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Long Term Care Insurance: Is It the Right Move For My Aging Parents?

The costs of caring for your elderly parents can be extremely high. Long term insurance can certainly help. But there are some things to know.

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My parents are getting up there. I’m not worried about them yet, but we don’t live very close to them. They still work and don’t have that much. I was thinking about buying long term care insurance for them. Is that a good idea? Does the long term care insurance cost make sense in the long run? — Larry, 37, via email

It’s great that you’re thinking about your elderly parents’ eventual needs, something a lot of adult children don’t consider until it’s too late. A lengthy stay at a facility can be financially devastating for families. Long term care insurance is certainly a way to help mitigate that risk.

As with most insurance products, long term care insurance policies have more varieties than a jumbo-sized chocolate sampler. But generally speaking, they’ll cover the cost of assisted living and nursing homes, as well as in-home caretakers. One of the advantages of getting covered is that older adults are less likely to put off getting the care they need, according to Jennifer Myers of SageVest Wealth Management, a fee-based advisory in McLean, Virginia. “Having that policy puts yourself or your family member on a healthier, safer trajectory,” she says.

One look at the cost of long-term care facilities, and you’ll get a sense of why establishing a safety net is so important. An analysis by Genworth Financial concludes that, nationally, the average yearly cost of an assisted living stay is $48,612. For a semi-private room in a nursing home, it’s $90,156. Those numbers should give anybody with aging parents some pause.

It’s true that not everyone is going to end up needing help with basic things like eating, bathing, and getting dressed for an extended period of time. The Center for Retirement Research at Boston College finds that 44 percent of men will need to be in a nursing facility after age 65, along with 58 of women. And the typical length of those stays isn’t all that long. The average duration is less than a year for men and around a year-and-a-half for women.

The problem is, you don’t know if your parents are going to those “typical” adults, or ones who need substantially longer care. It’s certainly a good idea to plan for the worst. Alas, you can’t lean on Medicare to pick up the tab. The program only covers nursing home placements in limited situations, and even then only pays for relatively short visits.

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The obvious downside of long-term care insurance policies is that they’re pretty dang expensive, and the price tag has only gotten higher over the past few years. The reason for that: some faulty assumptions by the insurance industry. When carriers first started introducing these plans, they foresaw a lot of owners letting their policies lapse, says Myers. But that never happened to the degree insurers predicted, leaving them on the hook for more claims than they had built into their pricing model. Now they’re trying to regain their footing.

The average cost of a policy for a 60-year-old couple is, according to the American Association of Long Term Care Insurance, currently $3,381 a year. The older they are, the more expensive the coverage becomes. What’s even more frightening, says Myers, is the fact that insurers often hike their rates after you’ve signed up. She’s seen rates go up anywhere from 10 percent to a staggering 130 percent from what the owner was previously paying. So, it becomes a question of whether you can afford a policy and keep it if the nearly inevitable price increases hit.

There are a couple alternative ways to plan for your mom and dad’s future needs, but they have serious shortcomings of their own. One is to self-insure – that is, put money aside in a separate investment of high-yield savings account so that enough will be in there for your parents should they need significant care in their later years.

The upside is to this approach is flexibility; if they never end up needing an in-home aide or a nursing home, the money’s still yours. But even if your folks are healthy now, you never know when their health may turn south. Plus, you’d need some serious resources to pull it off. To give you a rough idea, Myers says you’d have to amass somewhere between $500,000 and $1 million to cover the cost of round-the-clock care for five years. “For most people, it’s unattainable,” she says.

The other option is Medicaid, the state-federal program that covers lower-income individuals. But to qualify, your parents would need to liquidate much of their wealth. In some states, one’s assets can’t top $2,000 if you hope to get in the door (though when only one parent needs care, the other spouse can retain some of their assets). That’s not an enticing option for a lot of folks.

So that probably brings you back to the long term care insurance as Option No. 1. I’m not sure if the reason they’re not buying coverage themselves is more a lack of income or an uneasiness in facing their mortality. The latter is probably a question for another columnist. But if it’s a matter of resources, I’d try to work out a plan where they at least pay a part of the premium each month. Shouldering the whole load is a lot to ask a son your age, who has to think about his own retirement needs – and one day your own long-term care needs!

Premiums are all over the map. So if you pursue a policy, you’ll want to go through an independent agent who sells insurance from more than one company. Myers recommends sticking with carriers who have a strong financial rating to ensure they’ll have the ability to pay out claims should your parents need extensive care.

She also recommends purchasing a rider that annually increases the amount of benefits to keep up with inflation — preferably one that includes a compound adjustment of at least five percent a year. Some riders use something called “simple” inflation, which pegs the yearly increases to the original value of the benefits. But those stand little chance of keeping up with the actual cost of care over time. “If that’s one of the options, just walk away from it,” says Myers.

Ideally, you’ll want to get a policy with an elimination period – something akin to a deductible – of no more than 90 days and covers them for at least three years. But if a more spartan policy is all you can afford, don’t worry. Some protection is certainly better than none at all.