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Long Term Care Insurance – Is it 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. Sixties music is no longer being used 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” isn’t a love song; This is an entry in Microsoft Outlook. An aging population has led to a renewed focus on long-term care. Who needs it? What does it cost? And how will the people pay?
According to the American Association of Homes and Services for the Aging (AAHSA), a nonprofit organization that studies elder care, nearly 7 in 10 adults over the age of 65 will need long-term care at some point in their lives. Some of this care is provided at home, but most is provided in assisted living facilities and nursing homes.
In October 2007, the MetLife Mature Markets Institute reported that the average cost of a private room in a nursing home reached $77,745 a year, and the average nursing home stay was 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 stay in a nursing home for three years or longer. Fully 12% stay over 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 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 people. Most people don’t have $75,000 to $400,000 in savings, so many people pay through insurance or Medicaid.
To qualify for Medicaid, a person must have little income and few assets. Family homes are exempt from Medicaid calculations, as long as the person requiring care or their spouse lives in the home. Even then, home equity can be counted by Medicaid if it is more than $750,000. To control the rising costs of Medicaid, Congress extended the “look back” period to count assets transferred to friends and family from three to five years before applying for Medicaid.
For people with substantial assets in retirement accounts, stocks, bonds, or savings accounts, the best way to pay for long-term care is through long-term care insurance. Of course, a person should buy long-term care insurance before he or she needs it. The sooner a person signs up, the lower his premium will be. For example, a 50-year-old receiving 150-a-day for four years of coverage can expect to pay an annual premium of about $1,000. If the person waits until age 65, the cost will be about $2,200 per year. At 80, the cost is about $7500 a year.
Not everyone is convinced that a private room is necessary in a nursing home; Many feel they will be fine in an assisted care facility, which costs less. According to a MetLife study, a year in an assisted living facility costs $35,628 — about half the cost of a private room in a nursing home. As a result, the daily cost of a room in an assisted care facility is $97 per day, compared to $213 for a nursing home room. By cutting the daily rate in half, the insured is able to reduce the long-term care insurance premium.
Others reduce premiums by reducing the amount of time the policy covers. If the average stay is only 2.4 years, they argue, why get coverage for more than that? Only one in four people stay in a nursing home for three years or more. Some people are willing to play the odds to lower their premiums. The risk, of course, is that the insured will spend not just three or four years at the facility, but four, five, six years, or more. If a person has substantial assets, the lack of comprehensive insurance puts those assets at risk.
One good way to reduce premiums is by increasing the elimination period—the waiting period before benefits begin. By extending the wait period for a $150-a-day room by an additional 90 days, for example, the insured would pay an additional $13,500 in out-of-pocket expenses. This will lead to a significant reduction in the premium amount, thereby giving time to the insured to save the out-of-pocket amount. It will also protect against the high cost of continued living. It is better to pay a known upfront cost than to accept an open-ended arrangement that may cost much more.
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