Most Americans will need long-term care. Unfortunately, it’s extremely expensive and can deplete your finances quickly if you aren’t prepared to pay for it.
Many people get long-term care insurance (LTCI) to cover the costs. You may have also heard about term life insurance (TLI). What’s the difference?
What is long-term care insurance?
LTCI covers the costs of long-term care, such as custodial care, at-home care, or a nursing home. It covers care expenses that traditional health insurance doesn’t cover.
Who needs long-term care insurance? Typically, individuals in their 50s and 60s buy LTCI, and most policyholders are middle class — they have too many assets to qualify for long-term care coverage under Medicaid and not enough assets to self pay.
LTCI can protect retirement nest eggs and other savings from expensive long-term care costs — a private room at a nursing home can cost up to $253 per day.
LTCI relieves family and friends from the burden of a loved one’s long-term care. Also, LTCIs let loved ones decide where they receive care.
Finally, under federal and state tax codes, LTCI policyholders can count part of their LTCI premiums as tax-deductible medical expenses.
LTCI premiums are expensive, and they get more expensive the older you get.
A few years ago, on average, Americans each paid more than $2,700 per year for LTCI coverage, according to industry research firm, LifePlans. And women have to pay more since they typically live longer than men.
You have to qualify for LTCI coverage. To start, if you’re in your late 60s or older when you want to buy, insurers may decline your coverage.
Also, they may decline your coverage if you have preexisting health conditions — if they don’t decline your coverage, they almost certainly will raise your premiums.
Another downside to LTCI is the elimination period — your insurer won’t start paying for your care right away; you have to cover care costs during the elimination period, usually 90 days.
What is term life insurance?
TLI pays a death benefit to a beneficiary after the death of the policyholder within a specified term. If the term expires before the policyholder’s death, the policyholder may renew the term or turn it into permanent coverage.
TLI is very different from LTCI. In fact, you, as policyholder, cannot use TLI to pay for your own long-term care — you can only pay for the long-term care of a beneficiary through a death benefit after you die.
Most policyholders make their spouses the beneficiary (you can make anyone a beneficiary, even your estate or a trust), making TLI an attractive option for policyholders to pay for their surviving spouses’ long-term care.
Term life policies are markedly cheaper than LTCI policies. Premiums are fixed during each specified policy term. So premiums for a 20-year policy, for example, will stay the same throughout the 20-year term.
Additionally, the federal government doesn’t claim income tax on death benefits (though they may be subject to estate taxes). And TLIs are the better choice than permanent coverage if you have temporary insurance needs.
On each subsequent term, premiums go up. Another disadvantage to TLIs is that they don’t see cash growth, unlike cash value life insurance policies, which put part of your premiums into an investment account to grow.
The bottom line
When we compare long-term care insurance versus term insurance, we compare two completely different types of insurance that can both pay for long-term care. LTCI is designed to help policyholders pay for their own long-term care or that of loved ones, making it the popular choice. Click here to learn more about financial planning for long-term care.