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What is "long-term care" and do I need insurance for it?

Long-term Care Insurance
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Let's play a word association game, OK? I say "long-term care," and you say what?

If you're like most people, you say "nursing home." While it's true that nursing homes are a big part of the overall long-term care picture, the topic is not that straightforward.

In general, long-term care refers to help with basic activities of daily living (ADLs, in industry parlance) such as bathing, dressing, eating, and using the toilet. This help can be provided in the home, in middle-ground settings such as assisted-living facilities, or in nursing homes.

Technically, long-term care insurance provides ongoing income to cover the costs of such assistance. Practically speaking, however, long-term care insurance is a tool for protecting the assets of retirees, most commonly you, your spouse, or a parent.

Insurance for protecting assets? What are we talking about?

Here's the deal. If you become severely ill, disabled, or mentally impaired to the extent that you can't take care of yourself, you'll need some help. If you're not hospitalized or lucky enough to be living with a capable caregiver (another reason to pick a spouse based on features that can't be surgically enhanced), you'll need to hire the help.

As you probably know already, this kind of help is very expensive and health insurance usually doesn't cover it, not even Medicare. How expensive?

Well, according to the 1996 "Guide to Choosing a Nursing Home," published by the Federal Health Care Financing Administration (HCFA), "A skilled nursing home will cost about $200 a day in many parts of the country." This works out to $73,000 annually. On the positive side, many areas of the country are significantly cheaper, which brings the national average down to more like $50,000 annually. On the negative side, if you want a private room in the Northeastern U.S., your cost could be more than $100,000 annually, according to a recent survey by Kiplinger's.

If you're still working, you'll have two ways to pay for these costs: income and savings. You hope that income from private long-term disability insurance and/or Social Security disability payments will be enough to cover the cost. If not, you'll begin to spend down your savings. When they're gone, you'll have to turn to Medicaid, which is public healthcare assistance for the needy.

If you're retired, the same basic scenario applies. You hope that monthly retirement income from Social Security, pensions, annuities, etc., will cover the cost of long-term care. If not, you'll begin to spend down your savings. When they're gone, you'll turn to Medicare.

Here's where it gets complicated. Let's look at two extremes.

If you have amassed sufficient wealth, you will be able to pay long-term care costs from the nest egg and earnings on the nest egg. This is, of course, the ideal plan and the one that all Fools are working toward.

On the other end of the spectrum, if you have little or no nest egg and are just getting by month to month, there isn't much point in paying for long-term care insurance. This form of insurance is relatively new and untested, and premiums are very expensive. They will dig deeply into your ability to build that nest egg.

But what if you need long-term care? Medicaid will be available, and while you hear a lot of horror stories about "being on Medicaid," the truth is that many decent facilities accept Medicaid patients. Of course no one wants to limit future options, but, in many cases, the insurance cost to avoid Medicaid is prohibitive.

So, what's left between no nest egg and a giant nest egg? In general, people 55 and older with significant retirement assets, who want to be sure that a future disability or illness doesn't wipe out their spouse or leave nothing for their heirs. For these people, long-term care insurance can be a good way to protect a chunk of their assets from spend-down to Medicaid. If you fit this bill, read on. Otherwise, get back to building that nest egg, Fool!