7 Common Mistakes when Buying Long-Term Care Insurance (and How to Avoid Them)

 What is Long-Term Care Insurance?

 What is Long-Term Care Insurance?

Long-term care insurance is some form of risk management to avoid or lessen the financial impact of needing help when an injury or extended illness requires help to care for oneself. No one can predict how long a long-term care event will be, but 70% of individuals over 65 will need some form of long-term care as they age[1]. Care can come in the form of adult day care, home health care, assisted living, nursing home, or memory care (God forbid). Surprisingly, 40% of individuals receiving long-term care are working-age adults, ages 18-64 [2].

  • The national average cost of home health care in 2021: is $59,484/year[3]
  • The national average cost of a private nursing home room in 2021: is $108,405/year[4]
  • The annual national average assisted living facility care service in 2021: is $54,000[5]
  • These national averaged costs for long-term care services are projected to grow at a rate of 4.32%[6].

At this rate, this would double these expenses at the current growth rate every 16 years.

For most retirees, their motivations to have this coverage in place are typically one of the following:

  • They do not want to be a burden on their family.
  • They want to avoid leaving a surviving spouse (or other family members) impoverished.
  • Have the ability to age in place and preserve their independence as long as possible.
  • They want to protect assets and leverage dollars today (for long-term care premium costs) for multiple tax-free care dollars in the future.

A common dilemma is that the ever-changing variation of long-term care policies, benefits, and options has left many pre-retirees with paralysis analysis. Unfortunately, most policies are apples to oranges comparisons at best, but a knowledgeable professional can help shoppers simplify what solutions may be the best solution for their needs. 

Below are the most common (and avoidable) mistakes long-term care insurance shoppers make.

1. Believing it Will Not Happen to You. Denial is the best reason not to plan. The hope for many is to live a long life and never need long-term care. However, hope is not a strategy. Planning for the future is.

I have experienced a parent who failed to plan for their debility. Being a care coordinator is a challenging job, but having to pay the bill compounds an awful situation. Thanks to this experience, I have never been more steadfast to ensure my family never has to carry this weight. As a result, many policies now include care coordination (finding great care providers) with payment coordination services to give clients and their families peace of mind.

For those who live beyond age 65, there is almost a 30% chance of not needing long-term care. Many people who believe they will be in this group see the benefit of coverage options that can include a return of premium that allows all premiums to be refunded to heirs if a policyholder passes away without using it. Some policies even allow the policyholder to take back 100% of what was paid in during life if they feel the funds are desired for other goals and do not need the coverage. Statistically, 70% of Americans 65 and older will need long-term care [7].

  • Question to ponder: With no prior to planning, what would be the consequences of a long-term care event?

2. Counting on Government Programs. Unfortunately, Medicare (or any Medicare supplements) does not cover most long-term care expenses. Medicaid, a needs-based welfare program, requires individuals to spend their assets to under $2,500 (depending on state regulations) to have the state pay for any care. Medicaid paying the bill can create a future challenge that many states put a lien on a Medicaid recipient’s estate when they pass away to get paid back. Retirees used to gift away their estate to impoverish themselves in the past. In response, the IRS put a 5-year look-back on gifts on tax forms, so even this is not a reasonable plan.

Are you a Veteran? If so, we thank you for your service but having long-term care paid for by the VA also becomes a needs-based program similar to Medicaid. The main difference is that qualifying Veterans will have a slightly higher floor to spend down assets before the administration partially pays for care. Unfortunately, this asset limitation is not a viable option for many with a net worth above $138,489 (as of 2022). 

3. Working with an Agent Tied to Only ONE Insurance Company. Rates (Premiums) can vary significantly from one insurer to another. When applying, each insurer has pricing “sweet spots” based on your age. Available discounts and options can vary too. It is a reason to work with someone with access to policies from multiple insurers to tailor fit the best value for an applicant.  

 For example, here are monthly rates for basically equal coverage from four insurers for a couple of ages 60 and 55. $261/month (Genworth). $262/month (John Hancock). $358/month (New York Life). $429/month (Northwestern Mutual). As many can see, it is essential to speak with a knowledgeable professional to receive the best coverage for the best rate.

4. Not Electing Inflation Protection. Nowadays, long-term care insurance needs to be purchased decades in advance of the need to be affordable for most. The average cost of care grows at an estimated 4.32% annual rate when averaging every care setting. If home health care costs $59,484/year, in 16 years, it will be an estimated $118,968/year. Some retirees and pre-retirees make the mistake of buying policies with a set pool of tax-free care dollars, $100,000, for example, which may cover a good amount of the cost today. However, when care is needed decades later, those dollars will likely not go very far.

 A common mistake is to forgo inflation on future care dollars a policy will provide. Some shoppers do this to save on premium costs initially. Many carriers offer a 3% cost of living adjustment. A 3% growing pool of care benefits means long-term care coverage put in place today in the amount of $150,000, in 20-years, will provide $273,113 in benefits as the pool of care dollars grows by 3% each year compounded growth. For most policies, this is a recommended consideration to attempt to keep pace with the future cost of care. Some insurance companies still offer 5% cost of living adjustments on care dollars but price this benefit grossly out of reach for many. There is also a tiny handful still offering lifetime benefits, so tax-free care dollars continue to pay as long as care is needed. 

