Understanding Insurance: Long-Term Care

Nursing Home

It’s a heartbreaking story to watch: After spending a lifetime working hard and acquiring a little bit of wealth, someone is forced to spend their entire nest egg, little by little, to pay for nursing home or other extended care in the final phase of their life.

We’d like to think that the money that we’ve carefully saved throughout our lives would be there for us to enjoy in our old age, and to pass down to our heirs after we’re gone. But this story plays out in thousands of families around the country every single day. Nursing homes and other long-term health care are incredibly expensive, and if you don’t plan well to meet those expenses, they can strip you of very bit of wealth that you’ve accumulated throughout your life.

Fortunately, there’s an insurance solution for this problem. In this series, Understanding Insurance, we’ve been studying the role of insurance in our lives. We’ve looked at how auto, health and life insurance help to protect us against the financial impact of life’s little disasters. Today, we’re examining long-term care insurance, an important product that can help you preserve your nest egg at the end of your life.

Surprising costs

So, just how expensive is nursing home care? According to this page on the AARP website, the average cost of a room in a nursing home is over $50,000 per year, and much more than that in some areas. If you or your loved one has a condition that requires more specialized care, the costs can skyrocket far beyond that. And in-home care, while often cheaper than nursing homes, is still expensive. In fact, 24-hour in-home care can easily cost several thousand dollars a week.

As you can see, this kind of care can get very expensive, very quickly. And unfortunately, it’s not covered under most health insurance plans. While your health insurance might cover medical treatment you receive at a hospital, it’s not going to pay for your nursing home care. This means that you’ll have to pay out of pocket for a nursing home, and several years of that kind of expense could easily drain a small nest egg.

The solution to all of this is a product called long-term care insurance. Like the other insurances that we’ve studied, this product promises to cover the costs of an expensive life event — in this case, the necessity to go into a nursing home or receive other long-term care. If you carry a long-term care policy and you have to go into a nursing home, the insurance company will pay the care company directly, sparing you and your family from the huge costs associated with this care.

Care considerations

There are several things to consider about long-term care. The first is when to buy: If you’re a healthy 30 year old, you’re not likely to need long-term care any time soon, so you probably don’t need to buy this insurance. The people that require this kind of care are almost always elderly, so it makes the most sense to buy this product as you approach old age. Many financial experts recommend purchasing this coverage when you reach 60 years old, which seems like a reasonable idea.

The second thing to consider here is the cost. I won’t beat around the bush: Long-term care insurance is expensive. But it’s expensive because it’s a relatively high-risk proposition for insurance companies. There’s a good chance that you’ll need some kind of long-term care at the end of your life, which means that the insurance  company will have to pay out on the policy at some point. In order to cover that risk, they’re going to charge you a substantial amount of money in your monthly premiums. But I believe that it’s money well spent. By the time you reach this age, you should be out of debt and have enough discretionary income to cover the cost of the insurance. And buying the insurance can save your nest egg from being raided by nursing homes.

Sadly, the AARP says that only about five percent of people in nursing homes have long-term care insurance to pay their expenses. The rest pay out of pocket, often running out of money very quickly. When that happens, they must count on the government to pay for their care, which leaves them broke and trapped in a system of public institutionalized care.

If you’re not nearing retirement age, long-term care insurance probably isn’t something you need to be thinking about right now. But if you have parents or other loved ones who are approaching retirement, it might be a good idea to talk to them about this coverage. After all, they’ve worked hard their whole lives to accumulate the wealth that they have, with the idea that one day they can pass it down to you. Encouraging them to arrange good long-term care insurance may be the best thing you can do to assist them in their financial goals.


Photo by Sima Dimitric. Used under Creative Commons License.

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