How To Plan for Long-Term Care
Long-term care insurance determines how well you'll be taken care of when you can't take care of yourself.
Long-term care insurance is potentially one of the most important purchases you'll ever make. It likely determines how well you'll be taken care of when you can no longer care for yourself.
There are lots of decisions to make -- and they need to be informed decisions. Tempting as it is to think you'll never be in the position to need long-term care, you risk literally everything if you hide from this issue.
Long-term care is care that last longer than 90 days. Long-term care insurance kicks in when you need help with at least two activities of daily living -- bathing, dressing, transferring (getting from a bed to a chair, for example), using the toilet, or help if you're incontinent -- or you need assistance because you're cognitively impaired. These are the basics. From here, things get complicated.
To help take the mystery out of the subject, Marilee Driscoll, author of The Complete Idiot's Guide to Long-Term Care Planning, was interviewed by Advisor senior editor Christa Ayer.
Advisor: What kind of care does LTC insurance cover?
Driscoll: The vast majority of LTC insurance covers care provided by professional care givers. There is a subset of policies -- fewer than 10 percent -- that pay the insured even if the spouse or adult child provides care.
Advisor: Does LTC insurance cover all care expenses?
Driscoll: When you buy a policy, you purchase a set daily or monthly benefit. If your policy includes inflation protection, the benefit increases every year. It's vitally important to be aware of the price of care in the area where you're likely to receive care. And, you want to make sure the insurance you're buying is adequate to cover not only today's cost of care, but care when you're likely to be receiving it, which is in your 80s or 90s.
Advisor: How does inflation protection work?
Driscoll: You pay for a rider, which is expensive because every year the daily benefit goes up -- but the premium remains flat. Unfortunately, most consumers, to keep the premium low, don't buy inflation protection. So you have a horrible combination of people buying coverage that has built-in obsolescence.
If you're working with a qualified insurance agent, they're going to stress the importance of inflation protection. And, most policies sold by agents do include it.
Advisor: How expensive is this rider?
Driscoll: It depends on the age of the person. But, it could easily triple or quadruple the price of the policy. So, you might consider making trade-offs in other areas to make sure you can buy inflation protection.
Advisor: What trade-offs might you make?
Driscoll: First, check that the daily benefit is reasonable. When you need LTC, you're likely to have other income, for example social security or a pension. You might be able to self-finance part of the daily benefit. You just want to a realistic policy -- certainly not too small, but you don't want to buy more than you need, either.
After you have inflation protection and the right daily benefit, the next logical place to look for trade-offs is how long your policy pays after your claim starts. More and more people, myself included, are purchasing limited benefit policies -- three-year or five-year policies. That's going to take care of more than 90 percent of long-term care claims. That might drop the policy cost by 30 percent.
Advisor: Does medical insurance cover long-term care?
Driscoll: Medical insurance is designed to pay for care under a doctor's orders by a licensed medical professional. After the care you need doesn't require a doctor's orders -- getting dressed, taking a bath -- medical insurance doesn't cover these things. Most LTC is what's called custodial care: hands-on, low-tech assistance.
Advisor: The reality is that people don't always prepare like they should. How do you convince someone of the need for LTC insurance?
Driscoll: There's a window here. I find that the closer you are to needing the care, the less likely you are to admit you might need it. Seventy-five-year-olds don't buy this insurance. For one thing, it would be extremely expensive since they're only going to be paying in for a few years before they're likely to need care. Second, they usually have health issues that preclude them from buying it. This is really a baby-boomer issue. You should consider buying this insurance when you're handling the rest of your retirement planning.
Advisor: At 60? Younger?
Driscoll: Younger, and the reason is mercenary. First, you just don't know when something is going to happen. Science is getting to the point where it's able to diagnose issues earlier and earlier -- they're starting to diagnose Alzheimer's in patients in their 50s. I've crunched the numbers. Every year you wait to buy this insurance, the price goes up for a comparable policy about nine percent -- that's huge.
Advisor: On the other hand, the earlier you buy, the longer you're paying. Does it balance out?
Driscoll: Right, but the insurance companies have figured this out. Assume you're going to have a claim at age 80. If you buy LTC insurance at 40, you're paying for 40 years. If you buy it at 70, you're only paying for 10 years, right? But, if you calculate what's called the net present value -- put into today's dollars what the out-of-pocket cost will be -- there's almost no difference in price. If you're ever going to buy this insurance, today is the best day because you don't gain financially by waiting. And you might develop Parkinson's tomorrow.
Advisor: How do you decide on a daily or monthly benefit?
Driscoll: First, you need to make your best guess as to where you'll be living when you need the care because costs can vary throughout the U.S. There are companies that do cost surveys, including Genworth Financial and METLife Funds Mature Market Institute.
Do your homework
This article includes an important resource: an Excel spreadsheet that lets you calculate the cost of long-term care insurance. You can experiment with the numbers to see how much you'd probably pay for long-term care insurance if you buy it at different ages.
Because prices fluctuate, the spreadsheet might need adjusting for today's rates. To do this, begin by contacting a long-term care insurance provider to get their basic rates, then adjust the spreadsheet before you experiment with it.
To use the spreadsheet, click on the Download link, then either Save the file on your PC, or Open it directly in your spreadsheet program. (If you don't own Microsoft Office, save your money and install free OpenOffice.org, or use free online Google Docs.)