If your house is paid off and your children are out of college, you may be able to dispense with some life insurance and shift the cash to long-term-care coverage.
By Mary Beth Franklin, Kiplinger's
Like a young couple who trade the Miata for a minivan when their first child is born, families with grown children need to re-evaluate their life insurance requirements to see if they've outgrown their coverage. You may be better off using the cash to buy protection against the potentially devastating costs of long-term care.
"I commonly ask clients in their mid-50s whose houses are paid for and whose children are through college why they need so much life insurance," says Romeo Raabe, a long-term-care specialist in Green Bay, Wis. "In the event of the death of the breadwinner -- and there are usually two breadwinners by then -- the need for income replacement is just not there. But if one of them needs nursing care, the cost could ruin their financial plans."
The cost of a semiprivate room in a nursing home averages more than $52,000 a year -- ranging from a low of about $30,000 in Shreveport, La., to nearly $100,000 in New York City, according to a survey by the MetLife Mature Market Institute. The increasingly popular option of assisted living, which typically offers a more homelike setting and less supervision than a traditional nursing home, costs an average of $26,000 a year, but you'll see similarly wide price swings depending on where you live.
You'll get little -- if any -- help from Medicare for nursing-home expenses or other long-term-care costs. The same goes for private health insurance or medigap policies. The only options are paying out-of-pocket if you can afford it, hoping for increasingly scarce Medicaid subsidies if you can't and buying long-term-care insurance if you plan ahead.
Shift your dollars
Raabe suggests that should you no longer need life insurance, you drop it altogether, reduce coverage or borrow against your policy's cash value to free up dollars to pay for long-term-care insurance. That's what Pam Stencil and her husband, Paul Grathen, of Luxemburg, Wis., did. They canceled one of Grathen's life insurance policies and used the $2,000-a-year in savings to buy long-term-care insurance for the two of them. "We have been restaurant owners for 16 years, and some life insurance needs just don't exist anymore," says Stencil, who, along with Grathen, owns the Sweet Seasons family restaurant near Door County. The debt from the early years of the business has been paid off, and the couple's only child has finished college.
"Since we purchased the insurance, we personally have witnessed what it costs to receive long-term care," Stencil says, noting that Grathen's 51-year-old sister was admitted to a nursing home last year to recuperate from a severe illness. "If that had happened to one of us and we didn't have long-term-care insurance, our business would probably be gone."
In addition to re-evaluating life insurance needs, if you carry individual disability insurance -- not a group policy provided by your employer -- you may want to drop that coverage as retirement nears and apply the savings to long-term-care premiums.
It doesn't pay to wait
Stencil, 46, and Grathen, 48, are among a new wave of long-term-care insurance buyers. These buyers see the coverage as an important part of retirement planning and are taking advantage of the lower premiums offered to younger customers. Premiums are based on your age when you first buy coverage. The younger you are -- and therefore the longer you'll probably pay premiums before you need care -- the cheaper the policy. You also have to be healthy enough to qualify.
The price also depends on the length of coverage you select (ranging from one year to lifetime); the amount of the daily benefit (based on average costs in your area); inflation protection (which can double the premium but is critical for anyone under 65 who might not use the insurance for 10 to 20 years); and how soon you'll want coverage to begin after a disability strikes (referred to as the elimination period).
What's the best age to buy? "There is no age when you can beat the system," says Marilee Driscoll, a consultant and author of "The Complete Idiot's Guide to Long-Term Care Planning." "If you think you need this insurance or you are going to need it in the future, there is no incentive to wait because every year you do, the price goes up."
Of course, the younger you are, the sooner you have to find the dollars in your budget to pay for a policy. But whenever you buy, chances are you'll end up paying about the same amount over your lifetime. For example, if a 55-year-old buys a policy for $900 a year and doesn't use it until he turns 80, he will have paid $22,500 in premiums over 25 years. But so will a 65-year-old who buys a policy for $1,500 a year and pays premiums for 15 years before needing protection at age 80.
Sure, buying earlier has an opportunity cost (what you could earn if you invested the money elsewhere), but it also gives you an additional 10 years of protection. Generally, once you start collecting long-term-care benefits, you no longer pay the premiums.
Another advantage of buying sooner rather than later: Long-term-care premiums on new policies are 20% to 40% higher than a few years ago, reflecting both today's poor investment climate and the expectation that more policyholders are likely to need benefits than was assumed in the past, says Robert Davis of Long-Term Care Quote, in Chandler, Ariz. Although a few companies have raised rates on existing policies, most premiums have remained steady. (For a free comparison of three top-rated policies, contact Long-Term Care Quote at 800-587-3279 or online.)
On the house
Normally, it is difficult, and prohibitively expensive, for an 80-year-old to qualify for a long-term-care policy. But Elinor Kent of Framingham, Mass., is in excellent health. Kent concluded that long-term-care insurance would allow her either to remain at home or move to an assisted-living facility of her choice if she eventually needed care. But with an income of only $1,400 a month from Social Security and a pension, there is no way the single homeowner could afford to pay $7,000 a year for long-term-care insurance. Or could she?
Kent decided to use a reverse mortgage on her home, valued at $300,000. She now receives $500 a month to bolster her income and an annual lump sum of $7,000 to pay her long-term-care premium. She doesn't have to repay the loan as long as she lives in the house. When she moves (or dies), proceeds from the sale of the house will be used to pay off the debt.
Reporter: Matt Popowsky
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