The Long Term Care Annuity

Shawn Plummer

CEO, The Annuity Expert

What is a Long Term Care (LTC) annuity? This guide will show you how to reduce your long-term care costs with a long-term care annuity step-by-step. This guide is ideal for retirees wanting to know:

  • How much is long-term care insurance?
  • How much does long-term care cost?
  • How much does assisted living cost, and how to pay for it?
  • How much does a nursing home cost, and how to pay for it?
  • The cost of retirement homes.
  • How to pay for a nursing home.
  • If there’s federal long-term care other than Medicare.
  • If there are alternatives to long-term care insurance.
  • How to buy LTC without the hassle of finding an agent.
  • What happens if you can’t pay for a nursing home.
  • How to pay for nursing home care with social security.

What is a Long Term Care Annuity?

A long-term care annuity is a deferred fixed annuity (hybrid annuity) designed to help pay long-term care costs without destroying retirement savings. The LTC annuity is a form of long-term care insurance that helps pay for a nursing home, assisted living, home healthcare, chronic illness, and terminal illness expenses.

Other long-term care insurance alternatives are annuities with a long-term care rider.

Here is a list of annuities that help pay for long-term care. Use a long-term care annuity calculator to run a quote.

What is Long Term Care Insurance?

Long-term care insurance assists retirees to cover expenses they may need with care at home or in a facility when they cannot perform daily living activities such as bathing, dressing, eating, continence, toileting, and transferring.

70% of people age 65+ will need Long Term Care (September 2008).

– U.S. Department of Health and Human Services.

How Does a Long Term Care Annuity Work?

The base annuity contract is a deferred fixed annuity that offers enhanced care coverage, tax-free. However, there is minimal underwriting (no medical exam) involved, so not everyone can purchase an LTC annuity.

Basically,  these alternatives to traditional long-term care insurance double (200%) or triple (300%) your initial single premium payment (based on medical records) to generate a tax-free long-term care insurance benefit.

Yes, tax-free, thanks to the Pension Protection Act.

Long-Term Care Example: You invest $50,000 in an LTC annuity. The insurance company declares you are standard status, your $50k is worth $100,000 to spend on LTC services and facilities only. The insurance company declares you are preferred status, your $50k is worth $150,000 to spend on LTC services and facilities only.

When you are ready, you will choose the qualified service or facility of your choice. Then, you will be able to access the benefit via a reimbursement over a specified period of time. This means you have to pay for the cost upfront and then have invoices sent to the insurance company. The insurance company then pays you back up to the monthly allowance.

If any of your money is leftover in the annuity policy at death, the beneficiaries will inherit it.

Long Term Care Annuity Benefits

What is Long Term Care?

Long-term care is the care that people require for an extended period of time because of medical, physical, and cognitive conditions caused by an accident, illness, or frailty. LTC is receiving assistance or supervision to perform activities of daily living when these tasks can no longer be performed independently.

Types of Long Term Care

Long-term care may also include professional care services, which will evaluate your current and future needs then coordinate and monitor the delivery of long-term care services along the way. Someone with a physical or mental illness or disability often needs hands-on or stand-by assistance with activities of daily living. For example, people with cognitive impairments usually need supervision, protection, or verbal reminders to do everyday activities.

Today’s long-term care services are changing and expanding but still uses standard terms such as “skilled care” or “personal care.”

Skilled care is needed for medical conditions that require assistance from medical personnel such as registered nurses or professional therapists. Skilled care is usually needed 24 hours a day, a physician must order it, and there must be a plan. Seniors usually get skilled care in a nursing home or an assisted living facility but may also receive it in other places. For example, you might get professional medical care in your home with help from visiting nurses or therapists. This is called Home Health Care. Home Health Care may include physical therapy, caring for a wound, or supervising or administering medication.

Personal care (sometimes called custodial care) helps one with activities of daily living (ADLs.) Personal care is less involved than skilled care, and it may be given in many settings, typically in your home.

A long-term care insurance policy is essential in retirement planning.

Any Long-Term-Care insurance requires an individual not to conduct 2 out of the 6 Activities of Daily Living (ADL) to benefit from the insurance company benefits.

  • Adult Day Care: Adult Day Care is basically a community-based center for elderly adults who need assistance during the day but do not need round-the-clock care.
  • Assisted Living Facility: An assisted living facility is a residential living home (apartment or house) that provides individual care to those who do not perform Activities of Daily Living.
  • Home Health Care Services: Home Health Care offers health-related and homemaker services to seniors at their personal homes.
  • Nursing Home: A nursing home is a qualified facility that provides nursing care to seniors with chronic illness or who can’t exercise Activities of Daily Living.
  • Respite Care: Respite care offers caregivers relief for several hours at a time to break from daily responsibilities.

