Long-term care insurance (LTCI) is chiefly purchased by middle-income individuals and families. They have enough room in the budget to pay the premiums for an LTCI, but they do not have so much money saved, or assets to liquidate, that they rather pay for long-term care out of pocket. In some countries, a middle-income person or a person with assets above a certain threshold would be disqualified for tax-funded long-term care. In others, they would be eligible for tax-funded long-term care but aren’t happy with the type of care offered and wants to purchase an LTCI policy to give themselves more flexibility when it comes to care choices.
In the United States, it is mostly people who do not qualify for Medicaid that purchases LTCI. By having LTCI, they do not have to liquidate their assets to pay for long-term care. Even a substantial nest-egg can be eroded quickly if you need to pay for long-term care, or if you foot the bill for someone in your family that needs it. According to 2015 data from LTCI provider Genworth, a semi-private room in an average U.S. nursing home costs over $75,000 per year. An assisted living facility is cheaper, but you can still expect to pay well over $40,000 annually. If tax-funded long-term care in your area is only available to individuals or families deemed poor enough, a family can easily find themselves in a situation where they first have to exhaust all their savings and other assets before the person in need can obtain tax-funded care.
Individuals that need long-term care but are unable to pay for it out of pocket or through private insurance must rely on tax-funded programs, charity organizations or/and help from family and friends. In addition to helping you financially, family members may have to take unpaid leave from work to assist you, or even give up their job to be able to be there for you when you need them.
Long-term unpaid care of family members can create a cycle of financial hardship where the long-term care needs of one family member has a significant detrimental impact on the opportunities of the rest of the family, including children and grandchildren who might struggle to have their own needs met in this situation. This does not just include financial needs, but also the natural needs of underage children to be cared for and supervised, needs that can be difficult to meet for a parent that is squeezed between tending to children and providing long-term care for an adult family member.
Just like pretty much any other insurance policy, the LTCI policy must be purchased before we need the help covered by the policy. This is why it is a good idea to start thinking about LTCI at an early age and try to determine if LTCI is something that we are willing and able to purchase, and also at what point in our life it would be suitable to sign up for such a policy.
Who needs long-term care?
It is quite common for an elderly person to require long-term care, but long-term care can be needed at any age. A person can need long-term care in any stage of life, due to injury, debilitating illness, or similar. Long-term care can be required because of physical or cognitive problems, or a combination of both.
When should I sign up for long-term care insurance?
The short answer: when you are in your mid-50s.
For a more elaborate answer, please read our article “What’s the recommended age for getting LTCI?” on this site.
The availability of tax-funded care for you
One very important consideration is of course which type of tax-funded long-term care that you may be eligible for if you ever need long-term care. This varies a lot from one country to another, and can also vary significantly from state to state under a federal system.
In some countries and states, comprehensive tax-funded long-term care is available to all residents. In others, it is only available to some residents, e.g. residents that are deemed poor enough to qualify, are old enough, or that are suffering from certain ailments. Your present or previous work history can also make you eligible, e.g. as a federal or military employee. Sometimes, this cover will extend to the immediate family of the qualifying individual.
In some parts of the world, fully or partly qualifying for tax-funded or otherwise communally funded long-term care requires making payments into the system before the need for long-term care arises. There are also situations where a resident can be qualified because someone in their immediate family, such as a spouse or a parent, have made qualifying payments.
As you can see, there are a lot of things to consider when you try to determine if it is a good idea for you to pay for long-term care insurance.
Examples of government health programs in the United States
- Medicaid / State Health Insurance Assistance Program (SHIP)
- State Children’s Health Insurance Program (CHIP)
- Program of All-Inclusive Care for the Elderly (PACE)
- Prescription Assistance (SPAP)
- Indian Health Service
- Federal Employees Health Benefits Program
- Military Health System / TRICARE
- Veterans Health Administration
Medicaid & Medicare in the United States
If you live in the United States, your eligibility- or possible future eligibility – for Medicaid and/or Medicare should ideally be taken into account when you make decisions regarding long-term care insurance.
