Higher Costs for Long-Term Care
People who need long-term care are paying more each year. You may be able to partially protect yourself by buying a long-term care insurance policy when you’re relatively young. For added protection, include a cost of living adjustment to the benefits you might receive.
According to the Genworth 2009 Cost of Care Survey, the national average daily rate for a private room in a nursing home is over $200: around $6,000 per month. A private one-bedroom unit in an assisted living facility costs over $2,800 per month, on average, and you’ll pay anywhere from $18.50 to $46.22 an hour, on average, to have an aide come to your home, depending on the type of agency you retain.
These figures are averages; you’ll pay less in some areas of the country, more in others. In Dubuque, Iowa, for example, the median annual cost for assisted living is $24,000. In Bridgeport, Connecticut, that cost is over $52,000. For almost any type of long-term care the cost is likely to be substantial.
Acquiring insurance
Many people will seek to buy insurance to cover the possible future cost of long-term care. Although many insurers offer such coverage, there is a catch to buying these policies. The longer you wait to buy coverage, the greater the chance you will be in poor health. If you have a health condition that increases the chance you’ll need care, you will pay more for a policy—and you might not be able to get coverage at any price.
Therefore, you may want to start shopping for a long-term care policy while you’re in your 50s or 60s. At that age, you have a good chance of getting coverage at a relatively low cost. But here there’s also a catch: you have to plan for possibly receiving benefits far in the future.
Example 1: Bruce Moore buys a long-term care insurance policy at age 62. He selects a policy that will pay a benefit of $200 per day, whether he needs care at home, in an assisted living facility, or in a nursing home. Bruce is in good health now but fears he’ll need care when he is in his 80s or 90s.
According to the Genworth survey, costs for assisted living facilities and nursing homes have been increasing at more than 4% per year. At a 4% rate, costs double in 18 years. Therefore, if Bruce needs care at age 80, his $200 daily benefit might pay only half of a $400 daily nursing home bill.
Coping with COLAs
Consumers who want protection from rising costs can buy a long-term care policy with a cost of living adjustment (COLA).
Example 2: Bruce chooses a 5% simple annual benefit increase as a COLA for his policy. Each year, his daily benefit will increase by $10: 5% of 200. Therefore, if Bruce needs care at age 80, 18 years after purchasing the policy, he will receive his $200 original benefit plus $180 (18 years of $10 COLAs) for a total of $380. That amount will cover nearly all of a $400 daily nursing home bill.
In recent years, insurers have added more choices to the COLA menu. Formerly, consumers typically had three choices: a 5% simple annual benefit increase, a 5% compound increase, or no inflation protection at all. Today, many companies offer a choice between 3%, 4% or 5% COLAs, simple or compound. You also might be able to buy a COLA that’s based on the Consumer Price Index (CPI). The more inflation protection you choose, the more you’ll pay. Thus, because the CPI has risen around 4% per year over the past 30 years, on average, a CPI COLA generally will cost less than a 5% COLA.
Copyright © 2009 by the American Institute of Certified Public Accountants, Inc., New York, NY 10036-8775.