The case for buying long-term care insurance

The risk of having your financial security disrupted by the unexpected costs of a long stay in a senior care facility is an important financial planning consideration. But most people don't think about buying insurance to cover this risk until they're older. The problem is that if you don't buy the insurance until you think you'll need it, it can be expensive or no longer an option.

For example, at age 50, a typical long-term care insurance policy will run about $900 a year, but that can jump to about $6,000 at age 79. Another risk of waiting is that your health history at an older age may exclude you from being approved for the coverage.

I agree that it's hard to get excited about buying insurance for something that may never happen. While we all will die, not all of us will spend any time in a nursing home before we pass on.

But before you dismiss buying long-term care insurance, consider this: According to the Department of Health and Human Services, 70 percent of folks turning age 65 can expect to use some form of long-term care during the rest of their lives. And since women outlive men by five years on average, their risk is higher.

The national average cost of a stay in a skilled care facility is about $250 per day, or about $91,000 per year, and is expected to rise faster than the pace of core inflation. At this rate, a 55-year-old will have to save over $250,000 to have enough to pay for two years of long-term care costs at age 85.

Don't expect your health insurance or Medicare to pay much toward a long stay at a nursing home. These programs only pay 11 percent of costs nationally. They cover only a portion of the costs of the first 100 days in a nursing home -- and only if it's preceded by a stay in a hospital.

Medicaid, which covers over 70 percent of long-term care costs nationally, is the medical insurance program for folks with little or no income and assets. To file a claim under Medicaid, individuals with assets above very low limits must first spend them down substantially and direct all their income to pay their long-term care costs.

Private long-term care insurance currently pays for less than 10 percent of long-term care costs nationally, with the remainder coming from the income and assets of individuals who require the care.

Long-term care insurance policies offer a myriad of features and options. To keep the cost as low as possible, the rule is to choose only the most important options and accept some risk up-front.

So, if you're considering buying long-term care insurance, here are a few things to look for.

If the cost of care in your area is about $250 per day, consider that as a starting point for the daily benefit amount. Then reduce this amount by all retirement income sources, such as pension, Social Security and annuity income, which you'll be using toward this cost. If your total annual retirement income is $30,000, or about $80 per day, buy a policy with a daily benefit that covers the gap of about $170 per day.

Long-term care policies can pay benefits immediately or after the first year of care. You can really lower the annual premium cost if you chose a policy that pays only after the first six to nine months of a long-term care claim. With a little planning and some modest savings, taking on this risk shouldn't be a problem.

The average length of a stay in long-term care facility for women is almost four years, and for men it's a little over two years. For this reason, it's a good idea to choose a benefit period that provides benefits for at least three years. Also, include a "per period" option versus a lifetime option. A per period policy will cover more than one stay in a nursing home lasting up to the selected benefit period as long as each stay is separated by six months or more.

Ensure that the definition of services covered includes skilled and custodial care, delivered in a skilled-care facility or delivered in the home. Also, it's important to include home care services, home health aides, respite care (which relieves family caregivers) and the costs of an assisted-living facility.

Make sure the policy benefits will rise over time because the costs of long-term care certainly will. Most policies offer the option to purchase an annual benefit increase rider that's factored into the premium.

Finally, even if you've already purchased this insurance, it's a good idea to review it again because the features are evolving.