Long-term care insurance: what it covers and who needs it

Close to 70% of adults 65 or older will need long-term assistance at some point, according to a 2022 report from the U.S. Department of Health and Human Services.

Many Americans aren't prepared for the expense of paying for help with daily activities, let alone for residential care: Less than three in ten adults between age 50 and 64 say they have money set aside for future assistance.

Long-term care insurance can help with costs not covered by traditional health insurance or Medicare, whether that's a home health aide or ongoing care in a nursing home.

Before you buy a policy, though, it's important to understand what long-term care insurance covers, how rates are determined and whether it's the right decision for you.

Long-term care insurance reimburses policyholders for support services, whether provided at home, an assisted living facility, adult day care center or nursing home. It can pay for nursing care, physical or speech therapy and help with day-to-day activities like dressing, bathing and eating, according to Peggy Haslach, a certified financial planner at Finity Group.

It can also cover modifications to your living space, like ramps and shower handles.

Those utilizing long-term care insurance usually have a disability, disease or chronic illness, Haslach said. To access benefits, a person must have trouble performing at least two out of six routine activities, known as "activities of daily living" (ADLs).

• Bathing
• Continence
• Dressing
• Eating
• Transferring (getting from a bed to a chair)
• Toilet use

There is typically an elimination period before the insurance company starts covering expenses, during which time the policyholder pays out of pocket. This period varies by policy, but it's usually 20, 30, 60, 90 or 100 days according to the National Association of Insurance Commissioners (NAIC).

In addition, most long-term care policies have benefit caps — either a dollar amount or years that a policy remains in place. Because of these limits, having savings to supplement long-term care insurance is important. One way is with a health savings account (HSA): Your pre-tax contributions grow and can be withdrawn tax-free if you use them for qualified medical expenses, including home health help and nursing home care.

A traditional or Roth IRA with Charles Schwab or Fidelity Investments can also generate a sizable return over the long term, which you can use to fill gaps in your coverage.

Rising costs and increased longevity have led many insurers to limit or stop offering standalone policies, which account for less than 20% of long-term care insurance, according to the American Association for Long-Term Care Insurance (AALTCI).

Today, the vast majority of traditional policies are sold by six companies:

• Mutual of Omaha
• Thrivent
• National Guardian Life
• New York Life
• Northwestern Mutual
• Bankers Life 

New York Life is one of CNBC's standout picks for long-term care insurance, with a Secure Care policy that offers a daily benefit and covers the cost of care provided by family members. New York Life offers a three-year rate guarantee and eligible policyholders and couples that purchase a joint policy can earn a discount of up to 25%.

Hybrid long-term care policies, also known as linked-benefit or asset-based policies, combine life insurance with a long-term care policy. The care benefit amount is typically about five times what you've paid in premiums. Using the care benefit, however, reduces the amount of the policy's death benefit and cash surrender value.

MassMutual offers two hybrid policies: CareChoice One, a single-premium product requiring an upfront lump sum, and CareChoice Select, for which premiums are paid regularly for 12 years. Both plans are eligible for annual dividends and have surrender values that generally increase each year.

Long-term care rider

Another hybrid option is adding a long-term care rider to your life insurance policy. Similar to an accelerated death benefit rider, a long-term care rider has certain requirements that must be met.

Mutual of Omaha's indexed universal life insurance plans have a long-term care rider option that's available for individuals between the ages of 30 and 79. According to the company, the monthly cost of the rider will remain the same for the entirety of your policy.

Guardian offers long-term care riders with its whole life insurance policies that allow policyholders to use up to 95% of their death benefit for long-term care. It's an indemnity rider that pays a set amount, so you don't have to submit bills and receipts for reimbursement.

Chronic or Critical Illness Rider

Another option is adding a critical or chronic illness rider to your life insurance policy. Like a long-term care rider, it would enable you to access some or all of your death benefit to pay for supportive care.

Critical illness riders are usually paid as a lump sum and let you use the funds for whatever you want.  They may have different qualifying conditions than long-term care riders, however, and typically don't include terminal illnesses.

