I just got a lovely letter yesterday from Blue Cross informing me that my current health insurance would soon be defunct and I better get online today and pick out a new one. And, what a surprise, replicating my existing coverage is going to cost more. I’m not going to get too worked up about this one, because we all knew something had to change with health insurance, right? But what everyone in the country seems to be trying to ignore is the other big health care crisis—long term care.

Thinking about this is hard, painful even to try to imagine yourself feeble and incapacitated. But, with modern medicine, it’s probably going to happen. As a dog trainer once said to me—if your pet doesn’t get killed in a freak accident, you’re probably going to be faced with some day putting them down. Been true with 2 dogs and 9 cats. The few accidents were the worst. Difficult circumstances are easier to handle with some sort of rational plan. You need one for the point when you’re no longer able to roar around on your motorcycle. It appears, given the fight over basic health insurance, that it’s going to be a long, long time before we get any kind of national consensus about taking care of the very elderly.

Think Medicare will take care of you? Ha-ha. Theoretically, Medicare can cover 100 days of service. Getting that service in actuality is pretty difficult—you have to be making progress on rehab, and you have to have spent 3 nights in a hospital. An awful lot of hospitals will park you in the lobby if you’re not out in two, and extreme old age and frailty is not something you can be rehabilitated out of. And even if you (or your loved one) can work the system, what’s your plan after 100 days?

Wowie-zowie it’s expensive. Think $250-$300 per day at the joints around here, and I’m not talking luxury apartment. Assisted living can be less, but real full-blown nursing care is usually a small room that you may be sharing with at least one other person. The more you can pay, the less you share, but some places don’t even have space for single rooms. Can you pay $100K a year in today’s dollars? Will you have a spouse that still needs to live on your savings and your Social Security? And really, when you need it you really need it.  Unless your retirement portfolio plus Social Security generates at least $100K per person in today’s dollars (or you’re willing to liquidate it all and don’t outlive it), you need long term care insurance. Okay, there are some more factors, but your personal set of facts should be discussed with a financial planner—I’m just giving you the pep talk here.

I’ve seen quotes for LTCI that range from $1,500/year (probably inadequate) to more than $8,000 per year, so I’m going to list the key factors that seem to influence cost. These are the basics you will need to think through:

1. When to get it. The younger you are, the cheaper it will be, the longer you will pay, and the more likely you can still qualify. People in their 40s may be too young (depends on family history, whether your workplace offers it as a group benefit) and after 60 an awful lot of people develop health problems that make it difficult to qualify at a decent rate.
2. How long you’ll wait before it kicks in. 90 days? 180 days? How long can you afford to cover 100% of the costs before you cry uncle? Lately, 180 days doesn’t seem a whole lot cheaper than 90.
3. How much per day it will cover. Establishing your personal minimum and maximum requires some work with a calculator—taking into account other sources of income, and who else (your spouse) might need that income while you’re being cared for. Here’s where the cost of insurance starts to really break out—choosing a higher benefit preserves future assets but eats up current ones.
4. Whether the benefit goes up with inflation. Nursing home costs have gone up much faster than the Consumer Price Index. What seems like a generous benefit today may be chump change in 30 years. I mean, my tuition at the University of Chicago in 1977 was $3,600/year. No, I don’t believe it either. Plans offer 3% inflation, 4%, 5%, and you also need to choose whether compound or simple.
5. How long it lasts. Tell the agent when you’re going to croak and you can get the perfect term. Statistics say that most people kick off a little less than 3 years after entering a nursing home. If you’ve ever eaten their food or heard some of the entertainment, well…but, 3 years does give your family time to sell the house and re-arrange other investments if necessary. On the other hand, my daughter volunteered at the Mather for 5 years, and there were plenty of residents who had been around 5-7 years. My unscientific observation from her experience was that people who were single with no family to care for them tended to move into residential care earlier, at a point when they were relatively more healthy and lasted longer. People who had an involved spouse or children tended to be able to put off the move until they were much frailer. So weigh your support network as you select a term.

Do take a look at your own health and family history. But keep in mind that your personal habits and modern medicine might keep you alive much longer. For example, my mother’s siblings and parents all died in their 70s. My mother, who gave up smoking in 1963, kept her weight down, was happily married, and ate pretty well (none of which was true for the rest of the clan) made it to 90. Dad, with a very long-lived family, lived on his own until 8 months before he passed away at 96. I think it’s a pretty good bet I’ll collect on that long-term care insurance. Like most of us, I hope I’ll clutch and keel at an advanced age. But I won’t bet my money on it. Which is why I think LTCI is a pretty worthwhile investment.

It’s a pretty good bet that if you read a daily newspaper (some of us still do!) you’ll see at least one scare article per week about how much health care is going to cost you in retirement. Now, these articles have always mystified me, because almost anyone who can afford it is purchasing “medigap” insurance, and anyone who isn’t probably doesn’t have enough money to be worth collecting against. Agreed, there’s a lot of stuff Medicare doesn’t cover, but the medigap stuff, IMHO, has been pretty good.

Of course, there are some things that medigap doesn’t cover either—extensive therapy, experimental treatments, and drugs. Many people find that they slip through the “donut hole” in the Part D drug program, especially if they select a program based on what drugs they’re taking, and then the doctor decides to switch a prescription or they develop a new and uncovered need for a specific drug. However, the specific program can be switched next year. So, where are these huge estimates coming from?

