Don't ignore possible long-term care needs

The Savage Truth

Needing long-term care is an unpleasant thought as you approach retirement age. But ducking this issue could be the most expensive mistake you make about your retirement.

Aside from the obvious reluctance to think you might need help with basic activities of living, you might figure you've saved enough to cover the costs of care. Think again.

According to the latest Cost of Care survey by Genworth, which sells long-term care insurance, it now costs a average of about $3,800 per month for in-home care for a year, a similar amount in assisted living, and about $7,700 per month for a private room in a nursing home.

Need for care typically lasts only about two to three years, but extended care for Alzheimer's could wipe out a couple's savings — leaving little in the way of financial resources for the surviving spouse.

According to Home Instead Senior Care, one of the largest franchisers of care-giving services, only about 20 percent of its clients pay for care through long-term care insurance policies. The rest are digging into their own pockets. Mary Alexander, a vice president at Home Instead, says the issues that arise when people fail to plan are heartbreaking.

Another worry about buying long-term care insurance is the fear that annual premiums will continue to rise. Insurers say most of the big pricing leaps are behind them and that they are now setting rates that better reflect their claims experience. Still, increases in future premiums are a worry with traditional long-term care policies.

Here's a better alternative: combination life/long-term care insurance. If you can afford it, investing a lump sum of cash now can help pay for care you might need down the road, plus give your heirs a death benefit if care is not used.

Based on the Genworth survey, let's assume you want to cover a need for $4,000 a month in care costs. (Remember, that covers only 40 hours a week, so round-the-clock home care would cost triple that amount.)

I asked Brian Gordon of MAGA Ltd., experts in long-term care insurance policies, to assume the need for $4,000 per month in benefits. He gave me these comparisons of traditional long-term care policies and the new combination life/LTC policies that take away the risk of rising premiums.

For a single 55-year-old female today, four years of $4,000 per month benefits, with 3 percent compound inflation and a 90 day elimination period would cost $3,136.84 per year in premiums (which could rise slightly over the years).

But if the same woman purchased a combo life/LTC policy, depositing $75,000 in cash up front, she would get the same $4,000 monthly care benefit. If the insurance is not used for care, it would yield a death benefit to her heirs of $96,000. And if she had an urgent need, not based on long-term care issues, she could always borrow some cash out of the policy. But borrowing would impact the care benefit.

Because long-term care is now gender-based, and women live longer, the deal for men is even better. A 55-year-old single male would pay only $1,841 per year in premiums (which could rise) to get that $4,000 per month benefit. And he would have to deposit only $66,250 in the combo policy to get a similar benefit.

Importantly, married couples buying any of these policies get a large discount on covering two lives. And there are even second-to-die combo policies, often used by divorcing couples or two generations.

So before you decide you can't afford long-term care insurance, take a closer look at the alternatives. This is a bet you don't want to lose. And that's The Savage Truth.

Terry Savage is a registered investment adviser. She responds to questions on her blog at TerrySavage.com.

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