Long-Term Care Deep Dive - Part 3: Long-Term Care Insurance
In Part 1, we explored the likelihood of needing care and its impact on spouses and families. In Part 2, we mapped out how care is funded — through personal savings, government programs, and private resources.
Part 3 focuses on the most misunderstood component of the conversation: long-term care insurance (LTCI) — what it is, how it works, and how to evaluate whether transferring risk makes sense in your situation.
Insurance is not a default solution. It is a strategic decision.
Why This Topic Is Personal for Me
Looking back on my early career, one of the most meaningful planning conversations I ever had wasn’t about my own finances — it was encouraging my parents to secure theirs.
Fresh out of college, juggling student loans, raising children, and saving for retirement, I could barely imagine funding long-term care for someone else. My parents were active, healthy, and enjoying retirement. On the surface, it seemed like they had enough money to handle anything that might arise.
At the time, long-term care insurance felt distant — maybe even unnecessary.
But as I completed my CFP® coursework and began thinking more deeply about catastrophic risk in a financial plan, I realized something sobering: if either of my parents needed extended care, I could not absorb that cost. And even their savings, while meaningful, were not immune to a multi-year care event.
After thoughtful conversations and guidance from a trusted advisor, they ultimately purchased a joint long-term care policy. It wasn’t an easy decision. Like many families, they wondered: What if we never use it?
Life, of course, had its own timeline. My mother passed away unexpectedly at 67. Years later, my father suffered multiple strokes and eventually required assistance with bathing, dressing, and eating.
That policy they once questioned became our lifeline.
It covered nearly five and a half years of care for my father — paying out more than $450,000. Without it, the financial and emotional strain would have been significantly greater. Instead of scrambling to fund care, we were able to focus on his dignity and comfort.
That experience didn’t make me believe everyone must buy insurance. It did, however, reinforce one truth: you must know how you will fund long-term care if it happens.
Insurance is one way to do that.
What Long-Term Care Insurance Actually Covers
In exchange for premium payments, a traditional LTCI policy pays a selected dollar amount per day (or per month) for skilled, intermediate, or custodial care in nursing homes and, in many cases, home health or alternative care settings….
This distinction matters.
Medicare does not pay for custodial care — assistance with bathing, dressing, eating, or supervision for cognitive decline. LTCI policies are designed specifically to cover those services.
Most modern policies will pay benefits when:
- You are unable to perform at least two activities of daily living (ADLs), or
- You suffer a qualifying cognitive impairment What-Issues-Should-I-Consider-W…
There are six general ADLs (bathing, dressing, eating, transferring, toileting, continence), and needing assistance with two typically triggers benefits under most policies.
The Three Primary Types of Coverage
Industry sources, including NCOA and AARP, generally describe three broad types of long-term care coverage:
1. Traditional Long-Term Care Insurance
This is the stand-alone policy most people think of. You pay ongoing premiums, and if you need care, the policy pays benefits up to the daily limit and benefit period selected.
Key design elements include:
- Daily or monthly benefit amount (commonly $50–$350 per day)
- Benefit period (2–6 years, sometimes lifetime)
- Elimination period (waiting period before benefits begin)
- Inflation protection riders
Traditional policies are generally less expensive than hybrid policies but carry premium increase risk over time.
2. Hybrid or Linked-Benefit Policies
These combine life insurance or an annuity with long-term care benefits. If care is needed, the policy accelerates part of the death benefit (or annuity value) to pay for long-term care. If care is not needed, beneficiaries receive a death benefit.
The fpPathfinder planning checklist specifically highlights linked-benefit life insurance and annuity riders as alternatives to traditional LTCI.
Hybrids are often funded with a lump sum or limited premium schedule and are attractive to those concerned about “using it or losing it.” However, they typically require higher upfront capital compared to traditional policies.
3. Employer or Group Coverage
Some employers offer group LTC insurance, sometimes with simplified underwriting. Portability and premium stability should be evaluated carefully.
Evaluating Policy Design: What Actually Matters
Long-term care policies are not standardized. Comparing policies requires reviewing both the issuing company and the policy provisions.
