Terminal Truths About Long-Term Care Costs

-- You have planned for a comfortable retirement: where you want to live, how much you want to travel, how you would like to spend your days - and how you're going to pay for it all. One thing that could derail this plan financially is your health. The related financial problem doesn't stem from becoming sick and dying, but from becoming sick and living - and needing long-term care.

The financial risk that comes from this is greater for women than for men. Studies examining demographic data for all Americans - men and women - show that 30 to 50 percent of people who reach age 65 will eventually need long-term nursing care. These studies have found that almost 50 percent of all women in the U.S. will need this care.

This means that women are more likely to end up draining their retirement nest eggs - or greatly reducing their estates - to pay for long-term care. Unbeknownst to many people, Medicare generally doesn't cover this expense. In some parts of the country, long-term care with a private room can cost as much as $100,000 a year.

So you need a plan to pay for long-term care. One smart solution is to buy insurance to cover this cost, but many people fail to arrange this coverage.

This lapse is part of a larger personal financial issue: Research shows that people tend to make insurance decisions that aren't in their best interests. Decisions about long-term care insurance are a prime example - for both women and men.

It's important to understand the basic concepts of insurance and how to apply them to their situation, assessing costs versus risk.

Most people have fire insurance on their homes because their mortgages require it. But many of these people retain this coverage after their homes are paid off because they've grown accustomed to the peace of mind they get from knowing that, in the unlikely event of a fire, they will be covered against catastrophic financial loss. Yet, although most people are likely to need long-term care, many don't get it. Many buy expensive extended warranties on their televisions, but they don't make premium payments to protect their retirement assets from the drain of long-term care.

Insurance decisions hinge on your perception of risk - your risk tolerance - but in the case of long-term care, the odds are so great and the consequences of inaction so dire that this decision should be a foregone conclusion.

As with many types of necessary insurance, the primary goal of long-term coverage is to reduce your financial risk. If you buymore insurance than you need, involving higher costs, you may be defeating your financial purpose.

This concept applies to other types of insurance. If your car insurance policy has a low deductible, you're paying much higher premiums than you would with a higher deductible. A higher deductible makes financial sense because the cost of a low one greatly increases costs.

Yet most people don't feel that car insurance is unnecessary. This isn't just because most states require auto liability insurance by law. People understand that it's necessary to pay premiums to limit or eliminate their exposure to financial catastrophe from lawsuits stemming from negligence on the road. They grasp the concept that they are paying insurance companies to assume this risk on their behalf.

Yet when it comes to arranging long-term care insurance, many of these same people hesitate, saying, "What if I don't need it?" Of course, the whole point of this type of coverage, like auto insurance, is that you can't know this. You buy this insurance to protect yourself from risk, not certainty.

Some people think about long-term care but choose not to purchase it because they believe that alternative arrangements are possible. A common assumption is that their son or daughter would take care of them. But this may not always be possible, especially if the son or daughter has to work to assure their own financial security.

Another fallback strategy is: "I'll sell my house." But this shouldn't be confused with a risk-management strategy. The whole point of long-term care insurance is to protect assets, and your home is a significant financial asset.

For single women in some states, the cost of long-term care insurance is rising far faster than it is for men. In recent years, regulators in those states have approved policies that charge single women premiums as much as 50 percent higher than single men.

The justification for this cost difference is based on women's greater likelihood of needing long-term care, so these premium differences are expected to surface in other states. Women contemplating this kind of insurance may be able to save money by accelerating their purchase and locking in premiums before they rise in their states.

Here are some points for both women and men to keep in mind when assessing long-term care policies:

* Don't buy more insurance than you need. Brokers will try to sell you a Rolls-Royce policy that includes no elimination period - the initial period of care that you pay for yourself. This is like an auto policy with no deductible. Instead, assume some of this risk, choosing an elimination period of 90 to 180 days to get a lower premium. You don't need a policy that will cover costs of $100,000 a year.

Instead, you need one that covers much of your risk; covering all of your risk brings high premiums.

You may not know what part of the country you'll be living in when you retire, but you may be living in a less-expensive region - another reason to not over-buy. The average long-term care stay is two and one-half to three years, but you may want to insure for more than that. One reason for this is that Alzheimer's patients typically need care for extended periods.

* Unfortunately, you can't buy long-term care insurance directly; you must use a broker. You want a broker who represents various insurance companies so they're not intent on selling you one of the few substandard products that they have in their quiver. A professional broker with a lot of knowledge about this coverage can assist you in arranging appropriate coverage, assuming they're ethical and don't oversell.

* Beware of bundling. Bundled products have emerged in response to the irrational belief of many consumers that this kind of insurance is a waste of money if they don't end up using it. These products combine long-term care insurance with life insurance. This is a strategy to sell you a lot more than you probably need. There are often two problems with this: 1) Depending on your situation, you might not need any more life insurance, and 2) even if you do, you might be able to get life insurance and long-term care insurance at better rates when purchasing them separately. If you're offered this product, break out the policies and shop them around separately against competitors' products.

Given the chances that you'll need long-term care, obtaining coverage can give you peace of mind, especially if you're a woman. Remember that delaying can cost you money, because the younger you are at the time of purchase, the lower your premiums will be.

Any opinions expressed here are solely those of the author.

Laura Mattia is a partner with Baron Financial Group, and a fee-only financial advisor. She's a Certified Financial Planner professional (CFP), a Chartered Retirement Plan Specialist (CRPS) and a Certified Divorce Financial Analyst (CDFA) and holds an M.B.A. in accounting/finance. Her Internet radio show is Financially Empowering Women with Laura Mattia. A former professor at the Rutgers University Business School, Mattia is completing a Ph.D. in financial planning from Texas Tech University; her dissertation is on how to help women plan for retirement.