Who Needs Long Term Care Insurance?

Since the Federal Government is predicted that 7 out of 10 retirees above 65 will need some long-term care in their lifetime, it would be safe to say every senior will need coverage in some shape or form. Luckily there are different alternatives (annuities or life insurance) other than traditional long-term-care insurance. At the very least, the alternatives are not “use it or lose it” types of insurance plans. Since the immediate need for long-term care won’t begin until you start to need help with your day-to-day basic living needs, it’s hard to tell when you actually need to buy long-term care insurance.

70% of people age 65+ will need Long Term Care (September 2008).

– U.S. Department of Health and Human Services.

What I can tell you is that when it gets to that point, it’s already too late. You probably can’t be insured, and this is why a plan for long-term care needs to be taken care of at the start of your retirement, not the middle of the end.

How Much Does Long Term Care Cost?

Nursing Home Costs

In 2020, the national average cost of nursing home care was $93,075 a year for a semi-private room and $105,850 a year for a private room. A semi-private room cost increased by nearly 3.24% from 2019, while a private room increased by almost 2%. This cost does not include therapies and medications, which could make the cost much higher.

Assisted Living Facility Costs

In 2020, assisted living facilities had a median cost of $19,240 a year for adult day health care, and assisted living facilities charged a median cost of $51,600 a year. Adult daycare had a 1.33% decrease in cost from 2019, while assisted living facilities increased by 6.15% from the previous year. As a result, some residents in long-term care facilities may pay a lot more if their care needs are higher.

Home Health Care Costs

Homemaker Services

In 2020, the national median cost for Homemaker Services was $53,768 a year, a 4.44% increase from 2019. Homemaker services are professionals that come into your home and help with day-to-day chores, cook meals, or run errands. Homemaker Services are based on 44 hours per week for 52 weeks.

Home Health Care Services

In 2020, the national median cost for Home Health Care services was $54,912 a year, a 4.35% increase from 2019. Home Health Aide offers more extensive personal care (bathing, dressing, transferring) than Homemaker Services in terms of personal care. Home Health Aide cost is based on 44 hours per week for 52 weeks.

In-Home Care – Skilled Nursing

In 2019, the national median cost for In-home Skilled Nursing Care was $87.50 per visit. Skilled nursing is licensed health care that sends a registered nurse into your home and supplies personal care, intravenous medications, injections, caring for wounds, etc., on a visit-by-visit basis.

Who Pays for Long Term Care?

You pay for long-term care using personal resources, long-term care insurance, long-term care insurance alternatives, and some assistance from Medicaid for those who qualify. However, Medicare, Medicare supplement insurance, and regular health insurance (medical insurance) typically will not pay for long-term care assistance nor facilities.

Personal Resources

Typically long-term care expenses are out-of-pocket costs such as personal savings accounts, investments, retirement plans. Because of the expensive cost, some people sell their homes and assets to pay for their long-term care needs.

Related Reading: Washington State Long-Term Care Tax

Medicare

Does Medicare pay for a nursing home, home health care, or assisted living? Original Medicare doesn’t cover long-term care or custodial care.

Medicare Part A covers skilled nursing facilities in certain conditions. The skilled nursing facility care (SNF) benefit only covers you if a physician says you need daily skilled care after being in the hospital for at least 3 days. You are receiving that care in a nursing home that is a Medicare-certified skilled nursing facility.

While Medicare Part A may pay for nursing home care in some scenarios, the benefit doesn’t cover care costs in assisted living facilities. In addition, Medicare does not cover home health care, including homemaker services, home health aides, and in-home skilled nursing care.

Medigap (Medicare Supplement Insurance)

Medicare supplement insurance or Medigap is private insurance that helps pay for Medicare coverage gaps, such as hospital deductibles and excess physician charges above what Medicare approves. In addition, Medicare supplement policies do not cover long-term care costs but may pay for services to people recovering at home from an illness, injury, or surgery.

Medigap does not cover assisted living facilities, Alzheimer’s Disease, custodial or personal care, or adult daycare. Therefore, you must qualify for Medicare-covered home health services before this Medicare supplement insurance benefit is available.

Medicaid

Medicaid is a government-funded program that pays nursing home care only for destitute individuals. Medicaid pays for almost 50% of all nursing home care on an aggregate basis. However, people who need federal long-term care rarely qualify for Medicaid benefits.

