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Long-Term Care Insurance: Who Needs It and How Much Do You Need?

With longer average life expectancies being reported for both men and women, the cost of long-term care is an increasing financial risk. The term "long-term care" refers to a wide range of services ranging from limited assistance at home with daily activities to admission to a nursing home for intensive medical care and support.

The risk of long-term care can be dealt with in three ways: retain it (people with a sufficient net worth can self-insure), avoid it (staying healthy is the best method but, unfortunately, there are no guarantees), or transfer it (i.e., pay an insurance company to handle the risk).

Do you need long-term care (LTC) insurance? Below are some guidelines to consider:

• A good rule of thumb, according to Kiplinger's Retirement Report, is that no more than 10% of your annual income should be spent on premiums (e.g., $2,500 premium with a $25,000 income).
• The United Seniors Health Cooperative recommends that you have more than $75,000 in assets per person in your household (excluding your residence) and an annual income of $30,000 or more per person. You should also be able to afford the premium without a lifestyle change as well as a potential 20% to 30% future increase. If your net worth is $1 million or more, you can self-insure.
• The best time to purchase a policy is generally around age 60. If you wait too long, premiums increase significantly and/or you could become uninsurable through some type of medical diagnosis or pre-existing condition. If you buy in your 40s or 50s, however, you could be paying premiums for decades before coverage is actually needed.
• Couples often need long-term care insurance more than singles because, if one spouse ends up in a nursing home, it can greatly reduce the amount of assets left for the well spouse.

Below are some additional tips for purchasing long-term care insurance:

• Understand how you qualify for benefits. Coverage generally begins when a person is unable to perform a certain number of "activities of daily living" or ADLs (e.g., bathing, dressing).
• Insist on inflation protection to increase the amount of benefits over time. A "compound" inflation rider results in a larger benefit increase than a "simple" inflation rider, but it also costs more. The difference is that a simple inflation rider is calculated on the original benefit amount, while the compound inflation rider is based on the (inflation-adjusted) amount paid during the previous year (similar to simple interest and compound interest on bank accounts).
• Choose an appropriate elimination period (the amount of time between when care begins and when benefits are paid) based on the number of days of care you can afford to pay for out-of-pocket. Elimination periods can range from zero to 90 days to a 365-day waiting period for people who can afford to pay for a full year of care themselves in exchange for a lower premium.
• Two additional key decisions are the length of time you'll receive benefits (the range is one year to an insured's lifetime) and the benefit amount (often a specific number of dollars per day). The longer the benefit period, and the higher the policy benefit, the higher the cost.
• Contact your county SHIP office (part of the Office on Aging) for information and counseling about available LTC policies. SHIP is an acronym for State Health Insurance Program.