People over the age of 65 have a 70% chance of needing long-term care, so it’s important to factor long-term care expenses into any retirement planning. This article will explore how long-term care insurance and life insurance policies can help you pay for senior care, including their benefits and limitations and how to determine the best fit based on personal circumstances.
How much does long-term care cost, and how can it be paid for?
Before we explore the payment options, let’s take a brief look at how much long-term care costs. Genworth reported the following yearly median costs in the U.S. in 2024:
- In-home homemaker services: $75,504.
- In-home health aide: $77,792.
- Adult day health care: $26,000.
- Assisted living facility: $70,800.
- Semiprivate room in a nursing home: $111,325.
- Private room in a nursing home: $127,750.
Pricing varies considerably in different parts of the country and at different facilities.
Medicare does not cover long-term care, except for short-term stays at a skilled nursing facility following a hospitalization. Health insurance doesn’t pay for long-term care needs. Medicaid does cover long-term care for those with minimal income and assets. Otherwise, a person can self-fund the cost of care from savings and assets or can access different types of insurance to cover the cost, such as long-term care insurance and life insurance.
Understanding long-term care insurance (LTCi) and its role in senior care
Long-term care insurance (LTCi) is designed to help cover the cost of extended care services. Policies vary, but typically, to trigger benefits, the individual must require assistance with two or more activities of daily living. Those services may be provided in the home or at assisted living, skilled nursing, or adult day care facilities.
What are the benefits of LTCi?
- Policies provide comprehensive coverage of expenses in all the various venues.
- Policyholders have flexible care options, allowing individuals to choose based on personal preference instead of financial constraints.
- Personal savings and assets are not being spent on care.
- Some policies offer inflation protection and adjust benefits for rising health care costs over time.
- Some policies offer a lifetime guaranteed renewal of coverage as long as premiums are paid.
What are the downsides of LTCi?
- Premium costs may be high, especially when purchased later in life.
- Premiums paid over the years are lost if long-term care is unnecessary.
- Policies may have limited payouts of predetermined maximums per day or per month over a set period, with a lifetime benefit limit.
- Certification by a doctor is necessary to activate a policy, followed by a costly out-of-pocket waiting period.
- Proceeds can only be used for long-term care expenses and nothing else.
- Policies typically don’t build cash value.
- Applicants with preexisting conditions may have eligibility challenges, possibly resulting in higher premiums or denied coverage.
Using life insurance to cover senior care costs
As the costs of care skyrocket and LTCi premiums become affordable to fewer and fewer people, alternatives are being developed to help meet long-term care needs under varying circumstances. Among them are certain variations of life insurance policies:
Permanent (whole or universal) life insurance with accumulated cash value
This type of policy lets a policyholder borrow or withdraw the accumulated cash to pay for care (or anything else) without necessarily losing the death benefit entirely. This fact avoids the “use it or lose it” risk. However, the withdrawn amount or unrepaid loan (plus any interest) will be deducted from the death benefit when the policyholder passes away according to the policy’s terms.
Payouts are available with no waiting period once sufficient cash value accrues, but they are limited to how much cash has accumulated. However, that may not be enough to cover extensive care needs. Premiums for this type of life insurance are among the highest due to the cash value component.
Permanent (whole or universal) life insurance with an accelerated death benefit (ADB)
This kind of life insurance policy provides access to the death benefit for loosely defined care expenses, frequently at no extra premium charge. Access requires terminal illness, chronic illness, or permanent confinement in a nursing home. Once conditions are verified, benefits are available promptly. However, payouts are capped at a defined percentage of the death benefit, and any amount used reduces the death benefit left for heirs.
Permanent (whole or universal) life insurance with a long-term care rider
A long-term care rider is an add-on to the insurance policy that lets the policyholder use the death benefit for long-term care expenses alone. Activation requires a specific, medically certified inability to perform certain tasks.
