Insuring for long term is complex

Health care policies present consumer with information overload

`Always a personal decision'

Your Money

April 25, 2004|By Lorene Yue

For all the work Christopher Reed has done as vice president of fundamental research for Harris Investment Management Inc. in Chicago, he still can't figure out whether he should buy long-term-care insurance for his parents.

"There are so many variables in long-term care and so many issues - health, taxes, estate planning," he said. "Then you get presented with a policy and your eyes glaze over."

Long-term-care policies are designed to help pay for all sorts of expenses people can incur as they age. These range from such simple things as home help in performing everyday tasks that are taken for granted, such as bathing and eating, to the cost of a nursing home, hospice or assisted-living facility.

The national average cost of a nursing home is $52,000 a year, and home care costs about $20,000 a year based on five hours a day, five days a week at $18 an hour. Costs are expected to skyrocket as baby boomers strain the health care system. It has been estimated that by 2030, the average cost for one year in a nursing home will be $190,000.

"We feel it is the largest unfunded liability facing Americans today," said Celeste Cobb, vice president of individual long-term care for MetLife Inc. "Long-term-care insurance provides protection."

Just trying to figure out whether, when and how much to get can be mind-numbing. The insurance industry recommends working with an agent to sort out the details, but even that could be information overload.

Shoppers for long-term-care insurance have to consider length of coverage, the amount that will paid out each day or each month, the waiting period before being deemed eligible to collect, whether to account for inflation and the total amount they want to have spent when the policy pays out.

At John Hancock Financial Services Inc., the average buyer age for a long-term-care policy dropped to 59 last year from 72 in the early 1990s. MetLife's average buyer age is 58.

Some corporations are making long-term care insurance an executive perk, and the average age is 43 to 49 for corporate policies.

One thing styming Reed is the possibility that insurers have grossly underestimated the future cost of care.

"They could conceivably be underpricing policies," he said. "The industry in many cases represents that once you buy the policy, the premiums don't rise, but they should put that in quotes."

Adjusting a policy could bump up the premium, and the older you get, the higher the cost. And it's tough to predict what adjustments you might need to make.

Let's say you live in New Orleans, where the cost of care is relatively low, about $65,000 for two years in a nursing home. So you buy a policy based on that cost. But by the time you need it 15 years later, your daughter is living in Chicago - where the cost of nursing home care is currently $91,000 for two years - and she wants you in a facility near her so that she can see you every day. You suddenly have a $26,000 shortfall.

You can err on the side of caution and sign up for a big policy, then reduce coverage as you get a better sense of costs, but the premiums will be high. Is it worth it to reduce your standard of living in your healthiest years on the chance that you'll need all that insurance at the end?

"It's always a personal decision," MetLife's Cobb said.

Lorene Yue is a Your Money staff writer.

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