What Is Long-Term Care Insurance and How Does It Work?

As you get older, the tasks you complete on a daily basis may not come with the ease they used to. The need for outside care may seem like a long way away, but it’s never too early to start planning. Recent studies show that over two-thirds of individuals over 65 will need long-term care at some point in their life.

The population of older Americans has skyrocketed, and so has the demand for long-term care services. This has in turn led to a significant increase in the cost of long-term care. In 2019, the median cost for a private room in a skilled nursing unit was $102,200/year, the median cost at an assisted living community was $48,612/year, and the median cost for home health care was $52,624/year. Traditional private health insurance and Medicare are severely lacking in coverage for this type of care, which is where long-term care insurance comes in.

Long-term care insurance is designed to help with the cost of senior care in a variety of settings. It is typically used to supplement the cost of care, rather than pay for it entirely. Each plan is subject to daily spending limits as well as caps on the length of time coverage can be used. If you can afford it, long-term care insurance can help drastically reduce the amount you spend on long-term care over the course of your lifetime.

This article is designed to give you a broad overview of the facts surrounding long-term care insurance so that you can determine if it’s the right fit for you. We cover the following topics, and you can click on them to skip to a specific section:

What Does Long-Term Care Insurance Cover?

Long-term care insurance claims are made when an individual needs assistance with two or more activities of daily living (eating, dressing, bathing, transferring, toileting and continence). A variety of services can be used to assist with these activities, each of which offers a unique set of benefits.

Examples of services covered by long-term care insurance include:

  • Assisted living
  • In-home care
  • Respite care
  • Adult daycare
  • Hospice care
  • Skilled nursing care (nursing homes)
  • Alzheimer’s and dementia care

Long-term care insurance plans vary in the services they cover as well as the benefits they provide. It’s important to learn all the details of a plan and consider your individual needs before deciding on coverage.

Two Main Types of Policies

There are two main types of long-term care insurance—traditional and hybrid. Here is a breakdown of the difference between the two:

  • Traditional: The sole purpose of traditional long-term care insurance is to pay out benefits when long-term care is used. If you are one of the millions of Americans who need long-term care in their lifetime, a traditional plan will prove beneficial. If you don’t end up using long-term care, however, the benefits you’ve accrued will disappear and they cannot be applied elsewhere.
  • Hybrid: A hybrid long-term care insurance policy offers the same set of benefits as a traditional policy, but it also allows for unused benefits to be converted into life insurance. Under these plans, any benefits not used for long-term care may be converted to a tax-free life insurance payment to a policyholder’s beneficiaries. Hybrid plans typically require you to pay your full premium in a lump sum up-front. But most also offer a full money-back guarantee if you decide to cancel and don’t use any benefits.

Traditional plans are sufficient if you’re seeking coverage for long-term care alone, and you’re okay with the benefits going away if care is never used. Hybrid plans offer the extra benefit of a life insurance payout, but they tend to be much more expensive.

Policy Features

The details of a policy are important not only because they affect your premium, but also because they impact how much coverage you’ll get down the road. These are the top policy features you should pay attention to when deciding on a plan:

  • Daily benefits limit: The daily benefits limit is the maximum amount an insurance policy will pay out on a given day. It can be anywhere from $100 to $450, depending on the plan.
  • Payout duration / benefits period: The payout duration—or benefits period—is the total length of time an insurance policy will pay out benefits. It can be anywhere from one year to five years to completely unlimited, depending on the plan.
  • Total lifetime benefit: The total lifetime limit of a policy is calculated by multiplying the daily benefits limit by the number of days in the benefits period. For example, a plan with a $300 daily limit and a two year benefits period would have a total lifetime benefit of $300/day x 730 days = $219,000. Plans with an unlimited benefits period have an unlimited total lifetime benefit, although the daily benefits limit still applies.
  • Elimination period: The elimination period is the amount of time an insurance plan requires you to pay for long-term care before benefits kick in. It can be anywhere from 0 days to 365 days, depending on the plan. An elimination period functions similar to a deductible in that the insurance company requires the policyholder to pay a certain amount out-of-pocket before coverage kicks in.
  • Inflation protection: Inflation protection is a plan feature that helps offset the rising cost of long-term care. The protection works by increasing benefits on an annual basis to help keep up with the cost of care. There are two main types of inflation protection:
    • Simple inflation: Simple inflation is a percent increase on the original benefits amount, which is applied on an annual basis. 4% simple inflation protection on a $100/day benefit would increase the benefit to $104/day in year two, $108/day in year three, $112/day in year four, and so on. Each year, the benefit increases by a flat $4, which is 4% of $100.
    • Compound inflation: Compound inflation is an annual percent increase on the current benefits amount. 4% compound inflation protection on a $100/day benefit would increase the daily benefit to $104/day in year two, $108.16/day in year three, $112.49/day in year four, and so on. Each year, the benefit is 4% greater than it was the previous year. The real upside to compound inflation is seen down the road. For example, in year 25, this benefit would be $267/day with 4% compound inflation and just $200/day with 4% simple inflation.
  • Types of care covered: There are three main options when it comes to types of care covered: nursing home only, home health care only, and comprehensive plans. The function of each option is pretty self-explanatory: “nursing home only” plans cover just nursing home expenses, “home health care only” plans cover just home health care expenses, and “comprehensive” plans cover the full spectrum of long-term care services.
  • Nonforfeiture benefits: Many states require long-term care insurance to offer nonforfeiture benefits, which are features that allow you to receive a portion of your benefits if you lapse in coverage. This is helpful if your financial situation changes, or if you deal with a sudden rate increase, and you can no longer afford premiums. Nonforfeiture benefits protect you from losing the coverage you’ve earned through paying premiums over the years. It’s important to understand the full details of the nonforfeiture benefits in your specific policy—some plans specify that you can only receive coverage if your policy lapses because of a rate increase, while others are more lenient.
  • Nonforfeiture benefits: Many states require long-term care insurance to offer nonforfeiture benefits, which are features that allow you to receive a portion of your benefits if you lapse in coverage. This is helpful if your financial situation changes, or if you deal with a sudden rate increase, and you can no longer afford premiums. Nonforfeiture benefits protect you from losing the coverage you’ve earned through paying premiums over the years. It’s important to understand the full details of the nonforfeiture benefits in your specific policy—some plans specify that you can only receive coverage if your policy lapses because of a rate increase, while others are more lenient.
  • Restoration of benefits: Restoration of benefits is a feature that allows you to gain back the benefits you previously used if you stop receiving care for a period and then need it again down the road. It is offered by some, but not, all long-term care insurance plans. This feature can allow you to extend your total benefits period to a greater number of days than your initial policy specifies.

How Much Does Long Term Care Insurance Cost?

Annual premiums for long-term care insurance vary greatly based on a number of factors. The American Association for Long-Term Care Insurance conducted a survey of the average annual premium for a typical plan:

Person CoveredAverage Annual Premium% Difference Between Lowest and Highest Premium Surveyed
Single Male, age 55$2,050123%
Single Female, age 55$2,700105%
Couple, both ages 55$3,050 (combined)243%

*Survey conducted for a $164,000 initial pool of benefits, based on 3 year benefit x initial benefit of $150/per-day with 90-day Elimination Period and 3% Compound Annual Growth Option. Data collected January, 2019.

Factors Affecting Cost

The cost of long-term care insurance depends on a multitude of factors. All of the following details can have an impact:

  • Age: The age when you apply for coverage has a big impact. If you buy long-term care insurance at a younger age, your premiums will be lower.
  • Health: The healthier you are and the fewer health conditions you have, the less you will pay in premiums. If you have too many underlying health problems, you may be rejected from coverage altogether.
  • Gender: In general, women pay more for long-term care insurance than men. This is because they live longer and are more likely to make a claim.
  • Marital Status: Married couples who buy coverage jointly pay around 30% less in premiums than those who buy individually.
  • Insurance Company: Premiums vary from company to company, even for the same amount of coverage. That’s why it’s important to shop around before committing to a plan.
  • Amount of Coverage: The amount of coverage you buy impacts how much you pay in premiums. Coverage costs more if it includes higher limits on daily and lifetime benefits, shorter elimination periods, lower deductibles, better inflation protection, or more types of care covered.