- Medicaid is a social health care program for U.S. citizens and legal permanent residents in the U.S. It is for persons of all ages whose income and resources are insufficient to pay for health care. It is a means-tested program where each state have broad leeway to determine who is eligible for aid from Medicaid.Medicaid is funded jointly by the federal government and the individual states, and is managed by the individual states.
- Medicare is a national social insurance program that provides health insurance. In general, persons aged 65 years or more who have been legal U.S. residents for at least 5 years are eligible for Medicare, provided that they also meet the requirements for contributions to the Medicare fund.People with disabilities and/or certain medical conditions can be eligible for Medicare even if they are younger than 65 years, provided that they fulfill certain requirements.Medicare is funded chiefly by certain earmarked payroll taxes, by premiums paid by Medicare enrollees, and by general fund revenue. Medicare is administered by the U.S. federal government.
Will the quality of tax-funded LTC increase or decrease?
Canada and the United Kingdom are both examples of countries with comprehensive tax-funded long-term care where interest in private long-term care insurance has increased dramatically during recent years. A similar trend can be seen in the United States, despite the presence of fairly broad-reaching programs such as Medicare, Medicaid and Veterans Health Administration.
A lot of individuals are either not satisfied with the quality of today’s tax-funded care, or worried that the quality will decrease in the future and be too low for their preferences when they eventually need it.
We live longer, but that doesn’t necessarily mean that we are healthier. Conditions that would have been fatal in the previous century can today be managed medically as chronic conditions, sometimes in combination with long-term care.
In some countries, there are also concerns that due to the spike in birth rate from mid-1940s to mid-1960s, the workforce of the near future will not be large enough to shoulder the responsibility of paying for the needs of this aging Baby Boom cohort.
Post–World War II Baby Boom
Several countries experienced dramatically increased birth rates after the end of World War II, before seeing birthrates falling down again. The children born during this period of increased birthrates are commonly referred to as Baby Boomers.
In 2011, surviving children from the year 1947 turned 65 years old. The Baby Boomers have begun retiring from the workforce and are also entering into a stage of their life when they can be statistically expected to need more medical care and more long-term care than before. In 2029, those born in the year 1964 – generally seen as the end of the U.S. baby boom era – will turn 65 and are likely to leave the workforce. That same year, those who were born in 1947 are all 80+ of age and a large part of this group can be expected to need at least some type of long-term assistance.
The dependency ratio of a population is generally calculated by dividing the age-group typically not in the labor force (the dependent part) with the age-group typically in the labor force (the productive part). Most nationwide systems available to aid those outside the workforce, e.g. by paying for long-term care for elderly residents, are not pre-funded. There are no or very little assets saved up from before. Instead, these systems rely on new money being put into the systems by those who are currently of working age (e.g by taxes on wages). Having a small work force in relation to the non-working population can therefore put enormous stress on these system.
Of course, only looking at the dependency ratio of a population can lead us astray since it is a rather crude measurement. In published international statistics, the dependent part usually includes those under the age of 15 and those over the age of 64. It does not take into account that people over the age of 64 can still be in the workforce, or that they may be living from their own saved assets rather than relying on publicly funded programs. It also does not take into consideration that there are people in the bracket 15 years – 64 years that are not working. The productivity level for those who do work is not taken into account either.
Demographers in the United States usually use 1946-1964 to denote the Baby Boom, but birth rates in the U.S. actually began to increase in 1941, when Depression Era was replaced by the WWII Era. Still, the end of the war marked a significant increase in births. In January 1946, there were just below 223,000 live births recorded. For October that same year, the number was right below 340,000. More babies were born in the U.S. during the seven years after 1948 than in the previous 30 years. The number of annual births reached 4 million in 1954 and didn’t go below this until 1965.
In 2011, Medicare spending accounted for roughly 15% of the U.S. Federal budget. This share is projected to exceed 17% by 2020. At 2010, Medicare spending was at $560 billion. It is projected to reach above $1 trillion by 2022. By 2030, enrollment in Medicare is expected to increase from today’s 48 million individuals to over 80 million individuals, and the number of workers per enrollee will drop from 3.7 to 2.4.
