What is long-term care insurance?

I think long term care insurance removes a lot of the emotional baggage that comes with financial worry. You establish the policy, pay into it, and it's there for you and your family when you need it the most. I was diagnosed with early onset, early-stage Alzheimer's almost two years ago now. I want to give my family financial security. I want to give them peace of mind, and I want to live the best life that I can for as long as I can. [MUSIC PLAYING] Millions of people will need some kind of long-term care as they age, and it can be expensive. So today we're talking about long term care insurance. Who qualifies, what does it cover, and how much does it cost? This is Money Unscripted, Fidelity's personal finance podcast. I'm Ally Donnelly. Joining me is Stefne Lynch, VP at Fidelity Insurance Agency. She's going to answer those questions and map out why we want to have the conversation early while we're still healthy. Let's talk about one of the families behind the facts. Kerry Dennis watched the devastating emotional and financial toll Alzheimer's and dementia took on her grandmother, her mother, and the rest of the family. It helps explain the steps Kerry took years before she was diagnosed herself. I started doing puzzles during COVID. All right, you do colors. It engages my mind, and there's something fulfilling about being able to still do something successfully, enjoy doing it, and see a finished product. I'm gonna start putting facial pieces together. I am 60 years old. I was diagnosed with early onset, early-stage Alzheimer's almost two years ago now. And I have learned through this journey to live in the present and to love every day and appreciate every day you have. When did you start to notice more than just little things with your memory or with your cognition? At the beginning, you could explain it away. I noticed it the most at work. It was not being able to do things like set agendas, follow through on agendas, write emails. Writing emails. It sounds so stupid, but that was my nemesis. You don't think anything about writing an email until you can't do it. And we decided at that point that I would go on leave. And it was, for me, the beginning of a different journey, but a really important thing. See, I love these pictures of my parents. They were always so happy. Knowing that your mom was diagnosed, that your grandmother was diagnosed, that there were other people in your family, it must have always been there for you. It was always there. You always think about it, and you always worry about it. And I think, oh my gosh, am I my mom? Is this going to happen to me? Your dad was your mom's primary caregiver. How did her diagnosis and her decline hit him emotionally and financially? He was devastated. Like heartbreakingly devastated. There were a lot of times I thought that he would die before her because he took on so much of the caregiving responsibility. They didn't have a lot of savings. His little nest egg went pretty quickly. He ended up living off just Social Security. So, everything else went to pay for nursing home care. So, he lived for years on $1,500 a month, $1,700 a month. And that was really tight. You saw your parents destroyed financially. I did see my parents destroyed financially. So, you got a long-term care insurance policy almost a decade before you got your diagnosis. I recognized that to protect what was so important to me, my little nest egg that I worked hard, and my legacy, that was a piece of the puzzle that I needed to address. How did that fit into your financial life or picture or plan? It hasn't been exorbitant. It's just part of my-- it's part of what I do. It's part of my financial budget. OK. A lot of people might say, well, yeah, sure, I could get Alzheimer's. I could get dementia. But paying all of this money month after month when I don't even know if I'll be diagnosed. What do you say to that? If anybody ever drives a car and they just get in the car and they're like, you know what, I could get into an accident, but what if I don't? I'll have paid all that car insurance for nothing. It's protection against the unknown. And so, as I decline and as my life changes, I can't do anything about the emotional burden that that brings to all of us, but I can take the financial one and at least reduce it. And what peace does that give you? Oh, peace of mind beyond measure. I could go through. You remember. I remember how hard it was when my father was living on next to nothing and never complaining when my Nana lost her house. Those are the things, those gut-wrenching things that you remember, because they weren't able to plan. I have peace of mind that that won't be something that my family has to worry about. Gabby, you're her youngest child. You hear your mom talk about how important it has been for her to have long term care insurance. Does that mean anything to you? I can't imagine the future without it. I want to be focusing on being with my mom now, making those good memories. I can't imagine trying to figure out the financial aspects of everything while also being on that emotional journey. I definitely see and feel my disease progressing. My executive functioning is really poor. I can't do activities with too many steps, because I get lost. But I do a lot. I do a lot for myself. I eat right. I have amazing social connections. I enjoy life as much as possible. And it's a success, because life is good. This goes this way. I'm living a life that I love, and it's on my terms. All right. Plaid in. We're done. I love this puzzle. It is a good picture. That peace of mind was so important for Kerry and her family. Stefne, let me bring you into the conversation. Thanks for being here. Thank you, Ally. So, let's look at big picture. As we start to think about how or if we