What options do you have when it comes to planning to pay for long-term care? Medicare covers only 100 days of skilled nursing home care immediately following a hospitalization, and co-pays can also come into play too.
Although Medicaid might be another option for some people, the spend-down rules in many states might require you to use a significant portion of your personal resources before you become eligible for this coverage. Although a long-term-care insurance policy might be another alternative to look at, it might not be an option if your have had health problems in the past. With all of this in mind, you might want to consider another alternative: saving and investing to pay for long-term care yourself. It may not be as daunting as it sounds.
The average daily cost of a private room in a nursing home in the United States is $70,080 a year, or $192 a day, according to the 2004 MetLife Market Survey of Nursing Home and Home Care Costs (September 2004). These costs could also be higher or lower than this reported average, depending on the costs of this care in your community. According to the MetLife survey, the average nursing home stay is about 2.4 years , but the United Seniors Health Cooperative recommends that you plan for at least four years of nursing home care. Assuming the average costs apply to your situation, you may need to set aside about $280,320, plus a reasonable allowance for inflation to cover the costs of long-term care.
That may seem like a lot of money. However, any investment earnings from the money that's set aside for this care could help, if you are investing the money over a long-term period.
For example, let's assume you're 65 years old and have $600,000 saved for retirement. Based upon family experience, let's also assume that you want to have some funds set aside to cover long-term care costs when you reach age 80. Assuming annual inflation of 3%, in 15 years, you might need about $436,729 (the equivalent of $280,350 in today’s dollars). This could be a significant sum of money when compared against the balance of your retirement savings.
Now, you could purchase long-term care insurance. However, the premiums can vary dramatically by company, state and coverage. To give you a rough idea of what this coverage might cost you, we've assembled the following estimates from the Connecticut Partnership for Long-Term Care, a state of Connecticut program to help citizens meet their long-term care needs.
The table below illustrates the annual premiums for a policy that provides nursing facility care (at $200 per day) and home and community-based care (at $200 per day) with an elimination period of 100 days. The elimination period is the period of time that you are required to pay for this care out of your personal resources before the coverage begins. The table also includes a 5% compounded inflation protection provision. Under this policy, premiums will remain the same for your lifetime unless the insurance company gets state approval to change premiums for an entire "class" of policyholders.
Average Annual Premiums Across Partnership Policies
Coverage Purchase age and premiums
Approximate amount Period of coverage 55 60 65 70
$73,000 1-Year $1,500 $1,800 $2,400 $3,400
$146,00 2-Years $2,000 $2,400 $3,300 $4,700
$219,000 3-Years $2,500 $3,100 $4,100 $5,900
So, if you would happen to fit this example, you are 65, and you want the highest level of coverage (which costs $4,100 per year) over the next 15 years, you would pay $61,500 in premiums - which might go unused if you didn’t actually need the long-term care. Again, it is important to note that insurance premiums and benefits can vary greatly from insurer to insurer.
Another option would be to create a "long-term care" fund from your own resources. Continuing on with our example above, let's assume you decide to initially fund your own long-term care savings account with $150,000. Let's also assume that you are going to add an additional $4,100 a year to the account (which represents the annual cost of the policy above). If we were to assume a hypothetical annual return of 7% each year, in 15 years you would have accumulated $516,883.72 (which is not reduced for any investment-related costs or expenses). And, if it turned out that you didn’t need a nursing home, you could leave this additional money to your heirs.
Of course, these examples are presented for illustrative purposes only, and they do not reflect the return of any particular investment. As market fluctuations and investment relates fees can reduce you overall returns, your actual results will likely vary from this example.
And whether this is a good option for you depends on your individual financial situation too- for example, how you might be affected by Medicaid spend-down rules