What you need to know about long-term care insurance

Here's a killjoy question for people who think they've saved enough for retirement: Have you thought about the cost of long-term care and the possibility that you might need it?

The government estimates that 70 percent of seniors will need some form of long-term care assistance before they die. For those unfortunate few who will require the most costly type of long-term care, the tab can be astounding: about $240,000 for the 2.8 year "average" nursing home stay.

Some experts say the best way to handle that potential cost is with long-term care insurance. However, this insurance isn't a good deal for everyone, says Carolyn McClanahan, a medical doctor turned financial planner. Everyone needs a long-term care plan, she adds. But only some families need to pay for long-term care insurance.

This may be raising some questions for you, so here are a few answers.

What is long-term care insurance?

It's coverage specifically earmarked for paying the cost of nursing home or in-home assistance for people who don't have a medical ailment, but who without help are unable to handle some of the basic activities of daily living, like eating, drinking, walking, dressing, bathing.

Payments under the policies are triggered when the policyholder loses their ability to perform two or more of these activities of daily living. However, most policies don't cover every dollar of the policyholders' expenses. Policies typically pay a set amount per day until the policy runs out of benefits.

Thus, if you spent $200 a day on a full-time caregiver, your long-term care policy might pay up to $150 a day of that until you've spent, say, $165,000, or roughly the cost of three year's worth of care. At that point, the policy's benefits would be exhausted. However, each policy is a little different, but the richer the benefits, the more costly the premiums.

Doesn't Medicare pay for nursing home and in-home care?

Medicare does pay for some long-term care, but not all of it. Specifically, Medicare will pay for 100% of up to 20 days of skilled nursing care, but only for medically necessary skilled care following a hospital stay of more than three days. It will also pay for physical therapy, wheelchairs, walkers, hospital beds and even hospice care for those with less than six months to live.

But Medicare payments for skilled nursing care decline in day 21 and end completely after 100 days. Additionally, those who don't need medical services, but need a caregiver because of cognitive ailments, like dementia, or simply because they're unable to get around well enough to fully care for themselves, are not covered at all.

What are the chances that I'll need that kind of care?

That depends on you. Your chances of needing long-term care rise if you have a family history of cognitive ailments, such as Alzheimer's or dementia, or strokes. Ironically, you probably also have a greater chance of needing some long-term care, if you're extremely healthy, says McClanahan. Why? You're far more likely to live into your 90s, when the chance of needing help with daily activities soars.

Your end-of-life preferences also play a significant role, she adds. If you execute advanced directives that specifically bar doctors from taking extraordinary means to save your life when it's clear that you will have lost a certain amount of cognitive or physical skills, you're less likely to need long-term care.

On the other hand, if you want doctors to do whatever they can to save your life, if there's any chance you'd have even a few more months with your family, you'd be more likely to need this care. Medical advances can extend lives for months or even years, but they can't guarantee that you'll be physically and cognitively independent.

Are there other ways, besides long-term care insurance, to pay these expenses?

Of course. Though Medicare pays few of them, Medicaid programs pay for long-term care and nursing home care for those too poor to cover the costs themselves. Rich families can also "self-insure" by simply setting aside extra funds to handle the cost of hiring caregivers and aides.

Additionally, those with life insurance policies may be able to cash them in at a discount to the death benefit. (For instance, a policy that promises a $100,000 death benefit might pay the holder $80,000 or $90,000 if the policy were cashed in prior to the holder's death.) Some life insurance policies can also be "converted" into long-term care coverage. (Check with your insurer, or Google "viatical settlements.")

If you have equity in your home, you could potentially secure a reverse mortgage to pay for long-term care, too. However, reverse mortgages levy substantial upfront fees. They should be a last resort for someone needing long-term care.

Who should buy long-term care insurance?

It's best-suited for middle-income families, who want to make sure they or their survivors aren't economically drained by long-term care bills. The policies can also be advisable for families that might otherwise argue over a parent's care because one or more of the kids wants to preserve an inheritance. Because the money built up in a long-term care policy can't be used for anything else, it eliminates any arguing over whether those funds should be used to take care of the policyholder or be left for heirs.

Where can I shop for these policies?

The American Association for Long Term Care Insurance offers a shopping guide. Jesse Slome, the association's executive director, urges consumers to get quotes from several insurers. Costs and benefits with long-term care coverage vary dramatically. The easiest way to shop is to find an agent who has at least three years experience selling the policies and represents at least four different companies, Slome says. That gives the agent the experience and ability to help you find the best policy for your situation and circumstances.

Also know that some attractive "hybrid" policies are available, says McClanahan. She recommends those that combine life insurance and long-term care coverage. Why? With a traditional policy, if you don't need the care, the amount you paid in premiums goes to waste because no benefits are paid.

To be sure, that's also true with homeowner's insurance, and no one laments that his or her home didn't burn down. But long-term care coverage is comparatively more expensive than a homeowners' insurance policy, so it's tougher to argue that you shouldn't worry about that waste, she says. With hybrid policies that combine life insurance and long-term care coverage, either you or your heirs will receive some benefit from the policy, no matter what happens.

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