The issue of long-term care and whether one should own insurance to cover the risk is still a sore subject for a lot of people. Some people believe they don’t need it because their parents never went into a nursing home. Others think their children will take care of them if they ever need help. However, statistics indicate that 72% of Americans will need some type of long-term care during their life time. That’s a statistically significant risk and one that should be addressed. You may decide you don’t need to do anything about it, but it should at least be discussed with your adviser.
The average daily cost of a private nursing home room in 2010 was $247 per day ($90,155 per year) and $215 per day for a semi-private room ($78,800 per year). The average daily cost has been rising between 5-7% per year since 2004. These figures are national averages and vary significantly in different parts of the country. New York City has the highest daily rate of $479 and Shreveport, LA has the lowest at $134 per day.
The average life expectancy in a nursing home is less than three years. However, an average stay for Alzheimer’s could be closer to 8 years. It’s also important to note that over 40% of people that require assistance choose to stay at home rather than go to a nursing home. Home health care expenses can be just as expensive as a nursing home depending on the level of care needed.
Using a median cost of $80,000 per year, you’ll need $2 million of assets to cover that expense and keep pace with inflation without depleting your principal (see 4% rule). You would need to double this amount for a husband and wife with no other sources of income. A couple with a net worth of $4 million or more should consider self-insuring for this risk. Those with assets less than this should consider long-term care insurance to cover at least a portion of the risk.
There are four controllable variables that affect the cost of the premiums:
- The benefit amount – Typically quoted as the daily benefit in dollars. The average cost of a nursing home is $247 per day. You can insure for a daily benefit amount for as little as $100 per day or up to as much as $500 per day. The benefit amount has a significant impact on the premium cost.
- The benefit period – You could elect to have the policy pay as long as you are in the nursing home. Selecting a definite time such as three years or five years would reduce the premium cost.
- The elimination period – Many people elect to have the benefit start after 90 days, because Medicare pays for the first 90 days of the nursing home stay. Keep in mind that 40% of people elect to stay at home. Medicare does not pay unless you are in a hospital or nursing home.
- Inflation protection – You’ll probably want the benefit to grow each year to keep pace with inflation. Most policies give you an option for how much growth you want to include. The rate of growth (3% versus 5%) will have a big impact on the premium costs.
The final factors affecting your premium costs are your current age and health. The longer you wait to apply for long-term care insurance the more expensive it becomes and the greater the risk that you may not be able to qualify for it. It’s generally recommended that people apply for the insurance before age 60 even though most people don’t need nursing home care until they are in their 80s. It’s easier to qualify for when you are younger and the premiums are more affordable.
Take the time to evaluate the risk a nursing home stay could pose to your financial plan. Don’t let a debilitating illness derail your financial future and the legacy you planned for your family.
- Here’s my retirement planning rule for fixed assets: Keep the safe money, safe.
- When working with an advisor, don’t be pigeonholed into a one-size-fits-all plan. Your plan should be designed just for you.