At $100 a day, nursing home stays get expensive pretty fast. That's $3,000 a month, and $36,000 a year.
And in the future, those costs will go up. Maybe by more than inflation if the labor shortage in health care drives the price.
One solution to this problem, growing in popularity, is long-term care insurance. This was first introduced as nursing home insurance in the 1980s, according to A Shopper's Guide to Long-Term Care Insurance, a publication of the National Association of Insurance Commissioners, but has grown to cover much more these days.
"It's really taken off in the last five or six years," said Vicki Kukowski, who works with Craig Heitke at Independent Insurance and Financial Services.
What is it?
Long-term care insurance works a lot like health insurance. Premiums depend on how many benefits you eventually want, your age and health when you purchase the policy, and the type of coverage you want.
Long-term care is not cheap, and neither is insurance for it. Most policies have options for the amount of coverage and its length. For instance, a customer could opt for $100 a day over two years, $150 a day for five years, or even $200 a day for a lifetime.
Some policies will have a Maximum Benefit Limit, which is essentially a pool of money from which to draw benefits. Again, this works much like life insurance, with premiums paid to accumulate the fund, which then pays for long-term care costs.
Because long-term care insurance might not be needed for decades, the daily expenditure typically needs to have an inflation factor. An inflation adjustment can be figured using simple interest or compound interest. Compound interest offers the greater payout, but also costs the most.
Another way some plans account for inflation is to offer policy holders to increase their benefit level, at the cost of increased premiums, at some point in the life of the insurance.
Plans have different triggers for when the customer can collect. Triggers could include a cognitive impairment like Alzheimer's or a functional impairment. Common daily activities like bathing, dressing, eating, toileting, and moving are typically used as functional triggers.
Some insurance plans qualify for a tax deduction if the premiums are itemized with other medical expenses and they total more than a certain minimum. These tax-qualified plans generally have stricter triggers for the start of benefits.
Whether the insurance can be used for long-term care services beyond nursing home stays also effects the premium. Added flexibility in services costs more, but makes the insurance easier to use.
Some plans list the amount of money that can be used for assisted living, in-home care, or adult day care services as a percentage of the daily benefit. For instance, if your daily benefit is $100, and 75 percent can be used for alternative services, you could spend $75 a day for home health care.
Long-term care insurance policies have a deductible period where the customer would still be responsible for charges. The elimination period, as it is called, could range from zero to 90 days. A longer waiting period reduces the premiums, but commits the policy holder to foot the bill for services over that time.
Several other options influence the cost of long-term insurance, including what happens to the policy should payments default and whether any refund is given at death if the benefits haven't been used up.
Who needs it?
Kukowski said it's hard to know who should have long-term care insurance. Some people are convinced they should have it, she said, and others don't give it much consideration at all.
Usually, the prime consideration is the protection of their assets, which leads to consideration between the cost of premiums and the worth of the assets to be protected, said Kukowski. Anyone not concerned about preserving their assets for an heir or a spouse has little reason to buy long-term care insurance to protect their estate.
Some people opt to buy long-term care insurance because they want to have access to funds to pay for in-home care that will keep them out of nursing homes until it's absolutely necessary.
Because long-term care isn't cheap, neither are long-term care premiums, according to Kukowski. "You think, 'Am I going to use it?' " she said.
According to a national study in the Shopper's Guide, only a quarter of the people who live to be 65 will stay a year in a nursing home, and less than ten percent will stay in one for five years. In fact, two-thirds of people who live to be 65 will either not need a nursing home or will spend less than three months in one.
But, on the other hand, most people have fire and car insurance, even though the odds are far less than 33 percent.
Purchasing long-term care insurance turns out to be a personal decision based on your own financial situation and financial goals. "There are no pat answers," said Kukowski.
(Steve Whitcomb of State Farm Insurance provided a copy of the Shopper's Guide as well as background information for this article.)
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