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Do you need long-term care insurance?

(MoneyWatch) Not everyone necessarily needs insurance for nursing home costs or related long-term care. But that doesn't mean that you shouldn't factor these potential costs into your financial planning.

Most people don't perceive an extended stay in a long-term care facility or nursing home to be a threat to their financial security until they are older. And only when they are older do most folks even consider buying this insurance. By then, however, your health history may exclude you from coverage, and if approved it can be expensive. For example, at age 50 the typical long-term care insurance policy will cost about $900 a year, but it will run about $6,000 at age 79.

Most younger workers don't buy long-term care insurance. That's no surprise, since they are more likely to be thinking about about buying a home, saving for their children's education or their own retirement. It's difficult to accomplish these more urgent financial planning goals and have money left over to pay for insurance that covers the possible cost of long-term care needs that may be 30 to 50 years away.

Others believe that this will never happen to them. I can't disagree with this point: Everyone dies, but not all of us will spend time in a nursing home before we do.

According to the Department of Health and Human Services, people age 65 and over face a 40 percent chance of entering a nursing home. This risk is about 50 percent higher for women than men age 65 or older. Visit a nursing home and you will see these statistics playing out in real life. Most of the residents there are women. About 20 percent of folks aged 85 and older are currently in a nursing home. The reality is that as our lives are extended through medical advances and healthier life styles, the risks of needing long-term care will also increase for future generations.

Long-term care costs

The national average cost of a semi-private room in a skilled-care facility is about $250 per day, or $91,000 per year, with a low of about $54,000 in Louisiana and a high of $170,000 in metropolitan New York. Over the next 25 years, this cost is expected to rise faster than the pace of inflation as the dwindling supply of nursing home workers confronts the increasing demand for their services by an older population that will double in that time period.

At this rate, a 45-year-old will have to stash away over $4,000 a year to have over $400,000, or enough to pay for two years of long-term care, at age 85. A 55 year-old will have to stash away about $5,000 a year to have over $250,000, enough to pay for two years of long-term care costs at age 85.

Who pays?

Medicare, which picks up 11 percent of nursing home costs nationally, only partially covers the costs of the first 100 days in a nursing home, and only provides this coverage if the skilled care is preceded by a stay in a hospital. Medicaid, which covers over 70 percent of long-term care costs nationally, is the medical program for the poor and requires individuals to spend down substantially all assets and direct all their income to pay toward their long term care costs. Private insurance currently pays for less than 10 percent of long-term care costs nationally, with the remainder coming from the income and assets of the individuals who require the care.

Clearly, in other words, Medicaid pays the bulk of these costs. The challenges placed on individuals who will rely on Medicaid is that they may have to transfer assets out of their name in advance of anticipated long-term care needs. But doing so in an attempt to defraud the Medicaid system will result in criminal penalties for both the individuals and their advisors who assist this activity. Individuals who rely on Medicaid also lose control over their choices of the services, providers and the care they may desire.

Another, more troubling challenge is that placed on the long-term care system. Nursing homes are faced with a growing demand for their services, and with over 70 percent of their residents on Medicaid their costs are rising faster than the reimbursements they receive from the system.

Check back in a few days when I'll write about what to consider if you are looking to buy long-term care insurance.