Part I: Who should think about long-term care insurance?

by Don Kuehn

There are few things that weigh heavier on the minds of an aging population than what will happen when they no longer are able to care for themselves. Whether the result of accident or trauma, dementia, Alzheimer's or just the cumulative effects of the aging process, we all will face four basic options when the time comes for continuing care: relying on family, the government, our own financial assets or insurance.

The likelihood that at some point in life a person will need long-term care (LTC) is more than fifty percent. Thirteen percent of women and 4 percent of men will spend five or more years in a nursing home. The average duration of a nursing-home stay is under 28 months. On the other hand, help with the activities of daily living (usually precipitated by a heart attack or stroke) or life in an assisted living center could go on for years.

Costs will continue to rise. About 5 percent of all policyholders are forced to cancel policies each year simply because they no longer can afford the premiums. Unfortunately, they cancel their coverage just when they are most likely to need it: as they age.

Here's a quick quiz to see how much you know about long-term healthcare options:

• Within 20 percent, what is the average monthly cost of nursing-home care in the United States?
• What is the average monthly cost of an assisted-living facility in the U.S.?
• How much does it cost, on average, for an in-home visit from a skilled nurse or aide?
• What percentage of Americans have insurance that covers the costs of long-term care?
• How many people ages 18 to 64 in the U.S. are currently receiving some form of long-term care? How many over age 65?

When you buy insurance to protect your home from fire or other disaster, you're betting a relatively small amount of money (the premium) against a very rare, but potentially catastrophic, financial event. You hope you never have a claim, and few of us lament the fact that we haven't had enough house fires to justify the costs of our insurance.

When buying LTC insurance, the bet is quite different. Because the insurance company knows with a relative certainty the odds of their policyholders' eventually needing the benefits of a long-term care policy, the company's actuaries determine the risk and rates to cover future claims.

Because insurance is a means of spreading the risk among policyholders, either the premium must be quite high to cover the future cost of claims or the number of insureds the company covers must continue to grow.

In one sense, LTC insurance is like a legalized pyramid scheme: As long as the base continues to grow with new policyholders, the company will have the capital reserves to pay claims. If the number of policyholders levels off, the potential for staggering rate increases hangs like a cloud over them. It is not unusual for older folks to be forced to cancel policies on which they have been paying for decades simply because they no longer can afford to pay the premiums.

It's not for everyone

We may worry that we will become a burden on our children or other relatives, or that we will outlive our financial resources and be dependent on the government. The thought that we won't have choices about how and where we spend our final years on earth is certainly discomforting. However, there are some people who should not consider buying LTC coverage:

People who are very wealthy may decide to "self-insure" for the costs of home healthcare, assisted living or nursing-home care. Depending on the costs of care in your area, $2 million in assets is a starting point for self-insuring against various long-term care needs.

If you would easily qualify for Medicaid (the federal/state health insurance program for people with limited assets and low incomes), chances are that you could not afford to pay the high premiums of an LTC policy, nor would you want to. Some estimate that assets below $200,000 (depending on other circumstances) are a reasonable place to draw the line.

The third group of people who should not consider LTC includes those for whom paying the premiums would create great hardship. LTC insurance is not cheap. Policies run roughly between $1,000 and $8,000 per year depending on age. And remember, with luck, you'll be paying premiums for decades before you will need the benefits.

So, who should consider buying LTC insurance? First, you must be in reasonably good health and have done your homework. There are many resources available on the Internet, from your state department of insurance and from various organizations. "A Shopper's Guide to Long-Term Care Insurance" produced by the National Association of Insurance Commissioners is available for free through its Web site http://www.naic.org/ (see also http://www.ahca.org/ the Web site of the American Health Care Association).

Those who have significant assets and want to protect their life savings to pass on to their heirs are another group that might want to think about buying coverage. LTC insurance is expensive, but self-insuring could easily wipe out your life savings before you are able to qualify for any form of public assistance. A good policy can be part of a comprehensive estate plan.

A third group that should consider buying coverage includes those who value their independence and want to have choices about where and by whom they are cared for in their later years. Also in this category are those who have no children or other relatives likely to be able to help out when the time comes.

Medicaid satisfies almost half of all nursing-home billings. It is common for older Americans without LTC insurance to pay for care from their own assets until they reach the poverty level established by their state and for Medicaid to continue paying thereafter. As a result, most people in nursing homes are so poor that they must remain in the facility for financial reasons. Medicaid offers limited choices of the kind and location of facilities a person can get into.

Remember: Medical and environmental advances mean that life expectancies in the Untied States will continue to grow. It is not uncommon to see people born before the Great Depression living well into their eighties and nineties. Boomers in relatively good health should expect to live at least as long. That's a lot of years of paying premiums and potentially many years in need of some degree of living assistance.

Wondering how you did on the quiz? According to the syndicated Motley Fool, the national average cost of nursing-home care is currently $4,654 per month; the estimated median cost of care in an assisted-living facility is between $2,000 and $2,500; the average Medicare reimbursement for a skilled nurse visit is $109 and $64 for a home visit by an aide; only 6 percent of Americans have purchased insurance to cover the costs of long-term care according to the Health Insurance Association of America; and just over 40 percent of the 13 million people receiving long-term care are between the ages of 18 and 64-- so it's not just for old people!

Few topics are as complex and important to our members as LTC. In this column, we have just scratched the surface. In the next issue (April 2003), I'll cover what to look for when shopping for long-term care insurance and the factors that determine costs.

see Part II: Shopping for long-term care insurance