Long-term care falls beyond the scope of Medicare. But does that mean you need long-term care insurance?

Most Americans today can expect to live to a ripe old age. The life expectancy of a 50-year-old, according to the Social Security Administration, is now 79 for a male and 83 for a woman. What’s more, over a fifth of today’s 65-year-olds can expect to survive past age 90. While increasing longevity is good news, it increases the likelihood of needing long-term care at some point in your life. Long-term care costs can be significant and are not covered by Medicare or Medigap insurance. Whether or not you choose to buy long-term care insurance to defray such costs will depend upon a number of factors.

Safeguard your later years…
If you are considering long-term care insurance, it is critical that you plan early and choose wisely among the available options. The cost of long-term care policies may increase dramatically with the age of the subscriber. According to the National Association of Insurance Commissioners, a 50-year-old can expect to pay premiums averaging $888 per year, increasing to $1,850 at age 65 and $5,880 at age 75. Purchasing a policy when you are younger and healthier can help contain costs and maximize benefits. Determining which features and benefits are most meaningful to you requires an understanding of your projected financial situation, as well as your anticipated health insurance coverage in your later years. The following questions can help you decide whether long-term care insurance is right for you.

What does “long-term care” entail?
Long-term care encompasses a range of services that pertain to personal care as opposed to medical care: everyday tasks, which include bathing, dressing, moving around your surroundings and eating, as well as services that support independent living, such as house cleaning, medication management, shopping, cooking, using the telephone or even paying bills. These services can be delivered at home, in an assisted living facility or nursing home, and costs can be high. According to the 2012 MetLife Market Survey of Long-Term Care Costs, the annual cost for an assisted living facility averages $42,600, and a nursing home averages $90,520 per year. Expenses can run even higher, depending on where you live and the facility you choose.

Doesn’t Medicare cover these services?
Medicare coverage works in two phases: In phase one, Medicare will fully cover short-term nursing home stays up to 20 days for patients recovering from an acute illness or injury; in phase two, partial coverage maxes out at 100 days. During this second phase, individuals are responsible for daily co-payments unless a Medigap policy is in force. After 100 days, Medicare coverage expires, leaving the elderly fully responsible for funding an array of critical support services on their own, whether those services are delivered in a nursing home, assisted living facility or at home. In addition, Medicare does not cover any assisted living expenses or adult day care expenses. While Medicaid will pay for long-term care in certain qualifying nursing homes, only those with minimal assets and income may qualify for benefits.

Does the Affordable Care Act provide at all for long-term care?
Although there was an attempt to include a long-term care supplement within the Affordable Care Act, it was suspended indefinitely from the program due to questions surrounding its financial sustainability. Issues regarding pre-existing medical conditions and limited appeal to lower-income populations would result in extraordinarily high premiums, and therefore, the program was eliminated.

How are long-term care insurance premium costs determined?
In addition to your age and health profile when purchasing a long-term care policy, premiums are most directly linked to the benefits you choose. Because opting to cover every potential risk and need can be prohibitively expensive, picking and choosing what makes the most sense for your particular situation can manage premiums. For example, instead of opting for lifetime benefits, a three- to five-year benefit period may be sufficient. A shared benefit between spouses pools benefits and can be split up as needs arise. For example, a total of six years of benefits can be split equally, but if one spouse requires longer-term care, all of the policy could be used for that spouse. If you have a family history that includes Alzheimer’s or other significant predispositions, it may be cost effective to choose a longer benefit period to offset more extensive long-term care.

How can subscribers protect themselves against inflation if benefits may not be tapped for 20 years or more?
Inflation protection riders are valuable to any long-term care policy. A five-percent compound inflation protection rider has long been a traditional option on many policies, but recently a three-percent option has gained popularity, especially in view of low inflation rates that haven’t exceeded four percent since 1991. Opting for a lower inflation protection rider can also save on premium costs while still offering a hedge against rising prices.

If you are considering a long-term care insurance policy, it is important to discuss your needs and expectations with a trusted advisor. He or she can help you sort through all the coverage options and help you find a long-term care solution that works best for your particular situation. iBi

Cathy S. Butler, CFP, CRPC is a financial advisor with the Butler/Luthy Group of Morgan Stanley. For more information, call (309) 671-2873 or visit www.morganstanleyfa.com/thebutlerluthygroup.