Long-term care coverage: Peace of mind, at a price

When you're going through your retirement-planning checklist, don't forget long-term care.

It's a term that refers to help with daily activities, such as bathing, dressing and eating, or other mundane yet essential tasks. And assistance with those activities — which most of us will need someday — can come with a yearly price tag reaching into six-figure territory.

If you don't want to rely on family members or spend down your assets and you are above the income threshold to qualify for Medicaid, long-term care insurance might be a solution.

"If you can afford the premiums, it provides tremendous peace of mind to know you have a resource to go to if you or your spouse or partner needs the care," said Paula Nangle, a certified financial planner with Marshall Financial Group.

Remember, long-term care is different from medical care. As such, Medicare — which you can start to tap into at age 65 to cover medical expenses — does not pay for long-term care, whether you receive it at home or at a care facility.

According to the U.S. Health and Human Services Department, someone turning 65 today has nearly a 70 percent chance of needing long-term care services during his or her remaining years. On average, women need care longer (3.7 years) than men (2.2 years).

In general terms, LTC insurance will pay a daily amount, up to a predetermined dollar limit and length of time, for services. Those specifics, along with any optional benefits you choose, partly determine the cost of your premiums.

Your age also plays a role. The older you are, the more expensive the policy will be. Also, be aware that if you have a preexisting condition, an insurer can reject you or place care limitations on that condition.

According to the American Association for Long-Term Care Insurance, the average married couple, both age 55, would pay $1,816 per year for a policy with $162,000 in coverage for each. If they also purchased a 3 percent inflation protection rider, the policy would set the couple back $3,725 yearly.

Meanwhile, federal data shows that the average cost for long-term care in an assisted-living facility was $3,293 monthly (about $40,000 a year), $6,235 per month (roughly $75,000 a year) for a semiprivate room in a nursing home or $6,965 per month (more than $83,000 yearly) for a private room.

At home — where most LTC insurance policyholders use their benefits — Americans paid an average $21 per hour for a home health aid and $19 per hour for homemaker services. But in some areas, that can run as high as about $30 an hour, meaning one year of 24/7 care could cost a few hundred thousand dollars.

So while it might appear that LTC insurance can make sense, you have to be able to pay the premiums, consistently, for many years.

"If you think at some point you won't be able to afford the premiums … the insurance could lapse and you'll have wasted all that money," Nangle said.

While that may be horrible for the policyholder, the insurance company probably wouldn't mind.

The long-term care market has gone through a shakeout after many insurers underestimated how many claims would be filed and how long they'd be paying claims. Only a dozen or so companies now offer LTC insurance, compared with roughly 100 a decade ago. The remaining players are continuing to sort out how to balance the expense of paying claims with premium increases, which has been a sore spot with policyholders.

Even when you can easily afford the premiums, it's crucial to remember to pay them. Because, as advisers point out, insurers will cancel your policy even if you had a memory lapse after faithfully paying your premiums for years.

Nangle saw firsthand how helpful LTC insurance can be. A policy covered the full cost of her mother's in-home care after she developed Alzheimer's disease. When she needed to move to a skilled nursing facility, her insurance covered about 60 percent of the cost. Her policy was for three years of care, and about 1.5 years was used.

"Sometimes people feel like they'd rather save the money than spend it on premiums," Nangle said. "But once you need that care, the premiums get paid back very quickly" in the form of care.

Some advisors say that for people with at least $2 million or $3 million in assets, LTC insurance might make no sense. In simple terms, paying out of pocket for care probable doesn't dent their financial position too much.

But Stephanie Lee, CFP and principal of East Rock Financial Services, tells even her wealthiest clients to get a minimal-coverage policy. The reason? She has watched many clients and friends hesitate to get elderly parents the care they needed because the adult children — or the parents themselves — did not want to tap their assets.

"In that case, insurance can still help, because you or your adult children are more likely to start care for you because you'll use [the insurance] instead of your assets to pay for it," Lee said.

Wes Shannon, a CFP and principal of SJK Financial Planning, used to recommend LTC insurance and now prefers annuity contracts with LTC provisions.

"I like them better, because if you never use the long-term care portion, at least there's some return on investment," Shannon said.

He recently helped a client purchase an indexed universal life insurance policy with an LTC rider. In this case, an LTC policy alone would have been about $500 a month. The policy she purchased is $610 a month.

But it has a death benefit of $250,000. So even if the client never uses the rider, her estate will still receive $250,000.

"With long-term care insurance, you don't get anything back if you don't use it," Shannon explained.

But what concerns many financial advisors the most is that few people give any thought as to who will help them when they reach the point of needing assistance.

"Just make sure you have a plan, whether it involves insurance or not," Shannon said.

— By Sarah O'Brien, special to CNBC.com