To utilize Medicaid assistance, you must meet federal and state guidelines for income and assets. Basically, many seniors start paying for nursing home care out of pocket and “spend down” their income until they are eligible for Medicaid. The elderly have to become legally poor to take advantage of the Medicaid program.

How to avoid a nursing home taking your house.

Some of the elderly’s assets, such as a home and income, can be protected for a spouse (Medicaid Annuity) who remains at home.

Long-Term Care Insurance

Traditional long-term-care insurance is one other way you may pay for long-term care and comes in many forms. Long-term care annuities are just one way to pay or reimburse you for some or all of your long-term care costs.

Annuities

Annuities offer a hybrid policy called long-term care annuity, which is explained in this guide. Some annuities also offer contract waivers and optional riders that can be added to help with the cost of long-term care. Whatever value in the annuity contract is not used will be passed down to beneficiaries in a lump sum.

Life Insurance

Some permanent life insurance policies can be used as hybrid long-term care insurance. For example, the life insurance policy (Whole Life Insurance or Universal Life Insurance) offers riders and provisions called Living Benefits or Accelerated Death Benefits that will allow you, the insured, to access your death benefit while alive to pay for long-term care needs. If the life insurance policy has any death benefit (face value) left, the remainder will be passed down to your beneficiaries.

Underwriting Requirements

Whether you purchase a traditional policy or an LTC annuity, there will be some medical underwriting involved. The first step is requesting a long-term care insurance quote, fill out an application, and submit to the best long-term care insurance company for underwriting. With LTC annuities, the medical underwriting consists of a phone interview and a medical background check. With traditional policies, medical underwriting can be extensive, similar to applying for life insurance.

Below are some requirements insurance companies look for when a long-term care application is submitted.

Activities of Daily Living

Activities of Daily Living (ADL) are the primary requirement to trigger long-term care insurance benefits. Most insurance companies want a person to not meet at least 2 out of the 6 Activities of Daily Living: bathing, continence, dressing, eating, toileting, and transferring.

Cognitive Impairment

Most long-term care insurance policies cover “cognitive impairment.” The policy usually pays benefits if you cannot pass certain tests of cognitive function. Coverage of cognitive impairment is essential if you develop Alzheimer’s disease or other dementia. If being unable to do ADLs is the only benefit trigger your policy uses, it may not pay benefits if you have Alzheimer’s disease but can still do most of the ADLs on your own. On the other hand, if your policy tests your cognitive ability as a benefit requirement, it is likely to pay long-term care benefits if you have Alzheimer’s disease.

Doctor Certification

Some long-term care insurance requires a recommendation from a doctor that long-term care is medically necessary.

Elimination Periods

Most long-term care insurance policies won’t allow you to start the benefits on the first day you go to a nursing home or start using home care. This is because most policies have an obstacle called an elimination period (deductible or a waiting period).

The elimination period means benefits can start from 0 days to 30+ days after you start using the long-term care facility/service or become disabled. Elimination periods for each type of care may be different from another.

Sometimes there might be a single-elimination period. The elimination period will determine how many days you have to wait before benefits start. Be sure to review your policy carefully.

Some elimination periods allow you to accumulate non-consecutive days, and some policies require consecutive days. If you find a policy with a zero-day elimination period, it might cost you more, but it will set you up in a good position when you are ready to exercise the benefits.

During the elimination period, your policy will not pay the cost of long-term care services or facilities.

Medical expenses could be out of pocket during the elimination period. Elimination periods are determined by calendar days, while other policies use days of covered service to determine an elimination period. Make sure you know how the policy defines the elimination period.

Calendar Days

Every day of the week would count in determining the elimination period regardless of whether you received any services on those days.

Days of Service

Only days when you receive the actual services will count toward the elimination period, which means the benefits can take longer to activate if you only use the services part-time. That means more out-of-pocket medical expenses are accrued.

Single Elimination Periods

Some policies allow a one-time elimination period for you to get through, and benefits are eligible at your disposal for the remainder of your life.

 Long-Term Care Insurance Interview Questions

Typical qualifying questions would include:

Are you currently hospitalized, confined to a bed, or residing in an Assisted Living Facility?

In the past 12 months, have you applied for any long-term care insurance policy or long-term care rider that was declined or postponed?