  •  Did You Know: 1 in 5 retirees over age 65 need long-term care for more than five years [8].

5. Forgetting to Research the Insurance Company’s Financial Rating. Twenty years ago, over 100 insurance companies were offering long-term care insurance. Today there are a little over a dozen. In the past, many of these insurance companies thought many consumers would buy the insurance, eventually drop it or infrequently use it. They had no idea that less than 1% of consumers cancel their insurance and the extent of retirees who go on claim (needing long-term care). Those insurance companies who mispriced the coverage experienced significant financial losses from policy owners going on claim (needing long-term care). As a result, many stopped offering coverage or went out of business.

To check an insurance company’s financial rating, they can be researched online from a creditable rating agency such as AM Best, Fitch, or Moody’s. Many consumers find the AM Best rating agency easier to navigate and research a company. Their search portal can be found here:  https://ratings.ambest.com/search.aspx

 Note: any insurance company rated an “A” or above from AM Best is considered financially strong and should be considered a viable option.

6. Assuming Self-Paying will cover the Cost of Long-Term Care.

The challenge for many with the self-pay plan is timing and taxes. Suppose someone earmarks growing savings aside for long-term care expenses. Taking money out for care, in most cases, will trigger unnecessary taxes. It is also next to impossible to predict when a long-term care health event occurs. Assuming it will happen much later in life can leave many overly financially exposed if it occurs earlier, for example, after meeting a friendly student who took one of my virtual retirement planning classes. From my Zoom attendee view, I noticed she was hooked up to oxygen and in a bed. She shared that she was only 63 years and in the prior year, she unexpectedly had to spend more than $100,000 on long-term care. Unfortunately, she had no coverage and was trying to develop a plan to liquidate major assets to afford her care.

  •  Did you know: The average age someone needs a caregiver is only 69 [9].

As a CFP®️, I spend most of my time helping people develop comprehensive retirement plans. When reviewing a client’s retirement savings, I commonly see that more than 70% of the total savings have yet to be taxed. Retirement savings may have taken place in pre-tax 401(k), IRA, 403(b), 457, TSP, or similar retirement plans. The savers received a tax deduction for the year they contributed to the retirement plan, but it becomes fully taxable when the money comes out. Retirees can lose control of these savings and tax bills when they reach their Required Beginning Date. This date, for most, is when an individual reaches age 72. Individuals must take their Required Minimum Distribution (RMD) to satisfy the IRS. The challenge is that the IRS requires a higher percentage to be taken out each year, and not soon after age 72, the taxable withdrawal percentage can be much more than a safe range.

In addition, too much tax deferral for those who have saved well can eventually come back to bite those savers in the form of jumping tax brackets and being subject to Medicare stealth taxes (or IRMAA). As a result, an unnecessary amount of their retirement savings is eroded by taxation later in retirement. Unfortunately, this can change when a spouse passes away for those married and taking advantage of the generous federal Married Filing Joint tax bracket. Soon after, the surviving spouse will be forced to file an Individual, which can drive taxation (and the reduction of their estate) agonizingly higher.

7. Waiting Too Long to Start Planning. Life for many is about looking back with little to no regrets. Proactive planning can put individuals in the position of choice. If you take prescription medications or have health conditions, find out if you can qualify. Ask what health changes might make you ineligible to health qualify. For most, waiting beyond age 70 to get approved is too late as the costs for coverage can become too burdensome to consider. Many insurers raise rates between 10-20% per year for every year an individual ages beyond age 60.

An applicant’s age and current health are key determinants of what price they pay to shift this risk to an insurance company. An insurance company wants the healthiest applicants, and those already declining into chronic disabilities or illness will likely be shut out. Think of it as buying a parachute for a very likely skydiving trip that could be 2-3 decades away.

  • Did You Know: In 2018, 22% of long-term care applicants ages 50-59 were declined coverage based on health. In the same year, 30% of long-term care applicants ages 60-69 were declined coverage. For those approved, the average annual premium for an in-force long care policy was $2,169 [10].

Get educated, request personalized quotes and see if shifting some of this risk to an insurance company makes sense.

Next Steps:

  1. Request your long-term care insurance quotes using the form below.
  2. Review coverage quotes and consider researching the financial stability of companies offering coverage. 
  3. Apply with a licensed application specialist over the phone.
  4. If approved, consider what amount of coverage to accept. 

  [1] 2021 U.S. Department of Health and Human Services, “How Much Care Will You Need?” (February 18, 2020). https://acl.gov/ltc/basic-needs/how-much-care-will-you-need. Accessed on (January 10, 2022) 130964 01/31/22

[2] National Clearing House for Long-Term Care Information, October 2008.

[3] National Clearing House for Long-Term Care Information, October 2008.

[4] New York Life Cost of Care Survey, 2019

[5] New York Life Cost of Care Survey, 2019

[6] Genworth Beyond Dollars 2021 (https://pro.genworth.com/riiproweb/productinfo/pdf/682801BRO.pdf), site accessed 1/25/22

[7] 2015 Medicare & You, Centers for Medicare and Medicaid Services

[8] Administration of Community Living, https://acl.gov/ltc/basic-needs/how-much-care-will-you-need

[9] https://www.morningstar.com/articles/957487/must-know-statistics-about-long-term-care-2019-edition

[10] https://www.morningstar.com/articles/957487/must-know-statistics-about-long-term-care-2019-edition