Long Term Care Insurance and Annuity Purchase
There has been a dramatic increase in the percentage of Americans purchasing long-term medical care insurance. The past two years have shown a 68% rise in the sales of insurance policies covering this type of care. Statistics bear out the need to consider this issue in your financial planning. Nursing homes currently charge an average of $100 a day, but rates can run $200 or more in big cities. Over the next 15 years, those prices are conservatively estimated to double. As a result, some consumer groups that once warned against long-term-care insurance as not worth its cost now urge everyone over 60 at least to consider it when planning for the possibility of needing long-term care, either in their own homes or in nursing facilities.
If you don't have insurance, a third party will usually pick up nursing-home costs that you can't pay. Medicare will cover all costs of a skilled nursing facility for up to 20 days, as long as you're transferred to it from a hospital. For the next 80 days, Medicare will pay $89.50 daily. After that, you must pay all the costs. If the expense depletes all but $2,000 of your savings–which happens to one in five private patients–Medicaid will pick up the tab.
Long-term-care insurance to protect your assets can be expensive. Good policies cost a healthy 60-year-old less than $1,500 a year; people who wait until 70 to buy may have to pay $4,000 or more. (Once you obtain a policy, your premium won't rise.) But if you already have such illnesses as Alzheimer's or insulin-dependent diabetes, you probably can't buy insurance at any price. A typical policy pays for three years in a nursing home, or six years of home health care–up to a maximum dollar amount, typically $100,000 to $200,000.Before you shop for coverage, answer these questions:
What are your chances of needing the policy? Two out of three people over 65 either never enter a nursing home or stay in one for less than three months. Only one person in four stays a year or more; one in 11, five years or longer. Still, medical experts say that if your family has a history of long, debilitating illnesses, your odds of needing long-term care increase.
Who will provide long-term care if you need it? If you can depend on family members to help care for you at home, you may not need long-term-care insurance. For example, Medicare typically pays for such skilled care as physical therapy in your home. So if a family member can provide the additional help you need, your out-of-pocket costs for a lingering illness may be negligible.
Do you have financial alternatives? If your net worth tops $1 million, you can cover long-term-care costs yourself. If you have fewer assets than that, you still have alternatives to insurance. For instance you can obtain extra income with a reverse mortgage on your home. In addition, some whole or universal life insurance contracts pay accelerated benefits to policyholders who are terminally ill from such causes as cancer or heart disease. Some deferred annuities have waivers that allow you to withdraw money without penalty upon entering a nursing home. Finally, if you move to a continuing-care community, your initial purchase price and monthly rent cover assisted-living costs.
Long-term-care policies differ, so you can tailor your insurance to your anticipated needs–and your wallet. Your choices include the following:
Kinds of benefits.
If you're single or living far from family who could assist you at home, to save money you might opt for nursing-home coverage only. Such policies are usually 30% cheaper than ones that also cover home health care.
Elimination periods
Benefits can begin after you've received care for 30, 60, 90 or more days. The longer this elimination period, the lower your premium.
Inflation protection
You can buy a rider that will hike the benefits with inflation, typically up to 5% a year. Such a rider lifts premiums 36% to 90%; the younger you are, the more it costs. But the younger you are, the more you need it.
Hospitalization requirements
Be sure the policy doesn't require you to have been hospitalized immediately before coverage begins.
Routine activities
Policies often start paying benefits when you can't perform two or three routine functions without help, such as bathing or cooking. But each company has different rules. For example, some policies require you to need direct help rather than supervision. A few won't pay unless you need help every time you perform the activity, not merely some of the time.
Exclusions
Some policies will limit payments for certain conditions, such as Alzheimer's, or won't cover them at all. If you develop the illness, you'll have paid thousands of dollars over the years for nothing. In short, study the fine print.
Long-term-care policies' prices and terms vary widely. So first find policies with the benefits you need, then compare prices. Since group plans are generally cheapest, ask whether plans are available from your employer, professional organization or your children's employers.
TIP: Since you may not need coverage for 20 years or more, make sure there's little risk of your insurer going broke. Ask your state's insurance department about complaints regarding the company; the number is in your phone book. And check out the insurer's financial rating in A.M. Best's reports at your library.
Reprinted with permission from Retire with Money, March 1996. Subscriptions: 800-284-5300, $60/yr.
Further Reading For Long Term Care:
