Nov 27, 2017

Understanding Long-Term Care Insurance

By Jarrod Upton

It is an issue fraught with anxiety. What to do – if and when – you or a family member should get to the point where some kind of assistance is needed with everyday activities. Maybe help is required in the home – preparing meals, doing laundry, or even bathing? Or maybe more intensive care is required which necessitates a relocation to an assisted living facility or a nursing home?

Whatever the circumstances might be, long-term care insurance can help to defray the costs of home, assisted living and nursing home care. In doing so, it also provides an individual with greater choice and options, as well as some protection from catastrophic financial ruin due to health issues.

Traditional Long-Term Care Insurance

Long-term care insurance is a private policy obtained by individuals who wish to offset at least some of the expenses of home, assisted living and nursing home care. According to Genworth – a company specializing in long-term care insurance – the average cost of a semi-private nursing home room is $82,125 per year. The average cost for assisted living is $43,539, and home health aides typically charge an average of $20 per hour.

According to a recent survey from LifePlans, an industry research firm, the average annual premium for long-term care insurance was $2,727. In exchange for that, a policy holder will lock in certain daily benefits (for example, an average of $161 per day for nursing home care) for a set number of years (three is most common). In addition, as a hedge against inflation, policy riders can be included that will increase the daily benefit over time, typically by 3 percent a year.

In order to access the policy benefits, it must be determined that an individual can no longer perform two of six activities of typical daily living – bathing, dressing, eating, using the toilet, continence, and the ability to transfer to a wheelchair. Or it must be determined that an individual is suffering from severe cognitive impairment. Once an evaluation is made, benefits typically start after a 30-90 day waiting period.

Holes in the Medicare System

By some estimates, 10,000 Baby Boomers per day are retiring and a vast number of them are financially unprepared for the medical and long-term care costs they are likely to face in retirement. Many Boomers are under the mistaken impression that Medicare will cover all their medical costs, and though Medicare provides excellent health insurance, it doesn’t come anywhere near to covering a retiree’s medical costs, and it doesn’t anything for long-term support or services. Medicaid might be able to fill the gap, but only after most of your assets have been depleted.

According to a new study from Fidelity Benefits Consulting, those holes in the Medicare system mean a couple turning 65 today will pay an average of $220,000 in out-of-pocket medical costs before they die. Those out-of-pocket costs include premiums, co-pays, and deductibles. On top of their medical care, two-thirds of those 65 and older will have some long-term care needs. That means a typical couple will need to put aside roughly $300,000 to pay for their care in old age.

But according to a recent survey from PriceWaterhouseCooper, roughly half of all Baby Boomers have set aside less than $100,000 in retirement, and more than one-third have less than $50,000 in savings.

Given these numbers, one can easily see that millions of Boomers are totally unprepared for the medical care and personal care they are likely to need in retirement, and one can also easily see the value of long-term care insurance.

Long-term care insurance provides individuals with the peace of mind, knowing that no matter when and where they might need health care, they will have the money to cover at least a portion of their bill. They will also have the comfort of knowing that if a lengthy stay at a nursing home is necessary, it is less likely to drain their savings or completely wipe out their estate. And that kind of peace of mind is priceless.

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