Are you currently using, or in the past 12 months have you used or been medically advised by a Health Care Professional to use any of the following:

  • Medical Care in a Nursing Facility
  • Home Health Care
  • Adult Day Care
  • A Walker,
  • Wheelchair
  • A Cane,
  • Motorized Scooter
  • Hospital bed
  • Stair Lift
  • Oxygen
  • Dialysis machine
  • Hospice Care

Do you require assistance or supervision in performing any of the following activities including:

  • Taking medication
  • Bathing, dressing
  • Getting in and out of a chair or bed
  • Eating, toileting
  • Managing your bowel or bladder
  • Walking

In the last 7 years, have you had, been diagnosed or treated by a Health Care Professional, been prescribed or taken medication for any of the following:

  • Alzheimer’s disease or dementia
  • Recurrent memory loss
  • Mild cognitive impairment (MCI)
  • Organic brain syndrome
  • Mental incapacity or retardation
  • Multiple sclerosis
  • Parkinson’s disease
  • Paralysis
  • Organ transplant other than cornea or kidney
  • Spinal Stenosis or Chronic back pain with narcotic medication
  • Autoimmune disorder/disease such as Systemic Lupus
  • Systemic Scleroderma
  • CREST syndrome
  • Connective Tissue Disease
  • Mixed Connective Tissue Disease
  • Muscular dystrophy
  • Lou Gehrig’s disease (ALS)
  • Huntington’s disease
  • Hepatitis
  • Cirrhosis
  • Smoking in conjunction with Emphysema
  • COPD
  • Stroke
  • Multiple Transient Ischemic Attach (TIA)

In the last 12 months, have you had, been diagnosed or treated by a Health Care Professional or been prescribed or taken medication for any of the following:

  • Aneurysm
  • Heart bypass surgery
  • Heart valve replacement
  • Vascular surgery
  • Been hospitalized overnight 2 or more times
  • Had any fall resulting in a fracture
  • Had a seizure or convulsion
  • Had multiple falls, Tremors
  • Congestive heart failure
  • Cardiomyopathy

In the last 5 years, have you had been diagnosed or treated by a Health Care Professional or been prescribed or taken medication for any of the following:

In the last 7 years, have you had been diagnosed or treated by a Health Care Professional or been prescribed or taken medication for any of the following:

  • TIA with a history of heart disease
  • Diabetes currently treated with insulin
  • Rheumatoid arthritis with joint deformity
  • Rheumatoid arthritis with joint replacement
  • Kidney or cornea transplant
  • Myasthenia gravis
  • Diabetes with a history of TIA
  • Stroke
  • Neuropathy
  • Kidney disease
  • Peripheral vascular disease or congestive heart failure
  • Rheumatoid arthritis requiring the use of narcotic medication
  • Bipolar disorder
  • Schizophrenia or other psychosis
  • Chronic kidney failure

Have you been medically advised by a Health Care Professional to have any surgery, non-routine diagnostic test, or medical evaluation that has not yet been completed?

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Conclusion

Whether you should buy a traditional long-term care insurance policy or long-term care insurance annuity will depend on your age, health status, overall retirement goals, income, and assets. With that said, if you have assets for retirement planning, you may want to buy long-term care insurance sooner than later since there is roughly a 70% chance of needing long-term care in the future.

Many seniors buy a policy because they want to stay financially independent of government aid, or they don’t want to burden anyone, such as family members, to care for them in the future.

Not everyone should purchase a traditional long-term care insurance policy.

You should not buy a long-term care insurance policy or long-term care annuity if you cannot afford the insurance premium or aren’t sure you can pay the premium for the rest of your life. On the other hand, if you’re living on a fixed income from primarily Social Security Benefits, Medicaid might be the way to go.

If you currently have serious health problems such as Alzheimer’s disease or Parkinson’s disease, you probably won’t be able to buy a policy. Insurance companies have medical underwriting guidelines and procedures to keep the cost of long-term care insurance coverage affordable. Without these guidelines and procedures, most people would not buy coverage until they actually needed long-term care services.

Frequently Asked Questions

Does Medicare cover long term care?

Original Medicare doesn’t cover long-term care. However, Medicare Part A covers skilled nursing facilities if a physician says the patient needs daily skilled care after having been in the hospital for at least 3 days and are receiving that care in a nursing home that is a Medicare-certified skilled nursing facility.

What is the key determinant of the need for long term care?

A person who can not perform 2 out of 6 daily living activities (ADLs) such as bathing, dressing, eating, continence, toileting, and transferring is the key determinant of needing long-term care.

How much does long term care insurance cost?

Long-term care insurance costs are determined by the insured’s gender, age, daily maximum benefit, length of coverage, and coverage based on an individual or a couple.  The annual cost can range from $350 on the low end to $9,000 on the high end.

Shawn Plummer

CEO, The Annuity Expert

I’ve sold annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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