The Ups and Downs of Long-Term Care Insurance

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Long-term care insurance is a product that seemed to fill a big gap in paying for long-term care. Yet only about 7 to 9 million Americans have purchased these policies, and this coverage pays for only about 12 percent of the nation’s long-term care costs. But for those who are receiving benefits, it is clearly an important asset.

To make a decision about whether long-term care insurance is right for you, you have a number of points to consider. First, here is a quick definition of long-term care insurance:

a policy you purchase when you're healthy and at an age when you can afford the premiums, with the expectation that when you reach the stage of life when you need assistance at home or in a nursing home, the benefits will be available to help pay for the types of care you need.

This is the promise, and indeed it is fulfilled for some people, so it's a good idea to consider long-term care insurance to see if it fits your situation (as best you can predict it).

Medicare and private insurance don't cover all older persons’ needs, and long-term care insurance was created to help fill that gap. As a start, here are the most significant items that Medicare Parts A and B and private insurance do not cover:

  • Nursing-home care (except for short-term rehabilitation stays). In 2013, the median annual rate for a private nursing home room was $83,950, according to the Genworth Cost of Care Survey.

  • Assisted-living facilities. The median cost is $41,400 year, but costs vary depending on location and services provided.

  • Adult daycare. Non-24-hour care has a median daily rate of $65.

  • Home healthcare aides (except in limited, short-term circumstances). The private pay median rate charged by a licensed home healthcare agency is $19 an hour.

  • Customized durable medical equipment. This cost can range from a few hundred dollars to many thousands.

  • Disposable supplies (with a few exceptions).

  • Deductibles, coinsurance, and copayments.

  • Some prescription drug costs. Medicare Part D covers these costs but with a doughnut hole that requires you to pay until you reach the designated cap (see Chapter 10).

  • Home or vehicle modifications.

  • Special foods.

Depending on the policy, long-term care insurance will help fill some but not all these gaps. For example, nursing-home care and home healthcare aides are generally included, but home and vehicle modifications are not.

Of course, these costs vary across the country, but wherever you live, they add up quickly and are not going to get cheaper. If you need these items or services for years, they can overwhelm a family budget. A recent study of out-of-pocket spending in the last five years of life found an average of $38,688 for individuals and $54,412 for couples in which one spouse dies.

Spending on healthcare exceeded baseline total household assets for a quarter of the subjects and surpassed non-housing assets for 43 percent. Alzheimer's disease was the most costly — $66,155 — while gastrointestinal disease cost $31,069.

In calculating your need for additional coverage for the costs of long-term care, consider all your assets: savings, IRAs, pensions, 401(k) plans, Social Security income, and other resources. If you are still working, make sure you're contributing the maximum amounts allowable. You may find that you have more financial resources to draw on than you realized.

You need to consider the following three general questions in determining if long-term care insurance is right for you:

  • Should I buy long-term care insurance?

  • Should I continue to pay the increased premiums on my existing policy?

  • How can I ensure that the benefits I expect to receive are delivered?

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