What is Long-Term Care Insurance?

Typical health insurance policies and Medicare do not cover the costs of long-term care, such as preparing meals, doing chores and getting dressed. While none of those activities typically are difficult for a healthy person to perform, they can become very expensive if you have to pay someone else to do them. Costs for assisted living facilities and nursing homes can run easily into the tens of thousands of dollars per year.

Rather than pay for those expenses entirely out of pocket, long-term care insurance can cover a major portion or even all of those costs. Depending on your age, a long-term care insurance policy may cost you a few thousand dollars per year. To receive benefits from the policy, you have to meet the policy’s criteria, typically defined as not being able to perform two or more “activities of daily living” (such as eating, bathing, dressing, toileting, walking and continence.).


Consider an Inflation Rider

Because long-term care costs historically have risen faster than the rate of ordinary inflation, an important feature to consider for any policy is an inflation rider. The inflation rider allows your benefit amount to increase at a specified rate each year, such as 5 percent. Purchasing this option makes particularly good sense for younger buyers, such as those in their 50s, who may see long-term care costs more than double by the time they reach their 70s or older.

Note that there are two types of long-term care (LTC) insurance policy inflation riders: simple and compound. A simple inflation rider costs less and adjusts for inflation as a fixed percentage of the original daily LTC benefit. A compound rider costs more and increases daily LTC benefits at a faster rate, similar to how compound interest works on a savings account (i.e., interest on interest).

If Possible, Buy Long-Term Care When You're Young and Healthy

In general, the better your health and the younger you are when you first purchase a long-term care insurance policy, the lower your premium. There also is a tax break available to taxpayers who purchase these policies, which can help lower your overall costs.

Whether you should buy long-term care insurance depends on your personal situation. As with any insurance product, carefully examine the features and benefits of any long-term care insurance policy and weigh them against the costs and impact on your budget and other long-term care risk protection options (e.g., self-insurance). For more information on long-term care, visit www.longtermcare.gov.