Q: I'm 45 years old and have an elderly father who requires daily home health care assistance. We've seen firsthand how quickly long-term care costs can deplete retirement savings. What can I do now to keep this from happening to my wife and me as we get older--so we don't put our kids under greater financial burden to support our care? I've heard about long-term care insurance. Should we be looking into it? Or, is it too early?
A: Actually, you're smart to begin thinking about long-term care at your age. In fact, according to the American Academy of Actuaries, 40 percent of those receiving long-term care are working age adults ages 18 to 64 who've been put into that unfortunate position by car or sporting accidents, MS, aneurysms, brain tumors or strokes. At the very least, people need to seriously consider long-term care insurance, as part of their overall financial planning, by the time they reach 50.
What exactly is long-term care (LTC) insurance? While we're healthy, it's easy to take for granted the normal activities of daily living, such as getting out of bed, taking a shower, preparing and eating meals, and driving a car. However, when you or a loved one is stricken with a degenerative and chronic condition, performing even the most basic activities becomes impossible without the assistance of another person.
Long-term care is not necessarily medical care, but rather what's called "custodial care." Custodial care involves providing an individual assistance with activities of daily living or supervision of someone who is mentally impaired. LTC can be provided in many settings, including nursing homes, your own home, assisted living facilities and adult day care.
The cost of long-term care can be very expensive. Home health aides cost on average $65,700 per year. Nursing homes average $62,000 per year. So, LTC insurance is a proactive and often practical means to cover the costs of care without burning through your retirement savings or becoming a greater financial and/or emotional burden on your spouse, children and grandchildren.
How much does LTC insurance typically cost? Premiums are based on age, health and individual coverage choices. According to the Long Term Care Insurance Buyer's Advocate Alliance, there are more than 3,000 possible prices for each person. For example, a 60-year-old applicant could get minimal coverage for about $60 per month, while more comprehensive coverage can run as much as $12,000 per year.
There are three major areas that affect cost:
- Daily or monthly benefit: How much do you want your policy to pay per day or month for your care? This usually means choosing a daily benefit between $40 to $300 per day or a monthly benefit between $1,000 and $8,000.
- Benefit period: How many years do you want your coverage to last? For example, two, three, four, five, six years or a lifetime?
- Elimination period: This refers to the number of days you will pay for your own care before coverage kicks in. Waiting periods of 100 days or less make sense for most people, while shorter waiting periods like 20 to 30 days make more sense for people with less than $100,000 in assets.
Here are four factors to consider when selecting a long-term care policy:
- Financial strength: Make sure the company you select is one that will be around when you need to receive benefits; otherwise, you risk losing your policy if the company you bought it from goes out of business. Look up ratings on the insurance companies in your local library. Consult resources like A.M. Best Book, Standard & Poor's, Moody's and Duff & Phelps. And look beyond the ratings. Find companies with billions--not millions--in assets. Choosing companies with larger assets minimizes your risk of large rate increases.
- Sufficient daily benefit: LTC services are expensive, ranging from $130 to more than $200 per day, depending on where you live. Ask your financial advisor about average long-term care costs in your area.
- Inflation protection: The cost of long-term care services will increase over time. This is especially important to consider when you have 20 to 30 years before you expect to receive benefits.
- Comprehensive coverage: Choose a policy that gives you flexibility in how you receive long-term care services, whether nursing home, home care or adult day care.
When it comes to long-term care insurance, the younger you are, the better and the lower your premiums will be. Therefore, the time to look into long-term care insurance is when you're healthy--not when you're sick and need it. Otherwise, you risk not qualifying for coverage and having to pay out-of-pocket for the cost of care.
Phillip L. Pennartz, Ph.D., RFC, CSA, is a registered principal with IFG Network Securities Inc. who helps individuals and business owners build and protect their wealth in the areas of retirement planning, college funding programs, estate planning and long-term care programs. IFG Network Securities is a registered broker/dealer and a member of the SIPC.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.