you pay for the high cost of skilled nursing as you get older. This might include in-home nursing, assisted living and adult day care, or a nursing home. The coverage is an alternative to relying on Medicaid or your own savings to pay for these services. It’s also rather complex, so it may make sense to discuss your long term care insurance needs with an insurance agent.

Most people over the age of 65 will need long term care at some point

If you’ve spent time with an aging parent or other loved one, you probably understand some of the challenges we’ll face as we get old. Fact is, as we approach the end of life, there’s a chance we’ll lose the ability to perform everyday tasks — such as eating, getting dressed, or using the bathroom — that in our youth and adulthood we take for granted. 

Caring for someone in this situation can place an enormous physical and emotional burden on family members. That’s why many turn to skilled care. This is care that’s provided either by professionals who come to your home, at an assisted living facility or adult day care center, or in a nursing home. is a service that helps people find caregivers for older relatives. According to the U.S. Department of Health and Human Services, approximately 70% of people who turn 65 will require long term care at some point in their future.

Long term care can deplete one’s savings

Skilled long term care can be shockingly expensive, however. According to an analysis by Genworth, an insurer, the monthly median cost in 2020 for a home health aide was $4,576, a room in an assisted living facility was $4,300, and a private room in a nursing home was $8,821. This care is typically needed for many months at a stretch. The average nursing home stay duration is about 28 months, according to a joint report by the American Health Care Association and the National Center for Assisted Living. So these costs can add up quickly, and may quickly deplete savings that had been intended for retirement.

Medicaid does provide some benefits for people with low incomes or who have spent most of their savings on skilled care. However it has restrictions on what kind of care and what providers it will pay for. It rarely pays for in-home care or assisted living, for instance. Regular health insurance, on the other hand, doesn’t provide any coverage for long term care situations. Medicare’s long term care benefits are also quite limited.

What is long term care insurance?

Long term care insurance helps pay for in-home, assisted living, adult day care, or nursing home care for people over age 65 with a chronic condition or disability that requires constant supervision. As a form of private insurance, it provides more flexibility than Medicaid.

Today, around a dozen companies form the long term care insurance market. Depending on the company, policies may be available either directly from the insurer, or through an agent. 

How to buy a long term care policy

The first step in buying a policy, therefore, is to contact a company or one of its agents and fill out an application. The insurer may ask to conduct an interview, and/or review your health history and medical records. You’ll also specify the amount of coverage you want — expect to pay more in premium for higher coverage levels. Once your application is approved, you’ll start paying a monthly premium. The policy remains in force unless you cancel it. State law requires insurance companies to renew long term care policies provided the policyholder makes all their premium payments in a timely manner. 

Note: One advantage of buying long term care insurance through an independent agent is that they can typically offer you policies from multiple carriers. This allows you to compare prices and coverage levels to find a combination that’s right for you. Agents are also licensed by the state in which you live, and typically are trained on the policies they sell. They’re trusted advisors who can work to understand your needs and goals, and match you to a policy that will be a good fit.

When to buy long term care insurance

While long term care policy benefits don’t become available until you’re 65, many experts recommend shopping for and buying a policy when you’re much younger. The reason? As you get on in age, you’re more likely to develop chronic conditions that could limit your coverage options, make a policy very expensive, or make you ineligible for long term care insurance altogether. You must qualify for long term care insurance, and it’s possible to be turned down for coverage if you’ve developed a serious health condition.

In fact the American Association for Long Term Care Insurance (AALTCI) recommends shopping for and buying a policy when you’re in your 50s. For most people, this ensures they’re in the market while in reasonably good health (meeting the insurers’ qualifications), while optimizing the amount of premium they’ll have to pay over the lifetime of the policy. Of course, if you have a family history of certain conditions developing at a younger age, you may want to start your shopping even earlier.

Another reason to shop and buy at a younger age has to do with premiums charged. According to Investopedia, premiums for a new long term care policy rise 2% to 4% with each year of age for someone in their 50s, then jump 6% to 8% for each year of age for someone in their 60s. Even with an extra 10 years of premiums, buying at age 55 could save significant money in the long run.

How long term care insurance works

With most long term care policies, you can begin receiving benefits after you’re turned 65, and when you can no longer do at least two of the following six activities of daily living (ADL).

  • Bathing
  • Caring for incontinence
  • Dressing
  • Eating
  • Getting on or off the toilet
  • Getting in and out of bed, or in and out of a chair

The insurer will want to look at your medical records and may do a broader evaluation of your living situation. Whether you prefer to have in-home care, or care at any kind of skilled facility, the insurer must provide approval. 

As with many other forms of insurance, a long term care policy will require you to pay a share of the costs. In this case, your insurer may require you to pay for anywhere from 30 to 90 days of skilled care before you receive reimbursement — this is referred to by the insurer as the elimination period. Most policies also have a daily cap on the amount of money they’ll pay, along with a lifetime maximum payout. 

