Like Scarlett O'Hara who put off thinking about anything unpleasant until tomorrow, most Americans aren't planning for how they'll pay for a nursing home or at-home care should they need it when they're old, disabled or chronically sick.
Yet for the estimated 2-in-5 among us who will need extended care at some time in our lives, there's a tool that can keep us from racing through our life savings to pay for this expensive care: long-term care insurance.
This insurance would pay for home care and adult day care services that can keep people out of nursing homes for as long as possible. It could also provide a better, more expensive nursing home than government programs will subsidize.
In general, long-term care coverage should increase a person's choices -- and that could make all the difference in their quality of life as they age. Many aging people, of course, prefer to stay in their own homes, but home health aides cost an average of $21 per hour for a certified aide and $19 per hour for an uncertified aide. A substantial amount of that would be paid for by long-term care insurance depending on the policy you buy. Long-term care policies pay anywhere from $50 to $400 a day toward care. Most purchasers who buy coverage from private insurance companies expect to supplement it with their Social Security, pension or retirement plan.
A fairly standard policy that pays $160 a day for a nursing home runs $1,982 annually at age 50 and $3,026 annually at age 70 or older -- though amounts vary widely depending on which extra bells and whistles you buy. But this pricey insurance still compares well to the cost of care. A private room in a nursing home averages close to $80,000 annually -- and can be twice that in metropolitan areas. As far as cost, assisted living and at-home care are not far behind.
Filling a gap
This insurance, while not for everyone, seems to be catching on. Among Americans who are 65 and older, approximately 15 percent have LTC insurance, reports the national trade association, America's Health Insurance Plans (AHIP). But even so, only a small percentage of nursing home bills are paid for with this type of insurance, according to the Health Care Financing Administration. Critics say the coverage may not be worth the expense. Although the average nursing home stay is about 2.3 years, about half of those who need it live there less than 90 days. But many say it meets a colossal need. Private health insurance only pays for medical care, and Medicare covers a limited portion of long-term care for just 100 days after a hospitalization -- and that is only for short-term "skilled care," not for long-stay custodial care. As a result, many consumers plow rapidly through life savings paying for custodial care. And they must spend down to nearly their last cent to qualify for Medicaid (MediCal in California), the government program that provides long-term care for the poor.
Whom it's best for is subject to debate, but the benefits are clearest for middle-income people. The wealthy can afford to pay out of pocket for home care, assisted living, or nursing home care, and it wouldn't make sense for the poor to buy this expensive insurance when Medicaid is available to them.
But for middle-income people who can afford the premiums and don't want to see their savings and investments vanish swiftly, long-term care insurance is probably a sound choice. The United Seniors Health Cooperative, a Washington, D.C., consumer health insurance organization, advises that it is valuable for protecting assets of $75,000 or more per person in a family. "We think that if you are middle income, long-term care insurance makes a lot of sense for a fairly affordable and stable premium," said HIAA spokesman Richard Coorsh. "You have more flexibility with where you can stay when you have more financial freedom. Otherwise, your choice will be in a nursing home that takes Medicaid assignments."
People buy this insurance for a variety of reasons: They don't want to be a burden on their children in the future. They have substantial assets they want to leave to children and grandchildren and thus need to protect. And they want the peace of mind that they will have good choices for care should they need it and not be limited to facilities accepting Medicaid -- something that varies from state to state.
"It's for people who can afford it and have good reasons to buy it," said Priscilla Itscoitz, an AARP expert on consumer aspects of long-term care insurance.
The best time to buy
Most people buy this coverage while in their 60s, but many experts say there's no time like the present, especially if you're in your 40s or 50s and healthy. Applying when you're well means you won't get rejected because of preexisting conditions that are more common as people age. And the young get a major financial break: premiums are determined based on your age at time of purchase. Also, all premiums are supposed to stay at the same rate for the life of the policy. Insurers say that small increases will be tacked on over the years to groups of policyholders -- such as people in certain age groups or people who bought policies in a specific year. Individuals won't be targeted for rate hikes as they age or become sick or mentally incompetent. Coorsh notes that the increases must be approved by state regulators.
