Client & Advisor Update - March 22, 2010

Even thinking about nursing homes makes us nervous, too aware of advancing age. Maybe we have visited elderly relatives in a home and the thought of ending up there terrifies us. Or maybe we think we're too young to worry about it. Not buying long term care insurance, however, can be one of the most-expensive mistakes you will ever make.

Medicare pays medical expenses. It almost never pays for custodial care, the kind of day-to-day care people typically need as they get older.

And Medicaid is welfare. You probably don't depend on welfare for your needs now, for many of the same reasons you wouldn't want to depend on it later. You would have to be impoverished or make yourself that way, though the latter is more difficult now because of changes in the law. And you wouldn't have much choice in who provided your care or where. Take a tour of the assisted-living homes in your area that accept new Medicaid patients before you throw yourself at the mercy of the state.

Help you can't count on

Disability insurance and long-term-care insurance are not the same. Disability insurance replaces your income if you can't work; long-term-care insurance pays for your care.

"Disability coverage ends at age 65, while most LTC (long-term-care) claims begin after age 65," says Kyle Metcalf, the director of long-term-care marketing with HealthPlan Services, an administrator of insurance plans.

If you have kids, you may assume they will take care of you. They may be fine with that (it's best to check, though). But what happens if your kids are raising their own children and working long hours when you need care? Your daughter may want you to move in with her, but does your son-in-law? And what happens if you need more care than your kids can give 24 hours a day?

You could allocate savings to pay for your long term care, and if you have substantial wealth, that may work for you. Families with more-limited savings may go through their money in two to three years. At $5,000 a month or more, long-term-care costs can quickly deplete your savings.

Long-term care isn't always just for a year or two at the end of a life. Someone with Alzheimer's disease, for example, could need care for 10 years or more. A person diagnosed with multiple sclerosis in his 50s could live for decades, and with good long-term care, he stands a better chance of staying independent and enjoying those years.

When should you buy?

Most experts recommend buying long-term-care insurance by the time you reach your 40s or 50s. The rates are lower at that age, but more importantly, you can't be locked out of the market at any time if you develop a medical condition.

Fran Carson, the president of Chapel Wealth Management, a financial-planning firm, had talked to his parents about long-term-care insurance. His mother and father were approaching their 60s, so there didn't seem to be any rush.

Will you need it? Probably, as nursing-home costs keep rising. Here's what to look for in a policy.

He says: "At 61, my father's health began to deteriorate, and he was diagnosed with Parkinson's disease. When my parents decided to look into it, LTCI (long-term-care insurance) providers wouldn't cover my father's pre-existing condition. The outlook for his future level of care will be financially exhausting." At least Carson's mother was still able to purchase insurance for a moderate, locked-in monthly fee.

For some people, the need for long-term care comes suddenly. Randy Klein was in his 40s and healthy when he and his wife, Carol, went boogie boarding while visiting Hawaii. It took only one wave, driving his head into a sandbar, to change his life. He was paralyzed from the neck down, and he needs care 24 hours a day. That's more than Carol can provide while she raises their four children and runs their business.  Randy's in-home care costs up to $75,000 per year. Fortunately, the Kleins had purchased long-term-care insurance six months before the accident.

"Having long-term-care insurance has given me choices," Carol says. "Because of this protection, I am able to have someone assist me with his care. I am able to be a mother to my children. I am able to continue to live a small piece of my own life."

Standard provisions

Before 1993, long-term-care insurance had no government standards. Policies were hard to understand and often had riders that seemed skewed in favor of the insurance companies. For example, some companies canceled policies after a claim or didn't cover certain diseases such as Alzheimer's. Today, most states follow coverage standards developed by the National Association of Insurance Commissioners.

The following provisions are standard:

• A 30-day free look. You can cancel your policy at any time during the first 30 days and get all of your money back.

• Guaranteed renewability. A company cannot cancel your policy as long as you make your payments.

• An unintentional-lapse provision. An insured person whose faculties are slipping may forget a payment or two. If the missed payments are due to a cognitive or physical impairment, he or she has up to six months to catch up and reinstate the policy.

• Benefit triggers. Benefits may start when you need help with at least two "activities of daily living," such as eating, getting dressed, moving around or using the bathroom; your memory or thinking ability reaches the point that you need substantial help; or you need help for a medical reason.

Will you need it? Probably, as nursing-home costs keep rising. Here's what to look for in a policy.

• Home modification. You can get a lump sum to make your home accessible. For example, you may need wheelchair ramps or grab bars.

• Respite care. This takes over when your home caregiver needs to go somewhere or just needs a break.

• A waiver of premium. After you become disabled, your premium is waived.

• Exclusions. Most plans do not cover self-inflicted injuries, alcoholism or substance abuse. Coverage of mental-health issues varies; check your policy.

Discuss your policy with your family