How does long-term care insurance work?
Long-term care insurance is designed to protect people from incurring the full cost of nursing home, assisted living or home health care, which can run as much as $80,000 to $90,000 annually.
Many companies that offer other types of insurance also provide long-term care policies. You pay the insurance company a regular premium. If at some point you become unable to care for yourself, the insurance policy will pay the contracted benefit to help you pay for professional care.
Long-term care policies are similar to life insurance in that you will have to undergo an underwriting process to qualify for coverage. A person’s age and overall health will factor into how much coverage a person can receive and how much he or she will pay in premiums. Pre-existing conditions may disqualify a person from receiving coverage.
Once you qualify for a policy, you keep it for as long as you pay the premiums. There is no ‘term’ to long-term care insurance. However, companies can raise premium rates on a certain block of their policies with approval from state regulators. They cannot, however, raise premiums on a single customer’s policy.
Coverage amounts and time periods
People who buy long-term care insurance typically have many options for how much coverage they can receive and for how long. Many policies will pay a maximum daily, weekly, or monthly amount for care. If you have a policy that pays up to $200 a day in benefits and require care that costs $125, the insurance company will pay $125. If your care costs $250 a day, you will receive $200 in coverage per day.
This type of policy will also specify how long the insurance company will pay benefits. It may be a set number of years; some will provide a lifetime option. The more the per-day benefit and the longer the insurance company has to provide benefits, the higher your premium.
Instead of setting a daily maximum with a time limit, some policies will establish a lifetime maximum coverage amount. Once the insured uses up that maximum, coverage for care will cease. These are called indemnity policies.
Because the cost of long-term care will increase from the time you buy the policy to when you might use it, most policies offer inflation protection. This feature raises the benefit amount by a certain percentage — usually on an annual basis — up until you receive benefits. For example, if you buy a policy that pays $200 a day with a rider that increases that amount 5 percent each year, your coverage amount the second year will be $210.
If inflation protection is an optional benefit, it will add to the cost of your premium; however it’s highly recommended because you may not use the policy for 20 or 30 years, at which point the cost of care will be significantly higher. Some states, in fact, require inflation protection to be automatically added to all long-term care policies.
When benefits are paid
Long-term care insurance is designed to pay for care when the insured is unable to care for themselves. Most care policies are triggered by the insured’s inability to perform several of the activities of daily living (ADL), which include bathing, dressing, eating, walking and using the bathroom. Some policies may designate that a person starts receiving benefits once they lose the ability to perform at least two of those functions; others require three. A policy’s benefits may also be triggered if the insured is deemed cognitively impaired.
Long-term care policies come with a waiting period, also referred to as an elimination period. This is similar to a deductible on other types of insurance in that it requires the insured to pay the initial costs out-of-pocket. For long-term care, you may have an elimination period of anywhere from zero to 100 days.
Any care provided during the elimination period is paid out-of-pocket. Insurance coverage will begin the day after this period. The elimination period usually begins the day the insured’s care starts, such as the day he or she is admitted to a nursing home facility. The longer the elimination period, the lower the insurance premium. Some policies have only one elimination period, while others require an elimination period for each instance long-term care is needed.
Depending on the policy provisions, you could be covered for nursing home care, assisted living facilities, adult daycare, and at-home care. Policies usually require care be provided by licensed professionals and thus will not reimburse family members who provide care.
Policies will often exclude coverage for some conditions, including pre-existing conditions, mental disorders, alcohol and drug addiction, suicide attempts, or injuries resulting from military service, flying an airplane, or participation in a law-breaking activity.