Financial Strength of the Carrier
Because long-term care insurance is often a decades-long commitment, the financial strength of the issuing company is a critical consideration. I recommend reviewing independent insurer ratings — such as those issued by A.M. Best — and generally selecting carriers rated A or higher to help assess long-term claims-paying reliability.
Claims-paying ability decades from now is not trivial.
Inflation Protection
The cost of care rises over time. An inflation rider increases the benefit amount annually — often 5% simple or 5% compounded.
Compound inflation riders can significantly increase premiums, sometimes more than doubling cost over time. The younger you are at purchase, the more critical inflation protection becomes. My Dad's care costs rose on average 5% each year.
Benefit Period and Coordination with Medicaid
Benefit periods typically range from two to six years, with lifetime options available.
In some instances, we coordinate the benefit period with Medicaid’s five-year look-back period, particularly in states with Long-Term Care Partnership Programs authorized under the Deficit Reduction Act of 2005.
Partnership-qualified policies allow policyholders to protect assets equal to the benefits paid out, potentially qualifying for Medicaid without fully spending down assets.
Tax Considerations
Qualified LTC policies receive favorable tax treatment.
Premiums for tax-qualified policies may be deductible as medical expenses (subject to age-based caps and the 7.5% AGI threshold).
Benefits paid under qualified reimbursement policies are generally income tax-free. Indemnity benefits are tax-free up to the IRS per diem limit - currently $430 per day.
Non-qualified policies may not receive the same tax treatment.
Tradeoffs and Risks
Long-term care insurance is not without tradeoffs.
Premiums for traditional policies can be substantial and may increase over time. Medical underwriting varies by insurer, and certain pre-existing conditions can disqualify applicants.
There is also utilization risk: you may pay premiums for years and never need care.
But the risk it addresses — a multi-year, high-cost care event — is also asymmetric. A single extended health event can materially alter a retirement plan.
Insurance shifts that tail risk.
When Does LTC Insurance Make Sense?
Insurance is typically most appropriate when:
- You have assets to protect but not enough to comfortably self-fund a multi-year care event.
- You wish to preserve stability for a surviving spouse.
- You are healthy enough to qualify at reasonable premiums.
- You value predictability over full self-insurance.
Conversely, individuals with very modest assets may ultimately rely on Medicaid, and individuals with very substantial assets may choose to self-fund.
The middle — where many families reside — is where analysis matters most.
Beyond the Policy: The Role of a Geriatric Care Manager
One of the most overlooked aspects of long-term care planning isn’t financial — it’s logistical.
When my father needed care, the insurance policy helped fund it. But coordinating that care — evaluating facilities, hiring aides, managing transitions, communicating with providers — was its own full-time responsibility.
This is where a geriatric care manager can be invaluable.
A geriatric care manager (sometimes called an aging life care professional) is typically a nurse, social worker, or licensed professional who specializes in assessing needs, coordinating services, and advocating for older adults and their families. They can:
- Conduct care assessments
- Recommend appropriate providers or facilities
- Coordinate home health services
- Oversee care transitions
- Serve as a local advocate for out-of-town family members
- Help navigate insurance and care planning decisions
In many cases, long-term care insurance policies will reimburse for care coordination services if they are part of a covered care plan, though policy language should be reviewed carefully.
For adult children balancing careers and caregiving — or for spouses trying to manage overwhelming medical decisions — a geriatric care manager can reduce stress and improve outcomes.
Insurance funds the care. A care manager helps ensure the care is appropriate and coordinated.
Both can preserve not just financial stability, but emotional bandwidth.
The Bigger Strategic Question
Long-term care insurance is not about eliminating risk. It is about deciding how much risk to carry and how much to transfer.
For married couples, the question often becomes:
If one of us needs care for several years, how do we protect the other?
Insurance can serve as:
- Asset protection
- Income stabilization
- A Medicaid coordination tool
- Or simply peace of mind
But it must be integrated into the broader retirement, tax, and estate planning strategy.
Long-term care is not just a health issue. It is a liquidity issue, a longevity issue, and often a legacy issue.
Planning intentionally — rather than reactively — is what preserves options.
Sources:
- National Council on Aging (NCOA)
- AARP
- Broadridge Investor Communication Solutions
