Long-term care costs are the black hole of retirement planning.
With the fees for nursing home care averaging $212 a day, an extended stay can devastate the retirement savings of a typical household. Children of aging parents can see their own finances, and even their own children’s futures, undermined by their natural desire to help out Mom and Dad.
Private long-term care insurance can help, but only about one in eight Americans buy it, since the costs are high. Even so, I would argue that this coverage is well worth considering—especially if you have assets to protect, but can’t afford to pay for years of long-term care out of pocket.
Of course, it’s not an easy decision. Here are two key points to help you decide:
It’s Insurance, not an Investment
You’ve probably been hearing that buying long-term care coverage is a bad financial move for most people. Recently a study from the well-regarded Center for Retirement Research at Boston College found that fewer people will need long-term care— some 44% of men and 58% of women will need long-term care vs. estimates of 70%—and that those expenses may be less than previously thought.
One key reason for the lower costs, according to the Center, is that half of men and 39% women who enter nursing homes stay for less than three months—relatively short periods that are potentially covered by Medicare. (Contrary to what many people believe, Medicare does not cover long-term care expenses but will pay for up to 100 days of institutional care following a qualifying hospital stay.) Most Americans end up relying on Medicaid to pay for longer stays, although that program kicks in only after families have mostly spent down their savings.
Given these shorter stays and the availability of those safety nets, only 20% to 30% Americans were found to be economically better off buying long-term care coverage. “Few individuals would choose to buy insurance even if they were rational, far-sighted, and well-informed,” the Center concluded
These findings may very well be true, but they miss a bigger point. Insurance is not about optimizing your finances—it’s about protection against a catastrophic event. The odds of your house burning down are very, very small, but you have home insurance nonetheless. And even if your mortgage lender didn’t require it, I bet you’d still have home insurance.
The same case could be made for owning long-term care insurance. It offers valuable coverage that preserves choice and financial resources in the event you can no longer manage on your own.
Smart Shopping Lowers Costs
Of course, more people would probably own these policies if the premiums weren’t so steep and price hikes so frequent. Rates jumped another 8.6% last year, according to a recent report from the American Association for Long-Term Care Insurance, largely due to unexpectedly high claim expenses, which caused several insurers to leave the market.
Today a 60-year old couple buying coverage with a lifetime benefits cap of $328,000 might pay an annual premium of $2,170 a year, the association said. And if they bought inflation protection that boosted the value of their coverage to $730,000 at age 85, their annual premium would rise to $3,930.
Even so, wide price variances have become more common. “In some situations the difference between the lowest-cost policy and the highest-cost was 34%, but it could be as much as 119%,” association director Jesse Slome said. (The state of Texas has a helpful range of premiums for different coverage situations; your state insurance department may offer similar information.)
Clearly, smart shopping is crucial. Here’s what will influence the price you pay:
- Your age. It’s the biggest determinant of costs. Younger buyers get lower premiums because their insurers usually have many years to invest that money before paying out any claims.
- The level of coverage. The variables include the amount of allowable daily benefits, the number of years the coverage will last, and the number of days that expenses must be self-insured before benefits kick in (the so-called the elimination period). You can also add inflation protection to maintain the real value of coverage limits.
- Your health. Expect to get grilled about your physical condition. Bluntly put, insurers prefer really healthy customers for long-term care insurance. And it’s not just your health being reviewed here, but the health of your parents and siblings as well, since family history is used to forecast future claims.
Look to see how adjusting the major coverage variables will affect your premiums. Choosing a longer elimination period than the standard 90 days, for example, can bring down the cost.
In the end, you’ll have to weigh the costs against your own assessment of the risks. Personally, I have long-term care insurance to protect my family from catastrophic health care expenses in my later years. And, yes, it is more expensive than I’d like. But if I never use it, and wind up paying more than $100,000 in premiums during my lifetime, I will have one reaction:
Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published in February by Simon & Schuster. Reach him at email@example.com or @PhilMoeller on Twitter.