Long-term care insurance is one of the most difficult types of insurance for people to commit to.
Nobody wants to buy insurance of any kind. Nobody wants to ever use it. But other insurance policies are easier to pull the trigger on because:
- Auto insurance and homeowners insurance are usually required.
- Disability insurance is necessary when you can’t work due to injury or illness.
- Life insurance protects your loved ones if you die unexpectedly.
Whether you will ever need long-term care insurance is basically a flip of the coin. In fact, the American Association for Long-Term Care Insurance (AALTCI) says that 50 percent of people who buy coverage at age 65 will use their policy benefits. That means the other 50 percent won’t.
There are other unknowns about this type of coverage that makes people hesitant to purchase a policy. As with most major purchases, there are pros and cons to buying long-term care insurance.
Pros of long-term care insurance
It can protect your assets
The biggest benefit of long-term care insurance is not having to use your own savings if you someday require long-term care. Like most health care services, the cost of long-term care has risen significantly in recent years and will likely continue to do so.
The cost of nursing home care can run between $90,000 to $130,000 or more a year depending on where you live. Assisted living facilities run from $2,000 to over $5,000 a month. That can quickly erode your retirement savings or your home equity.
Long-term care insurance can cover much of these costs so that neither you nor your family have to shoulder the entire cost.
There are many options to fit your needs and budget
Long-term care policies can be structured in a number of ways. Many offer optional benefits at extra cost. You can purchase joint coverage for you and a spouse. Some policies offer inflation features that will increase the amount of coverage you would receive each year. Insurers usually allow you to choose how long you will receive benefits and a maximum daily amount. You can save on the expense of premiums by opting for a longer waiting period before coverage kicks in.
Your premiums are potentially tax-deductible
Premiums you pay on a long-term care insurance policy can qualify as a deductible medical expense. To deduct your premiums from your federal income taxes:
- The policy must be tax-qualified, which most policies are. Your insurer can confirm if your policy is tax-qualified.
- You itemize your deductions.
- Your medical expenses must exceed 7.5 percent of your adjusted gross income, and you can only deduct expenses that exceed that amount. For example, if you adjusted gross income is $100,000, you must have $7,500 or more of deductible medical expenses to get a deduction. If you have $10,000 in medical expenses, you can take a $2,500 deduction ($10,000 – $7,500).
There is a limit to how much of your long-term care insurance premiums you can use to qualify for the medical expense deduction. For 2021, qualified long-term care premiums, up to the amounts shown below, can be included as medical expenses on Form 1040, Schedule A, Itemized Deductions or in calculating the self-employed health insurance deduction:
- Age 40 or under: $450
- Age 41 to 50: $850
- Age 51 to 60: $1,690
- Age 61 to 70: $4,520
- Age 71 and over: $5,640
Many states also have tax deductions or credits for long-term care insurance.
Your coverage can never expire
Long-term care policies are guaranteed for as long as you pay the premiums, regardless of your age or health condition.
Cons of long-term care insurance
It can be expensive
AALTCI reported that for 2020, its survey of insurers showed that a single male, age 55, will spend an average of $1,700 a year for a benefit that totals $164,000 at age 65. The benefit will grow 3 percent annually and would equal $386,500 if you didn’t use the policy until age 85. For women, the annual premium was $2,675 for the same benefits.
Keep in mind that the benefit total is a maximum of $164,000 at the age of 65, which could be depleted by the cost of nursing home care in 14 to 18 months or so, depending on where you live.
The premium amount will be higher if the insured’s opt for more coverage, if they are older than age 55 at the time they apply for coverage, or if they have certain health issues.
Your premiums can increase after you buy the policy
This is perhaps one of the biggest drawbacks of buying long-term care coverage. With approval from state insurance departments, insurance companies can raise premiums on a block of policies (they can never raise just one person’s premium). Five or 10 years after you bought the policy, you may experience an increase in premium of anywhere from 5 percent to 25 percent. In some cases, insurance companies have been given approval to raise rates by 40 percent. So when you budget for insurance, you should leave enough room for future premium increases.
It’s difficult to predict how much coverage you may need in 10, 20 or 30 years
Most people buy this type of policy in their 50s or early 60s. But you may not require long-term care until you are 85 or older. As expensive as care is today, one can only predict how much it will cost when you need it and what care options might be available. You also have no idea how long you will need coverage. While some research says the average duration of care is under a year, some people will need lifetime care once they become ill.
You may never use it
People are living longer, healthier lives. Although many will require long-term care as they age, some will never lose the ability to perform the daily functions that trigger long-term care benefits. That’s a hefty cost for something you never use.
You have other options for receiving long-term care coverage than buying a dedicated policy
The most common options are life insurance policies and annuities that provide long-term care coverage as part of the policy or as an optional benefit. Some life insurance and annuity policies will advance the death benefit in the event the insured needs long-term care. Others provide separate long-term care insurance in addition to life insurance or annuity benefits. These are known as hybrid policies.
It’s important to weigh the upside of long-term care with the potential downside before committing to buying insurance. For some, the risk of spending the bulk of their savings on care outweighs the negatives of long-term care insurance. For others, there are too many variables involved to feel comfortable with the investment in coverage.
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