Dealing With the High Cost of Long-Term Care

Question of the week:My financial advisor suggested that I get long-term care insurance, but it seems like this might be just another expense I don't need right now. What's your take on it? --Jesse T.

Dear Jesse,

Consider that the cost of a long-term care policy can be downright cheap compared to the cost of long-term care. According to the United Seniors Health Cooperative, the national average cost in 2000 for a nursing home was $153 a day, or over $55,000 per year. In some areas, the cost can be much, much higher.

But will you end up in a nursing home? A study by the U.S. Department of Health and Human Services found that people at age 65 have at least a 40 percent lifetime chance of entering a nursing home, with about 10 percent staying there at least five years. So while you might never need long-term care, the longer you live, the greater your chances are that you will.

We asked members of the Armchair Millionaire community about the reasons they have purchased long-term care insurance and got some great, common sense responses:

For peace of mind. "We bought our policies in our early 40s so that we would know that we are prepared for whatever happens. We wish that we had taken policies for our parents years ago!" --B. in Alabama

For financial security. "As part of my overall financial plan, I purchased a long-term care insurance policy when I was 34. At that age, the premiums are dirt cheap." --Bob S.

For asset protection. "My mother-in-law has been in a nursing home for two years and the cost is $5,000 to $6,000 a month, so slowly but surely her assets are being spent down. I do not want that to happen to everything I worked for my entire life." --Tom from Buffalo Grove

To make a wise decision about buying this all-important insurance, use my quick overview of long-term care coverage.

The Armchair Millionaire Guide to Understanding Long-Term Care Insurance

Policies provide for care in a nursing home, and often also pay for at-home nursing care, physical therapy, and home health aids. And many policies cover the cost of assisted living and adult daycare.

Any policy you consider should include an "outline of coverage" that describes the policy in detail and helps you compare it to others. There are three major things to understand about any policy:

• The benefit amount and period. This is the amount that the policy will pay each day you require care and the total number of days the policy will pay for covered services.
• The elimination period. Like a deductible, this is the number of days you require care before the policy begins to pay benefits. Elimination periods of zero days are available.
• Inflation adjustment. This is an increase in the benefit to offset inflation. Five percent inflation protection is common.

It all depends on the level of benefits you choose and your age when you buy the policy. A typical policy costing $900 a year at age 50 could easily be double that at age 65. And premiums do vary quite a bit between insurance companies. A nice thing about long-term care insurance, though, is that your premium does not increase as you age (unless your provider chooses to raise its rates for all its policy holders).

You want a reputable, financially strong company without a history of major rate hikes. Your insurance agent should be able to give you company ratings and rate histories. Your state insurance department can also be a valuable resource, providing the names and ratings of companies licensed to sell insurance in your state and maintaining public records of complaints against companies.

• What does it cover?
• How do I choose a policy?
• How much does it cost?
• How do I find a good insurance company?

THE BOTTOM LINE: For protecting your assets and offering peace of mind, there may be no better deal than long-term care insurance. But policies and options are complex, so research carefully before you buy and consider consulting a financial advisor specializing in long-term care policies.