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Finding the Right Long Term Health Insurance Christina Morales

October 2nd, 2014

Long Term Care InsuranceMy parents are Baby Boomers and in this past year they have spent more time in the hospital and at doctor’s appointments than either of them had ever planned. From bunion surgery to complications with a routine colonoscopy, my mom and dad have realized how much Medicare doesn’t cover and are grateful that they have a comfortable savings account to tap into if necessary. One major lesson learned is to expect the unexpected. With that said, have you considered long term health insurance?

First of all, what is long term health insurance? Basically, this policy helps to cover the costs of nursing home care, an assisted living facility or in home care assistance if you are no longer able to take care of yourself. Generally people purchase policies around the age of 60 to plan for future assistance. However, this insurance is by no means inexpensive. The annual premium can easily be $2,500 or more a year and many insurers have increased initial premiums by 20% or more over the past decade.

Now for the numbers: how much coverage will you need? This is hard to say and depends on your health and how much you can afford. Overall, the average cost of a nursing home is $180 per day and the average length of stay is about three years so that would be $180 x 1095 = $197,100. You may choose a policy that uses this equation for your lifetime benefit. Now it doesn’t mean that you have to stick with this specific cost per day or exactly three years to spend it, but this is your total amount of funds that you have to draw from for your lifetime.

Healthcare has been in the news a lot lately and many seniors are worried about if their medical needs will be met. There has been speculation that health care costs will increase across the board. What if you planned for nursing homes to continue to average $180 per day and the economy tanks and costs rise to $300 per day? Well, you can and should purchase inflation protection to go with your plan including an annual inflation adjustment rider. This will increase your daily benefit coverage by a set amount each year. Furthermore, choose a policy with a benefit that increases by 5% compounded a year since inflation grows at a compounded rate. A “simple” interest rate will get you less money in the long run.

Now what about premium costs? An annual premium can cost you a minimum of a few thousand dollars a year. Furthermore, you’ll be spending this amount for many years until you actually start pulling money from the policy to pay for your care. That could be 10 or 20 years down the road. CNN Money also shares this word of advice: “You will have to keep paying the premium when you are retired and probably living on a smaller income. If you stop paying your premium at any time, you can lose your coverage and every penny you paid up to that point. If you doubt your ability to keep paying for the policy through retirement, you probably shouldn’t buy it.”

Feel like buying long term health insurance is too much of a gamble? Prescott Cole, a senior staff attorney at California Advocates for Nursing Home Reform makes an interesting point in a Wall Street Journal article. He argues:

“For those with little wealth, a policy will never be suitable. They will be covered by the long-term care provided by Medicaid. For individuals with incomes of at least $250,000 a year and substantial savings, the smarter move might be to either self-insure or use their resources to pay for high-level in-home health care.

“For mid-wealth individuals, the answer isn’t so clear. The average annual premiums for policies sold to seniors run around $3,500 per year. But few—if any—policies pay 100% of the daily private pay rate, currently about $250 per day. Policies typically pay $150 a day. So, even a resident with a policy will have to dig into savings to pay the difference.

“But instead of buying a policy and paying premiums, the consumer could set aside savings for long-term care. At $3,500 a year, in 20 years he or she could have $70,000 plus interest. In the statistical unlikelihood they end up in a nursing home, they could use these savings to pay the bills.”

So should you or shouldn’t you buy long term health insurance? Make an appointment with your doctor to get a physical, with your CPA to analyze your finances, and your family for their input on your future health care decisions. Even then nothing is ever certain, but you can make the most educated decision possible.

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