Canadian soldiers returned home later from WWII than the U.S. soldiers, and the Canadian birth rate did not begin to go up until 1947. Most Canadian demographers use the years 1947 – 1966 as the start and end of the baby boom era.
The United Kingdom experienced a short baby boom right after the end of WWII, but this little baby boom peaked in 1946. There was then a second baby boom in the 1960s, which peaked in 1964. A third UK baby boom peaked in 1990.
Will you be able to afford the premiums every month / quarter / year?
The insurer will cancel your long-term care insurance policy if you fail to pay the premiums, and with many policies, all the money that you have paid so far will be lost.
For some individuals and families, forgoing LTCI altogether is therefore best choice, since the risk is too big that they will, at some point, be unable to make future premium payments. They would be better off looking for other ways of saving money for future needs – money that wont be lost just because they hit a rough patch and were unable to keep up with premium payments for a while. If your budget is already very tight, building an emergency fund is probably a better choice than paying LTCI premiums, since you will be fully in charge of your emergency fund and no one will take your emergency fund away from you just because you failed to make a few payments.
Will you be able to afford the premiums without your spouse’s income?
Even in families where both spouses contribute equally to the budget, losing one income is usually a very hard blow to the family budget. In families where one adult contributes significantly more financially than the other, it will usually be even more difficult to keep up with insurance premium payments without that income. The insurer will cancel your long-term care insurance policy if you fail to pay the premiums, and with many policies, all the money that you have paid so far will be lost.
Regardless of your situation, it is a good idea for you and your spouse to sit down and put some sort of plan together for future scenarios where you or your spouse do no longer have an income, or where the income has been reduced. What kind of protection do you have for situations like that? A nest egg for periods of unemployment? Real estate that isn’t mortgaged to the hilt? Life insurance for one or both spouses?
Your level of financial protection will largely determine your ability to keep up with LTCI premiums even after an unexpected loss of income.
Will you be able to afford the premiums even after retiring?
The insurer will cancel your long-term care insurance policy if you fail to pay the premiums, and with many policies, all the money that you have paid so far will be lost. It is therefore very important to try to determine beforehand if you will be able to afford paying the premiums even after you retire.
If your policy is canceled when you have already retired, you will not just lose the money that you have already paid in premiums, but it can also be difficult for you to be approved for an new LTCI policy with lower monthly premiums. Generally speaking, an older person will be quoted a higher monthly premium when shopping for LTCI. This change becomes especially dramatic after the age of 60 years, when each new birthday typically means a steep increase in premiums if you want to sign up for a new LTCI policy.
This is why it is very bad to pick a LTCI policy with high premiums when you are still working without carefully calculating if there will still be room for the premiums in your budget once you have retired. Generally speaking, it is better to pick an LTCI policy with lower premiums even if it means somewhat poorer coverage, if that is what’s required for you to feel confident you will be able to keep up with premium payments even after retirement.
When you calculate your post-retirement budget, keep in mind that you may be facing new costs after retirement, e.g. increased health care costs or the need to hire a private housekeeper to help you with certain day-to-day chores even though you aren’t in a position where you need LTC. Even if your projected budget looks fine for the age span 65-75 years, how does it look for 75+ years?
Of course, retirement can also be an opportunity to cut costs, e.g. moving to more affordable living quarters now when commute to work is no longer an issue.
Alternatives to LTCI
There are many alternatives to long-term care insurance and one must take ones personal situation, preferences and risk willingness into account when determining what or which alternatives to chose. There are for instance those who prefer to put money into more general investments or into special health-related savings accounts rather than paying premiums to an insurance company.
Here are a few examples of interesting venues to explore:
- Universal life insurance
- Health Savings Account (USA)
- Tax-advantaged financial accounts set up by an employer for an employee (various forms exists)
- Income-generating investments