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I'll take care of me: Self-insuring for long-term care

If you're thinking about saving extra money to pay for long-term care instead of buying long-term care insurance, think again carefully.

Self-insuring might work if you have plenty of assets and a carefully thought out financial plan. But it's not a decision to be taken lightly just to save money on long-term care insurance premiums.

Can you afford to pay for your own care when you're old?Here are six pitfalls to avoid.

1. Wishful thinking

Don't fall into the trap of thinking you can self-insure because you probably won't need long-term care.

Dennis Hebert, a Certified Financial Planner in Liverpool, N.Y., says his dad helped care for three relatives who required long-term care at the end of their lives. Together, their care cost $800,000. Yet Hebert's dad insisted he would never need long-term care, figuring he would live independently until the day he died peacefully in his sleep.

"He still believed it would never happen to him," Hebert says. Unfortunately, his dad now lives in a nursing home.

The odds of needing long-term care at some point after age 65 are about 70 percent, according to the National Clearinghouse for Long-Term Care Information.

Medicare and private health insurance generally don't cover long-term care, which pays for help with the activities of daily living, such as eating, getting to the bathroom and getting up from a chair.

Read more on long-term care issues from the National Clearinghouse for Long-Term Care Information.

2. Self-insuring by default

A lot of people end up deciding to self-insure after they get a pricey long-term care insurance quote, says Christopher Abts, founder and president of Cornerstone Retirement in Reno, Nev., a retirement and estate planning business.

"They'll meet with a long-term care insurance agent, get a quote for a Cadillac policy with all the bells and whistles, and then put it in a drawer," he says. "They missed a few steps. Because the stakes are so high, it's about more than getting a quote. You have to look at the big picture."

Unless you have minimal assets besides a home -- less than $80,000 if you're married and less than $30,000 if you're single -- the Life and Health Insurance Foundation for Education (LIFE) says you need to think about how to protect them if you require long-term care.

Abts recommends doing a thorough financial review. That means taking a look at how much income you'll have in retirement -- including Social Security, pensions and retirement accounts -- and evaluating how much income you'll need to maintain the lifestyle you desire. Don't forget to account for all the expenses you will face, including out-of-pocket medical costs, such as health insurance deductibles, co-payments and premiums for Medicare coverage.

Only after a thorough review can you begin determining whether you have enough left over for long-term care.

3. Underestimating the cost of long-term care

Keep these facts in mind when estimating how much to save:

  • The median annual rate for a private nursing home room in 2012 is $81,030. That's $15,330 more than the median cost in 2007, according to the Genworth 2012 Cost of Care Survey. The cost of in-home care has remained flat the last five years, but it's still substantial. National median hourly pay for licensed home health aides is $19 an hour. That totals $55,480 a year for eight hours a day of care. Genworth features an online tool to let you compare cost of care by state.
  • On average, a 65-year-old today will need some type of long-term care services for three years, according to the National Clearinghouse for Long Term Care Information. Women need care an average of 3.7 years, and men require long-term care an average of 2.2 years.
  • About one-third of 65-year-olds might never need any long-term care services, but 20 percent will need care for longer than five years, according to the clearinghouse. "You can eat through a great deal of money very quickly," says Glenda Kemple, a Certified Financial Planner and founder of Kemple Capital in Dallas.

4. Spending long-term care savings on other things

Stuart Speer, a Certified Financial Planner in Shawnee, Kan., recommends putting long-term care savings into a dedicated account.

Otherwise, he says, "lake houses, cabin cruisers, trips to exotic places, gifts to the kids and other expenditures may ultimately convert a client with adequate long-term care funds into a client lacking long-term care funds."

5. Leaving too little behind for the surviving spouse

Hebert says a key question to ask is, "Does anyone depend on my income or assets?"

If you spend all your long-term care savings and still need care, you'll have to dip into other savings. If you're married, you have to spend down your assets to a certain level before you qualify for Medicaid -- the federal and state health care program for low-income people -- to pay for long-term care.

Under 2012 federal guidelines, your spouse can have up to $113,640 in resources (as well as a home, car and personal belongings) and up to $2,841 in monthly income for you to qualify for Medicaid. States can set their own eligibility levels, but they can't exceed those federal guidelines.

If you do meet Medicaid eligibility requirements, your finances may not allow your spouse to maintain the lifestyle you both had planned.

"It often means moving to [a cheaper place in] a new neighborhood," Abts says.

6. Ignoring alternatives to traditional long-term care insurance

Consider other ways to pay for care.

Kemple says one alternative for high-net-worth or uninsurable clients is to purchase a variable annuity with a disability rider. Prudential, for instance, offers a product called Lifetime Income Accelerator that doubles the annual income from a variable annuity if the investor becomes disabled.

Another possibility is a combination life and long-term care insurance policy, Abts says. Lincoln Financial Group, for instance, markets Lincoln MoneyGuard Reserve, a universal life policy that provides long-term care benefits, a death benefit if the long-term care benefits aren't used and a money-back guarantee on the premium if the policyholder decides he or she doesn't want the policy after all.

Regardless of what you decide, remember to look at the big picture, Abts says.

"Long-term care is not something that can be addressed in a bubble all by itself," Abts says.

 

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