Long-term care

As you age, your medical needs are likely to increase. Long-term care insurance (LTC) is designed to cover custodial healthcare costs that Medicare won't cover, such as extended nursing home care or at-home nursing care. Since those costs can be extremely expensive, long-term care insurance is one way to protect your assets. Without the insurance, you might have to spend everything you have to pay the bills.

When are you covered?

When you qualify as chronically ill, your policy will begin to pay benefits. Some policies allow your doctor to make that decision, while other policies require that the issuing company's medical examiner agree with the diagnosis. In most cases, being chronically ill means either that you're unable to perform a specific number of activities of daily living (ADL) such as eating, bathing or moving around on your own, or you have a cognitive impairment, such as Alzheimer's, that means you depend on another for care.

Remember, though, that most policies specify that a certain amount of time, known as the elimination period, must pass between when you begin to need care and when you begin to receive benefits. You can buy a policy with a shorter elimination period, but that will increase the cost of coverage.

What you receive

Most long-term care policies pay a certain dollar amount, known as the daily benefit, to cover costs of care, though they may place some restrictions on who provides the care. For example, some policies require that providers be certified healthcare professionals. You'll have to pay out-of-pocket for anything the nursing home or other care provider charges above that amount. You may want to investigate a policy that provides inflation protection, as nursing home costs have tended to increase faster than other costs. You don't want to find yourself in a situation where the daily benefit you qualify for is much lower than the real cost of care.

You'll continue to receive benefits as long as you continue to qualify as chronically ill. However, there is typically a limit to the dollar amount you can receive, or a cap on the number of years you can receive treatment, so be sure to check what a policy you're considering covers.

What it costs

The premiums for long-term care insurance vary from policy to policy. In general, the longer the coverage will last and the larger the daily benefit, the more the policy will cost.

The cost of coverage also depends on your age when you buy a LTC policy. The older you are — and so more likely to need care in the short term — the higher your premiums will be. One way to reduce the premiums is to spread the cost over a longer period, which means buying in your 50s or 60s, rather than in your 70s.