Many of us are aware of the high cost of nursing home care, but what is surprising is the likelihood that we will actually need those services one day. Recent reports indicate that if you are 65 today, there is a 70% chance you will need this type of care sometime in the future.
One way to pay for this type of care is through long term care insurance. With the cost of care approaching $90,000 per year, it’s important to find out whether or not there is a type of insurance that makes financial sense to help meet these expenses.
There is a simple, but unhelpful, answer to this question: Yes. No. It depends.
There are several factors that influence the highly personal decision for long term care insurance, and we are going to break them down for you.
How Wealthy Are You?
One of the first things to consider is what options you have at different categories of wealth.
If you have minimal assets and anticipate a small income when you are aged, then Medicaid coverage could be an option to pay for nursing home care. Medicaid is a state-administered program, jointly funded with the Federal government to provide funds for care for those in financial need, and the program currently pays for over 50% of today’s nursing home residents.
If you are fortunate enough to be very wealthy, then you have the option of using your own funds for long term care. By self-insuring, you are assuming the risk yourself, and not spending your funds on premiums for an insurance policy that you might not ever have to use.
However, if you have moderate assets, then this is the point at which evaluating a long term care insurance policy makes the most sense.
How About Your Health?
Most policies require evidence of insurability through a questionnaire, medical records review or a physical. Therefore, timing is important not only from an age perspective (lower age = lower premiums) but also prior to a major health event.
No one has a crystal ball for that topic, but many experts recommend the best window of time for this type of insurance purchase is in your 50s. There is still a discount related to age and health, but it shortens the years that you might be paying for insurance that isn’t used.
It’s possible that long term care insurance is offered by your employer, so that option should also be explored. Often the premiums are lowered by the fact that it is a group offering, and evidence of insurability might be simplified. Finally, it is usually a portable benefit that you can take with you when you leave that employer.
Do You Want Options?
One of the best things about long term care insurance is that it is not strictly for nursing home care. Most policies also cover benefits for home care and assisted living. This provides the insured with multiple options.
In contrast, Medicaid usually does not pay for these care options.
Another reason that people purchase long term care insurance is to protect their assets from being depleted, preserving savings for other purposes, such as a legacy gift to children or grandchildren.
In addition, a married couple must consider differing health care scenarios between them. Having a policy in force would provide financial stability for a spouse that remains in the home, and prevent the need for drastic financial measures to pay for care.
What Should I Look for in a Policy?
In evaluating policies, in addition to cost, a close evaluation of the policy elements is essential.
First, check out whether or not there is an elimination period. Think of that as similar to your car insurance deductible. It’s the period of time where you will need to pay for care, prior to when the insurance policy begins to pay. The elimination period usually ranges from 60 to 90 days.
Then, examine your insurance proposal for the benefit period. This is how long the insurance policy will pay for nursing home care. It often runs 3 to 4 years. The average length of stay in a nursing home varies by age and diagnosis, so while difficult to anticipate your exact needs, remember that many nursing home stays result in discharge to home or a lower level of care.
Evaluate whether or not the policy provides an inflation factor in order to keep up with the increasing cost of care, especially if you are purchasing the policy at a younger age. You will want to make sure that the policy will pay for higher room rates and services by the time you need the coverage.
Will I be Able to Find a Policy?
The insurance marketplace has taken some big hits with their long term care products. Twenty or so years ago, there were 100’s of carriers offering coverage. Today there are a handful, possibly a dozen, including major carriers like MetLife and Prudential. Interestingly, according to Forbes, only 8% of Americans have this type of policy in place.
Recently, the insurance industry has begun to offer a hybrid policy that combines the features of long term care insurance with whole life insurance. Whole life is often referred to as “permanent” insurance, distinguishing itself from term insurance, purchased often by a large lump sum. With a hybrid policy, if the insured doesn’t need the long term care benefit, then the beneficiaries receive the proceeds of the policy when the individual passes away. If the insured needs long term care, then the policy can be accessed to pay for those benefits.
There are some potential disadvantages to these policies, as the premiums are not tax-deductible, you might forego investment earnings in order to purchase them, they are known to be expensive and your insurance investment is usually not paid out at market rates.
However, it remains an option to examine if you decide you need protection and cannot find affordable traditional long term care insurance.
Should I Consider my Family Health History?
Consider chronic conditions and genetic predisposition for illnesses that may run in your family. Issues such as obesity, heart disease and diabetes and are all things that can set the stage for a nursing home stay down the line.
It’s not just illness that can create the need for a nursing home; it can be loss of the skills we use to take care of ourselves, referred to as Activities of Daily Living (ADL’s). These are things like bathing, dressing and feeding ourselves. Fortunately, most long term care policies will pay benefits if two or three of these skills are impaired.
Another reason people seek care in a nursing home is due to cognitive issues. Even mild cognitive issues can create a situation where a person is unsafe at home, particularly if they live alone. As cognition declines, individuals often forget how to perform those ADL’s, and may become quite frail.
Remember why people have insurance in the first place: It protects against expensive and unlikely events.
Many people drive accident free or never have a catastrophic event like a fire. However, we’ve established the likelihood that those over 65 will someday need to stay in a nursing home, but the extent to which you may need that care is unknown. As you read through the additional considerations above, consider whether these issues increase your personal and family certainty of need:
- Do you have modest assets that you wish to protect?
- Are you concerned about how your spouse would manage financially if you were in a nursing home?
- Are you between 50 and 64 years old?
- Do you want the flexibility to choose alternatives to a nursing home?
- Can you find a policy that is affordable and has the elements you are seeking?
- Are there health concerns in your family or your own medical history that should be considered?
Finally, as we know, things never stay the same in life and issues that factor into today’s decision can be fluid and situational.
Therefore, it is very wise to revisit this decision as we experience milestones such as children leaving home, the death of a spouse, retirement, the dependency of an elderly parent and other changes impact our world.
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