As we grow older, it’s natural for our needs to shift, often including a greater need for support with everyday living. Two-thirds of adults 65 and older today will need long-term care in their lifetime, and 20% of them will need it for longer than five years.¹ Considering that traditional health insurance policies don’t typically cover ongoing care costs, this need for long-term care can become a major financial hurdle for unprepared retirees.
If you’re concerned about the possibility of needing ongoing care (both medical and non-medical) in retirement, now’s the time to start planning. One of the most common forms of long-term care risk protection is an insurance policy or rider, which can be used to offset the financial challenges of long-term care.
To help break down the options, we’re featuring insights from Michael S. Orentlich, CFP®, CLU®, ChFC®, CASL®, AEP®, a financial professional who specializes in helping individuals navigate long-term care planning as part of their broader financial goals. With so many policy types and benefit structures available, Michael’s expertise lies in helping clients determine which approach best fits their needs and priorities.
What Is Long-Term Care Insurance?
A long-term care insurance policy provides coverage in the event you are unable to perform activities of daily living (often called ADLs) and require assistance over an extended period of time. This is different from the care required post-surgery or following an injury or accident. In those cases, someone may need temporary physical therapy or assistance until fully recovered, and eligible services are at least partially covered by Medicare or traditional health insurance.
According to the Administration for Community Living, long-term care services include “medical and non-medical care for people with a chronic illness or disability.” They provide assistance with ADLs including:
- Getting dressed
- Bathing
- Using the restroom
- Transferring (walking/wheeling/pivoting)
- Feeding or cooking for oneself
- Taking medication
- Grooming
In addition to physical assistance, long-term care also supports individuals experiencing cognitive decline, such as memory loss, dementia, or Alzheimer’s disease. In fact, many long-term care insurance policies are triggered when a person either needs help with at least two ADLs or has a diagnosed cognitive impairment that compromises their safety and ability to live independently.
Long-term care may be provided at home, or in an assisted living, continuing care retirement community (CCRC), or skilled care facility, depending on the level of care needed.
The Benefits and Drawbacks
As with any type of insurance policy, it’s important to weigh the pros and cons before committing to long-term care coverage.
The primary benefit of long-term care insurance is that it helps fill in the coverage gaps left by Medicare and traditional health insurance, which rarely cover extended care, especially non-medical support like help with ADLs. A long-term care policy can ease the financial burden of services such as ongoing nursing care, medical equipment, assisted living, and more.
Policies typically pay benefits in one of two ways: reimbursement (which covers eligible out-of-pocket expenses) or indemnity (which provides a flat cash benefit regardless of the actual cost of care). Indemnity-style benefits can offer greater flexibility, allowing policyholders to pay informal caregivers—including family members—if they choose.
Some policies (particularly linked-benefit or hybrid plans) may also accrue a cash value. In these cases, that cash value is typically accessible if the policyholder cancels the policy or borrows against it for other needs. We’ll dive a little deeper into these policies below.
“If a client needs long-term care services, the policy accesses a leveraged benefit pool specifically designated for care-related expenses,” explains Orentlich. “But if the client cancels the policy or needs to borrow against it, the cash value may be available for other purposes.”
One of the major drawbacks of a traditional long-term care policy is that premiums are not guaranteed to remain level. In fact, many insurers offering these policies have implemented significant rate increases over time. While increases must be approved by the state’s insurance commissioner, premium hikes of 30% to 100% are not uncommon.
To help mitigate the risk of rising premiums, hybrid long-term care plans offer a guaranteed premium, providing more predictability for those concerned about cost increases down the road.
Some long-term care policies can put policyholders in a “use it or lose it” situation—especially the more traditional, standalone policy types. Premiums can add up over time, and while the statistical likelihood of needing long-term care is high, there’s no guarantee you’ll use it.
However, Orentlich points out that, “Hybrid plans typically offer a return of premium features with a dollar-for-dollar reduction for any long-term care expenses used.”
If your policy does accrue a cash value, investments made within the policy will often be conservative (comparable to investing in the bond market, for example). Your long-term care policy is not a tool for pursuing aggressive growth within your portfolio. Rather, it’s designed to protect your future financial well-being in the event long-term care is required.