Beware of Rate Increases

Since long-term care insurance is a relatively new product, the cost of premiums tends to be unstable. Insurance companies have discovered that more of their beneficiaries are using long-term care than they initially expected, and this has led to an at times drastic spike in premiums. Individuals should plan for potential yearly rate increases of at least 10%, as well as consider purchasing nonforfeiture benefits in case they can no longer pay premiums.

Should I Buy Long-Term Care Insurance? Is It Worth It?

Whether or not you should buy long-term care insurance depends largely on your individual situation. There is no universal answer. For those who can afford the high premiums, it goes a long way in protecting assets down the road. For those who can’t afford premiums or can only afford limited coverage, it may be worth looking into other options.

Regardless of whether you chose to purchase long-term care insurance, it’s important to plan for how you will pay for care down the road. When deciding if long-term care insurance is right for you, you’ll probably find yourself in one of the following groups, each of whom has a different set of considerations:

You’re Eligible for Medicaid Now, or You’ll Likely Be Eligible in the Future

If you’re eligible for Medicaid, there’s no need to purchase long-term care insurance, since it is included in the program’s benefits. Medicaid is typically available to individuals with disabilities as well as those below certain income and asset levels. Eligibility guidelines and types of long-term care covered vary by state. If you’re not eligible for Medicaid now but believe future expenses could bring your assets down to eligibility level down the road, that’s another reason to pass on buying long-term care insurance.

You’re Very Wealthy, With Net Assets Over One Million Dollars

If you’re a very wealthy individual with a large amount of savings, it’s probably not worth it to buy traditional long-term care insurance. If it turns out you need long-term care in the future, you should be able to pay for it out-of-pocket. And if you don’t end up needing it, you’ll save money from not having to pay premiums every year. Before you decide to pass on long-term care insurance, it’s important to speak with a financial advisor to determine if you’ll have the resources to cover care out-of-pocket for an extended period of time.

Wealthy individuals may also be interested in hybrid long-term care insurance. The benefit of hybrid plans is that you pay one lump sum upfront that includes a hefty total benefit for future long-term care, and any benefits you don’t use can be converted into a life insurance payout for your loved ones. This means that regardless of how events unfold, you won’t spend money on premiums and not get any benefits in return.

You’re Somewhere in the Middle

If you’re in between the above two groups financially, long-term care insurance is something to consider, but the decision is not cut and dry.

The most important thing to determine is whether you will be able to pay for premiums every year. If you run out of money down the road and don’t pay your premiums, you risk losing all or a portion of your benefits. Calculate your finances far into the future, and see if you will be able to afford premiums well into your 80s. Keep in mind that long-term care insurance plans often come with drastic increases in premiums year over year, which can be greater than 10% and even as high as 50% (although the latter is rare). Some states have protections requiring insurance companies to offer nonforfeiture benefits, which provide individuals with partial benefits if they lapse in coverage. This allows them to receive a reduced daily benefit for the full term of their policy or the full daily benefit for a reduced term of their policy. It’s important to note, however, that nonforfeiture provisions increase the initial cost of premiums even more, and they only kick in after you’ve had coverage for a certain length of time.

The short answer is that long-term care insurance is worth it if you can afford it. If you’re able to afford the cost of premiums for the next several years of your life, and you can withstand rate increases or the extra cost of nonforfeiture benefits, it goes a long way in protecting your assets in the future.

When Should You Buy Long-Term Care Insurance?

Just like with other insurance products, it’s best to buy long-term care insurance before you actually need it. Financial advisors typically recommend purchasing coverage somewhere between the ages of 50 to 65. The best time to apply will depend on your individual needs and financial situation.

If you buy long-term care insurance at a younger age, you will pay lower premiums to start off. This will save you a significant amount of money over the course of your lifetime. It’s also important to note that insurance companies frequently deny coverage to individuals with pre-existing conditions. The correlation between age and rejection rate is clear, with 25% of those in their 60s being rejected and 44% of those in their 70s being rejected. This is another reason why applying for coverage at a younger age can be beneficial.

