Although you likely won't need long-term care until after you retire, preparing early can help lessen your financial strain as you get older. Almost 70% of baby boomers will need some form of long-term care, and half of those will need that care for up to two years, according to the U.S. Department of Health and Human Services (HHS).

One of the best ways to plan ahead is to purchase long-term care insurance — an option that 7.5 million Americans have chosen, according to the American Association for Long-Term Care Insurance (AALTCI).

So, what is long-term care insurance? It's a valuable and beneficial financial tool that can help you avoid high costs in retirement, and it's worth taking some time to understand what it covers, how it works and how to decide if it's a wise choice for you.

What Is Long-Term Care Insurance?

As you might expect, long-term care is provided over an extended period of time, typically anywhere from 12 months to several years. Most long-term care is non-medical and involves recipients getting help with personal tasks, such as bathing, dressing, using the bathroom and other basic daily activities they're unable to do on their own.

You can purchase a short-term care insurance policy if you'll have care needs that will last 12 months or less. This shorter coverage option and policies that pay benefits for longer periods are both considered to be long-term care insurance.

Long-term care insurance helps pay for the cost of extended care services and support, whether they're home-based or in a community setting, such as a nursing home. Although long-term care planning is most often associated with the older population, people of any age may require care, so you're not alone if you're thinking about this option earlier in life.

Because Medicare, Medicaid and most health insurance plans don't cover long-term costs, obtaining a policy can help relieve you of the financial burden of paying for necessary care.

What Does Long-Term Care Insurance Cover?

The types of non-medical services that most long-term care insurance policies cover include:

• In-home assistance with bathing, dressing, toileting and other personal care — some policies may also cover in-home meal preparation and housekeeping services.
• Home-based skilled nursing care.
• Assisted living.
• Nursing home care.
• Adult day care.
• Hospice care.
• Respite care to give regular caregivers time off.
• Alzheimer's special care.
• Occupational, speech, physical and rehabilitation therapy.

How much you receive in benefits and how long your coverage lasts can vary depending on which long-term policy you purchase. Most policies limit the total amount they will pay out over the life of the policy, with some deciding the maximum based on the length of coverage. Others set a dollar amount as the limit.

In either case, it's important to understand the total amount of coverage you're buying so you can prepare for when your benefits max out and your coverage ends.

What Impacts the Cost of Long-Term Care Insurance?

The cost of your individual long-term insurance policy will depend on several factors, such as:

• Your age when you purchase the policy — the older you are, the higher your premiums will be.
• Your policy's maximum daily benefits.
• Your policy's total coverage period.
• Your policy's maximum lifetime benefit.
• Your state of residence.
• Any optional benefits — known as riders — that you choose.
• How long you must wait before receiving benefits.

To get a general idea of how something like your age can impact what you might expect to pay, let's look at a few examples from the National Association of Insurance Commissioners (NAIC). These figures are for the average annual premiums on a basic long-term care policy that offers $200 in daily benefits initially, with increases to adjust to inflation in health care prices.

According to the NAIC, a policy with four years of benefits that's purchased by a 50-year-old will cost an average of $4,349 a year. However, if a 70-year-old purchases the same policy with four years of benefits, it will cost an average of $13,500 a year.

Short-term care insurance — the type that provides coverage for one year or less — is less expensive than traditional long-term policies because the shorter time commitment means less financial risk for the insurer. For example, if you're 70 years old, a typical short-term care policy would cost you $141 a month or $1,692 a year, according to the AALTCI.

Note: While this information can provide general guidance, it's important to remember that your experience could vary greatly depending on the above factors. Make sure to discuss any details that could impact the cost of long-term care insurance up front when speaking with providers.

How Does a Long-Term Care Policy Pay Benefits?

Most policies will reimburse you according to a preset daily amount for the types of services you receive, up to a lifetime maximum. Some policies pay a preset amount for each day you are eligible to receive long-term care services, even if you don't actually receive paid services on those days.

Two key factors determine when you become eligible for benefits: the benefit trigger and the elimination period.

What Is a Benefit Trigger?

A benefit trigger is when an insurance company makes the decision to begin paying out benefits. It typically occurs when there's a change in your physical or cognitive condition that results in you needing long-term care.

Your insurance provider will likely require that a doctor, nurse or social worker complete a form documenting their assessment that your ability to perform basic activities or your cognitive function has decreased. Most policies pay benefits when a policyholder exhibits cognitive impairment or needs help with activities of daily living as defined by HHS. Your insurance company care manager will use your needs assessment to decide whether or not to approve a Plan of Care. If you receive one, it will outline the benefits you can receive.

What Is an Elimination Period?

The elimination period of your policy is the amount of time you must wait between when your benefit trigger occurs and when the policy begins paying benefits. The concept is similar to the deductible you pay in health, home or car insurance, but it's measured in time instead of dollars.

Depending on the policy you purchase, your elimination period could be either 30, 60 or 90 days. In most cases, the shorter the elimination period, the higher the premiums.

A key difference here between short-term care insurance and long-term care insurance is that there's no benefit trigger or elimination period with short-term policies — you start receiving benefits as soon as you incur a need.

Why Should I Consider Getting Long-Term Care Insurance?

Buying long-term care insurance can help you avoid the high costs that can come with extended care services. For example, the average cost for a semi-private room in a nursing home (not including costs of medications, therapies and other services) in the U.S. was about $89,297 in 2018, according to NAIC data. Meanwhile, the average reported annual cost of rent and most fees at an assisted living center was $48,000 and the average cost of hiring a home health aide was $22 per hour, which at six hours per day would add up to $34,320 a year.

Because Medicare, Medicaid and most health insurance plans don't cover long-term care, you may need long-term care insurance to fill the gap. Long-term care insurance can offer peace of mind for you and your loved ones — you'll know your needs will be covered without your loved ones having to worry about the cost.

If you're thinking about buying long-term care insurance, it's important to take stock now about what your future care needs might be. The earlier you can plan ahead based on your financial and health care needs, the better. A long-term care specialist can help you figure out the plan that will best fit your retirement lifestyle.