Long Term Care - Does A Long Term Care Insurance Policy Make Sense?

When most of us picture our retirement years, we imagine walks on the beach, fishing at a favorite spot, traveling to new places, or simply pursuing the hobby we never seemed to have enough time to enjoy. Few if any of us imagine living in a nursing home or an assisted living facility. But experts who study gerontology say that a person who reaches the age of sixty-five has a seven-in-ten chance of needing some kind of long term care.

Long term care is not cheap now and it will be even more expensive in the future. A report issued in October 2007 by the MetLife Mature Market Institute states that the average price of a private room in a nursing home is $77,745 a year. If a person stays the average 876 days (2.4 years), the total cost would be $186,588.

There are three options for paying for long term care: 1) using personal savings, 2) through Medicaid, the federal government’s healthcare program for low-income Americans, or 3) with long term care insurance. Very few individuals or families can afford to pay $70,000 to $300,000 out of pocket, so most people use Medicaid or long term care insurance.

If a person has any assets at the time of retirement, such as a retirement account, stocks, bonds, annuities, or cash, Medicaid will require that most of those assets be spent on care before it will begin paying benefits. A home does not count toward Medicaid eligibility, but home equity above $750,000 does. Anyone thinking of transferring assets to a friend or relative will have to think ahead: Congress put a five-year “look back” period in place for property transfers that occur before applying for Medicaid.

An individual also must look ahead when buying insurance. Insurance companies sell insurance to people before they need the benefits, not when they already do. Also, premiums are lower for younger people. For example, 50-year old will pay about $1000 a year for a policy that covers four years of long term care at $150 a day. A person who is 65 will pay more than double that: $2200 a year. By 80, the cost will be $7500 a year.

To reduce premiums, some people reduce the daily rate the insurance covers. According to the MetLife report, the cost of staying in an assisted living facility is $35,628—about half the cost of a nursing home. If the insured thinks that assisted living is all he or she will need, then the cost of care could go down from $213 a day to just $97 a day. Reducing the daily rate will reduce the cost of the insurance.

Other people lower premiums by reducing the period the policy covers. They reason that the if the average stay in a facility is just 2.4 years, then there is no need for coverage to extend beyond this period. This approach involves a risk, however. If the need for coverage does continue beyond the insurance period, the additional costs could wipe out a person’s life savings.

A wiser way to reduce premiums is for the insured to assume more of the risk by increasing the elimination period (waiting period before benefits begin). For example, delaying the benefits for 100 days would lower the premiums substantially. The insured would then pay the additional $15,000 in costs. This may seem like a lot of money, but at least the amount is limited. If a person requires care for years or even months beyond the cut-off period of the insurance, the cost could be astronomical. It is better pay a known amount than to risk paying a larger, unknown amount.

A frequent contributor to online and print publications, Bradley Steffens is the author of twenty nonfiction books for children and young adults and coauthor of seven more. His newest book, Ibn al-Haytham: First Scientist, is the first biography to be published in English about the medieval Arab scholar known in the West as Alhazen.