Chris Farrell: Long-term care insurance is a difficult decision

Q: What is your position on long-term care insurance? I am a healthy 60-year-old woman. We have no debt and own our home. I hope to work until I’m 70. Currently making $99,000 a year but only halfway to my retirement goal of $500,000.

Jolene

A: I think the decision whether to purchase long-term care insurance is one of the more difficult questions in personal finance. The biggest potential unknown expense when we get older is long-term care. The catchphrase includes the cost of nursing homes, assisted living, home health care and other services for frail elderly. The price tag for long-term care is breathtaking. Like all insurance (fire for example) the hope is that you never need to tap the policy, but it’s reassuring to know it’s there in case you need it.

Without insurance you and your family are largely on your own meeting these costs. Medicare doesn’t pay the tab for most long-term care charges. Medicaid, the joint federal/state safety net, is the main public program for long-term care. However, Medicaid is a “means-tested” program geared toward low-income households. The greater your financial resources, the more purchasing long-term care insurance is a sensible precaution. Put it this way: If you can easily afford the premium payments then go ahead and get it and hope you never have to tap the policy.

Why don’t I simply recommend “buy it” after sensibly shopping around? The reason is that the long-term care insurance market is in turmoil. A number of brand-name insurance companies have dropped out of the market. Companies are finding it difficult to price the product at an affordable rate while still earning enough money to pay for rising claims down the road. The remaining insurers are hiking prices and lowering benefits. Long-term care insurance premiums are costly for middle-income households that may be trying to save for retirement.

What I would do is gather basic information. Two potential resources are Allen Hamm’s “How to Plan for Long-Term Care’’ and “Personal Finance for Seniors for Dummies,’’ by Eric Tyson and Robert Carlson. These guides will give you a good feel for the trade-offs. When looking for a policy, you’ll want inflation protection. It’s the most important option to choose with long-term care. You’ll also need to understand the fine print.

Then, put down the long-term care guides and brochures. Instead, focus on thinking through a comprehensive financial plan. Long-term care insurance is only part of a much bigger retirement planning puzzle. You can only make sense of long-term care insurance in the context of an overall financial plan. For example, here are some critical questions raised by Henry Hebeler, head of the financial planning website Analyzenow.com:

• Will Social Security, your pension and investments be enough to pay for long-term care?

• Will you have relatives who would be willing to care for you?

• Can you preserve an investment fund that would cover several years of long-term care.

• Will you have a home that through sale, or a reverse mortgage, would support several years of long-term care.

• Finally, would you be willing to leave your LTC to government welfare (Medicaid)?

Your financial plan will help determine not only whether you can afford a policy, but what kind of policy will work for you.

Chris Farrell is economics editor for “Marketplace Money.” His e-mail is cfarrell@mpr.org.

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