might need long term care, what are some things we should be thinking about? Many of us will need long term care during our lifetime, so it's very important to start talking about what that plan looks like to you. Most of all, where do we want to have our long-term care? Is it in your home? Is it outside of the home? Talking with your family about their role and responsibility. And most of all, how do you plan to fund this care? Is it through savings or could it be through long term care insurance? So, we're talking about two things here today, I want to make clear. So, we're talking about long term care, a health event. And we're also talking about long term care insurance, how to pay for it. So, let's define those two things. First off, what is considered long term care? So long term care is being able to do your activities of daily living. And what do those mean? Could you bathe yourself? Could you feed yourself? Can you transport yourself? There are many criteria there as far as eligibility for long term care. When you can't do two of the seven activities of daily living, that's where you might be eligible for long term care benefits. OK, what is long term care insurance? And so long-term care insurance is when you plan ahead and put an insurance policy in place in order to pay for that care, whether it's in your home or outside of the home. So, a nursing home facility, perhaps, or a home health care aide coming in. Yes, exactly. OK. Give me some scope of who could need long term care over their lifetime. It's a surprising statistic. Someone turning 65 today has almost a 70% chance of needing long term care during their lifetime. And I mean, health care costs are already one of the biggest costs in retirement. It's true. And according to recent Fidelity research, retirees may need approximately $172,500 in retirement to cover health care costs. And that does not include any kind of long-term care coverage. You said long term care isn't typically covered by traditional insurance or Medicare. But if you've already got kind of that big number for what you could expect on average for regular health care expenses and then bringing in long term care expenses, that feels like a big financial gap to have to cover. It's true. Let's take a look at some of the numbers just to put it into reference. The average national median for a private room in a care facility was $127,750. For a semi-private room, $111,325. For a home health aide, $77,792. And for an assisted living community, it's $70,800. And these costs are only expected to increase in the years ahead. I think about this in my own life. Thinking about whether or not you'll have dementia, or a stroke can really bring up a lot of big emotions. So, what do you say to families about when they should start talking about a plan? It's a question we get a lot, and the recommendation is to start the conversation typically in your 40s, when you are young and healthy and have the ability to plan for your long-term care. And things you need to look at are your health, your savings, where you want to receive any long-term care, and also how you plan to fund it. Don't put these conversations off for a time when decisions may be made for you and not with you. Yeah. So, if I'm in my 50s or 60s, the same time when a lot of us are experiencing decline in our parents, am I too late to start thinking about long term care insurance? Have I kind of missed the boat, so to speak? Yeah, it's never too late to have the conversation about long term care. Ideally, we recommend in your 40s because you're younger, you're healthier, you're in more of a planning mindset for that long term. Versus in your 50s or 60s, you're older, you may not be as healthy, and you may have an event that's triggering this conversation. So, I would say the sooner the better to have the conversation. But it certainly isn't off the table in your 50s or 60s. But if I don't start investigating or maybe get serious about long term care insurance, like you said, I might not be eligible, or it might be cost prohibitive. Is that right? That's right. It may be more expensive. You may not have a favorable underwriting outcome, or it may be off the table. So, the earlier the better in terms of having that conversation. What if I've already been diagnosed with dementia, for example? What are some of the things that would disqualify me from getting long term care insurance? Certainly, if you've been diagnosed with Alzheimer's, Parkinson's, dementia, certain types of cancers or AIDS, HIV, you will not be able to qualify for long term care coverage. OK. All right, let's get specific. How much does long term care insurance cost? It depends on so many factors. Your age, your gender, the state in which you live. There's also potentially a waiting period. If you receive benefits sooner, your costs will be higher than if you wait a little bit longer to get benefits. So, there are a number of inputs into the total cost. I want to drill in there for a second. Waiting period. What does that mean? So, it's the time in between your long-term care event and when you actually get the cost covered by your long-term care insurance. So, for certain policies, there's no waiting period, which means that if you have a long-term care event, your benefits start immediately on day one. However, if there is a waiting period, let's say 90 days, you cover out of pocket for those first 90 days of care, and then the long-term care benefit would kick in after 90 days. So, this is one of the variables as we go through the quote, which may drive your cost up for a shorter waiting period or potentially down for a longer waiting period. Meaning I might have a health event, and there's a waiting period until the benefits kick in. Correct. And the longer that waiting period is, the longer I can