Do You Need Long Term Care Insurance?

Today, the average cost of a nursing home is $82,125 per year for a semi-private room, according to US News and World Report.   Generally speaking, except in limited circumstances, this cost is not paid by Medicare or standard health insurance, so many people, especially as they approach the retirement years, wonder if they should buy insurance to cover the cost.  The answer, of course, is "it depends".

What is a Nursing Home?

For the purpose of this article, we are going to define a "nursing home" as an institution that provides complete custodial nursing care of the elderly or disabled who are not able to live independently because of mental or physical condition. Medicare does not pay for nursing home care.

This is different than a "skilled nursing facility" that is attempting to improve the person's health and/or functioning so as to allow them to return home.  The facility may be the same but the function is different.  Medicare pays for up to 100 days of skilled nursing care in a year. 

Does a Nursing Home REALLY Cost over $82,000 Per Year?

While the $82,000 figure is an average, different facilities have different costs and the average cost in some states is far more than in others.  If you are in a low cost state you may not need as much, and if in a high cost state you'll need more.

How Much Is Long-Term Care Insurance?

According to the American Association for Long-Term Care Insurance, the average cost of a policy for a single person, age 55, is about $2,000 per year. This policy would pay $150 per day for up to three years.  If purchased at age 55, a couple would pay about $2,500 per year for benefits of $150 per day for three years.  If one member of the couple used all the days, then nothing would be left for the other.  To compare, if the couple waited until they were 60 to purchase that insurance, the premium would be about $3,400 per year. 

Is Long-Term Care Insurance Worth It?

The rule of thumb about ANY insurance is that most people are going to pay more in premiums than they collect in benefits.  If this wasn't the case, insurance companies would not make money and we all know they do.  When you buy insurance, you are paying the insurance company a fee to assume a risk, to turn an unknown into a known.  

I don't know if my husband or I will need nursing home care.  I do know that if we do need it, it will be expensive.  The insurance company knows the odds, ad they are going to look at me and my health history and determine how much time people like me spend, on average, in a nursing home.  They price the policy to make sure that we pay more than that.

The question is whether I need them to turn that unknown risk into a known premium.  Using the figures above, the policy will pay a maximum of $164,000.  If that 55 year old lives to 105, she will pay $100,000 for that insurance.  If she lives to 85, she'll pay $70,000.  Is it worth it?  

A rule of thumb is to buy insurance for things you can't afford to have happen.  I can afford to replace my cell phone so I don't insure it.  I can afford to pay $1,000 toward home repairs so I don't insure the first $1,000 worth of damage from storms.  I can't afford a trip to the hospital so I buy insurance to cover it. 

If all indications are that you will be able to pay $85,000 per year out of your assets, then long-term care may not be worth insuring. The thing to realize, especially with single people (whether never-married or widowed) is that by the time you need a nursing home, your other expenses will be minimal.  Your nursing home bill covers room and board, entertainment, transportation and more.  You won't need your car, you won't shop regularly for clothes or toys, and you won't be going out to restaurants.  Your house can be sold or rented out, and you will still get your Social Security and any pensions.  

The average nursing home stay is 835 days though the stay can be considerably longer for people with dementia and few physical problems.  Interestingly though, the average nursing home resident has a life expectancy of about six months when entering care.   Baby Boomers are estimated to have a one in four chance of spending the end of their life in a nursing home.  Those are the risks.  Can you afford them?

What If You Need a Nursing Home But Can't Afford It?

If you have reached the point that you need custodial care and you cannot afford it--there is no money there, then Medicaid will pick up the bill.  In order for Medicaid to pay your nursing home bill, your assets must be gone, or nearly so.  While some can be set aside for a spouse, your kids' inheritance must be spent before Medicaid pays.  Also, Medicaid looks at transfers from your estate in the last five years when determining eligibility, so if you are planning to give the money to the kids and then to let the government take care of you, make sure you get an early start.  

Maybe Your Kid(s) Should Pay for Long Term Care Insurance for You

If you have adult children and are comfortable discussing your finances with them, give them the figures and let them decide it long term care insurance is worth it, particularly if you are single.  If you do not have a spouse to worry about, then your long term care insurance is insuring an inheritance for your kids (assuming you don't outlive the policy). It isn't going to provide any benefit to you, because Medicaid will pay your nursing home bills if necessary.  Since they are benefiting, they can pay. 

On the other hand, if your kids include one with special needs who will be depending on an inheritance, purchasing long term care insurance could be part of your plan of long-term support.  

What do you think?  Is long term care insurance worth it?  Who should pay for it?