Don't Overlook Long-Term-Care Insurance

Long-term care includes medical and nursing services beyond your typical visits to the doctor, treatment for illnesses and short hospital stays. It's the kind of ongoing help you need when you can't handle activities of daily living, such as bathing, eating or dressing. It can take place in your home, assisted-living facilities (residences with services that monitor your health and provide your meals) or nursing homes.

The case for insuring yourself and your family against the costs of long-term care is straightforward and essentially statistical. First, however hale and hearty you may be today, you may well need help tomorrow. Americans age 65 and over have a 40% chance of entering a nursing home at some point during their lives, according to the Department of Health and Human Services. Meanwhile, today 55% of Americans age 85 and over are impaired seriously enough to require long-term care, according to America's Health Insurance Plans, a trade group. Many of these seniors will get help at home, but a good proportion of them will have to move into a facility.

Second, this kind of care is extremely expensive and getting more so every year. The annual cost of private nursing-home rooms averaged a whopping $75,190 in 2006, up 7.3% since 2004, according to the Met Life Mature Market Institute. The average cost of 12 months in an assisted-living facility was $35,616 in 2006, up 17.6% since 2004 — and that doesn't include extra charges that some impose for dementia care.

Third, for most Americans long-term care isn't covered by other types of insurance. Don't be confused by the fact that Medicare pays for "skilled nursing care." That refers to short-term help you may need to get over an injury or acute illness. If you break your leg, for instance, Medicare will cover the cost of "medically necessary" care, like physical therapy, for 20 days. (It will then cover part of your costs for another 80 days; after that, you're on your own.) But if you are chronically sick or permanently incapacitated, Medicare won't help. Neither will Medigap or Medicare Advantage policies.

Medicaid, the federal health care program for low-income Americans, will pay for long-term care. But to qualify in most states, a senior must have less than $2,000 — that's right, $2,000 — in assets. In recent years Medicaid's eligibility rules have triggered concern among middle- and upper-middle-class seniors, worried they might need to give away their houses and investments before entering nursing homes — anxiety that has only worsened as the federal government has tightened its guidelines. The whole mess has spawned an entire industry of "Medicaid planning," and in a future column, we will return to the subject of how to pay for long-term care if you (or your parents) aren't fully insured. For now it's enough to note that you shouldn't rely on Medicaid if you don't have to. You will be impoverishing yourself to get federal money. You will have to surrender any income, such as Social Security or pension benefits, to keep it. And maybe most important, you might not keep full control over the kind of care you receive.

Add up these three factors — you could well need care, it's hugely expensive, and most insurance won't cover its costs — and you arrive at this stark conclusion: Long-term care is the single most catastrophic financial risk you face. And that's why the protection of insurance is so important. It's also why some states now encourage people to purchase this kind of insurance as they would for other financial risks. Sacha Millstone, senior vice president of the Millstone Evans Group of Raymond James and Associates, a planning firm in Boulder, Colo., points to how often people use insurance to cover expenses of more than $100,000. She says there's a one-in-1,200 chance that your house will burn down, a one-in-240 chance that you'll be involved in a car-accident lawsuit, a one-in-15 chance you will incur a major medical expense — and a one-in-four chance you will rack up a long-term-care bill.