Facing up to the costs of long-term care

No matter how well you plan your retirement, the catastrophic expense of long-term care could ruin it all. Insurance looks like the obvious solution. Turns out it's anything but.

NEW YORK (Money Magazine) -- Some insurance decisions are easy. Take life insurance. You know you need it to replace the income your spouse and kids would lose if you died. Insurers don't have much leeway to dispute claims for death benefits because "deceased" is a pretty definite condition.

After you decide how much to buy, you can compare various term policies, see which are the cheapest and most practical, and buy the least expensive one that fits your needs.

Long-term-care insurance seems just as simple - at first. Its purpose is to protect you from a very real, very scary possibility - that one day you might be unable to take care of yourself. If you wind up in a nursing home or need extensive assistance at home, you will face catastrophic costs that could eat up every dollar you ever earned.

The average daily rate now for a stay in a nursing home is $183, or nearly $67,000 annually, an expense that after a few years would sink all but the very well-off. And prices will go up. If they rise a bit faster than inflation, by 2026 the daily rate could hit $486 a day, or $177,000 a year.

Insurance looks like the solution - the customary mechanism for sharing a potentially devastating financial risk with thousands of other policyholders. And it can work.

Take the case of David and Kristi Schubbe of suburban Minneapolis. Starting in 2002, when she was only 61, Kristi became forgetful and had difficulty performing routine tasks such as following familiar recipes. After three years David became unable to care for her, even with a home aide. He found a nearby nursing facility that specializes in Alzheimer's patients.

"I knew when I saw it, this is where I want my Kristi," he says. The bill is $5,400 a month, but their long-term-care policy, which the Schubbes bought in 2001, covers the entire expense. Insurance helped make the tragedy manageable.

Says David: "It took the financial element out of when to go [into a home], where to go and how to do it."

What if the Schubbes had not purchased insurance? Medicare would not have helped because it doesn't pay for long nursing-home stays. Medicaid might have paid - about 43 percent of nursing home residents eventually qualify - but only after David had exhausted much of the couple's assets. (Transferring assets to relatives is almost impossible because the government penalizes you for having given money to others within the previous five years.)

States set strict limits on how much money the spouse not in care can retain. In Minnesota, for example, the spouse can keep half of the couple's assets up to about $100,000, plus their home (with as much as $500,000 in equity).

Finally, some nursing homes will not accept Medicaid, so relying on it would have diminished the Schubbes' options.

Remember: This is ultimately a question about your financial security. Imagining yourself so frail and vulnerable that you need to live in an institution or rely on a stranger's help is deeply unsettling.

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