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How to manage the cost of long-term care

Long-term care can be pricey, but the right insurance may be able to help.

  • Long-Term Care Insurance
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Read part two on long-term care about how to evaluate whether you’re a good candidate for LTC insurance, and how to make sure your policy is the right fit.

The good news: We’re living longer, thanks to healthier lifestyles and continuous improvements in medical care. Now the bad news: This increased longevity comes with its own challenges. The longer you live, the greater the chance that you’ll need extended medical care—whether it is to rehabilitate after a broken hip, or to manage the effects of Alzheimer’s disease or any of the other ailments that may wait down the road.

“According to the U.S. Department of Health and Human Services, at least 70% of people over age 65 will require some long-term-care services at some point in their lives,” notes Tim Gannon , vice president at Fidelity Investments Life Insurance Company. “As you age, your potential for needing long-term care increases significantly.”

In previous generations, the caretaker role typically fell to family members. For instance, an aging father would move in with his grown child’s family, who would provide care—from help with daily activities to rides to doctors’ appointments. These days, however, many of us are reluctant to saddle our children or other loved ones with responsibility for care. “Baby boomers in particular don’t want to be a burden on their families,” says Gannon. “Family dynamics have changed.”

That leaves the aging population in need of help from professionals—including home health aides, nursing homes, and other providers. And that help can be costly: A year of nursing home care carries an average cost of $90,000, according to MetLife’s 2012 “Market Survey of Long-Term Care Costs.” So you face a crucial decision as you get older: Should you rely on your retirement nest egg and other savings to pay the bill if you need long-term medical care, or should you consider the up-front cost of long-term-care insurance?

“The question is, do you want to buy insurance and pay now to protect against something that may or may not happen, or pass up insurance and take the chance that nothing will happen or that you will have to pay the full cost later?” asks Gannon.

The cost of long-term care

Before deciding whether to purchase a long-term care (LTC) insurance policy, consider the costs involved if you don’t have insurance. If you’re 65 or older, Medicare generally pays for routine medical issues such as regular doctors’ visits and appointments with specialists. In-patient procedures at hospitals are typically covered, and some short-term home health care services are provided to Medicare recipients.

But Medicare does not cover most long-term-care needs, such as an extended stay in a nursing home facility. Medicare will pay for some expenses, non-custodial only, for up to 100 days. And Medicaid will typically help only once you have depleted your savings. As a result, you may need to cover the costs of home-based care, nursing home care, or other LTC needs out of your own pocket. “I think a lot of people fall into the trap of thinking that Medicare is going to cover these types of medical expenses,” says Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company. “Unfortunately, that’s not the case.”

So how much will you actually have to pay out of pocket for these kinds of services? The answer depends largely on where you live—or where you choose to live in retirement. While annual nursing home costs average roughly $90,000 for a private room, they vary from state to state. In Louisiana, you’ll pay an average of about $57,000; in Connecticut, the average cost is more than $148,000. Similarly, the national average hourly rate for a home health aide is $21—but it is an average $17 an hour in Alabama and $30 an hour in Minnesota.1 “These are substantial costs for a family to have to absorb without insurance,” says Ewanich.

The true cost comes at the expense of your long-term savings. Relying on your retirement nest egg to pay for your medical expenses as you get older can jeopardize your financial future, whether that means reducing the income you can draw from your savings in retirement or undermining the financial legacy you can leave your heirs. For your spouse, depleted savings could mean a major change in lifestyle. “If you take the chance and end up needing long-term care, you’re significantly changing whatever financial plan you put into place for retirement,” says Gannon.

Understand the insurance option

LTC insurance can offer the peace of mind that medical events won’t derail your financial plan. But the policies can be quite complicated, so you need to consider whether you want to buy coverage, and take special care to buy a policy that’s appropriate for your needs. Here are some things to look for when evaluating a policy.

When to buy your policy: The longer you wait, the more expensive the coverage will be—and the greater the potential for a medical event to occur while you’re uninsured. Even if you don’t have a significant medical event, certain health issues may stop insurers from approving your policy. “People typically buy long-term-care insurance in their late 50s,” says Ewanich. “It’s cheaper than it is later in life, and you’re more likely to qualify.”

