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Preparing for the Worst
Long-term care insurance isn't
just for the elderly
By
Sue Stevens
From
Morningstar.com, June 12, 2003
A friend of mine
(and someone known to many of us at Morningstar) just died from a
mosquito bite. He was 42 years old and in the prime of his life. He
leaves behind a young wife and two small children. I still can't believe
it. In 2002, there were 4,156 cases of West Nile virus reported--284
people died from it. More than 20% of those deaths were in Illinois.
My friend was in
rehab institutions for the better part of a year. Of course, middle-age
or even younger people could need long-term care for a variety of
reasons--consider Christopher Reeve or Michael J. Fox.
Many people are in
denial about long-term care. If you don’t have a family friend or
relative who has gone through this type of treatment, you may not have
given it much thought at all. For those of you who have experienced it
first-hand, you know the physical, mental, and financial strain it can
bring to the whole family.
The Cost of Care
Although long-term
care insurance is an important consideration for everyone, clearly, the
majority of people who will need long-term care are older. According to
a study by The New England Journal of Medicine, 43% of people age 65 are
expected to enter a nursing home at least once before they die. Here are
some of the most common reasons for nursing home stays and the average
length and cost (at $158/day) of those stays:
- Alzheimer’s
disease; 96 months; $455,000
- Cancer; 36
months; $170,600
- Cardiac
condition; 16 months; $75,800
- Diabetes; 48
months; $227,500
- Pulmonary
condition; 36 months; $170,600
- Stroke; 21
months; $99,500
(Source: Financial Planning News, March
1994)
Your health
insurance won’t cover these costs, and Medicare only pays for up to the
first 100 days of skilled care in a nursing home. Depending on your
total net worth, you can see that even an average stay in a nursing home
can eat right through the family nest egg.
Does Everyone Need Long-Term Care Insurance?
No. But a lot of us
should consider it. And many long-term care insurance policies today
cover home health care as well.
If you have less
than $150,000 in total net worth, you may find the cost of nursing home
care is just too prohibitive. Once you’ve spent your assets down to
virtually nothing, Medicaid may pick up the cost of your care, but you
probably won’t have a say in where you stay. (For more on Medicaid,
click here.)
If you have $10
million or more, you can self-insure. If you did need care, you could
probably afford to pay out-of-pocket.
But everyone else,
in my opinion, should consider buying long-term care insurance.
Depending on many factors--how much you typically spend in retirement,
what your feelings are about leaving an estate, your family health
history, your personal health status--you may find the protection that
long-term care insurance can provide will help you meet your personal
financial goals.
Most people start
to think about making this purchase once they are age 60 or older. After
seeing tragedies like my friend's battle with West Nile, the spread of
AIDS, and other serious illnesses that strike people of all ages, I'm
beginning to think we should consider this coverage much earlier.
You may think I’m
exaggerating, but more than 40% of Americans receiving long-term care
are younger than age 65 (source: Urban Institute in collaboration with
the Congressional Research Service, 5/5/00). And one third of the
700,000 stroke victims each year in the United States are under 65
(source: U.S. News and World Report, 3/15/99).
What to Look for in a Long-Term Care Insurance Policy
If you decide you
want to buy a policy, you'll need to make some decisions about the
features that you need or want. The following questions may help you get
started:
What daily
benefit will you need? The
higher the daily benefit, the higher your premium. I would recommend a
benefit of $150 a day with inflation protection, but you'll need to find
the balance between daily benefit and cost for your own situation. Be
sure to do some cost comparisons of nursing homes in your area.
How long will
benefits last? The typical
stay at a nursing home is between three and five years, so make sure
your coverage lasts for at least that period. Think about your own
family's health history when choosing benefit periods. Have family
members traditionally lived to ripe old ages? If so, you may want a
longer benefit period.
What's the
elimination period? The
elimination period is comparable to the deductible on your other
insurance policies. Your long-term care policy won't begin paying out
for a certain number of days. Remember Medicare typically pays for an
average period of about 25 days. Most policies I’ve seen have a 90-day
elimination period, but you can increase that. The longer the
elimination period, the cheaper your premium.
Is the benefit
inflation protected? Go for
the guaranteed annual-inflation increases rather than the opportunity to
increase daily benefits down the road. This rider may be more expensive
up-front, but you are guaranteed to keep pace with inflation.
Is the policy
guaranteed to be renewable?
This language guarantees that you can continue the policy as long as you
pay your premiums. That includes coverage even if the company stops
selling policies. This language does not, however, guarantee that your
rates won't go up.
What level of
care does the policy cover?
The policy should cover all levels of care, both skilled and nonskilled.
Nurses generally need to provide skilled care. Nonskilled care includes
assistance with activities that don't require a nurse, such as bathing,
walking, and dressing. You should be able to use the benefits not only
for care at a nursing home but also for home health care, day care, or
assisted living.
Does the policy
cover help at home? Some
policies will cover the costs of bringing people into your home to help
with physical therapy, bathing, dressing, walking, and so on. Make sure
the policy doesn't require a prior hospital stay before this benefit is
available.
Does the policy
cover mental conditions?
Sadly, Alzheimer's disease is a reality for many people. Be sure your
policy includes all types of dementia.
How are premiums
waived? A typical policy will
waive premiums after 90 days of skilled care. Check to see if the days
must be consecutive. Also, find out when premiums kick back in if you
get better and go home.
How financially
stable is the insurer?
Research the financial rating of the company offering the policy. Check
out ratings at the A.M. Best Web site.
Final Thoughts
Once you know what
features are important to you, get a couple of quotes. Some of the
top-rated insurers I often consider for my clients are GE Capital and
John Hancock.
If you want to read
more about long-term care, I recommend Phyllis Shelton’s book
Long-Term Care: Your Financial Planning Guide.
If you want to contact a specialist in this type of insurance, go to a
company like
MAGA. I met with them recently and will be giving them a call
shortly to purchase my own coverage. (I'm 47 years old.)
No one wants to
think about these catastrophic possibilities. But just as you protect
your home from fire or theft, you also need to protect yourself from the
financial strain (not to mention emotional agony) of longer-term
illnesses.
Sue Stevens,
CPA, CFP, MBA, and CFA Charterholder, is Director of Financial Planning
for Morningstar Associates, LLC. Sue reads every e-mail but cannot
respond to them all. She can be reached at
stevens.portfolios@morningstar.com.
