Long Term Care - is Long Term Care Insurance Right for You?

You can't watch television for five minutes without realizing that the Baby Boom generation-the 78 million Americans born between 1946 and 1964-are entering their senior years. The music of the Sixties is now being used not to sell cars and jeans, but an array of senior products-from retirement investments to dietary supplements. For some boomers, "When I'm Sixty-Four" not a love song; it's an entry in Microsoft Outlook. The aging population has focused new attention on long term care. Who will need it? What does it cost? And how will people pay for it?

According to the American Association of Homes and Services for the Aging (AAHSA), a nonprofit organization that studies elder care, nearly 7 out of 10 adults who reach the age of 65 will require long term care at some point in their lives. Some of this care is given in the home, but the majority is provided in assisted living facilities and nursing homes. In October 2007, the MetLife Mature Market Institute reported that the average cost of a private room in a nursing home has reached $77,745 a year, and the average nursing home stay is 876 days, or 2.4 years. That means the cost of an average nursing home stay is $186,588. However, 25% of nursing home residents remain in a nursing home three years or longer. Fully 12% stay more than five years. A five-year stay would cost $388,000 at today's prices. In 2011, when the first baby boomers turn 65, costs will undoubtedly be higher than they are right now.

People pay for long term care in three ways: 1) out of their savings, 2) with insurance, or 3) through Medicaid, the government health plan for low-income individuals. Not many people have $75,000 to $400,000 in savings, so most people pay with insurance or Medicaid.

To qualify for Medicaid, an individual must have little income and few assets. The family home is exempt from the Medicaid calculation, as long as the person needing care or their spouse lives in the home. Even then, the home equity can be counted by Medicaid if it exceeds $750,000. To control exploding Medicaid costs, Congress extended the "look back" period for counting assets transferred to friends and family from three years to five years prior to applying for Medicaid.

For people with substantial assets in retirement accounts, stocks, bonds, or savings accounts, the best way of paying for long term care is through long term care insurance. Of course, the person must buy the long term care insurance before he or she needs it. The sooner individual signs up, the lower his or her premiums will be. For example, a 50-year old who gets a $150-a-day for four years of coverage can expect to pay annual premiums of about $1000. If the person waits until he or she is 65, the cost will be about $2200 a year. At 80, the cost is around $7500 a year.

Not everyone is convinced they will need a private room in a nursing home; many think they will be fine in an assisted care facility, which costs less. According to the MetLife study, a year in an assisted living facility costs $35,628-about half the cost of nursing home's private room. As a result, the daily cost of a room in an assisted care facility is $97 a day, rather than the $213 for a nursing home room. By cutting the daily rate in half, the insured is able to reduce the insurance premiums.

Other people reduce premiums by cutting the amount of time the policy covers. If the average stay is just 2.4 years, they reason, why get coverage for more than that? Only one in four people stays in a nursing home three years or more. Some people are willing to play the odds to reduce their premiums. The risk, of course, is that the insured ends up spending not just three or four years in the facility, but four, five, six years, or more. If a person has considerable assets, the lack of comprehensive insurance will put those assets at risk.

A smarter way to cut premiums is by increasing the elimination period-the waiting period before the benefits start. By extending the waiting period for a $150-a-day room by an extra 90 days, for example, the insured will have to pay an additional $13,500 in out-of-pocket expenses. This will decrease the premium amount substantially, giving the insured time to save up the out-of-pocket amount. It will also protect against the high cost of an ongoing stay. It is better to pay an upfront cost that is known than to accept an open-ended arrangement that could cost far more.