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What is Long-Term Care Insurance and Do You Need It?

Health care coverage protects you if you get sick or injured while life insurance takes care of your family if you die unexpectedly. Medicare and Medicaid are designed to cover some of the costs of aging but an extended illness could easily wipe out a lifetime of savings. Long-term care insurance can help to fill the gaps but it’s not necessarily right for everyone. If you’re wondering what long-term care insurance is or whether you should shell out money for this type of policy, here’s what you need to know.

Find out now: How much life insurance do I need?

How Long-Term Care Insurance Works

A traditional health insurance policy covers you against certain events like illness up to a specific limit. You pay the insurance company a premium and in exchange, they cover the cost of your care as specified by your policy. Long-term care insurance is designed to help pay for the costs of custodial and personal care, versus strictly medical care.

The types of things that are covered depend on your policy but they typically include things that don’t fall under the umbrella of traditional health insurance or Medicare. This may include the cost of staying in a nursing home or assisted living facility, adult day care or in-home care. This includes nursing care, physical, occupational or speech therapy and help with day to day activities. When you’re buying a policy, you can tailor it to fit your anticipated needs.

Adding Up the Cost

What Is Long-Term Care Insurance and Do You Need It?

Long-term care insurance tends to be much pricier than other types of insurance, largely because of what it covers and the fact that it’s only offered by select insurers. Typically, when you buy coverage you pay a pre-set premium but you won’t pay anything while you’re receiving care.

The policy pays for whatever services you need on a day-by-day basis for a specific number of years, up to your chosen coverage limit. Coverage typically lasts anywhere from two to six years. If, for example, you purchased a five-year policy with $200 of daily benefits, you’d have a pool of $365,000 in available benefits to draw from. If your costs are below the daily limit, your coverage would last longer.

How much a long-term care policy costs depends on how old you are when you purchase it, what type of policy you get, your overall health and your level of coverage. According to the Department of Health and Human Services, the average annual premium for a long-term care insurance policy is $2,283. On average, these policies pay out a benefit of $150 a day for a period of 4.8 years.

Weighing the Risks

While long-term care insurance can protect you and your loved ones from the financial fallout if you require extended care, there are some potential drawbacks. For instance, if you purchase more coverage than you need there’s no way to recoup the cost of the premiums. There’s also the possibility that your long-term care costs will extend well beyond your coverage limits, which shifts the financial burden back to you and your family members.

Timing is also an issue when purchasing long-term care insurance. The longer you wait to buy a policy, the higher your premiums tend to be, especially if you’ve already developed a serious health condition. If you’re expecting your income to decrease significantly when you retire, affording the premiums may be difficult. In some cases, you may not be able to qualify at all if you’ve been diagnosed with certain illnesses, such as Alzheimer’s Disease or another progressive neurological condition.

Is It a Good Investment?

What Is Long-Term Care Insurance and Do You Need It?

The question of whether or not you should buy long-term care insurance ultimately comes down to your individual financial situation and your overall health. If you have substantial assets, a long-term care policy may safeguard them if extended care becomes necessary. However, the high cost of premiums may make a different solution more appealing.

Purchasing an annuity or taking out a reverse mortgage on your home, for instance, can free up cash to pay for health care costs without draining your nest egg. Placing assets in a trust also allows you to protect your estate for your heirs without impacting your Medicaid eligibility. With the average cost of long-term care insurance ranging from roughly $32,000 to $56,000 annually, it pays to understand all of your options before you commit to a long-term care policy.

Photo credit: flickr/Felbry College, ©iStock.com/Gun2becontinued, ©iStock.com/Yuri_Arcurs

Rebecca Lake Rebecca Lake has been writing about the nuts and bolts of personal finance for nearly a decade. She is an expert in investing, retirement and home buying topics. Her work has been featured on The Huffington Post, Business Insider, CBS News, U.S. News & World Report and Investopedia. As a homeschooling mom of two, she's always looking for ways to make the most of every dollar.
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