Insurance Can Ease the Burden

Of Long-Term Care

By

Erik Sherman

      The thought of spending their final days in a nursing home scares many seniors.  The thought of paying for it, though, may be even more frightening.

      The cost of a year in a nursing home now averages more than $70,000, or $192 a day, according to The Washington Post (Oct. 5, 2004).  And it is likely to continue going up at a rapid rate.

      One factor driving prices up is that people are living longer.  In the days when people typically lived for only a few years after retiring, only a small percentage of the population needed nursing home care.  Today, it is not unusal for seniors to live into their 90s.

      The older an individual is, of course, the more likely it is that he or she will need nursing home care. 

      Another factor that will drive costs in coming years is the aging of baby boomers.  The number of retirees is projected to increase from 47 million today to 77 million over the next 20 years, according to the U.S. Census Bureau (U.S. Summary: 2000).  Unless the supply of nursing homes increases as demand increases, prices will continue to rise.

      Nursing home costs also rise as general healthcare costs rise – and healthcare costs in most years have been rising at double-digit rates.  Healthcare costs rise significantly as people live longer, but costs are also being driven up by factors such as medical malpractice lawsuits and the rising cost of bringing new drugs onto the market.

Addressing Costs

      Why should you care about the cost of nursing home care?  For one thing, long-term care is not covered by health insurance.  Medicare pays for no more than 20 days of nursing home care, and it won’t pay at all unless care is preceded by hospitalization.  Medicaid pays for long-term care, but is available only to patients with virtually no assets.

      Most people cannot afford to pay $70,000 a year for care.  Many people, of course, don’t even earn $70,000 a year.  Rather than leave an inheritance for their children or grandchildren, many seniors are being forced to liquidate all of their assets just to pay for nursing home care.

      It’s no wonder, then, that long-term care insurance is increasing in popularity.

Selecting a Policy

      When considering long-term care insurance, it is important to plan ahead.

      The younger you are when you buy it, the less it costs.  Premiums increase dramatically as a person ages, because the odds of needing long-term care increase.  To control costs, purchase a policy that is renewable for life and has level-funded premiums (i.e., premiums remain at the level they are at when you purchase the policy).

      Another reason to purchase long-term care insurance when you are still relatively young is that policies often exempt pre-existing conditions.  If a major illness is diagnosed before coverage is obtained, it will not be covered.

      Before purchasing a policy, read it carefully to determine whether there are any exemptions.  Purchasing the wrong policy can be as risky as having no policy at all.

      Some policies, for example, exempt coverage for Alzheimer’s disease and related illnesses, even though about half of long-term care treatment is the result of Alzheimer’s disease.  Other policies provide coverage only if long-term care is preceded by hospitalization.  Policies with this exclusion should also be avoided, since most patients enter nursing homes without prior hospitalization.

      When considering the level of coverage needed, base your decision on the cost of long-term care in your market.  The average daily cost varies significantly.  The policy should also compensate for inflation.  Unless the policy increases benefits by at least 5 percent a year, the benefit may be inadequate by the time it is needed.

      While a policy that covers an unlimited number of days and an unlimited number of stays may be expensive, it is often worth the cost.  It would defeat the purpose of insurance if coverage were to run out while the patient still needs care.  Some policies limit coverage to anywhere from two to six years.

      Also check to see what kind of long-term care is covered by the policy.  Some policies cover only nursing home care, some cover only home health care and some cover both.  Ideally, the policy should cover skilled, intermediate and custodial care.  Skilled and intermediate care is provided by nurses and other trained medical personnel.  Custodial care assists the patient with bathing, eating, dressing and other routine tasks.

      One way to reduce the cost of coverage is to extend the waiting period before benefits begin.  The best policies have a waiting period of 20 days.  Before choosing a longer waiting period, make certain you can afford to pay for care during the waiting period.

      Most insurance companies also offer a waiver of premiums beginning 60 to 90 days after the policyholder receives the first benefit payment.  Some companies waive premiums immediately.  However, the quicker the waiver, the more expensive the policy.

      Another affordable alternative may be to add a long-term care rider to your life insurance policy.  Most riders pay 2 percent of the face value of the policy for up to 25 months.  In addition to limiting the time period for which coverage is provided, the rider does not make adjustments for inflation.

      Given the complexity of coverage, it is best to seek assistance from your financial and legal advisers before purchasing long-term care insurance.

      Long-term care can place a heavy emotional burden on you and your family.  Purchasing the right insurance can at least ensure that long-term care does not also create a financial burden.

Erik Sherman is a registered representative with John Hancock Financial Network,
9155 South Dadeland Blvd., Suite 1200, Miami, FL  33156 and can be reached at 305-266-6300, ext. 123
or essherman@jhnetwork.com.  Insurance products offered through John Hancock Life Insurance Company, Boston, MA 02117. Securities and Advisory Services offered through Signator Investors, Inc., Member NASD, SIPC, a Registered Investment Advisor.

This material is for informational purposes only.  Although many of the topics presented may involve tax, legal, accounting or other issues, neither John Hancock Life Insurance Company and its affiliated companies, nor any of its agents, employees or registered representatives are in the business of offering such advice.  Individuals interested in these topics should consult with their own professional advisors to examine tax, legal, accounting or financial planning aspects of these topics.