Long-Term-Care Mistakes
Avoid these five blunders people commonly make when trying to cut premium costs.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
May 2006
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In an attempt to hold down your long-term-care insurance premiums, you might cut some corners that could cost you a lot of money in the long run. Avoid these five common mistakes:
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1. Relying on average benefit amounts. The first decision you need to make when buying long-term-care insurance is how big a daily benefit you need. "Everything else centers around that," says Mike Ashley, a long-term-care insurance broker near Kansas City. But if you rely solely on the national average, you could fall short of the cost of care in your city -- or you could end up buying too large a benefit and skimping on other parts of your coverage.
For example, the average daily cost of a private room in a nursing home is $203 across the country, according to the MetLife Mature Market Institute. But the average daily cost is $135 in Birmingham, Ala., and $330 in San Francisco. The average hourly rate for a home health aide varies just as much: It's $13 in Birmingham and $21 in San Francisco. To figure out how much coverage you need, check out prices for facilities in your area you wouldn't mind using. Then figure out how much of the bill you could shoulder yourself.
Ashley surveyed nursing-home costs in his area and found an average price tag of $3,900 per month (about $130 per day)--much lower than the national average. The price of care in Kansas City has been going up by about 4.25% per year, which would bring the monthly cost to more than $13,500 in 30 years -- by the time a 55-year-old is 85 and most likely to need care. "When I show clients that number, they go, 'Oh, my God!' " he says. But Ashley is quick to point out that a nursing home is probably the worst-case scenario and that many people receive care at home or in an assisted-living facility, which may be less expensive.
Then Ashley asks clients how much they can afford to pay out of their retirement savings (the key is to think in terms of future dollars, just like the rest of retirement expenses). If they can afford, say, $3,000 per month in nursing-home costs in 30 years without dipping into savings, then they should buy enough long-term-care coverage to provide up to $10,000 a month by then.
Assuming local nursing-home costs continue to rise by 4.25% per year, they'd need to buy about $2,400 in monthly benefits now to provide that much coverage in 30 years -- which translates into about an $80 daily benefit, assuming they buy a policy with 5% compound inflation protection (see below for more on inflation-protection options). "Don't buy more than you need," says Ashley.
2. Skimping on the waiting period. You can lower your premiums by choosing a longer waiting period before benefits kick in (called the "elimination period" in insurance jargon). But too long a waiting period can cost you.
For a John Hancock policy with a $200 daily benefit, a three-year benefit period and a 30-day waiting period, a 55-year-old would pay $2,430 per year. Extending the waiting period to 60 days lowers the price to $2,227. A 90-day waiting period drops it to $2,025; 180 days to $1,822, and 365 days to $1,620. But a longer waiting period means you'll need to pay the bills yourself before benefits kick in. At an average daily rate of $200, that translates into a $36,000 bill with a 180-day waiting period, and $73,000 for a 365-day waiting period.
And that's just in today's dollars. Your expenses will be much higher when you consider the future cost of care. If costs continue to rise by about 5% per year, that daily bill could rise to $677 in 25 years -- which means you'd pay $122,000 with a 180-day waiting period and nearly $250,000 with a 365-day waiting period. Those bills make saving $200 -- or even $400 -- per year in premiums seem like small change.
Bottom line: Most people should consider a 60-day or 90-day waiting period, which keeps premiums manageable but limits out-of-pocket costs.