3 Types of Long-Term Care Insurance
Long-term care insurance comes in a few common varieties, each with its own benefits and considerations. These include:
- Traditional policies
- Riders
- Hybrid or linked policies
Let’s take a closer look at each.
Traditional LTC Policy
A traditional long-term care policy is a standalone insurance policy, much like your health coverage or home insurance. You pay premiums each month, either for a fixed period or a lifetime. Generally speaking, the longer the period of coverage, the higher your monthly premiums will be (since the likelihood of needing coverage increases).
Most LTC policies have set benefit amounts, though these are often adjusted for inflation annually. The benefit amount is the maximum the policy will pay out for long-term care expenses, usually on a per-day or per-month basis.
LTC Insurance Rider
As a type of hybrid insurance, you may have the option to add a long-term care rider to your existing life insurance policy or annuity contract.
Accelerated death benefits (ADBs) enable policyholders to receive an “advance” on their existing policy’s death benefits in the event they become terminally ill or require long-term care services. The exact amount will vary by policy, but typically, ADBs are capped at 50% of the total death benefit.
One advantage of a hybrid option like this is that it eliminates the “use it or lose it” drawback of traditional long-term care insurance, since beneficiaries will receive the death benefit (or a partial death benefit) after the policyholder’s passing.
For example, if your life insurance has a $1 million death benefit, but you use $250,000 of that to cover long-term care expenses, your heirs will still receive the remaining $750,000 after death.
Linked-Benefit LTC
A linked-benefit long-term care rider is similar to the hybrid option mentioned above, but offers a few more options for receiving benefits. In some cases, policyholders or their beneficiaries may even be able to receive a portion of their premium payments back.
Some linked-benefit policies may accrue a cash value, even offering policyholders tax-advantaged withdrawals for expenses related to long-term care. In addition, certain linked-benefit policies will pay out a small death benefit to your beneficiaries, even if the original death benefit was used to cover long-term care costs.
Are Long-Term Care Insurance Premiums Tax-Deductible?
Each year, you’re allowed to deduct medical expenses from your taxes under certain conditions. First, you must itemize your deductions instead of taking the standard deduction. In addition, your out-of-pocket medical costs (not including normal health insurance premiums) must exceed 7.5% of your adjusted gross income for the year.²
The IRS does allow taxpayers to include a portion of their long-term care insurance premiums as part of their deductible medical expenses. The limit changes annually and is based on age, but for 2025, you may deduct up to:³
- Under age 41: $480
- Age 41-50: $900
- Age 51-60: $1,800
- Age 61-70: $4,810
- 70 and older: $6,020
Benefits of Long-Term Care Insurance Policies for Business Owners
Long-term care insurance (LTCi) can be a smart planning tool for business owners, not only for protecting personal and family assets, but also for its potential tax advantages. Premiums for tax-qualified LTCi policies may be fully or partially deductible as a business expense, depending on the business structure.
For example, C-corporations can generally deduct 100% of the premiums paid on behalf of an employee for a traditional long-term care policy (including owner-employees), with no inclusion in the employee’s taxable income.
Other structures, like partnerships or S-corporations, may also deduct premiums, though the benefit is passed through to the individual and subject to age-based limits discussed in the prior section. When using a hybrid policy, only the cost associated with the long-term care portion is considered an eligible deductible expense. For non-C corporations, how much is deductible depends on the business structure and is subject to IRS rules.
In addition to potential tax savings, long-term care insurance provides peace of mind by helping cover future care expenses without draining business or personal finances. This makes it especially valuable for entrepreneurs whose wealth is often tied up in their companies.
Does Long-Term Care Insurance Belong in Your Financial Plan?
Considering the statistical likelihood that either you or your spouse will need long-term care in your lifetime, it’s important to plan ahead. Whether that means building a separate savings or incorporating an additional policy into your lineup will depend on a number of personal factors.
If you’d like to discuss the potential need for long-term care and what options may best suit your needs, don’t hesitate to reach out to our team. We’d be happy to take a closer look at your existing coverage and find opportunities to help cover the future cost of care.
Sources:
2. www.irs.gov/publications/p502
