The cost of long-term care insurance is soaring. It's up 6 to 17 percent this year, depending on the type of coverage, according to the American Association for Long-Term Care Insurance.
Insurance companies are losing money on the policies, and dropping out of the business.
That has prompted people to wonder if they really need such expensive coverage. A healthy 60-year-old might pay $1,750 a year for a Thrivent Financial policy that will cover home health aides and most nursing home costs for about three years.
This kind of coverage protects your retirement nest egg. So, let's look at the odds of ending up an invalid, and what such bad luck might cost you.
The Department of Health and Human Services says seven out of 10 people will need help when they're old – be it getting out of bed, cooking a meal or getting up the stairs. They'll need it on average for three years.
They often don't pay for it. Families help out. Grannies move in with the kids. When my 98-year-old mother-in-law started slowing down last year, her bachelor son moved in. It's working out fine.
But paid help is expensive. A home health aide, visiting 18 hours a week, costs an average of $19,656 a year in 2010.
According to the government, 13 percent of us will land in "assisted living" apartments where help comes with the rent. One third of us will spend time in nursing homes, where costs average about $75,000 a year.
Most won't stay long. A 2007 study in California found that 76 percent of nursing home residents stay less than three months. Only one in 10 nursing home patients stays more than a year. (This is important because some long-term care insurance policies won't pay for the first three months.)
So, if you buy a policy, there's a reasonable chance that you'll use it.
But that doesn't mean you need one. If you don't have much money, you can lean on Uncle Sam.
Medicare doesn't pay for nursing or home health care, except under very limited circumstances. Medicaid does pay, but that's a program for the poor. If you have no insurance, you'll have to spend your own money until you're poor by Medicaid's definition.
If you're single, you have to be down to your last $1,000 in savings. But Medicaid lets you keep your house, one car and household goods.
If you're married, your spouse can keep half of the joint assets; the spouse can keep at least $21,912 and as much as $109,560 in Missouri, plus the house and car.
The spouse might be able to keep part of the patient's income, such as a pension, depending on the spouse's needs.
The bottom line: People without much wealth and income don't need long-term care coverage. They won't lose much before Medicaid takes over.
On the other hand, rich people don't need it either. They can pay the bills themselves. Chris Lissner, president of Acropolis Investment Management, draws the line at about $1.5 million. If you have that much, you don't need coverage.
So, long-term care insurance is a product for middle-class people with mid-sized nest eggs who want to preserve what they have, either for a spouse or their heirs.
If you decide to get a policy, shop around. Costs for the same coverage can vary by 90 percent, says Jesse Slome, director of the American Association for Long-Term Care Insurance, which represents insurance agents.
These policies have lots of fine print, so be careful. Slome recommends finding an agent who represents many insurance companies, so he can find a policy that fits you. Don't sign with a newbie; you want someone who understands these policies. Slome points to his group's website, aaltci.org, as a referral site for agents.
Long-term policies are cheaper if you buy when younger, and there's less chance of rejection because of your health. They generally cover nursing homes, in-home care and assisted living centers.
Policies limit the amount per month they'll pay, and the total amount of payments. So, even an insured person can end up poor and on Medicaid after a very long nursing home stay.
Prices are going up fast. Insurers blame low interest rates, which are sapping insurance company profits. Ten of the 20 biggest players have left the market. "Lifetime" benefits are becoming a thing of the past, and customers are cutting back on coverage to avoid rising premiums.
"Changes in interest rates have more impact on long term care than on anything else we sell," says Randall Boushek, chief financial officer at Thrivent Financial for Lutherans. Bucking the trend, Thrivent is getting back into the business after nine years on the sidelines.
Boushek says it's easier to sell women on such policies than men. Women are more likely to have helped care for an older relative, and they don't want to put their children through the same thing.
"It's often less about the cost than if you've had a personal experience with it," he said.
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