Read the fine print
But disturbing reports have surfaced recently about some policyholders getting exorbitant rate hikes and being forced to cancel. Then they find that in the years since they first bought the insurance, they've acquired too many medical problems to qualify for insurance with another company. "That's a big concern," said Itscoitz. She said getting information on a company's rate-increase history is "harder to get than information from the CIA."
"It's very hard to know if a company will increase rates on you, but I tell people to assume the price will go up, as it does with most things," she said. "I tell them that over the next 10 to 15 years, they should assume the premiums will go up 20 to 30 percent. And if they don't, that's a bonus." Itscoitz also advises people to consider buying non-forfeiture benefits. With these benefits, if the insurance becomes too expensive to continue, what you've spent so far won't be worthless; it will pay for some care. If you buy a policy when you're relatively young, it's best to pay extra for inflation protection, which generally allows an increase in care costs of 5 percent compounded annually. "This is just common sense," Itscoitz said. "If you buy a policy you don't use for 20 years without inflation protection, you might think you're buying a daily benefit of $100. By the time you use it, it might be only worth $40 a day due to inflation."
Although it may seem that you're throwing money down the drain if you don't use a policy for 30 years, if ever, many experts say you will still spend less this way than if you buy the insurance in your 60s or 70s. For example, someone who buys a bare bones policy at age 45 would have paid $14,175 in premiums by age 85 while another consumer who bought the same plan at age 79 would spend $26,232 by age 85, according to the American Health Care Association. The downside of buying in middle age is that more flexible policies with better options may become available later. Also, if insurers find the baby boom bulge is costing them more than they anticipated, they may have to raise rates more than they now anticipate.
But most people do purchase this insurance in their 60s, and experts say this may actually be the most sensible time to buy. That's because the cost is still manageable and people know better what they need in their policies. Instead of inflation protection, it might be a good idea to buy a policy that pays a larger daily benefit amount as a hedge against increased costs, Itscoitz said.
Choosing the right carrier
About 195 companies -- primarily health and life insurers -- sell long-term care policies, which have a wide range of options that cost extra.
The typical policy provides a daily benefit of anywhere from $50 to $400, depending on how much you're willing to spend. The buyer must choose an "elimination period," which is akin to a deductible and represents the number of days you pay out of pocket for care before the insurance kicks in. Most people pick from 20 to 100 days.
With many policies, the insured person must be unable to manage two or three "activities of daily living" such as eating, dressing and bathing to begin collecting benefits. Customers choose how long the coverage will last, which usually ranges from two to four years to an unlimited period, depending on how much you're willing to pay. Because this insurance is complex and difficult to understand, most consumers should get advice from someone who doesn't sell it, such as a certified financial planner, an eldercare lawyer and the free insurance counseling service known as "SHIP" for State Health Insurance Assistance Program.
It's crucial to check into the company's financial stability to determine whether it is likely to stay in business long enough to pay out your benefits. A handful of insurance rating agencies evaluate the companies' claims histories and financial security. "I always say there are about 120 companies that sell this insurance, but there aren't 120 companies you'd want to buy it from," Itscoitz said. "You want a company to have a track record and that won't go out of business in five years."
Alternatives to LTC insurance
If you have a whole life insurance policy - meaning that the policy has cash benefits --you can include a rider to the policy that will let you start drawing part of the death benefit if you need long-term care. This has an advantage over some long-term care policies, which have a waiting period for receiving benefits. It may also be less expensive.
For free counseling, the State Health Insurance Assistance Program or SHIP near you can be found through your local Area Agency on Aging or the Elder Care Locator Service (800/677-1116).
Insurance-rating agencies include A.M. Best (908/439-2200, ext. 4742), Weiss Research (800/289-9222) and Moody's (212/553-0300).
AARP's Health and Long-Term Care Program
America's Health Insurance Plans
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