The Lowdown on Long-Term Care Insurance

One of the challenges of retirement is facing the moment when we may no longer be able to care for ourselves. But life in a nursing home or other facility can wipe out savings quickly. Long-term care insurance can ease the burden; find out how and when to purchase it in How to Make Your Money Last.

Long-term care (LTC) insurance helps pay the bills—at home or in a nursing home—if you become unable to care for yourself. Married couples in particular should consider it. The policy protects the standard of living of the healthy spouse if the other spouse falls permanently ill. A year of care can cost $85,000 or more.

But can you afford a policy? The answer is probably yes if your company offers it as a group-health perk. Group LTC plans usually take all comers if you sign up during the hiring process. If you wait more than 30 days you’ll be accepted only if you pass a health exam.

Spouses always have to pass an exam if the plan offers them coverage, too. You can probably take the policy with you when you leave the job at no increase in price, but check.

Policies are much more expensive outside of the workplace—so much so that they’re principally bought by people with upper-middle incomes and above-average assets. Individual policies always require a health exam. The older you get, the higher the risk that you or your spouse won’t pass. Couples can buy a shared policy that costs less than two separate policies. Policies for women are usually far more expensive than policies for men of the same age.

Premiums depend on your age when you enter the plan. The older you are when you sign up, the higher your cost will be. In theory, your premiums are supposed to stay level for life. In practice, most insurers raise them from time to time, sometimes by 10 or 20 percent. At this writing, I know of only three companies, Mass-Mutual, New York Life, and Northwestern Mutual, that have never raised prices on existing policyholders.

U.S. tax policy might help you pay. You can tax-deduct medical expenses that exceed 10 percent of your adjusted gross income. Qualifying expenses include the premiums for LTC insurance.

As a rule of thumb, you shouldn’t spend more than 5 percent of your retirement income on LTC premiums. You can lower your annual expense by choosing a policy that covers you for three years rather than five years or more. (The majority of nursing home stays don’t exceed three years.) Inflation adjustments can be cut, especially in your older age. You might set the waiting period at six months or more before the policy clicks in. To cut costs even further, you might insure only 50 or 75 percent of the expected cost of care, intending to make up the difference from personal savings.

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