Long-term Care Insurance – is it Right for You?

The average annual cost of care in a private nursing home is about $66,0001 a sum that could quickly deplete almost anyone’s assets. One way to protect yourself and your assets is to purchase a long-term care insurance policy — just in case.

Essentially, long-term care insurance pays for extended care either in a nursing home or by a health-care professional in a person’s own home. Benefits generally become available when the insured person cannot perform one or more activities of daily living, such as bathing and dressing.

Do You Need It?

Neither Medicare nor standard health insurance pays more than a small amount, if anything at all, for long-term care. Medicaid will pay, but only if your income and assets don’t exceed the modest amounts set by the government.

Some people are able to “self insure.” To understand how this works, consider Mary and Al, a hypothetical couple. When they retired at age 65, Al had a pension from his employer, as well as an individual retirement account (IRA). Mary had the money she’d put away in her employer’s retirement savings plan. During the early years of their retirement , they lived comfortably on Al’s pension and IRA and saved Mary’s retirement account for future medical care — if necessary.

1 Market Survey of Nursing Home & Home Care Costs, MetLife Mature Market Institute, August 2003

Several years later, Al had to enter a nursing home. Mary’s assets covered his two-year stay in the home. However, if the couple had not had Mary’s retirement account to draw on to pay for Al’s care, they would have been forced to use income Mary needed for her living expenses to pay for Al’s care.

The bottom line: Unless you have sufficient assets that you won’t need for other retirement needs, you should consider buying long-term care insurance.

What To Look For

When evaluating policies, shop carefully and ask plenty of questions. Look for a policy that offers inflation protection. A benefit that seems adequate today may not be enough when you need it. For example, if nursing home prices were to rise by 5% per year, the current average $66,000 annual bill could top $175,000 in 20 years.

Another consideration is the policy’s waiting period. Figure out how long you can afford to self-insure before benefits actually begin. The longer the waiting period, the less expensive the policy is likely to be. Other important features to evaluate are the daily benefit amount and the length of the benefit period. Higher benefit amounts and longer benefit periods generally increase premiums.

Premiums will be more affordable if you buy a policy when you are young and healthy. The older you are, the more you can expect to pay for long-term care insurance. Premiums may also be higher — perhaps significantly so — if you are in poor health when you buy a policy.

If you already have long-term care insurance, review your policy to be sure it meets your needs. The best policy for you will depend on your personal financial situation.

Help from Uncle Sam

Long-term care insurance can be expensive. But, if you itemize deductions on your federal tax return, you may be able to deduct part or all of the premiums you pay for a qualified long-term care policy as a medical expense.

Long-term Care Premiums May Be Deductible

Your Age Maximum Amount Deductible*

40 or younger $260

41 to 50 $490

51 to 60 $980

61 to 70 $2,600

71 or older $3,250

* These 2004 limits will be adjusted for inflation in future years.

Keep in mind that you can only deduct medical expenses that exceed 7.5% of your adjusted gross income. So, you may have to incur significant other medical expenses in order to deduct your long-term care premiums. Check with your tax advisor to see how much — if anything — you can deduct.

Planning for long-term care can help you maintain control over your finances and improve your chances of getting the care you want. For more information, consult your financial advisor.