Crucial Considerations and Tips
If you can’t take care of yourself when you’re old, there are plenty of resources from which to choose: home-health services, adult day-care centers, assisted-living facilities, or nursing homes. Finding the money to pay for such help, however, presents a dilemma.
Right now, the average rate for a private room in a nursing home is $181 a day, or about $66,000 a year, according to a 2003 survey by Metropolitan Life Insurance Co. If the room rates reflect current annual increases in nursing-home costs, then by 2021, when today’s 60-year-olds might need such care, the average rate will have risen to about $480 a day, or $175,200 annually.
Few people are able to amass such sums. And the government is unlikely to pick up the tab. (See What Medicare/Medicaid cover.) The only obvious answer is long-term-care insurance, a disability plan that has been around since the mid-1980s. Its promise: to pay the expenses of people consigned to nursing homes or needing other forms of long-term care.
While purchasing long term care insurance seems like a no-brainer, it is a little more complicated than it seems and riddled with more than a few perils and pitfalls.
As with health insurance, you must keep paying to keep it in force. If premiums rise, you may have to drop the coverage, possibly losing everything that you’ve paid. The policy’s benefits may cover only a portion of the total expense. Finally, there’s no guarantee that long-term-care insurers, some of which have weak balance sheets, will be around 20, 30, or 40 years from now when you need them to pay.
So, while Long term care insurance may be an imperfect deal, right now it’s just about the only deal.
The Promise of The Policy
Long-term-care insurance sounds simple. You pay annual premiums now for coverage that you might use years hence should you need custodial care.
Such coverage really shouldn’t be considered before age 60 except by those with chronic diseases. Insurance agents, however, wax on about the policies’ benefits, often pushing the plans on people in their 40s. And no wonder. Agents can reap hefty commissions--50 percent of your first year’s premium and 10 percent of your payment for every succeeding year.
Even in this day of internet resources, long-term-care insurance can still stymie the most conscientious consumer because it can be complicated. Indeed, although the policies have become more standardized in recent years, they are fraught with uncertainties that can leave you much less secure than you planned. Among the most important points:
- Your insurer may not be around for the long haul. Some long-term-care insurers have shaky finances at best. When we reviewed 47 policies offered by seven companies in California, we found that three of the seven insurers had Weiss financial-safety ratings lower than B+. If a company goes under, you could lose your coverage, and at least some of the money you paid, or face stiff premium increases if the business is bought by another insurer.
- The coverage may be insufficient. Long-term-care insurance pays a daily benefit for nursing-home care. (Currently, nursing-home day rates range from $96 in Shreveport, La., to $420 in Alaska.) But drugs, supplies, and special services, which aren’t covered, add 20 percent or more to the bill. Then comes inflation. Between 2004 and 2008, nursing-home costs are projected to rise by 5.6 percent a year, and 5.9 percent for four years after that, according to the Centers for Medicare & Medicaid Services. That $181 daily benefit you buy this year will cost $238 in five years and nearly $300 in nine years. A $181 benefit bought now will only pay about half the cost then.
- Many Americans hope to receive care in their homes. But policies generally pay only a portion of the daily benefit--older policies paid just 50 percent--for home care. That’s not enough if you don’t have a spouse or relative to help take care of you. Home-health aides charge $18 an hour, on average. Hiring one for eight hours a day costs $144. A policy with a $181 benefit would only pay a portion of that.
- There’s never a good time to buy. Premiums escalate as you age. For example, a plan that costs a 50-year-old $1,625 annually will run a 60-year-old $3,100 and a 70-year-old $7,575. Many insurance agents recommend you buy young to lower your annual premium. Say you buy at age 40 and pay a relatively modest $685 annually. But the average age of people admitted to a nursing home is 83. That means you might pay for nearly 40 years before knowing whether you’ll need to use the policy.
- You may not qualify for benefits. Insurers will not pay for your care unless you are unable to perform a specified number of what the industry calls "activities of daily living": bathing, dressing, eating, getting from a bed to a chair, remaining continent, using a toilet, and walking. Alzheimer’s and other forms of severe cognitive impairment may qualify you for coverage if you meet certain clinical criteria. You may also qualify through "medical necessity" if you have a condition such as congestive heart failure.
- The policies have limitations. First there are deductibles, in the form of elimination periods--20, 30, 60, 90, or 100 days during which you must pay for nursing-home care out of your own pocket. As with other insurance, the larger the deductible (or in this case, the longer the elimination period), the lower the premium.
Insurers do offer lifetime coverage, but many people can’t afford the premiums. Instead, they purchase a specified benefit period, usually one to six years, and hope they won’t need more coverage.
Given the complexity of the product, we highly recommend you speak to a licensed long-term-care professional who can provide no obligation quotes and clarity.
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