Looking to buy long-term care insurance? Check out this story first
The average cost of staying in a nursing home for a year is between $55,000 and $170,000, depending upon where you live. Therefore, a question that always comes up is: Should I buy long-term care insurance?
Private long-term care insurance can help you prepare your finances for the future, but experts warn that you must be careful when selecting a policy, because unscrupulous insurers may try to take advantage of your situation. To that point, it's essential to investigate your options thoroughly and ask for referrals from people you know and trust.
Most people are woefully unprepared to cope with long-term care needs and expenses. In fact, various studies have found that individuals admit that they are confused about how to approach future long-term care challenges.They are also failing to actively build a strategy for long-term care needs, despite the possible personal and financial consequences.
I had an opportunity to discuss long-term care insurance with Carolyn McClanahan, a physician and a certified financial planner. She is the founder and director of financial planning at Life Planning Partners, Jacksonville, Fla., and a regular speaker on health and financial topics.
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Q: What exactly is long-term care insurance?
McClanahan: There may come a point where you can no longer care for yourself. Dementia, chronic illness or an injury may result in the need for long-term care. LTC insurance pays for health-care costs related to ongoing care not covered by regular health insurance. Custodial care in the home, assisted-living facilities and nursing-home care are typically not covered by regular health insurance or Medicare. The cost of this care can be very expensive, and long-term care insurance can help defray some of these costs.
Q: How does it work?
McClanahan: Long-term care insurance pays for care once someone loses the ability to care for themselves.The insurance kicks in once someone loses two of six of their "activities of daily living" or develops dementia. The six activities of daily living are eating, bathing, dressing, toileting, walking and continence.
Q: Is LTC insurance a wise purchase?
McClanahan: It depends on the person. The cost of long-term care insurance is very steep.The person most in need of this type of insurance is someone who is too wealthy to qualify for Medicaid and too poor to self-insure for this expense. Consult a fee-only financial planner to help you determine if this insurance is right for you.
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Q: At what age should someone start to plan to buy LTC insurance?
McClanahan: Once again, it depends on the individual. Underwriting for long-term care insurance is very stringent. If you are at risk for significant health problems, such as diabetes because you are obese, you should consider the purchase as soon as you think about it. If you live a healthy lifestyle, you may consider the purchase later, although you risk becoming uninsurable at any time.
Q: What questions should be asked before purchasing LTC insurance?
McClanahan: There are many factors that weigh in the decision to buy coverage. Can you afford the premiums? Ask how often the insurer raises rates and what options are available if they do raise the rates. Make certain the company is highly rated and has a lot of experience with long-term care coverage. Also make certain you understand the benefits paid by the policy. For instance, are the benefits inflation-adjusted? How long will the benefits be paid, and are the benefits enough to cover potential expenses?
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"The main problem with long-term care insurance is you may not need the coverage for many decades, and the environment for long-term care may change significantly over that time."
Q: You mentioned that LTC insurance is expensive. What should someone do to plan ahead for future health-care costs?
McClanahan: Long-term care costs can be very significant. Even more important than having long-term care insurance is to have a plan for your long-term care. Do you have family members who can take care of you? Have you completed clear advance directives and appointed a health-care surrogate to make decisions for you in the event you can no longer care for yourself? These are all important factors to address when planning for future health-care costs. Taking better care of your health can go a long way toward reducing future health-care costs.
Q: What are the pros/cons of LTC insurance?
McClanahan: The pro of buying insurance is you have money dedicated for your care that your family can use to make certain you get the care you need. The cons of buying traditional long-term care insurance are many—it is expensive, you may die before using it, premiums may increase in the future, or the insurance company may get out of the market and turn your policy over to another company. The main problem with long-term care insurance is you may not need the coverage for many decades, and the environment for long-term care may change significantly over that time.
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Q: Are there any other options to LTC insurance?
McClanahan: There are many options that should be considered in addition to or in place of purchasing long-term care insurance. You may plan to use the equity in your home to finance coverage, save a larger nest egg to cover the cost of care, or create a family-care plan if your family is willing to take on the responsibility for your care. Another option is to buy a hybrid life insurance/long-term care insurance policy. These policies pay a death benefit if you die or pay for long-term care if you need it—either way, you or your family receives something for all the money you put in the policy. Talk to your financial planner to determine if this is a good option for you.
—By Jim Pavia, CNBC.com. Follow Jim on Twitter @jimpavia.