- Introduction
- A brief history of long-term care insurance
- How much does health care cost in retirement?
- What long-term care insurance covers
- Costs and types of long-term care insurance policies
- The bottom line
Long-term care insurance: Costs, coverage, and policy types
- Introduction
- A brief history of long-term care insurance
- How much does health care cost in retirement?
- What long-term care insurance covers
- Costs and types of long-term care insurance policies
- The bottom line
Paying for costly health care in retirement can add financial stress when you least expect it. Although Medicare covers many health needs, individuals who need assistance with daily living due to aging, a chronic illness, or disability may require additional care. Long-term care insurance is designed to cover such needs.
The U.S. Department of Health and Human Services estimates that someone turning 65 today has nearly a 70% chance of needing some type of long-term care and support in old age. Women typically need care longer than men because women live longer on average and are more likely to be single or widowed in later years.
Key Points
- Long-term care insurance policies cover what Medicare and private health care don’t pay.
- These policies can be expensive, and premiums vary based on age, health, and coverage choices.
- Hybrid policies allow some flexibility, but coverage varies, making it essential to read the fine print.
Many seniors will need some form of care not covered by Medicare, yet long-term care insurance remains a tough sell. One reason is cost—these policies can be expensive. What’s more, traditional long-term care policies are typically “use it or lose it,” which makes many buyers hesitant to pay premiums for coverage they may never need. Still, with medical costs rising, long-term care insurance can safeguard your assets should you require long-term care.
A brief history of long-term care insurance
Long-term care insurance policies first became available in the late 1970s and early 1980s to address the financial challenges of paying for extended care. Initially, they were designed to help seniors pay for long-term nursing home care. At the time, these policies had limited benefits, and most consumers who bought these plans did so to protect their financial assets.
By the 1990s and early 2000s, the policies expanded to offer coverage in other settings, including assisted-living facilities and at-home care, and included options such as inflation riders. By the 2010s, the long-term care insurance market was struggling. Insurers lost money, having underestimated coverage costs while overestimating how much they would earn on the financial reserves they held to pay claims. That led to significant rate increases on policyholders and caused some insurers to stop writing new policies. Even with higher premium rates, several insurance companies faced significant financial challenges that threatened their viability and policyholders’ future benefits.
Since then, the National Association of Insurance Commissioners (an organization created by state insurance regulators) and the long-term care insurance industry have worked to review rate increases, ensure insurers have enough financial reserves to pay claims, and develop new products.
How much does health care cost in retirement?
No one has a crystal ball to see whether they might need skilled nursing help in their old age, which makes it tough to decide if you need to buy long-term care insurance. But what’s clear is that health care costs in retirement can be expensive. Consider these statistics:
- The average 65-year-old spends $157,500 on health care throughout retirement, according to Fidelity Investments’ annual Retiree Health Care Cost Estimate survey from 2023.
According to insurer Genworth Financial:
- The monthly median cost of care in 2023 for an at-home health aide was $6,292, while a semiprivate room in a nursing home was $8,669.
- Among adults turning 65 today, 70% will need some sort of long-term care.
- The average care for any service is three years.
- On average, women need care for 3.7 years, while men need care for 2.2 years.
- Of those who need long-term care support, 20% will need it for more than five years.
What long-term care insurance covers
What Medicare covers (and doesn’t) for long-term care
Many beneficiaries assume Medicare offers extended care, but its coverage is limited. Because Medicare doesn’t provide comprehensive long-term care coverage, many seniors turn to long-term care insurance, Medicaid, personal savings, or family support to cover these expenses.
Medicare covers:
- Skilled nursing care for up to 100 days during each hospital stay and recovery period. Coverage resets after 60 days without inpatient or skilled care (known as a benefit period). Most patients use far fewer days on average—just 22.
- Short-term home health care, such as skilled nursing or physical therapy, but only under strict eligibility rules.
- Hospice care for terminally ill patients.
Medicare doesn’t cover:
- Custodial care (help with daily activities like bathing or dressing).
- Long-term nursing home stays beyond the short-term skilled nursing care benefit.
- Assisted living facility costs or nonmedical home care.
Older adults who need long-term care often need assistance with daily personal tasks, often referred to as activities of daily living (ADL). These activities include bathing, dressing, using the toilet, moving to and from a bed or a chair, caring for incontinence, and eating.
Long-term care services may cover other basic daily functions known as instrumental activities of daily life (IADL) and include tasks such as housework, managing money, and taking medications.
Many consumers assume Medicare covers extended care, but in fact, coverage is limited. It pays only for a short period of skilled nursing care under specific conditions, and does not cover custodial care or long-term nursing home stays. As a result, many seniors must pay out of pocket for most long-term care services unless they qualify for Medicaid.
Medicaid covers the largest share of long-term care services, but eligibility is strict. Income limits vary by state; your total assets cannot exceed $2,000. You must also meet certain minimum state eligibility requirements.
Costs and types of long-term care insurance policies
The cost of a long-term care insurance premium varies widely and is based on several factors, including your age when buying a policy, your health status, where you live, and what you want the policy to cover. Premiums are cheaper the younger you are when you buy a policy.
A single 55-year-old purchasing coverage with a $150 daily benefit and a three-year benefit period paid an average of $1,720 in 2023, according to the American Association for Long-Term Care Insurance, which publishes an annual price index. Premiums ranged from $1,428 to $2,552.
A perennial concern among many policy buyers was purchasing a plan and never using it, resulting in premiums totaling $100,000 or more over several decades with no payout.
To address that concern, long-term care insurance policies have evolved to allow more flexibility, with two main types: traditional stand-alone and newer hybrid policies.
| Key differences | Traditional stand-alone policy | Hybrid policy |
|---|---|---|
| How you pay | Annual or monthly premiums | Lump sum or installments over time |
| Payout | Pays only for long-term care | Pays for long-term care or provides a life insurance benefit |
| Unused benefits | No refund if care isn’t needed | Remaining benefits can go to your heirs |
| Payment flexibility | Insurers can raise rates | Premiums are typically fixed |
| Customization | Can add inflation protection and other riders | Limited customization options |
| Cost comparison | Usually lower up-front costs | Higher overall cost but includes life insurance |
Stand-alone policies work much like auto or homeowner’s insurance—you pay annual premiums for coverage and file claims as needed. These policies are often cheaper than hybrid options and may allow you to purchase additional coverage over time. Insurers can adjust premiums and benefits, and if you never use the policy, you won’t receive a payout or be able to leave any benefits to your heirs.
Hybrid policies allow buyers to pay premiums either as a lump sum or over time. Unlike stand-alone policies, they include a life insurance benefit—if you don’t use the coverage or only use part of it, the remaining value can be left as an inheritance. Coverage details and payout structures vary widely, making it important to review the policy terms carefully.
The bottom line
Long-term care policies are expensive and complex, but they can help to cover medical costs as you age. Another option is to self-insure—that is, set aside part of your investment portfolio to cover potential long-term care costs instead of buying a policy. If you end up not needing long-term care, that money remains available for other uses in your estate. Self-insuring may also be an option if you have someone you can trust to manage your finances and arrange for care if needed.