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52% of people over age 65 require long term care at some point in their lifetime.

Average care lasts 1.5 years for men and 2.5 years for women.

14% of people require care for more than five years.

Care can cost $60,000–$120,000 or more annually.

Long term care (LTC) insurance was created as a way to pay a portion of these expenses and protect your retirement nest egg later in life. LTC policies generally:

  • Provide a daily or monthly benefit to cover home healthcare costs or the expense of care facility.
  • Require inability to perform two or more Activities of Daily Living (ADLs) – eating, bathing, continence, toileting, dressing, and transferring in and out of bed.
  • Tax-qualified policy premiums are considered a deductible medical expense, subject to IRS limits.
  • In recent years, hybrid policies have been developed that combine long term care benefits with life insurance.

So, when and how should you consider long term care insurance?

Would you be able to cover expenses out of pocket?

We often see people with a net worth of $2–5 million purchase LTC insurance because they typically have enough in their portfolio to fund retirement but not quite enough to self-insure. The $60,000–$120,000+ cost can drain the retirement portfolio quickly, especially when added to living expenses for a spouse. Fixed income sources like social security, pensions and rental income are also important to consider – higher fixed income allows more portfolio assets to be reserved for possible healthcare expenses.

Can you afford the premiums?

Premiums for LTC coverage can be expensive, especially if acquired later in life. Premiums for traditional long term care coverage usually increase 10–15% or more at least once or twice during the life of the policy. Premiums for hybrid LTC policies are generally higher but stay fixed. If paying premiums with retirement assets, plan in extra buffer. If possible, however, try to pay up the premiums ahead of time during your working years.

Do you qualify medically?

LTC insurance can be difficult to qualify for because underwriters look at many risk factors. Your health risk profile is typically lower when you’re younger because you haven’t been given the kinds of medical diagnoses and health complications that naturally occur as you age.

Underwriters will look carefully at your health history when writing your policy, including:

  • Chronic illnesses like hypertension, diabetes, or sleep apnea
  • Family history of serious medical events or diagnoses of major medical issues like cancer or cardiac problems
  • Family long term care history – if your parents were in nursing homes, for what, and how long

The ideal time to discuss this coverage is ages 45–54. You may be eligible if between 55–65 and in excellent health, but the premiums will be higher. When it comes to LTC insurance, early planning is essential.

What if you do not qualify for LTC insurance?

If you can’t get an LTC insurance policy, it’s even more important to work with a strategic advisor to create a retirement plan and determine what else you can be doing now to plan for expenses later in life. If you’re getting a later start on planning or trying to re-plan after a change of life has occurred, you may need to consider how you can lower expenses and increase savings to provide for the additional costs related to home care, assisted living, or nursing home care.

Traditional vs. hybrid LTC insurance

As mentioned previously, long term care insurance currently takes two primary forms.

Traditional long term care coverage is likely to provide the highest long care benefit for your dollar. However, if you don’t have a long term care need, the policy goes unused. Premiums on these policies tend to increase occasionally during the life of a policy.

Hybrid long term care policies combine a life insurance benefit with coverage for long term care or chronic illness, depending on the specific policy. While premiums on these policies tend to be higher for the same level of LTC coverage, costs remain fixed. Additionally, hybrid policies, if unused for long term care needs, build cash value that can be used during your life and a death benefit that passes to your beneficiaries when you pass away.

In recent years, we’ve seen hybrid policies as a more flexible way to provide long term care coverage without the “use it or lose it” risk of traditional policies. For an in depth comparison, see Traditional vs. Hybrid Long Term Care Policies – a Comparison.

Alterra Advisors - Josh Whelan

Ryan Colis

CFA, CFP®
Partner, Financial Advisor

About the Author

Ryan is a problem solver. He has a distinct ability to create a simple solution for very complex puzzles. So, naturally, he’s an integral part of our team. His favorite part of his role at Alterra is the analysis – whether analyzing a financial plan or reviewing an investment portfolio. However, the profession allows him to share that passion with clients by helping them navigate financial complexities as they collaborate on achieving their personal and financial goals.

After completing his undergraduate degree in Business Management, Ryan and Grant met by chance, developed a rapport and have been working together ever since. Ryan has continued his formal training in finance by earning his CFP and CFA designations.

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.

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