Determining The Need for Long Term Care Insurance (LTCI): How Much Is Enough?

Updated: Nov 14, 2018

Whether you should purchase an LTCI policy depends on your financial situation, age, health, retirement objectives, and whether you have assets you want to protect.

Once you’ve made the decision to buy, you’ll need to decide how much coverage is enough. Insurance protects against an event that may (or may not) occur in the future. Buying sufficient protection is important, but the insurance must also be affordable for you. When considering the purchase of LTCI, you must pay particular attention to the benefit amount and to the benefit period.

What is the daily benefit amount?

Most LTCI policies will let you select the amount of your coverage, typically running anywhere from $40 to $150 or more per day. Benefit amounts are usually offered in $10 increments, although a few companies only offer a fixed amount (e.g., $50 per day).

The cost of nursing home care varies tremendously within a community and from one metropolitan area to another. For instance, a $60-per-day policy for the Manhattan area will not go very far, whereas a $150-per-day policy for a small Iowa town may greatly exceed the daily cost of care. Therefore, it’s important for you to research the cost of nursing homes in your area. Moreover, you should consider whether you plan to remain in your present state or whether you plan to move to another state in the future—for example, to live closer to your children.

Local variations in long-term care costs make it difficult to recommend one specific dollar amount appropriate for all persons. In general, however, you should buy enough insurance to cover 50 to 100 percent of nursing home costs in your community of choice. Fifty percent of current nursing home costs is appropriate for persons of means who expect to use some income to pay for care. If you will be unable (or unwilling) to supplement the cost of care in the future with your own income, you should buy closer to 100 percent of nursing home costs.

Be aware that policies usually differentiate between the benefit amount per day for institutional or facility care and the amount per day for home care. The daily benefit of the policy usually refers to the amount to be paid for nursing home care. Some policies offer less than the daily benefit (usually one-half ) for home care. Certain policies, however, now offer an optional rider for home care to be covered at 80 percent or 100 percent, instead of at the base contract amount of (typically) 50 percent.

Inflation Rider

It may be a wise idea to purchase an optional inflation rider for your policy. Although the average daily cost of nursing homes in your locale may be $100 today, it could rise to $200 five years from now. And the younger you are when you buy an LTCI policy, the more important inflation protection is. An inflation rider can be very expensive, sometimes increasing the cost of a policy by as much as 40 percent.

What is the length of the benefit period?

Although some policies will measure lifetime maximum LTCI benefits in terms of a dollar amount, others will express a time limit, such as one, two, or three years of benefits. After the applicable limit has been reached, no further benefits will be provided.

With a view toward Medicaid planning and the possible transfer of your assets to children or other loved ones, it is important that your LTCI policy pay the cost of a nursing home for at least three years (or for five years, if you contemplate transferring assets to an irrevocable trust). That way, you’ll be covered during the Medicaid ineligibility period, if any.

Most companies offer several options for benefit periods. To decide the length of the benefit period, you should analyze the probability of spending an extended length of time in a nursing home. Is there a likelihood of contracting Alzheimer’s disease or some other degenerative disease? If not, purchasing a lifetime benefit is probably not necessary, as money spent on especially high premiums could be wasted. Selecting a longer-than-usual benefit period might also be warranted if you plan on giving away a substantial sum of assets (as this will prolong your ineligibility for Medicaid).

Recent studies have shown that the average stay in a nursing home is about three years. Consider purchasing a policy with the maximum benefit amount measured in dollar value rather than in a pool of days to be used. This is because a policy that pays for two years of benefits (730 days) will sometimes count one day of home care as equal to one day in a skilled nursing home, even though the cost differs substantially.

As a rule of thumb, you should consider buying a policy with a higher daily benefit amount and a shorter benefit period (as the average nursing home stay does not exceed three years).

Securities and Advisory Services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Copyright Commonwealth Financial Network

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