COVERING THE HEFTY TAB FOR LONG-TERM CAREToday's policies, while still pricey, are a lot better than earlier ones
O.K., you've finished planning the globe-trotting, golf-playing stage of your retirement. So far, so good. But have you considered where you'll go and who'll take care of you if your health starts to fail? Fears of spending your declining years without adequate resources to choose an approriate nursing home or watching your children's inheritance dwindle as you are cared for at home by round-the-clock nurses may prompt you to consider long-term care insurance.
This form of health insurance picks up the tab if you need to go into a nursing home or require home care, but don't qualify for Medicaid, which funds care for those with little in assets or income. As recently as the early 1980s, long-term care policies were so restrictive as to be nearly useless if you wanted care in your home or came down with a mental impairment, such as Alzheimer's.
Today's policies are much more flexible. They provide coverage for home care, adult day care, or nursing-home care for those who can't perform so-called "activities of daily living," such as bathing or dressing, as well as for individuals who suffer from "cognitive impairment." But this coverage doesn't come cheap. Depending on your age, the features you select, and the cost of care in your region, expect to pay $500 to $5,000 in annual premiums.
Chances are, moreover, that you probably won't ever use this coverage. Insurers estimate that only 4 out of 10 people who live past 65 will spend time in a nursing home, and the average stay is only 2.5 years. About 7 in 10 will use home care. Given the cost of premiums, low-income seniors are probably better off skipping the expensive policies and spending down their assets to the point where Medicaid can pick up the tab.
Given that the cost of care will not break the bank for high-income seniors, they're probably better off self-insuring, says Joel Isaacson, a New York City financial planner. That's another way of saying that they should plan to pay the costs out-of-pocket if the need arises. Depending on where you live, it costs $40,000 to $80,000 a year to stay in a home. Couples who are planning to live on $200,000 a year in retirement income can probably easily afford such care. That's partly because when one spouse becomes ill, the couple won't spend as much on travel and leisure, Isaacson says.
Yet he has noted in recent years that wealthy clients are choosing to ignore his recommendation that they self-insure. Instead, they're buying long-term care policies purely for peace of mind. Even for the wealthy, $25,000 spent on premiums over 20 years could prove a good value if it pays for $200,000 in benefits, says Loida Abraham, John Hancock Mutual Life Insurance Co.'s general director of product development for long-term care insurance.
These policies really make the most sense for people who can handle the steep premiums but who couldn't easily afford paying for the care. If one spouse becomes ill, this coverage protects the living standard of the healthy spouse, who might otherwise have to sell assets to fund the other's care. Such policies also appeal to couples who plan to leave an inheritance for their children. For New York City, which has perhaps the highest nursing-home costs in the country, couples with between $500,000 and $1.5 million in assets are good candidates for long-term-care insurance, says Isaacson.
Once you've decided that you want long-term-care coverage, you'll have to educate yourself about all the different features of policies. An independent agent can walk you through your options and show you quotes from three or four companies.
"Given the fact that almost everybody wants home care, as a critical starting point you have to know how much home care a policy pays for and how flexible it is," says Alfred C. Clapp Jr., a New York financial planner who specializes in long-term care. Some plans let you spend only 50% of the benefit on home care. So if you bought $110 a day of nursing-home coverage, the policy would cover only $55 a day in home-care costs. The drawback is that "because of the high level of services that can be provided at home," home care can easily amount to 80% of the cost, says Nancy Magee, vice-president for long-term care products at Unum Life Insurance Co. of America. If you're facing that prospect, you may want to choose a policy that'll let you put 100%, or the full $110, toward home care.
Plenty of policies will pay for licensed professionals to provide home care. But through Unum, you can now buy a policy that pays for care from the individual of your choice, even if the person isn't licensed. In fact, Clapp believes that clients can hire better-quality caregivers if they aren't required to go to licensed agencies.
You can also specify how long coverage will last. Four years is the average coverage purchased, although you can buy a lifetime plan. Hancock offers a "shared care" rider for couples, so that if the husband needs six years of care, the couple can dip into the wife's plan to fund the extra two years.
Although it makes the policies much more expensive, many experts believe you should purchase a rider that insures that your coverage will keep pace with rising costs. "Unless you are quite old and expect to use the insurance in just a few years, you should buy a policy with an inflation rider," says Clapp.
You should also choose a "qualified" policy, which has certain tax advantages, including tax-free payout of benefits. Unum says 98% of the plans it sells are tax-qualified.
If you want to try saving on price, Isaacson recommends extending your "elimination," or deductible, period. That means you may need to pay out-of-pocket for 90 days instead of 30 days, for example, but you can afford a better policy for the long run.
Just remember: Long-term-care insurance is so expensive that it isn't a good deal for most people. But if you decide to pay up for a policy, make sure that what you're buying will provide the benefits you need.
By Amey Stone, associate editor, Business Week Online
Updated July 9, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.