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

Long-term care insurance (LTC) can pay for costs not covered by health insurance or Medicare, like a home health aide, physical therapy or ongoing care in a nursing facility.

Before you buy a policy, you should understand what LTC policies cover, how rates are determined and whether buying a plan is the right decision for you.

Long-term care insurance covers expenses related to support services if you're facing a disability or chronic illness, including in-home care, speech or physical therapy, assisted living or a nursing facility. It can also cover modifications to your living space, like ramps and shower handles.

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

To access benefits, you need to have trouble performing at least two of the six activities of daily living, according to Peggy Haslach, a certified financial planner at Finity Group. They are:

• Bathing
• Continence
• Dressing
• Eating
• Transferring from a bed or a chair
• Toilet use

There is typically an elimination period before an insurance company starts covering expenses, during which time you need to pay 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.

In addition, most long-term care policies have benefit caps — either a dollar amount or a number of months a policy remains in place. So, having supplemental savings, like in a health savings account, can be essential.

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

Standalone policies

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 insurance

Hybrid policies, also known as linked-benefit or asset-based policies, combine life insurance with a long-term care benefit, typically about five times what you've paid in premiums.

Using the care benefit, however, reduces the amount available for a 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 available to individuals between 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 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 out in 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 is ranked highly for customer satisfaction by J.D. Power and has far fewer complaints than other providers 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, including age, health status, and location. Women tend to pay more for a policy, Haslach said, because they live longer and usually retire with fewer assets.

Your marital status can also play a role since some companies offer a discount if both members of a couple get coverage.

Your insurance provider and policy type have a big impact — especially the elimination period, benefit amount and riders you select.

A long-term care policy with a $165,000 benefit cost an average of $900 a year for a 55-year-old male in 2023, according to AALTCI, and $1,500 for a 55-year-old woman. The average cost for a couple with both partners age 55 was about $2,080 combined.

Long-term care partnership plans

Medicaid provides health care coverage for low-income households, including long-term care. Individuals usually need to use up 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.

For example, if you buy $150,000 worth of partnership-qualified long-term care insurance you would be able to keep $150,000 over the Medicaid asset threshold, according to the AALTCI.

You'll need to 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 income taxes. (Hybrid plans don't typically qualify for this deduction, according to AALTC.)

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 consider your personal and family medical history and 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 long-term care insurance could be a good idea

• 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.
• Family medical history. 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 long-term care insurance 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.

It's hard to know when you'll need help, but the American Association for Long-Term Care Insurance recommends purchasing an LTC policy in your mid-50s. It's a time when changes to your health can start to impact your quality of life, but you're still young enough to be approved and even qualify for a good-health discount.

Experts say buying a policy before then isn't cost effective, because you could be paying premiums for decades before you need to file a claim.

A look at the benefits and drawbacks of long-term care insurance.

Pros

• Protect your savings
• Premiums may be tax-deductible 
• You don't have to be reimbursed with a cash indemnity policy
• May be able to use your benefits to pay family members helping with care.

Cons

• Premiums may increase over time
• May not be enough to cover cost of care
• You may be turned down due to age or pre-existing health issues
• Care not covered during elimination period

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 article 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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