Weighing the pros, cons of long-term-care coverage

No one wants to think about it, but the reality is that sooner or later the majority of people will require some sort of long-term care.

In fact, 70 percent of people turning 65 years old can expect to need some type of long-term care, according to the U.S. Department of Health and Human Services.

Long-term-care insurance can help defray the cost. Though pricey, it's an investment that does pay off if you wind up using it, say its advocates.

The dollar amounts for long-term care are ugly. A one-year stint in a nursing home averages more than $87,000 for a private room, according to the latest survey by Genworth Financial, a long-term-care insurance carrier.

It can cost significantly more in high-cost locales such as New York ($136,000) and, surprisingly, Alaska ($240,000). Even home care, which costs less, can still run in the $50,000 range.

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Long-term-care insurance reimburses you for this cost. To "go on claim," insurance-speak for using the benefit, you must be unable to perform at least two "activities of daily living," such as bathing, dressing, feeding and toileting, for most policies.

"The people who end up buying it tend to fall into two different camps," said certified financial planner Doug Wheat of Family Wealth Management, regarding his clients. "They are either worried about depleting their assets for their spouse, or they want to make sure they have enough money to pass to their children."

Most financial advisors acknowledge that long-term-care insurance is a hard sell. For starters, it brings up the topics of illness and death, something clients have an aversion to talking about. Second, it's expensive.

Policies typically range between $3,000 and $6,000 a year, depending on a variety of factors, such as sex, age, health status, maximum daily benefit, length of benefit and waiting period.

"You're talking about a European vacation every year," Wheat said.

Yet it can be money very well spent in the event of a long-term disability.

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To drive the point home, CFP Matt Curfman, an owner of financial advisory firm Richmond Brothers, points out that a policy that costs $5,000 a year is the equivalent of a one-month stay in a nursing home in many locations. "Why wouldn't you be willing to pay five grand a year for a five-grand-a-month benefit?" he said.

That still may be too rich for some people. There are a number of ways to keep the cost down.

The most potent way to keep the price low is to buy long-term-care insurance early. Most advisors suggest that clients make the purchase when they're in their early 50s and presumably in good health.

"People will pay about three times as much if they wait until age 70," said Andrea Graham, a long-term-care specialist with Upstate Special Risk Services, an insurance broker. "But the biggest cost of waiting is your health.

"You just don't know what your health will be in 20 years and whether you'll be able to qualify for coverage."

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Rates for long-term-care insurance are not guaranteed, and they are subject to rate hikes by the insurers. However, the younger that people are when they buy the insurance, the lower the base—upon which future increases are determined.

"Long-term-care insurance is more like health insurance, and those prices are going up," said Aaron Ball, senior vice president for long-term-care insurance products at Genworth.

Consumers can expect yearly increases of 3 percent to 5 percent a year, said Ball, though there have been years when premiums have gone up much more.

Like other insurance products, long-term care comes with bells and whistles. Some are worth the money; others don't provide much value.

Katy Votava, founder of GoodCare, a health insurance consultancy, advises her clients to buy as big of a benefit as they can for just a few years, what she calls a "short and fat" policy.

Votava, a registered nurse with a Ph.D. in health economics, recommends a policy that will cover at least $300 a day, with inflation protection for just three years.

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"A lifetime policy is not worth the money," Votava said. "For most people, [long-term care] doesn't go beyond three years."

Of course, that changes drastically for dementia, when care may be needed for up to a decade. That's why Votava and others recommend purchasing a partnership policy. A partnership policy lets you keep a sizable portion of your assets after your benefit runs out and still qualify for Medicaid.

Typically, you are allowed to keep only around $100,000 in assets, depending on your state of residence. But if you owned a partnership policy with a maximum benefit of $500,000, for example, you will be allowed to keep $500,000 of your assets after your long-term-care insurance runs out and still be eligible for Medicaid.

Inflation protection is another important consideration, Votava explained. Health care rises about twice the rate of general inflation. In 20 years, a $300-a-day benefit may not buy much care at all, she added.

Not everyone needs long-term-care insurance. People with modest assets of about $100,000 will likely qualify for Medicaid, which does cover custodial care. However, experts note that unless you have a partnership policy, you may not have a choice of which facility you will be assigned to.

Also, people with significant assets—in excess of $2 million, said Richmond Brothers' Curfman—can self-insure. Of course, they may prefer to buy long-term-care insurance and pass assets to their heirs.

One overlooked source of money for care is a reverse mortgage.

"The reverse mortgage can give you assets for paying for long-term care," said Votava, who recommends taking out a line of credit. Any money you don't use immediately will continue to grow until you need it.