Long-Term Care Insurance: A Brief History And Different Types Explained
By Todd Youngdahl, CFP®
According to the U.S. Department of Health and Human Services, “long-term care (LTC) insurance is designed to cover long-term services and supports, including personal and custodial care in a variety of settings such as your home, a community organization, or other facility.” (1) Essentially, this type of insurance policy was created to help cover expenses that you might expect to have when you reach 65 or older. Such expenses, for example, include costs of a nursing home, assisted living, or in-home care which all “help with basic personal tasks of everyday life, sometimes called activities of daily living." (2) Because these expenses are not covered by Medicare, LTC insurance can be very important for some. In addition, this type of insurance can help protect family members and heirs from bearing all the costs of long-term care for their loved ones. Before we explain the different types of LTC insurance, let’s go into a brief history of this kind of policy.
A Brief History
LTC insurance was brought to the marketplace in the 1970’s, but did not catch much traction until the late 1980’s and early 1990’s. This slow adoption was partly due to a lack of insurers actually offering this type of insurance, but also for the fact that for most people, the ideas of adult day care and at-home care were still very foreign. It wasn’t until the 1980’s when assisted living communities started to grow, that LTC insurance began to start growing in awareness. With nursing homes already very common, and now with the growth of assisted living communities, there was a need for long-term care. These facilities would eventually start offering varied levels of care, which would increase costs.
The tough part for most, was that their traditional health insurance did not cover living at nursing homes or assisted living communities. Before LTC Insurance became popular and appropriately offered, some people would sell their homes just to be able to pay for long-term care.
Eventually, LTC insurance would become widely popular by the early 1990’s. However, some problems would arise with the insurers. Insurers would make a mistake on how many policyholders they thought would continue to pay premiums and make claims. That fact, along with low interest rates, caused insurers to drastically increase prices for consumers, or even get out of the business of LTC insurance. In the early 2000’s, more than a hundred companies sold LTC policies. Today, that number is down to about a dozen. Even though there has been some ups and downs with LTC insurance and premiums have become more expensive, that should not downplay the potential need of this policy for some of the population.
“Researchers estimate that more than half of today’s 65-year-olds will require long-term care at some point, at an average total cost of $138,000. Most will need help for less than two years. But one in seven Americans turning 65 today will face more than five years of disability, with potentially dire financial consequences.” (3) Because of those statistics, it is worth learning more about the different types of LTC insurance policies.
Types of LTC Insurance Policies
Traditional or Combination Policies
If taken in the context of “policies”, there are essentially two types of LTC insurance policies. The first type of policy offered is considered “traditional”. This policy has premiums that are paid on a continual basis, and if the benefits are unused, no premium is returned. However, a traditional policy could have a return of premium rider, which would pay the beneficiary a death benefit if the insured dies at a time when benefits received under the policy are less than the premiums paid to the insurer. The second type of policy within this context is commonly referred to as a combination or hybrid policy. These policies are essentially a combination of LTC insurance with either life insurance or an annuity.
Tax Qualified or Non-Tax Qualified Policies
If taken in the context of “tax”, we can think of there being two types of LTC insurance policies: Tax qualified (TQ) or Non-tax qualified (NTQ). For a long-term care insurance policy to be considered TQ, it would require that the person either 1) “be expected to require care for at least 90 days, and be unable to perform two or more activities of daily living without substantial assistance”; or 2) for “at least 90 days, need substantial assistance due to a severe cognitive impairment." (4) For the NTQ type, it is often triggered by what is called a “medical necessity” trigger. What this means is that the patients doctor can state that the patient needs care for any medical reason and the policy will pay. However, the downside with these NTQ policies, is that individuals that receive benefits under a NTQ risk the possibility of a hefty tax bill.
We’re Here To Help
While we can never predict the future, LTC insurance can help you afford quality care and reduce potential stress that a long-term care event causes for families. If you’d like to learn more and discuss this topic further, please do not hesitate to reach out to us. You can always call our office at 703.584.2700, email us at email@example.com, or Schedule a meeting with Todd.
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