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Afford the care you need
Nursing home insurance is still far from being the obvious solution.
By Cybele Weisser, Money Magazine staff writer

NEW YORK (Money Magazine) -- Perhaps the only thing scarier than the possibility of needing long-term health care is the prospect of not being able to pay for it.

With the average annual cost of nursing-home care in the U.S. projected to rise to $175,000 by 2020, a lengthy stay would decimate the assets of all but the wealthiest Americans.

Long-term-care insurance can cover much of the tab, but a good policy doesn't come cheap. Even basic coverage will probably cost several thousand dollars a year, and a deluxe model could be three or four times more.

If you can't afford to spend that much without shortchanging your retirement savings and your life and disability insurance coverage - or you aren't certain you'd be able to keep up payments for 25 to 40 years - then long-term-care insurance isn't for you.

If you can shoulder the costs indefinitely, you're a candidate, and you should seriously consider insurance if you want to preserve your assets for your spouse or heirs.

Here's what you need to know about buying a policy.

When to buy

The right time to get long-term-care insurance is around age 60. Agents will encourage you to buy when you turn 40 because as you grow older, premiums increase and your chances of passing underwriting screens decrease.

But you likely have more pressing financial commitments in your forties and fifties (such as your kids' college). Premium prices don't really spike until after age 60.

And it's hard to know what your long-term care options will be 40 or so years down the line. So unless your family history gives you reason to think your health could fail at a young age (a parent with early-onset Alzheimer's, for example), wait.

Where to buy

Most policies are sold through agents. Over the past five years, lots of insurers got out of the business of issuing new long-term-care insurance policies, leaving the market to a few big, established firms such as Genworth Financial, John Hancock and MetLife.

Even though the market is now more stable, you should still stick with companies with high financial strength ratings; you can get free guides from A.M. Best (ambest.com), Moody's (moodys.com) or Standard & Poor's (standardandpoors.com).

Some large employers, including the federal government, let employees buy long-term-care coverage at cheaper group rates, though you may lose the discount when you leave the job.

How much you need

With long-term-care insurance, what you're buying is a daily benefit. The higher it is, the more expensive the policy. Chances are you won't be able to afford a policy that covers the full cost of a nursing home, but aim to get as close as possible to prices in your area.

"The national averages are useless," says Deena Katz, a financial planner in Coral Gables, Fla. who specializes in planning for seniors. "If you live in North Carolina, $150 a day might buy you a room in a very nice home, but in New York, that won't cover half of it."

In 30 years or more, $150 won't pay for a nursing home anywhere. To make sure that your policy will be worth something when prices are higher, you must buy inflation protection.

This will add to your cost substantially: According to TheStreet.com Ratings, a 55-year-old in good health would today pay an average of $611 a year for a policy with a $100 daily benefit that does not adjust for inflation, but would have to spend $1,373 a year for the same policy with 5% compounding inflation protection.

It's worth it. "If you have to choose, get a smaller daily benefit so you can afford the inflation protection," says Marilee Driscoll, author of "The Complete Idiot's Guide to Long-Term Care Planning."

When it pays out

Make sure the policy covers home care - an increasingly popular option - as well as nursing-home care. In most cases, benefits are triggered when you can't perform at least two "activities of daily living," such as bathing or feeding yourself, or you demonstrate severe cognitive impairment.

But some insurers have stricter criteria than others, so check. Nearly all long-term-care policies have a 30- to 90-day "elimination period" before coverage starts, an insurance deductible of sorts. Opt for a 90-day elimination period, which will lower your premium by about 15%.

How long you need it

Lifetime coverage will send your premiums into the stratosphere, and chances are it's unnecessary. In a 2005 study of claims on more than half a million long-term-care policies with benefit caps of six years or longer, the actuarial firm Milliman found that only 5% of the policies paid out for that long.

"If you knew you were entering a raffle with those odds, you sure wouldn't count on winning," says Deborah Grant, a co-author of the study. Three to six years of coverage is enough.

What other features to get

When you shop, you'll come across plenty of extras and policy variations. If you're buying a policy with a spouse, you may want to consider a "shared care" policy, which is about 10% more expensive but allows either of you to use the full benefits.

Alternatively, if you and your spouse both buy identical policies, you'll likely qualify for a 10% to 30% discount. Don't pay extra for "forfeiture benefits," which offer you some of your money back if you stop paying premiums.

"If you can't afford the insurance, don't buy it in the first place," says Driscoll. You may also hear about hybrid policies that add a long-term-care component to a disability or life insurance policy or combine it with an annuity.

While these new policies hold promise, it can be hard to understand how much you're paying for each component. "I recommend people stick with old-fashioned long-term-care policies," says Katz.


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