SO YOU'VE GOT the idea: Medicare can help your parents with short-term illnesses, but don't bank on it for chronic care. Instead, you need a game plan with long-term implications in mind-like the one Lisa Thomas devised.

In 1995, Thomas made a drastic decision: The then-38-year-old executive coach transferred from her company's Detroit office to its New York City branch in order to be closer to her mother, Gwendolyn, 62, a longtime diabetes sufferer. She then spent $90,000 remodeling her mom's home to ready it for any future disability, and started putting $100 a month into a "worst-case scenario" fund. With her own $90,000 salary and her mother's pension, Thomas figured she was well-prepared.

But when Gwendolyn's diabetes began to worsen in 2000 and she required $110-a-day home health aides, it became clear that their money wouldn't last. Thankfully, they had an out: Gwendolyn's long-term-care insurance, which picked up all her major expenses. "Without it, we would be in serious trouble," Thomas says of the coverage.

Just a few years ago, we argued that most people were better off skipping long-term-care insurance. At the time, we recommended that your folks self-pay for long-term care; the stock market was roaring, while long-term-care insurance was costly and dubious in value. Well, today, if you have the savings, by all means forgo the insurance. But if you don't, then consider it. Coverage has improved notably in the past three years.

Thanks to legislation passed in 2000, there is greater rate disclosure, along with more regulation of promotional literature. Also, heightened competition has meant improved products, with policies offering more home care and assisted-living coverage than before. Plus, the rising trend in employer-sponsored long-term-care insurance has helped make coverage more affordable and accessible. (The federal government, in fact, rolled out its own long-term-care insurance program in July for current and retired employees and their dependents.)

Of course, the rich (more than $2 million in assets) don't need the insurance; they can afford to self-pay. And those of more modest means (less than $100,000) will quickly qualify for Medicaid. It's the people in the middle who are left debating the costs and benefits of insurance that may never get used. People like 62-year-old Steve Cooperstein. He bought insurance three years ago for both himself and his then-52-year-old wife. "I finally realized that for me an actuary who doesn't like to overbuy insurance this was catastrophic insurance," says Cooperstein, who lives in Pacific Grove, Calif. "I can't afford to pay for the catastrophe of a long-term illness."

Though it's no fun to pony up for coverage that may not be needed for 20 years or more, Tom Doherty, a certified long-term-care consultant in Montclair, Calif., points out that "even 40 years of premium payments will always add up to less than one year of care." And the earlier your parents get it, the better the deal. The optimal age to sign up is between ages 55 and 59 when the children are grown, the house is almost paid off and the body hasn't packed up yet. A 55-year-old can get the insurance fairly cheap $1,500 a year for a policy that would pay $120 daily for five years of care. For a 60-year-old the premium jumps to $1,950; for a 70-year-old, $3,800. But be sure to check with the insurer on cheaper policies that don't include benefits your parents will never use. The key is, your parents shouldn't have to scrimp to pay for the premiums. According to the United Seniors Health Cooperative, a nonprofit elder-care advocacy group, if premiums will eat up more than 7% of their income, then the insurance is too expensive.

There are ways to make the premiums more affordable. For instance, your parents could purchase less than the recommended daily benefit and plan to cover the shortfall themselves. For one plan, buying a $130-a-day policy instead of $160-a-day policy would bring a 19% discount. Or they could choose a longer waiting period 90 days instead of zero or 30 days before benefits kick in. Just know that in most plans this waiting period refers to days of service, not calendar days. If your mom buys a 90-day deductible but needs home care three days a week, it will take longer than 90 days for her insurance to start, Doherty warns.

check www.ambest.com or www.moodys.com that have assets in the billions and have been in the long-term-insurance game for more than a decade (such as GE Capital or John Hancock). Your parents should also call the state insurance commissioner to find out about lawsuits or raised rates. A recent rate increase suggests that the company is either misleading customers it was offering low rates with the intention of raising them later or clueless about what rate level was needed to make the business profitable. For instance, Conseco recently settled a class-action lawsuit for allegedly concealing its intentions to raise rates.

It's crucial to ensure that your folks' coverage will actually pay for care down the line. The cost of a one-year stay in a nursing home will quadruple by 2030, according to the American Council of Life Insurers, so a policy should include a 5% compound inflation rider. However, Phyllis Shelton, author of Long-Term Care: Your Financial Planning Guide, advises that if your parents are older than 75 and don't expect to live more than another 10 years, a compound inflation rider may not be worth the additional expense (as much as 50% more). Instead, they should buy a higher daily benefit or put aside money to cover any shortfall in coverage down the line.

Long-term-care benefits kick in when daily activities start to falter. Most policies are triggered when your mom or dad can't perform two of six activities of daily living (ADLs): bathing, eating, toileting, continence, dressing and transferring (getting in and out of a bed or chair). If staying at home is important, go for plans that offer 100% home-care coverage and policies, such as Prudential's, that are flexible about who can perform home care. Avoid those that restrict policyholders to selected nursing homes. "When I check those facilities, I find that they are the Kmart level in terms of quality," says Marianne Ewig, a Milwaukee-based geriatric-care manager.

Willing to forgo long-term-care insurance? That's where Medicaid comes in. Although this welfare program has become a safety net for the middle class, discourage your parents from looking to it simply because they don't want to shell out their own money. "People need to spend money on their care," says Ruth A. Phelps, an elder-law attorney in Pasadena, Calif. "I say to clients, you've been saving your whole life for a rainy day. Well, guess what? It's raining."

First of all, getting on Medicaid isn't easy. The application process can be a nightmare, requiring three years of banking records and other documentation. And now, after expanding Medicaid eligibility in recent years, states are making it harder to get aid, especially for the middle class. Some states are also stepping up estate-recovery efforts. If your parent is single and goes on Medicaid, the agency will place a lien on his or her house if your parent dies or spends more than six months to a year in a nursing home (it's assumed the person is not returning). One escape tactic is to have a qualified elder lawyer create a life estate, in which the parent deeds the home to his or her kids but retains the right to live in it.

Even if your parents do manage to qualify, Medicaid is no grand prize. Medicaid patients have to put up with limited choice in terms of nursing homes. They have to share rooms and often deal with substandard care. And after three straight years of budget shortfalls in many states, it's only getting worse. States are slashing services 15 of them, for example, have announced cuts in dental, optical or other benefits. But if your parents know they will have to go on Medicaid soon to pay for a nursing home, Ewig advises getting them into a top facility early and paying with their savings. The best facilities usually require that you can personally afford to cover at least six months before going on Medicaid.

In This Story: Medicare
Long-Term-Care Insurance and Medicaid
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