Assessing the Need

• What are the chances a given individual will need long-term care?
• What if I pay premiums on long-term care insurance and never need it?
• So why do so few people have long-term care insurance?
• Are you saying everyone should have long-term care insurance?
• Wouldn't it be better to invest the money?

What are the chances a given individual will need long-term care?
Believe it or not, the odds are greater than 50% -- more than one out of two -- that any of us will need some kind of long-term care. It might be just a few weeks for one person but for the next one, it could be 15 or 20 years. It's a risk. And that's what insurance does -- protects against risk.

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But what if I pay premiums on long-term care insurance and never need it?
What if you pay the premiums on your car insurance for years but never have a serious accident? Wouldn't you consider yourself lucky? Insurance is there to protect us in the event that we need it. The probability that we'll need long-term care is much greater than the probability that we'll have a serious accident.

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So why do so few people have long-term care insurance?
Good question. It's mostly a matter of consumer education, something the industry hasn't done very well to date. There are also a couple of myths about LTC insurance that dissuade many who should have it. One is that it's "nursing home" insurance and the other is that long-term care insurance is basically something that older people should have.

First of all, it's the opposite of "nursing home insurance." Long-term care insurance can help you keep your independence and stay out of nursing homes. It will pay for home health care, adult day care and other services that can enable you to live independently and with dignity.

The other big myth about long-term care insurance is that it's just for old people. In fact, 40 percent of those who need long-term care are in the 18-to-64 range -- people like Christopher Reeves and Michael J. Fox. If we're lucky, we may need a few months or a few years of chronic care when we're really, really old. If we're unlucky and we're injured in an accident or we come down with a chronic disease, we may need it for a lifetime.

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Are you saying everyone should have long-term care insurance?
No. Those with limited assets don't need it and would perhaps be better off investing their money elsewhere. My rule of thumb is that if your assets are less than $50,000 not counting your home and car, Medicaid will be there for you.

It's at the other end of the scale that far too many people are geting bad advice. Many independent professionals and small business people who may have accumulated $1 million or $2 million in assets are getting bad advice from their financial advisors who are telling them they don't need long-term care insurance.

What none of these financial "experts" understand is the true cost of long-term care and the length of time that care may be needed. First, let's look at the cost of nursing homes. Today the cost of being in a nursing home is around $157 per day for a semiprivate room. Conservatively, costs are going up 5% to 6% per year.

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So if you take a 50-year-old person today and assume that nothing happens to them that requires long-term care until they're 80. By that time, at 5.8% a year, we're up to $850 per day. Now the latest studies show that the average long-term care amounts to 4 1/2 years of care at home and 2.4 years in the nursing home.

So leaving aside the cost of home health care and adult day care for a moment, let's look at 2.4 years -- 876 days -- in a nursing home at $850 per day. The person has just spent $744,600 of that $1 million he spent a lifetime accumulating. There's not much left to take care of the person's spouse when he or she needs longterm care and there certainly won't be much to leave to the children, now will there?.

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Wouldn't it be better to invest the money?
Let's do the math. Take a 40-year-old couple. They could buy a worthwhile long-term care plan for $1,300 for year -- that's for both of them. Now let's say that instead of that, they invest $1,300 each year for 40 years. At 10%, that comes to $633,000 -- before taxes and broker's fees.

Now take the $157 per day for a nursing home and run it out for 40 years at 5.8% and we get a projected one-year cost of $546,000. So they will have saved enough money to cover one person for one year. What about the other one? What if more than a year is needed?

Next: Buying Wisely