Its cost is greater than an accelerated death benefit but moderate compared to hybrid policies. Also, there may be costly out-of-pocket waiting periods of 30 to 90 days. Payouts are capped at daily or monthly limits, are limited to the death benefit amount, and reduce the death benefit for beneficiaries.
Hybrid life insurance
This type of policy combines permanent life insurance and long-term care insurance in a single integrated product that allows a policyholder to withdraw funds when needed for long-term care expenses, both medical and nonmedical. Depending on policy terms, payouts include a long-term fund and a death benefit. Once the fund portion runs out, the insurance company pays for any further care. If care is not required, the beneficiaries receive the full death benefit.
Premiums are significantly higher than for other options, often as a single, up-front premium. However, since the policy offers so much LTCi, the growth of its cash value and its death benefits are not remarkable. Activation requires a medically certified inability to perform specific tasks and follows a waiting period of 30 to 90 days, during which the policyholder pays for care.
Life settlements
These settlements allow funds to be extracted from whole, universal, or hybrid policies by selling the policy to a third party for a lump sum. The sum is typically higher than the policy’s cash surrender value but lower than the death benefit. The buyer assumes payment of future premiums and eventually receives the death benefit in return. The policyholder is freed from paying premiums and faces no restrictions on how the settlement proceeds can be spent. However, the death benefit for beneficiaries is lost.
Is long-term care insurance or life insurance better to fund senior care?
There is no single best way to cover long-term care needs. The decision of whether you opt for using life insurance or long-term care insurance to pay for senior care is really dependent upon your specific situation. The three major factors below are parts of the equation. We’ve listed some questions you might consider and some potential considerations for older adults in various financial and health situations.
Personal financial situation
Some questions to consider are:
- Are other sources of liquid assets available?
- Can they cover the cost of care during waiting periods, if needed?
- Are the premiums affordable in the long term?
- Is a dedicated insurance product for long-term care more important than maintaining financial flexibility?
Wealthy seniors might opt to use their existing assets to pay for eventual care. Someone with moderate savings might find predictable insurance premiums more manageable and a way to protect the assets they do have. A senior with limited assets might prefer flexibility over locking into a long-term care plan.
Health status and care needs
The need to pay for necessary long-term care depends on the health of the senior: If a senior is extremely healthy and can function independently, there may not be a need for care. Some of the health questions you might ask yourself include:
- What options are available for the policyholder’s present health condition?
- How long might care be needed?
Seniors with existing chronic conditions or a sudden health crisis might prioritize the health factor when choosing a coverage option. However, eligibility for long-term care insurance might be an issue. A family history of great longevity might rank the health factor over finance or legacy based on the potential for extended care needs.
Legacy and estate planning goals
Many people want to leave assets to their younger loved ones when they pass away, and paying for expensive long-term care has the potential to deplete or even eliminate a person’s estate. Some questions a person may consider about their estate planning goals include:
- How important is leaving an inheritance?
- How would each alternative affect what’s available for legacy building?
- How important is it to keep accumulated assets from being depleted by care costs?
Seniors keen on leaving an inheritance might opt for long-term care insurance to protect their assets. If maintaining their quality of life is a priority, they might choose an option that leaves their assets available to enjoy rather than to go to heirs. If they consider Medicaid their long-term care solution, estate planning might take precedence: They can structure their assets to ensure they qualify for government assistance while protecting some wealth for their heirs.
As seniors plan for how to cover the possible need for care in their later years, long-term care insurance and the ever-growing versions of life insurance can offer the peace of mind of knowing they will not burden their families. The best choice will depend on the individual’s financial situation, present health, potential long-term care needs, and estate considerations. The tax implications of each option are also vital. Consulting a tax professional or financial advisor can be essential to making such a significant life decision confidently.
This information is for educational purposes and is not legal, financial, tax, or investment advice. It should not be substituted for information from professionals authorized to practice in your area. You should always consult a suitably qualified professional regarding your specific situation.