swing it on my own, the lower the cost would be. Right. So, the longer your waiting period, the lower your premium. OK, OK. Bring me into the process a bit. What's the process of getting long term care insurance? Is it like life insurance? Yes, it's very, very similar. So, the first step is a written application. Then there's a cognitive exam and then a physical exam. So, you'll talk with a doctor. They'll pull some driving records. And then other factors go into the underwriting decision. So very, very similar. As I'm figuring out how I could pay for long term care, there's government assistance if I qualify. There's long term care insurance, which we're going to dig into. But as I look at my finances, what if I think I have a lot saved. I probably have enough. I'm just going to pay for it out of pocket. What are some watch outs there? The watch outs are around self-funding is you don't know the severity of your long-term care need. You don't know how long it might last. You really can't plan for it. And that's where if you're relying on your savings or on retirement savings, you will have to really make sure that you don't outlive those dollars. And the things that you need to take a look at are your assets, how you've saved for your retirement, what a long term care event for whatever duration might look like on your retirement, and really see how that might ripple down to future generations if you have a longer long term care event. Meaning? Meaning you have a stay in a care facility for, let's say, the average of three to five years. What does that look like in terms of impact on your finances? The numbers can add up very, very quickly. As we discussed earlier, the average cost annually for an assisted living facility is $70,800. For two years, this would be around $141,600 that you would need to pay out of your savings. And if you need this type of care for five years, it would be $354,000. Also, if you're using qualified dollars, like your 401(k) or your IRA, there could also be tax implications on that. So, it's important to think through it and really assess all of the impacts on that strategy. Let's focus back on long term care insurance. So, there are two options. There's a traditional and a hybrid policy. Walk me through both of those. What's a traditional first? Sure. Traditional long-term care is also known as a standalone long term care policy. And it typically has premiums that you pay annually, although those premiums can go up if the insurance company chooses to raise premiums. Oh, OK. And often we don't see these policies in the marketplace-- For that reason? For that reason. You can choose the amount of coverage that you have, like we talked about the waiting period. And typically, it is a premium that you're going to be paying for life. OK. So, help me understand hybrid policies. Hybrid policies are also long-term care, but they're also in combination with life insurance. The benefit of that is that you have long term care coverage, but if you don't have a long-term care event, you also have a benefit that can be paid out to your beneficiaries. Meaning if I don't have that health event, so I don't have a stroke, I don't develop dementia, and I don't use the policy I bought, it will give a financial benefit like a life insurance policy to my beneficiaries. Exactly. If I do have a health event, but I don't end up using all the money, does a portion go to my beneficiaries? It does. So, the unused portion would go to your beneficiaries. One more option is you can cash it out. However, fees or surrender charges may apply. So, it's a much more flexible approach to long term care. OK, Stefne, we've covered so much, but it's such an important topic. So, what do you hope as people walk away from this conversation that they take with them? I'd like them to start planning early, preferably in your 40s when you have more options on the table. You're younger, you're healthier. I'd also like the family conversations to happen as well. It's so important to bring in your loved ones and your circle as you plan for long term care events. And most of all, take a look at how long-term care fits into your overall financial picture, because you'll have much more options if you're able to think ahead and be proactive. Stefne, I thank you so much. Thank you, Ally. And thanks to all of you for joining us. We've got some great resources on our website to learn more about long term care insurance, and strategies to protect yourself and your family. It's Fidelity.com/MoneyUnscripted. Be sure to like, follow, and subscribe to the podcast, and we'll see you next time on Money Unscripted. It's your life. Get your money's worth. [MUSIC PLAYING] [Disclosures] Administration for Community Living, Department of Health and Human Services Genworth and CareScout Cost of Care Survey Results for 2024, March 2025 The Retiree Health Care Cost estimate is based on a single person retiring in 2025, 65-years-old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates projected with Mortality Improvements Scale MP-2020 as of 2022. Actual assets needed may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Cost Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, original Medicare. The calculation takes into account Medicare Part B base premiums and cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care. Investing involves risk, including risk of loss. A contract's financial guarantees are solely the responsibility of and are subject to the claims-paying ability of the issuing insurance company. Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. The views and opinions expressed by the Fidelity speaker are his or her own as of the date of the recording and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. 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