How to Tell if You Need Long-Term Care Insurance
Lauren Tara LaCapra
06/26/08 - 12:58 PM EDT
Long-term care insurance sets up the typical "boon-or-boondoggle" conundrum of insurance: If it's needed, it's a great purchase. If it's not needed, it's a waste of money.
AARP estimates that a 65-year-old consumer in good health will pay between $2,000 and $3,000 a year for a policy that covers home care and nursing-home care, with inflation-adjusted premiums. Premiums can be much higher or lower, based on several factors, like health, age and family-health history. Location also matters since the cost of living and the cost of health care are more expensive in big cities.
Still, the average cost of a private room in a nursing home is more than $75,000 per year -- a cost burden that family members often have to carry, and which will almost certainly increase in years to come. The cost of long-term care has been expanding at a rapid pace and most services, from home aides to nursing homes, are not covered by government programs or traditional health insurance.
"These expenses really get quite significant over time," says Joan Bloom, senior vice president of Fidelity Investments' life-insurance business. "It can have a significant impact on people's asset level and the quality of life they have through the rest of their years of retirement."
New Fidelity research suggests that a 65-year-old couple in 2008 will need to spend $85,000 for long-term care insurance. While that figure sounds high, it is certainly less than the total costs that they and their family would incur for just a few years of care.
Vincent Barbera, director of financial planning at TGS Financial Advisors, offers a rule of thumb for clients: Those between the ages of 55 and 65 with $500,000 to $1.5 million in assets should consider long-term care insurance. "Under that, you can't afford the premiums and over that you can usually self-insure," he says.
More of Barbera's clients with even greater assets have been requesting information about long-term care insurance because they view it as a way to leave more cash behind for children, charities and other pet projects.
"They want to pass that money on to their children and want to bestow grants to their alma maters," he says. "It's insuring against that asset base being depleted. Spending $100,000 or more a year will take away from that legacy."
He notes that long-term care insurance has improved in terms of affordability and coverage since it started being offered in the mid-1990s.
Michael Branham, a financial planner with Cornerstone Wealth Advisors, suggests that clients also consider how much they plan to withdraw from their retirement portfolios each year. He says a client with a $1 million portfolio who withdraws 5.5% or more of the balance each year -- or at least $55,000 -- has a greater need for long-term care insurance.
"If you add the cost of long term care for one -- or both -- spouses on top of their normal monthly expenses, they will put a lot more pressure on their money, and increase the chances it will run out," he adds.
Those who decide to purchase long-term care insurance need to make sure the policy is comprehensive -- covering both in-home and out-of-home care -- and that it is adjusted for inflation.
A "shared benefit" option might also make sense for some couples. Under those plans, spouses purchase one policy, say for 10 years, for both partners. If one spouse uses six years worth of care, there will still be four years available for the other.
Bonnie Lawrence, spokeswoman for the Family Caregiver Alliance, says that consumers should weigh the risks, other types of support and affordability before committing to a policy.
"You really have to look across the spectrum of things that are available and your own financial situation," she says.
The San Francisco-based nonprofit group
offers a Web tool for consumers to explore all the long-term care options in their local area.
