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Long-Term Care Comes Of Age

Putting off planning for long-term care? Think again. These days, your assets can be quickly drained — especially with skyrocketing costs and strained Medicare and Medicaid programs..

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Costs for nursing homes and assisted living are rising twice as fast as inflation.

The national average for a private room in a nursing home cost $83,585 a year, according to a 2010 MetLife survey. Less costly assisted living was $32,930, but had even heftier price hikes.

"People are burning through their money,” says Matthew Tuttle, CEO of Tuttle Wealth Management in Stamford, Connecticut. “They didn’t plan ahead.”

Nevertheless, about two-thirds of those 65 years or older will use — or need — some form of long-term care.

The challenge — as we live longer — is how to pay for it.

Most experts favor insurance. A new hybrid life insurance or annuity policy can be used to cover long-term care costs. Or you can use traditional long-term care insurance. The latter is especially cost effective — about $3,000 to $5,000 a year, a fraction of the cost of a nursing home. And the policies are wide-ranging, covering home care, assisted living or nursing homes.

After seeing their parents deplete their life savings, more baby boomer are signing up for this insurance, says Diana Scheel, a financial advisor at Sapient Financial in San Antonio, Texas. She expects the trend to accelerate as long-term care costs rise.

Despite rising demand, though, some companies have left the space and others are raising premiums because they underpriced policies—complicating the process.

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And other social safety net alternatives like Medicare and Medicaid are under the gun. Medicare is due to run dry as soon as 2017, says Larry Van Horn, professor of health care economics at Vanderbilt University. And it’s highly limited, usually only covering 20 percent of long-term care costs.

Meanwhile, state-run Medicaid keeps tightening its rules. Experts see it as the payer of last resort, and soon some things won’t be covered.

“Medicaid will get worse,” says Van Horn, as states struggle to pay for it.

The answer, then, is doing aggressive financial planning, say experts; for starters, make sure you have three to four sources of income to fund long-term care.

Fortunately, most people prefer home care, which is cheaper than the institutional kind. Costs have barely risen for the past ten years. Nationally, the average hourly rate for a licensed home health aide was $21 last year, according to MetLife.

“People can arrange their affairs so they can stay at home,” says Tuttle. “Nursing homes are expensive and depressing.”

And long-term care policies can help shoulder the costs. But you must use the policy or lose the money you contributed—much like health insurance. And policies can be complex because they’re customized. You decide when they start, how you’ll pay and how long the waiting periods are. Also, costs are rising quickly.

Life Changes - A CNBC Special Report
Life Changes - A CNBC Special Report

The sweet spot for buying insurance is when you’re in your 50s, says Scheel. After that, long-term insurance is more expensive and poor health can disqualify you. She suggests adding inflation benefits to your policy to cover rapidly rising rates. Also, choose a plan that covers your full stay at a nursing home — usually three years.

To guard against being caught short, over-fund the policy, suggests Louis Berlin, president of Insurance for Enhanced Living in Miami, whose mother was bankrupted after spending 27 years in a nursing home.

Lately, some experts are recommending hybrid policies, which combine death benefits and long-term care insurance. They come in two versions: a deferred fixed annuity or life insurance policies; both leave money to heirs. The death benefit is simply reduced if you use it to pay for your care.

But there are drawbacks—they’re highly complex and carry higher premiums than regular long-term policies. Tuttle calls them a “marketing gimmick,” preferring long-term care insurance.

“Long-term care is a colossal train wreck,” says Van Horn, adding that costs will very likely keep rising. “We’ve shifted home care from kids to public vehicles. We can’t afford that anymore.”