What long term care insurance costs

The costs of long term care insurance can vary widely, depending on several factors. As explained above, your age when you buy a policy will affect what you pay. According to the AALTCI, the average annual premium for a 55-year old man in 2020 was $1,700, while the average for a 55-year old woman was $2,675. The average for a 55-year old couple was $3,050.

Aside from your age, premiums may depend on any of the following:

  • Your health — The presence of chronic health problems may affect what you pay
  • Your gender — Women have a longer life expectancy than men, so they’re more likely to need their policy to pay for skilled care
  • Marital status — Married people can get lower rates as a pair than single people
  • Amount of coverage — As with any insurance, the more coverage you want, the more you can expect to pay; asking for higher limits for the daily dollar amount cap, or choosing options such as cost of living adjustments to protect against inflation, can force up your premium

Premiums will also vary by insurer, even for policies with similar levels of coverage. Once again, it’s a good idea to discuss your needs with an independent insurance agent who represents multiple companies. Your agent can shop around on your behalf to help you get the best combination of coverage and premium. 

Tax advantages of long term care

When considering costs, it’s also important to factor in any possible tax advantages you’ll have from buying a long term care insurance policy. 

If your policy is considered “tax qualified” by meeting certain federal standards (your insurance company can tell you if yours does), and if you itemize your deductions on your tax return, you can count part or all of your premiums paid as medical expenses under state and federal law. Medical expenses that reach a certain threshold can be deducted.

The maximum deductible premium depends on the age of the taxpayer. For the 2021 tax year, according to the IRS, they are as follows:

  • Age 40 and under: $450
  • Age 41-50: $850
  • Age 50 to 60: $1,690
  • Age 60 to 70: $4,520
  • Over age 70: $5,640

As noted by the AALTCI, this may not be much of an advantage if you’re young, and with little or no additional medical expenses. But as you get older and more likely to have significant medical expenses, this deduction could become very valuable.

Long term care insurance state partnership programs

Yet another aspect of long term care to consider are state partnership programs. These programs, available in most states, were developed years ago to encourage people to finance their long term care with private insurance rather than through Medicaid.

With a partnership program, you purchase a qualified long term care insurance policy (the insurance company can let you know if it qualifies under your state’s rules). Then, if the policy pays out to its maximum benefit limit, you can qualify for Medicaid while still retaining at least some of your personal assets. All this is provided you qualify for all other Medicaid criteria. Stated another way, you’ll be able to receive Medicaid benefits without spending yourself into poverty. 

With these programs, the amount of assets (savings and investments) you’re able to keep is equal to the amount of money your insurance company pays for your long term care. So if your insurer pays a total of $50,000 in benefits, you’ll be able to qualify for Medicaid with $50,000 still in your savings and investment portfolio. Otherwise, you’ll need to have no more than $2,000 (or $3,000 for a married couple) to your name to qualify.

Alternatives to long-term care insurance

A long term care insurance policy is not the only way to pay for skilled care as you get older. A number of alternative approaches do exist.

  • Save for your long term care — One alternative to buying a policy is to pay for your long term care costs from your personal savings. Depending on your financial situation, this will likely require some long term wealth planning that begins when you’re young. Contact a financial advisor to discuss this approach. 
  • Sell your life insurance policy — It’s not uncommon for people who’ve bought life insurance to later realize that they don’t really need it. If this happens to you, and if you have a universal or whole life policy with a cash value, you can sell the policy to a third party broker or settlement company for cash. You may also be able to take out a loan against your life insurance policy, using its cash value as collateral. Just remember that this loan must be repaid.
  • Buy what’s known as a hybrid policy — If you’re also in the market for a life insurance policy, this option might work for you. A hybrid policy combines the benefits of both long term care and life insurance into a single policy. Essentially, if you need long term care, you can receive a payout of money that would’ve been paid as a death benefit — insurers refer to this as an acceleration of benefits. Hybrid policy terms and structure vary by insurance company. Your best bet would be to discuss the option with an insurance agent to make sure it’s right for you and your family.
  • Buy an annuityAnnuities are available with benefits for those needing long term care. You purchase an annuity that earns interest at a fixed rate, but if you have long term care needs, the annuity pays higher benefits than the amount of premium paid. In one example, from Investopedia, an annuity with a $100,000 premium could pay as much as $786,000 in long term care benefits. The downside is that annuities tend to require a large premium up front. And with ongoing low interest rates, an annuity may not be a very profitable investment if long term care is never needed.
  • Buy short term care insurance — A final option is short term care insurance. This is a policy that’s similar to a long term care policy in most respects, except that it provides coverage for no more than a year. These policies cost less than long term policies, and tend to not have any elimination period — you start receiving benefits on the first day you need to pay for care. 

Most of us hope to live a long and healthy life. But the fact is that as we get older, we’ll likely become ever more susceptible to the chronic conditions associated with age. Long term care insurance can help you plan for that, relieving your family of the financial stress that comes with receiving skilled care.