FUTURE SHOCK: ARE YOU PREPARED FOR
THE COSTS OF LONG-TERM CARE?
A brief look at long-
term care insurance

By JUDY ALEXANDER

How secure is your future? If you’ve created a retirement plan with savings and investments, estate planning, sufficient life and health insurance coverage and other financial strategies, you might be confident that whatever happens in 20, 30 or 40 years won’t sink your financial ship. But if you’ve neglected to consider and plan for the potential costs of long-term care, you may be heading straight for a financial iceberg.

There are good reasons to be concerned. After age 65, most people have at least a 50-50 chance of needing longterm care, generally because of a chronic illness, a serious accident or simple aging. And when that care is needed, one thing is certain — it is expensive.

In 2004, a private room in a nursing home cost an average of $192 per day, a 6-percent increase from 2003 — nearly three times the rate of inflation. And typical costs in some areas of the country climbed to more than $500 per day. Home health care was even more expensive — $432 per day, or an average of $18 per hour for a home health aide, according to a study released earlier this year by the MetLife Mature Market Institute.

What drives this expense? Unlike traditional medical care, which seeks to rehabilitate or correct medical problems, long-term care helps people with chronic conditions compensate for limitations on their ability to function independently. Services can include everything from skilled, around-the-clock nursing care to basic assistance with personal needs such as bathing, eating and dressing. As individuals grow older, they may need more of this care than they anticipate.

You might expect that government programs such as Medicare and Medicaid provide financial assistance for long-term care, but the truth is these options offer little help. Medicare — the federal health insurance program for people age 65 and older — provides extremely limited long-term care benefits and may require substantial copayments for the coverage it offers. Medicaid — the public health care program for low-income Americans — has strict financial eligibility criteria and generally requires beneficiaries to deplete or “spend down” their financial resources before it will pay for services. Other public services may be available on a limited basis but are generally provided on a sliding-fee scale and may have waiting lists for assistance.

With the escalating costs of longterm care and few resources to depend on beyond your own finances, it is clear that a brief stint in a nursing home or a few weeks of home health care could take a big bite out of your retirement savings. Worse yet, if you need care for several years, your retirement savings could drain away completely. So is there a viable alternative?

It’s all about protecting what you have
Increasingly, Americans are choosing to protect their savings against the possibly catastrophic expenses of future care by purchasing long-term care insurance. The coverage, considered a part of their retirement planning strategy, is a defense against watching their nest egg being ravaged by nursing home bills or having their care choices limited by a lack of funds. Some baby boomers are even buying coverage for their parents if they are still healthy enough to get an affordable policy.

Typically, long-term care policies can be purchased from private insurance companies. However, a growing number of employers are now offering policies to their employees, employees’ parents and retirees.

Like other forms of insurance, longterm care insurance policies vary widely in coverage and cost. Some provide a benefit only for nursing home care; others cover only in-home care. And some policies offer coverage in a variety of settings. Long-term policy features that may be standard or available as options and riders at an additional cost include:

• Coverage for skilled, intermediate and custodial care

• A choice of where care is received (for example, a private home setting, an adult daycare facility, assisted living facility and nursing home)

• The trigger for benefits to begin — when activities of daily living cannot be performed independently (for example, bathing, toileting, eating)

• Guaranteed renewable provision — the policy cannot be cancelled

• Inflation protection

• Waiver-of-premium provision — the premium payments are stopped while the beneficiary receives care

• Respite care coverage

• Grace period for late payment

• Third-party notification for late payment

Get out there and shop
Because of its impact on your current and future financial life, you will want to take the same care in shopping for a longterm care policy that you would take with any other major financial product or service. But before you begin to search for the right policy, be sure that you have the financial resources to continue premium payments even if you lose a job, retire or face major financial challenges. If your budget is tight, long-term care insurance may not be an option for you, no matter how important you believe it is.

For example, you will not help yourself if you buy a long-term care policy at age 55 and quit making payments at age 65 because you have retired and can no longer afford the premiums. In most cases, no matter how long you have paid into a policy, once you quit making premium payments, you are no longer covered by the policy.

Once you are sure that long-term care insurance is the right option for you, you are ready to find the policy that best meets your needs.

• Choose a large, well-established insurer. Any insurance policy is only as good as the company that stands behind it. For a long-term policy, you will want to consider quality insurers with financial stability and a proven track record. Look for companies recommended by financial advisers who understand the longterm care insurance industry.

• Compare policies. Policies offered by various companies can differ in ways that may be significant for you. Each offers its own discounts and variations in coverages and features. If your employer offers a long-term care policy, compare rates and features to policies offered in the marketplace.

• Determine how much coverage you will need. Do some homework to determine the typical costs of nursing home care, assisted living facilities and home health care in your area. If you plan to relocate after you retire, you may want to base your decisions on costs in the area where you will live after retirement.

• Be sure to add inflation protection. Statistically, you are not likely to use your long-term care insurance until you are in your 80s. If you buy the coverage when you are in your 50s or 60s, as most financial advisers suggest, you may have 20 or 30 years of cost increases — currently about 5 to 6 percent each year — to overcome with policies you buy today. Inflation protection can help you minimize the effects of these increases and maximize the benefit of your policy.

• Pick a benefit period that fits your needs. You will be able to choose from a range of benefit periods, the amount of time the policy will pay you — typically two years to your lifetime. Increasing your benefit period increases your annual premium. Consequently, you will want to weigh the odds that you will need a longer period of care against the increased cost you will pay for the coverage. The average nursing home stay is less than three years, but some people are in a nursing home for only a few weeks after a hospital stay, and others are there for a decade or more. If you have a family history of Alzheimer’s or some other chronic disease, you may find it worthwhile to pay extra for a longer benefit period.

You need to know more
Of all the insurance products you may ever buy, long-term care insurance can be the most intimidating to understand. Fortunately, information is available for the discriminating buyer who wants to make an educated buying decision. State insurance departments and senior counseling programs offer valuable information. Internet resources provide basic knowledge and buying guides. Be sure to look for resources from American Association of Retired Persons (AARP) at www.aarp.com and from the National Association of Insurance Commissioners (NAIC) at www.naic.org.

Should you buy long-term care insurance?
Purchasing long-term care insurance is truly a financial decision that you should make only after reviewing your current and future financial resources and obligations, your longterm financial plan and your objectives. In general, long-term care insurance can be a useful financial tool for almost anyone, but only if you can afford it. Because you generally lose coverage if you ever stop paying premiums, consider your long-term ability to meet this financial obligation. Longterm care insurance is designed to protect your assets in case you need longterm care, not deplete your assets in a struggle to keep paying premiums.

The National Association of Insurance Commissioners offers these guidelines to help you decide if long-term care insurance is right for you.

Long-term care insurance is not a good option for you if:
• You cannot afford the premiums.

• Your assets are limited.

• Your only income source is Social Security or Supplemental Security Income (SSI).

• You struggle to pay for basic needs such as food, housing, medicine or utilities.

Long-term care insurance may be a good option for you if:
• You want to stay independent of the support of others.

• You want to pay for your own care.

• You have assets and income that you want to protect.

• You are between the ages of 40 and 84.

• You are in good health and consequently are insurable.

• You have the ability to pay premiums even if you lose your job, retire or face major financial challenges.