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The Unaffordability of Long-Term Care

We frequently hear about the rising costs of health care, and those associated with long-term care are no different. The AARP Public Policy Institute recently compared long-term care services costs with senior citizens' median income and found care simply unaffordable for middle-income families.

Study findings
Here are the key takeaways from AARP's nationwide study:

  • Private-pay nursing home costs in 2012 averaged 252% of median age 65-plus household income.
  • The cost of home health services averaged 88% of median age 65-plus household income.
  • Out-of-pocket spending represents the third largest source of payment for long-term care services, after Medicaid and Medicare.

Sadly, these figures aren't surprising given the rising cost of long-term care, which has increased nearly 6% annually for the past five years. According to Genworth's 2012 Annual Cost of Care Survey (link opens PDF file), the national average cost of a private room in a nursing home is approximately $80,000 annually. Meanwhile, an assisted-living facility stay will run you roughly $40,000 per year, and home health services cost approximately $19 per hour.

If you think you're excluded from needing to worry about a long-term care event, think again. According to the U.S. Department of Health and Human Services, 70% of people who reach age 65 will need long-term care services at some point in their lives. Long-term care is defined as needing assistance with at least two of six "activities of daily living," like bathing and dressing, over an extended period of time. Advances in medicine allow us to live longer but increase our need for care when we're old and worn out.

So where does this leave hardworking folks planning for retirement? How do individuals prepare to pay for these high costs?

Our alternatives
Currently, we have four options when facing a long-term care event. They include relying on family, spending down our assets, going on Medicaid (which occurs after we go through our assets), and buying long-term care insurance. But if you don't want to be a burden on family and if the idea of watching your nest egg circle the drain after forking over thousands of dollars monthly -- for possibly many years -- doesn't sound appealing, then long-term care insurance is worth a look.

But it's no small task sifting through insurers. Not all long-term care insurers are created equal. Some boast vast amounts of actuarial data gathered from decades of experience in the business. Tenure in the industry has helped insurers like Genworth Financial (NYSE: GNW  ) and Manulife Financial (NYSE: MFC  ) predict and mitigate risks. Considered conservative underwriters, these two insurers are frequently highly rated by consumers.

On the other hand, some insurers purposefully underpriced premiums to gain market share. But after they couldn't meet their claims-paying obligations, they were eventually forced to sell their policies to other insurers. Recently, MetLife (NYSE: MET  ) , Prudential Financial (NYSE: PRU  ) , and Unum Group (NYSE: UNM  ) stopped selling new individual policies.

Foolish bottom line
The likelihood of needing to cover hefty long-term-care expenses in retirement poses a significant challenge for households. If you're financially fortunate enough to afford long-term care insurance, consider it. Determine your best course of action and come up with a plan given your financial situation, goals, and priorities. With escalating long-term care costs, insurance may be your only option for affording care, even with its substantial price tag.

If you've decided to self-insure against a long-term care event, you'll need to build a robust, income-producing portfolio. The best investing approach is to choose great companies and stick with them for the long term.  In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of.  Click here now to keep reading.

Read/Post Comments (5) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 08, 2012, at 6:16 PM, fromthecenter wrote:

    Since I have aged it no longer bothers me to demonstrate my ignorance. You said long term healthcare costs have been rising by 6% a year. I doubt that wages, the major portion of their costs have been going up at the same rate, nor have materials costs. Where has this increase in rates come from and who is getting the income from it?

  • Report this Comment On November 09, 2012, at 10:17 AM, jjf3851 wrote:

    It's important to note that apples-to-apples comparisons of healthcare costs are rising that quickly. The healthcare costs of the average 40 year old male (for example) aren't significantly higher from 2000 - 2010. The reason healthcare costs have risen is that a higher percentage of healthcare users are in more costly age brackets. The 40 year old male from year 2000 is now 52 years old, and he is in a more costly age bracket (requires more routine tests, higher incidence rate of cancer/heart disease etc).

    To put it bluntly, older people use more healthcare resources, and there are more older people today than yesterday. This isn't a bad thing (hey, I want to get older too!); it's just a reality we must face.

  • Report this Comment On November 09, 2012, at 10:18 AM, jjf3851 wrote:

    Sorry, typo above:

    ... apples-to-apples comparisons of healthcare costs are NOT rising that quickly.

  • Report this Comment On November 09, 2012, at 3:04 PM, ltcassociates wrote:

    @fromthecenter You are right to question the increase in LTC costs of 6%! There's a danger in applying national averages to one's personal, local circumstances.

    I am familiar with Genworth's annual Cost of Care Surveys, and while many in our industry consider it the "gold standard", it's hardly the only such survey. Still, readers can click the link in the article above to browse it. A few conclusions are readily apparent.

    1) Costs vary widely from state to state, city to city.

    2) Costs vary by care setting.

    Let's look at the 2nd point in more depth, for this is particularly important. Nearly 2/3rds of care today is now rec'd in the home and community, so it's less and less relevant to quote "Nursing Home" rates, much less their inflation rate.

    When we zoom in on the inflation rate for HHC, it hovers around 1.00% over the last 5 yrs. That's closer to what you expect to find. The Cost of Care Survey explains that part of this is due to heavy competition, and an abundant supply of unskilled labor.

    The upshot of this is that LTC insurance policies may not need to include expensive 5% compound inflation protection either. Check out my article: "Inflation: The Silent Killer of LTC" on Producers eSource for further reading.

    (Thart article is part of a 5-Part series of consumer-educational pieces, by the way, completed for National LTC Awareness Month.)

    Stephen D. Forman, SVP

    LTCA, Inc.

  • Report this Comment On November 09, 2012, at 3:19 PM, ltcassociates wrote:

    "On the other hand, some insurers purposefully underpriced premiums to gain market share. But after they couldn't meet their claims-paying obligations, they were eventually forced to sell their policies to other insurers."

    Citation please?

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