Does Long Term Care Insurance Add Up?

Studies by the American Association of Homes and Services for the Aging (AAHSA), a not-for-profit group that studies elder care, 70% of people who reach age 65 require long term care at some point in their lives. Some of this care is provided in the home, some in assisted living facilities, and some in nursing homes. According to an October 2007 study by the MetLife Mature Market Institute, the average cost of a private room in a nursing home is $77,745 a year. The average stay is 2.4 years. Doing the math, an “average” stay would cost $186,588. Of course, costs can go much higher than that. More than 25% of nursing home residents stay three years or more, with 12% staying more than five years. Can you say half a mill?

There are three ways to pay for long term care: 1) out of pocket, 2) through Medicaid, the government health program for low-income Americans, or 3) with long term care insurance. Few people can absorb $75,000 to $500,000 in expenses, so the choice for the vast majority is between Medicaid and long term care insurance.

Qualifying for Medicaid is not as easy as one might think. The individual can have little income and very few assets. The family home does not count as an asset, but home equity above $750,000 does. Assets transferred to a friend or family member within 60 months of applying for Medicaid still count toward eligibility.

Buying long term care requires foresight; a person needs to buy it before he or she needs it. The sooner a person buys it, the lower the premiums will be. A 50-year old person who takes out a long term care insurance policy that covers $150 a day in expense for four years can expect to pay at least $1000 a year in premiums. The cost of premiums more than doubles for a person fifteen years older. A 65-year-old will pay about $2200 a year for a similar policy. At 80, the cost of long term care insurance shoots up to $7500 a year.

Older people pay higher premiums because the insurance company has less time to recoup expenses associated with their policies. Conversely, a person who pays premiums for a longer period of time gives the insurance company more time to invest and grow the funds. As a result, he or she is charged a smaller premium.

Another way to lower premiums is to limit the daily rate of the policy. The MetLife Mature Market Institute reports that a stay in an assisted living facility costs $35,628 a year—less than half the cost of a private room in a nursing home. The insured could look at his or her family history and, deciding that he or she will not be likely need the intense care of a nursing home, could elect coverage that pays for $97-a-day assisted living facility rather than a $213-a-day nursing home. The premium would decrease with the lower daily rate.

Another strategy to reduce the premium is to limit the period the policy covers. Since the average nursing home stay is less than two-and-a-half years, the insured can have the policy written to cover only three years. This strategy is risky, however, especially if the insured has a large nest egg to protect. There is a chance that he insured could be among the one-quarter of nursing home residents who stay longer than three years. With medical advances, it is a virtual certainty that life expectancy will increase in the future, increasing the chances of a prolonged stay.

A more prudent way to reduce premiums is to increase the waiting period, known as the elimination period, before benefits are paid. By increasing the waiting period from 30 days to 90 days for a facility with a $150 daily rate, the insured would have to pay an extra $9000. Once the waiting period is over, however, the insured would not have to worry about running up a huge bill. The long term care insurance would protect the bulk of the individual’s assets.