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By Karen Hube, March & April 2006
A long-term care policy can keep you up and about—if the cost doesn’t bring you down
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Healthy and youthful through their 50s, Susan and Roger Allen didn't fret much about long-term care. They figured retirement savings would pay for any help they might need. They hoped never to burden their children—or spend so much that they'd need the safety net of Medicaid. Then mounting prices for care made them think again.
The Problem
Roger, now 65, and Susan, 63, wonder whether they should buy long-term care insurance. The Allens plan to retire this year, he from his executive-recruiting job, she from a nursing position. Given their family histories, they can expect to live well into their 80s—and one or both could need assistance with everyday living. Roger is particularly concerned because his mother had Alzheimer's disease. The couple worry that the $900,000 they have squirreled away won't be enough to cover years of care.
The Plan
The Allens face a dilemma because—as with life insurance—the longer you wait to sign up, the more a policy costs. Only 9 percent of people ages 70 to 74 need even a short spell of home or nursing home care. But from 80 to 84 the proportion rises to 25 percent, and in the late 80s it's 40 percent.
For the Allens, it's too late to find a bargain. For a 50-year-old, a no-frills plan providing four years of coverage at $150 a day (after 90 days paid out of pocket) is less than $600 a year, according to a recent survey of insurers. The cost jumps to $1,300 for a 65-year-old and $5,300 for a 79-year-old.
Those prices don't even include inflation protection to keep the benefit's value from eroding. That's a pricey add-on but an important one. And there's always the risk your insurer will seek your state's permission to up rates on existing policies, as some companies did in the 1990s after they drew less business than expected.
Many planners recommend passing up a policy if you'll have less than $200,000 or more than $2 million in disposable assets at retirement. For those in between, it's a question of sure costs versus potential benefits. (For an impartial description of policy pitfalls, get "A Shopper's Guide to Long-Term Care Insurance" from the National Association of Insurance Commissioners; 816-783-8300.)
Roger's family history means he won't be offered the lowest rates. A $3,680 annual premium will buy the couple a basic plan paying $250 a day per person for four years of in-home, assisted living, or nursing home care. That's more than adequate to pay for today's $74,000 average annual cost of a nursing home.
That policy, however, leaves out inflation protection. To add it and keep the plan affordable, tradeoffs might include trimming the daily benefit or the duration of coverage. For example, a $4,430 premium will buy the couple three years of benefits (instead of four) but will add $12.50 a day each year to the $250 ceiling. In the end, the Allens must ask: is this peace of mind a good value?
"As a rule of thumb you should not spend more than 7 to 9 percent of after-tax income," says Jim Ryan, who sells policies at Lenox Long Term Care in New York City. "If the premium payment is going to stretch your budget, don't do it. It's too much."
Karen Hube writes on finance from Westport, Connecticut.
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