Should You Buy Long-Term Care Insurance?

As life expectancy increases, so do the costs associated with aging, especially when seniors need help with daily tasks like dressing or eating. A 2011 MetLife survey shows that the national average cost for a home health aide was $21,840 annually, while a private room in a nursing home cost $87,235 per year in 2011.

According to Department of Health and Human Services, close to 70 percent of people over age 65 need long-term care, which can include care in a nursing home or assisted living facility, or home health aides to assist with daily activities like bathing or meal preparation.

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For low-income individuals, Medicaid covers costs such as nursing home care in a Medicaid-approved facility. But those who have sizable assets would need to transfer assets or spend them down before qualifying for Medicaid.

Medicare covers certain medical needs, but not day-to-day activities like dressing, bathing, or using the bathroom. "There are very few pieces of long-term care that involve medical treatment," explains Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, a nonprofit consumer education organization. "If you need help taking your medicine, Medicare would tend to pay for that sort of thing. But helping you take a shower in the morning? That's not a medical activity."

If your life insurance policy offers an accelerated death benefit, that would allow you to use some of your life insurance money while you're still alive to cover long-term care costs. Long-term care insurance is another way to cover those costs, and it's especially appealing to those with assets they want to protect instead of spending them down to qualify for Medicaid. "In essence, you're insuring your bequest to your heirs," says Gerard Wedig, healthcare economist and associate professor of business administration at the Simon School of Business at the University of Rochester.

In fact, the only people who should be buying long-term care insurance are those with assets over $50,000, according to Sandy Praeger, Kansas insurance commissioner and chair of the National Association of Insurance Commissioner (NAIC)'s Health Insurance and Managed Care Committee. "If you have assets below $50,000, you'll spend those assets down rather quickly," she explains.

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In addition to protecting assets, long-term care insurance affords more choice about whether you move into a nursing home or assisted living facility or stay at home. Long-term care policies can cover home care, while Medicaid generally does not.

Since long-term care insurance is medically underwritten, it's tough to qualify for a policy if you're already showing signs of dementia or another condition that might necessitate long-term care. And because older policyholders are more likely to need this type of care, age is heavily factored into the premium. "If you can get a policy before you're 60, that would keep the monthly payment down considerably," says Praeger. Insurance companies can still raise premiums, but they have to justify the rate increase, according to Praeger.

However, adds Wedig, if you start paying premiums too early, you run the risk of lapsing payments and losing the policy altogether if your situation changes. For instance, you buy a policy and later decide that you don't need it because you moved near adult children who can handle care-giving responsibilities if needed.

With a non-forfeiture clause, you would get back some of the money you already paid if you later cancel the policy. However, that benefit can increase your premiums by 10 to 100 percent, according to data from NAIC.

Younger policyholders may also want to consider inflation protection, as the cost of home or nursing home care will likely increase by the time by the time they need it. NAIC data shows that inflation protection can add 25 to 40 percent to the premium, but without it, you may find that your policy only covers a portion of your actual costs. "Some people pay their policies for 20 years, and they go into a nursing home and find out the policy pays out only $75 per day," explains Tom Burke, a spokesperson for the American Health Care Association, an association of long-term and post-acute care providers.