Who looks forward to living in a nursing home? Few people build the possibility into their financial planning, an understandable lapse but unwise in the long run. Even if they did, the cold fact is that the options available to pay for long-term care, whether it's a nursing home, an assisted living facility, or home care, are limited and too often unaffordable.
Still, it is a harsh reality that about 70 percent of 65-year-olds will need long-term care at some point, according to a study conducted by researchers at Penn State, Georgetown, and the Lewin Group. Of that group, about 30 percent will need it for more than five years. That's extreme—the average long-term stay is about 2½ years. But it's expensive even for short-timers. The average daily rate in 2008 for a semiprivate room was $191 last year, according to MetLife Mature Market Institute's annual survey of nursing homes. Do the math. The sum comes to about $70,000 a year.
Other long-term care options are less onerous but will still wreck many fixed incomes. Assisted living facilities, where people who don't need skilled nursing care can get help with essential but routine chores, are much less expensive, averaging $36,372 annually. For those who can stay put, the services of a home health aide typically cost $20 an hour. Adult day care, another option that can allow someone to continue to live at home with family, costs $64 per day on average, according to MetLife.
Medicare isn't an option for truly long-term care. Coverage of skilled nursing care is limited to 100-day benefit periods and requires at least three days of hospitalization before being admitted to a home. It's fine for someone who's just had surgery or an acute case of pneumonia and needs recovery or rehabilitation, but it's no answer for someone with Alzheimer's disease or a debilitating chronic condition. Moreover, "covered" doesn't mean free. While Medicare pays all expenses for the first 20 days, the next 80 cost a resident $133.50 a day—that is, if coverage for the full 100 days is approved; consumer advocates say approval for much shorter stays is more likely. Medicare will also cover an unlimited number of days of part-time home healthcare for homebound seniors, although again, getting approval can be difficult. Medicare will not cover care in assisted living facilities.
There's no one right answer. The best option for a particular individual will take into account income and assets, current health, family medical history, and whether family members can pitch in to help. Geography also plays a role—nursing home costs vary widely, from $566 per day for a semiprivate room in Alaska to just $121 in parts of Minnesota and Oklahoma.
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It is never too early to begin weighing your options from among the four major sources for funding long-term care:
Pay out of pocket. Self-funding is for the financially fortunate. It is especially attractive to those who don't wish to buy long-term care insurance (see below) or who would be turned down for medical reasons. It hardly needs to be said that reasonably substantial assets that provide steady cash flow are necessary. "Substantial" depends on where you live, among other things, but generally it means at least a few hundred thousand dollars. "If you have a good income from a pension and Social Security or investments, you could be fine," says Craig Reaves, president of the National Academy of Elder Law Attorneys.
Buy long-term care insurance. A long-term care policy pays a specified daily amount for nursing home care for a specified number of years or for the policyholder's lifetime. It typically covers care in other settings as well, such as the home or an assisted living facility.
Many experts are lukewarm about such insurance. The policies are complicated, the language is often confusing, and the Oracle itself would be baffled by the significant decisions that must be made. Take timing. Is it better to buy at a younger age, when premiums are cheaper, recognizing that you'll likely write premium checks for decades before you need to tap the coverage—if you ever do? Or is it wiser to wait and buy when coverage is more expensive but you're closer to when you'll need it? A policy that pays out $100 a day for three years would cost an average 55-year-old $709 in annual premiums, according to the American Association for Long-Term Care Insurance. That same policy would cost a typical 65-year-old $1,342. If your family is stocked with hale and hearty 85-year-old marathoners, you may want to delay. On the other hand, if cancer runs in your family, you might want to consider buying on the earlier side. And although three years of coverage may be enough for an average long-term stay, are you willing to risk the possibility that you'll need five or 10 years?
There are also simple or compound inflation factors, elimination or waiting periods, and many other factors to consider. All can substantially affect the premium. (Our long-term care checklist shows elements to consider when picking a plan.)
The policies have improved in recent years. They're more standardized, and fewer policyholders these days get hit with huge, unexpected premium increases. Still, it's a pricey product that often falls short. "The benefits tend to be limited and fixed in dollar terms," says Judy Feder, a professor of public policy at Georgetown University and an expert on long-term care. "So even if you buy ahead of time, it still leaves you exposed to substantial costs."
To take some pressure off of the Medicaid program, which covers most long-term care costs, while allowing seniors to shelter some of their assets and still qualify for Medicaid, 32 states now offer "partnership" long-term care insurance policies. In these states, policyholders who run through their long-term care insurance benefits can keep a specified amount of assets, such as the total value of the amount the policy has paid out, and still be eligible for Medicaid. Partnership policies cost about the same as standard long-term care insurance policies with comparable benefits but are typically less expansive and their terms shorter than regular policies, says Jodi Anatole, vice president for long-term care product management at MetLife. State standards for these policies vary, and the way they mesh with a particular state's Medicaid program can be tricky, so consumers considering such insurance should definitely discuss it with a State Health Insurance Assistance Program counselor or an elder law attorney, consumer advocates say.
Qualify for Medicaid by spending down. For many people of modest means, even a short-term partnership policy may not make financial sense. These people will exhaust their assets and qualify for Medicaid coverage of any nursing home costs quite quickly. State laws vary, but some Medicaid programs also cover some forms of assisted living or home care.
Get a reverse mortgage. Some counselors advise covering long-term care costs with a reverse mortgage instead of taking out a home equity loan, which poses the risk of losing the home if payments can no longer be made. With a reverse mortgage, homeowners draw on the equity, but payment on the loan is deferred until they move out or die. And reverse mortgages are "nonrecourse" loans; even if the house eventually sells at a price below the amount of the reverse mortgage, the seller never owes more than the value of the home . How much money people can qualify for depends on their age and home value; the older they are, the more they can qualify for. See how much you might get with this calculator.
Reverse mortgages aren't for everyone. The home must be your or your spouse's primary residence, and if you're single and have to sell the house to move into a nursing home, the loan will come due. But if you need funds to pay for home care, a reverse mortgage may be a good option, says Barbara Stucki, director of the reverse mortgage project for the National Council on Aging: "It's a way to leverage your home equity to stay at home."