With life expectancy on the rise, retirees face the risk of outliving their money. During the later years, covering costs for custodial care can be astronomical. Since these costs are not covered by health insurance and Medicare, a sound financial plan should include long-term care planning.

Long-term care insurance provides funds for custodial care in various forms, including home health care, nursing home care, adult day care, home modifications for medical necessities, hospice care, and consultation for selecting appropriate providers.  Many people assume that Medicare or a Medicare supplement policy pays for such expenses.  However, benefits under Medicare are very limited and only provide skilled medical care.

The basic features of the long-term care policy include the following:

Elimination Period
The elimination period functions like an insurance deductible, during which time the insured pays for medical expenses.  The length of the elimination period can range from zero to 180 days and is determined at the time of the application. Increasing the elimination period lengthens the time of self-insurance and reduces the cost of the premium.  For example, with a 90-day waiting period, the insured would begin receiving the benefit 90 days from the time that she became eligible. A person qualifies for long-term care when she cannot perform two of common daily tasks (eating, toileting, dressing, continence, bathing, mobility) and completes the review by a medical specialist.

Daily Benefit Amount
:  The long-term care benefit is calculated daily, ranging from $50 to $500 per day. The average long-term care costs in one’s geographical region provide a reasonable estimate for determining appropriate levels of coverage.  Some policies offer a monthly benefit to offset the problem of expenses exceeding the daily limit. The monthly benefit reimburses the insured a specific amount, regardless of how many days care was received. The pool of money may extend beyond the benefit period and is available until fully depleted. Policies offer the benefit as a cash indemnity or as a reimbursement of actual expenses.  While a reimbursement policy requires verification of medical bills and only covers the actual expenses, the cash indemnity benefit provides a monthly sum that can be used for any purpose.  Keep in mind, however, that that the cash indemnity benefit is more expensive and may not be provided by every insurance company.  A cost-effective option is to choose the monthly benefit (instead of the daily benefit) that is paid on a reimbursement basis.

Home Health Care Benefit
:  This provides health and support services through nurses, home health care aides, and paid caregivers.  Individuals may choose the amount of their home health care benefit based upon a percentage of their institutional care benefit. Decreasing the Home Health Care coverage reduces the premium cost. However, the U.S. Department of Health & Human Services indicates that individuals employ home care for longer periods than in facilities. In addition, most people prefer to stay at home as long as possible. Consequently, individuals should consider retaining the entire coverage (100 percent) for their Home Health Care Benefit.

Institutional Care Benefit
:  This covers adult day health care, assisted living facilities, and nursing home care.  The inflation rider increases the benefit over time to keep up with inflation. Typically, policies offer 3 percent compounded, 5 percent compounded, and 5 percent simple interest.  Given the rise in institutional care costs, an inflation rider is advisable.

Some policies offer a return of premium up to a certain age. Others offer a cash reimbursement if the benefit was not received, although this rider is very expensive.

Length of Benefit Period:  Individuals 65 and older have approximately a 70 percent chance of needing some type of custodial care over a period of three years or less. The costs of long-term care can easily derail retirement if not planned for carefully. For example, in 2015 home health aides make on average $45,760 a year (based upon 44 hours per week), and a private room in a nursing home costs approximately $91,250.

Long-term care policies provide a lifetime benefit or a specified benefit period from two to five years. Given current statistics, a three-year benefit period provides a reasonable amount of coverage.

Options for Couples
:  When couples purchase long-term care, they have two options. First, each spouse owns a separate policy. If one spouse exhausts their maximum benefit, he or she can access the other spouse’s benefit. Any remaining benefit transfers to the remaining spouse at death, who continues to pay for his or her single premium policy. The second option allows spouses to purchase a joint policy. Both policies are combined into a single pool of benefits. If one spouse dies, the other retains all of the remaining benefit, but is only responsible to pay the single premium.  Most policies offer a spousal discount.  Insurance companies may also reduce premiums due to good health.

Qualified Long-Term Care Partnership Program
:  As a federal program, Medicaid assists low-income families in covering necessary medical expenses. Families that qualify can only own a limited amount of assets.  To offset the federal government’s obligation to cover long-term care expenses, the Partnership Program, administered at the state level, allows individuals to retain assets equal to a dollar-for-dollar amount of long-term care coverage. For example, purchasing a partnership policy with a $100,000 benefit would allow one to retain $100,000 in assets.  After assets are depleted, individuals may still qualify for Medicaid.

Families must carefully consider how long-term care costs would impact their financial plan. A CFP® professional can help you determine whether purchasing long-term care insurance can bolster your financial security.