The amount of coverage: Most LTC policies cover the same types of costs, from nursing home stays to home health aides. Choosing a plan often starts with choosing how much coverage you want. Ewanich notes that buying LTC insurance is like purchasing a pool of money. That pool of money is laid out as either daily or monthly coverage: for example, a plan might offer $200 a day in coverage or $6,000 a month.

Gannon and Ewanich recommend basing your coverage in part on where you live. The map above can help you gauge LTC expenses in your state. “Some states are significantly more expensive than others,” says Gannon. “It’s important to understand what the costs are where you live or where you plan to retire, so you can purchase the right amount of coverage.”

The duration of your coverage: Next, consider your coverage period, or how long your LTC insurance would last following a medical event. Ewanich notes that some plans offer unlimited coverage, but he doesn’t think it is worth the additional cost for most people. According to the Department of Health and Human Services, the average use of long-term-care services is three years.2

When your coverage kicks in: Unlike medical insurance, which typically covers such things as doctor visits, surgery, hospital stays, and emergency room visits when someone falls ill, long-term-care insurance is for individuals who are unable to perform certain normal daily functions, called “activities of daily living” or ADLs. ADLs include eating, bathing, dressing, toileting, continence, walking, and transferring (moving from a bed or chair to a standing position).

For benefits to be triggered, a person must be unable to execute one or more ADLs. For most LTC policies to start benefits, for example, a person must be unable to dress and feed himself or herself. Each policy has different criteria to determine the onset of benefits to be paid out, but ADLs are typically the measure.

You also can choose when your LTC coverage kicks in after you experience a medical issue. Your elimination period, or waiting period, starts from when you become disabled or satisfy the ADL requirements. You can pay for policies with no waiting period, but Medicare will cover care for certain health-related needs for short periods—for instance, after a stroke or heart attack. So it may make sense to have some waiting period, and, in general, the longer the waiting period is, the cheaper the insurance premium. “For most people, the happy medium for waiting periods seems to be about 90 days,” says Ewanich.

Inflation protection: While you need to make choices about several pieces of the LTC puzzle, there’s one option that is especially important to consider: inflation protection. If you purchase LTC insurance in your late 50s, you may need the benefits 20 years down the road. Without increased coverage through an inflation-protection rider, your coverage two decades from now is likely to pay for only a fraction of the care it would fund today. You could buy significantly more coverage to fund future costs, but, in general, inflation protection is a better fit.

Policies offer inflation protection in two forms: simple and compound inflation. Simple inflation takes the original benefit and increases it by a set dollar amount each year, while compound inflation protection uses the last year’s benefit as the base for calculation. A $300 daily benefit would grow to $450 over 10 years at 5% simple inflation, while the same benefit would grow to $488.67 using compound inflation protection. While more expensive, compound inflation protection may be more likely to keep up with rising health care costs, particularly over longer periods of time. So if you are buying insurance in your 50s, you may want to consider it.

The provider: You may not need to make a claim on your insurance for decades after you buy it, and that makes choosing the right company extremely important. You may want to consider a company with a long track record in the industry and strong financial health, to ensure they will be able to pay benefits down the road. Additionally, you may want to consider the company’s rate history: If you are paying over time, you don’t want to have rates increase suddenly.

Choose the right plan for you

Knowing the basics of what to look for in an LTC policy can help you as you compare plans. But it’s important to realize that no single LTC plan is right for everybody: An appropriate plan for one person may provide much more coverage than you need or want. As a result, it’s important to factor in your personal circumstances as you shop for an LTC policy. “Not all the features and the benefits and the riders of these policies are for everyone,” says Gannon. “The right plan depends on each individual’s situation. If you buy a policy without carefully considering your situation, you may end up paying for more—or less—coverage than you ultimately require.”

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1 “Market Survey of Long-Term Care Costs,” MetLife Mature Market Institute, November 2012.
2. Based on the Department of Health and Human Services National Clearinghouse for Long-Term Care Information as of September 2012. http://www.longtermcare.gov/LTC/Main_Site/Planning/Importance/How_Much.aspx.
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