The downside to buying long-term care insurance early is that you will have an extra monthly expense in your budget for a longer period of time. Healthy individuals in their 50s may consider putting their extra money into investments instead, which will help grow their assets before purchasing long-term care insurance in their 60s. If you decide to go this route, however, it’s important to weigh the risk of both a negative return on investment as well as an unexpected health problem.

As you can see, there are pros and cons to buying earlier and to buying later in life. The decision you make should be based on your health, financial situation and assessment of future needs.

Is Long-Term Care Insurance Tax Deductible?

If you itemize deductions on your federal return, a portion of your long-term care insurance premiums can be deducted using the medical expense tax deduction. For the tax year 2019, all qualifying medical expenses making up over 7.5% of an individual’s adjusted gross income can be deducted from taxes. The threshold will be raised to 10% for the tax year 2020.

There is a limit to how much of your long-term care insurance premium can qualify as a tax-deductible medical expense, and it is dependent on your age. Here is a breakdown of how much of your premium you can claim as a medical expense, for both the tax year 2019 and 2020:

Age2019 medical expense cap for long-term care premium2020 medical expense cap for long-term care premium
40 or under$420$430
71 or older$5,270$5,430

State Tax Deductions

Depending on where you live, you may be eligible for an additional deduction on your state tax return. Some states allow you to deduct the entire remainder of your premium that wasn’t eligible to be deducted on your federal return, while others allow you to deduct a smaller portion. There are also a large handful of states with no tax deductions at all. If you’re considering buying long-term care insurance, be sure to check your state’s list of tax deductions to see if you can deduct long-term care premiums.

Get a Long-Term Care Insurance Quote

Prices for long-term care insurance policies vary greatly, even for the same amount of coverage. It’s important to get quotes from as many companies as possible when applying for coverage.

The following is a list of companies currently offer long-term care insurance:

If you have the resources, you should consult with a financial advisor or retirement planning professional before deciding on a plan.

Alternatives to Long-Term Care Insurance

Given the high price tag of long-term care insurance, there are many people out there seeking alternatives. These are some additional options you may consider to help cover the cost of long-term care:

  • Medicaid: For those who qualify, Medicaid will cover the cost of care at a skilled nursing facility. Depending on the state, it may also pay for in-home care or care at an assisted living community. Check your state’s Medicaid guidelines for coverage options as well as eligibility requirements.
  • Medicare: While not as expansive as Medicaid, Medicare will help with the cost of skilled nursing care in certain situations—if it is following a hospital visit, recommended by a doctor to treat a medical condition, or being used as hospice care. The amount of coverage depends on the situation. You read more about Medicare coverage for long-term care here.
  • Deferred-income annuity: A deferred-income annuity allows you to pay a lump sum of money up front in exchange for a guaranteed monthly payout in the future. For example, an annuity may allow you to invest $100,000 at age 60 in exchange for payments totalling $40,000/year starting at age 85. This can be a helpful way to pay for care in the future as well as get a great return on investment.
  • Investments/savings: Saving and investing your money over a long period of time can be a great way to grow your assets. Stocks, bonds, ETFs and mutual funds are some of the most common investment vehicles used to build wealth. Just make sure to diversify your portfolio across a number of investments to lower risk. If done effectively, saving and investing can go a long way in helping pay for long-term care in the future. Be aware, however, that investing always comes with the risk of financial loss.
  • Short-term care insurance: Short-term care insurance is less expensive than its long-term counterpart. It usually provides coverage for up to just one year, but there is no elimination period or deductible. This can be an effective option if you don’t see yourself needing care for more than a year, or if you’ve been priced out of or denied long-term care insurance.
  • Care from family and friends: If you have friends or family who can take care of you in your old age, you can save a fortune in long-term care costs. To supplement their assistance, you may consider paying for occasional home care out-of-pocket or purchasing a cheaper long-term care policy with a lower benefits total.

The Bottom Line

Life comes at you fast, and it’s important to plan ahead so that you don’t get blind-sided by long-term care costs. There are many options to consider when building your plan, and long-term care insurance is one of them. If you have the resources, we recommend meeting with a financial advisor or retirement planning professional to help determine your needs and figure out the best route for you.