Pacific Life's variable universal life insurance policy, Pacific Protector, has an option for a chronic illness rider for those 75 and younger. Pacific Life ranks highly for customer satisfaction on J.D. Power's 2023 U.S. Life Insurance Study and has far fewer complaints than expected for a company of its size, according to the National Association of Insurance Commissioners.

Many factors go into how much you'll pay for a policy, according to AALTCI.

• Age
• Gender
• Marital status
• Health
• Location
• Insurance company and policy type 
• Benefit amount and period
• Inflation option or other riders
• Elimination period

Women tend to pay more for a policy, Haslach said, because they live longer than men and usually retire with fewer assets.

In 2023, a 55-year-old male could expect to pay an average of $900 a year for a policy with a $165,000 benefit and no inflation protection, according to AALTCI. 

A 55-year-old woman could expect to pay about $1,500 for the same policy, while the cost for a couple with both partners aged 55 would average $2,080 combined.

Medicaid provides health care coverage for low-income households, including long-term care. Typically, individuals need to use their savings before qualifying for Medicaid assistance.

But many states have launched long-term care partnership plans that can shelter some or all of your assets from Medicaid requirements.

For example, someone who buys $150,000 of partnership-qualified long-term care insurance would be able to keep $150,000 over the Medicaid asset threshold, according to the AALTCI.

You'd need to buy a qualifying plan and check with your state's insurance department to see if it offers partnership plans.

If you have a standalone long-term care plan and your premiums exceed 7.5% of your adjusted gross income, you may be able to deduct them from your federal taxes. (Hybrid plans don't typically qualify for this deduction, according to AALTCI.)

Some states also offer tax credits or deductions for long-term care insurance. In New York, for example, taxpayers can deduct 20% of their annual premiums up to $1,500. (Only filers whose adjusted gross income is below $250,000 can claim it.)

In addition, benefits from long-term care insurance aren't counted as taxable income.

Whether to get long-term care insurance is a personal decision, but you may want to talk to a financial planner or insurance expert.

"Find somebody who understands all the options — annuities, life insurance, long-term care insurance and your investments," Haslach said.

When it makes sense

• You don't think you could afford supportive care. The median monthly cost for a home health aide to come six hours a day, five days a week is $4,290, according to a December 2023 survey from insurance carrier Genworth. The median monthly cost for a private room in a nursing home was $9,733.
• You expect to live alone. Not everyone will have a partner or family nearby to provide support. A long-term care policy could give you peace of mind.
• You have a family history of needing care. If Alzheimer's disease or other serious conditions run in your family, it may be the right choice. At the same time, if people in your family tend to be long-lived, it may also be worth considering.
• You make too much to qualify for Medicaid. While Medicaid can help with paying for care, there are income requirements and not all facilities accept Medicaid. If you think you'll have too much to qualify, but not enough to afford care on your own, a policy may be the right choice.

When it might not make sense

• You can pay for care out of pocket. If you expect to have a sizable nest egg and could pay for supportive care out of your savings, a policy might not be the right choice.
• You don't have a lot of income or assets. On the other hand, if you expect to qualify for Medicaid when you retire, you might not want to get long-term care insurance.
• Premiums would take a lot out of your budget. According to the NAIC, you should probably only consider a policy if the annual cost of premiums is under 7% of your current income and if you could still comfortably afford them if they increased by 25%.

Before buying a policy, see how much caregiving costs in your area are: AARP's calculator can give you an idea of the costs, and allows you to change how many hours a week of support you expect to need.

You should also factor in other sources of funding that could be tapped for care, like savings and investments, annuities, retirement plans and your house.

If you wait until you need long-term care, you won't get approved for a policy. However, if you buy long-term care insurance it too early, it could make it harder to meet other financial goals, like saving for retirement, paying off your mortgage or sending your kids to college.

Both AARP and the AALTC recommend purchasing long-term care insurance in your mid-50s, when you're still relatively healthy but have probably fulfilled your other major financial obligations.

Caregiving costs can devastate your savings, but you should consider your assets, family structure, health and personal needs before buying a long-term care policy. There are both standalone policies and hybrid options and riders that combine long-term care and life insurance.

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Peggy Haslach, a certified financial planner in Washington who focuses on women-owned practices and small businesses.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every insurance review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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