As far as I can tell, most of these projection type studies assume that the cost of these various insurances will inflate over the years. But I don’t see many people having a specific fund or savings program for health care costs—we tend to pay these things (just like a great part of college tuition) from current income. Certainly, the cost of health care should be factored into your overall budget, and just like everything else, you can expect it to inflate.

But where do the really huge numbers come into play? Long-term care. And despite what a distressing amount of people seem to believe, Medicare does NOT pay for long term care. Medicare will pay for 100 days of long term care provided you have been hospitalized for THREE days, and provided you can be certified as continuing to make progress. And boy does the medical system work those qualifications! You have to fight tooth and nail to be kept in a hospital for three days—when my father landed in the hospital while I was out of town (bed-ridden, with pneumonia, and semi-incoherent) I received a call saying that they were releasing him in two days. Since I was out of town and had no way to find a placement for him, I told them they’d have to park him in the lobby. When I arrived at his bedside right from the airport, I was told that he, and only he, could make a direct appeal to Medicare. I’m still not clear exactly what that procedure was, but he was given a phone number and while I watched him gasp out answers, he apparently demonstrated enough illness and incoherence that they kept him another two days.

Fast forward—we placed him in a nursing home. For 100 days at Medicare’s expense? Nope—he collapsed at the “physical therapy” sessions, had to be lifted onto a gurney by three people, and because he was “refusing” to go to therapy (since he couldn’t even turn over), he was no longer eligible for Medicare coverage for the nursing care. Moral: don’t count on Medicare AT ALL for so-called custodial care.

Long term care insurance is expensive, but for most people, paying for that insurance for 20 years isn’t as expensive as one year in skilled nursing care. In this neck of the woods, a semi-private room will cost $275-$300 x 365 days = or somewhere north of $100,000 per year. But that’s not the end of it—every aspirin, mouthwash, or bit of shampoo you consume will also be added on, at nursing home prices.  Compare that to $3,500 for 20 years = $70,000. And what about if you live for several years needing skilled care?—believe me, when you need it you really need it. For some reason, people hate the thought that they might pay for It and never use it. I say, do you have homeowner’s insurance? What’s the likelihood that your house will ever burn down?

So why is it a women’s issue? Well, every single article you see always estimates health care for the elderly as costing more for women—we simply live longer, and that means significantly more costs. But, there’s more.

You may think you have enough assets to cover the cost of nursing care. There’s the side problem that your kids will be thinking about how you’re burning up their inheritance, but maybe you don’t care about that. For couples, though, there’s a sad and ignored scenario. The usually older husband ends up needing care. The elderly wife takes care of him as long as she can, but she’s elderly too, and there’s a serious cost to her own health and well-being, as anyone who has ever done this will attest.

Finally, he ends up in a nursing home, but now a huge amount of their assets, and all his Social Security, are going to pay for costs of care. Yet, except for food, her expenses at home are probably not going down. It’s stunning to see how fast the retirement fund will need to be liquidated. Finally, he passes on and she’s left with 1/3 less Social Security, far less assets, and probably much poorer health. Who’s going to take care of her? When she needs long term care, will there be anything left?

Oh, perhaps you think your children will care for you. Me, too. But having also been a daughter in that position, I can attest that it is much better to be a care manager than a care provider. Even with long-term care funds, your children will be exhausted from all the doctor’s appointments, midnight calls, and rocket rides to the emergency room. I don’t want my daughter cleaning me up, lifting me, and even more unspeakable tasks. I want someone who has professional training, knows what they’re doing and can properly use assistive equipment. And statistics say that it almost always is the daughter, or the daughter-in-law, to whom care-giving falls. One of the consequences of modern medicine is that far more of us are likely to spend an extended time as very frail and very elderly.

If you love your spouse and care about your children, you’ll get long term care insurance. If you as a couple can only afford the premium for one, make it the woman—she’s way more likely to collect on it.

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If you are one of the rare few who have a guaranteed pension at work, you’re probably pretty happy when you think about your retirement. Over the last 20 years or so, these have just about evaporated for most of us working stiffs, except for teachers and public employees. Now, any state or local employee probably is just a teensy bit worried these days about underfunded pensions, but let’s not go there for now. But what about the rest of us?

We’ve all heard about the profligate baby boomers and their frugal saver parents, but the truth is that those “frugal” parents probably collected a nice stable pension from the giant stable companies they’d worked for for 30 years. Baby boomers have been hit with the triple whammies of companies who have moved to 401ks, far less certain and stable employment, and a big thud from investments just as they reach retirement age. And while I’m at it, let’s talk about those generous company matches to your 401k—even a “great” employer probably has figured out by now that a 5% match costs a lot less in contributions than a pension plan (especially if one or two employees don’t contribute, ya’ know?) and is a lot cheaper to set up and run.

So basically, it’s all on you and Social Security. And now, we get to annuities. People hate them, in fact, I hate them. Why? Because the insurance industry has come up with a jillion ways to separate you from your money, pay you less than you thought you’d get, and make it darn near impossible to get out of them once you plunk your money down. Like all the other creative insurance “products”, it’s buyer beware and be sure you know what you’re investing in.

The other reason many people hate annuities (I’m talking about the simplest single premium fixed annuity here) is that it HURTS to write out a big check and wave all that money bye-bye. And we all want to leave our kids a million bucks, right? Do me a favor–ask your kids whether they’d prefer you to run out of money and move in with them, or whether they’d prefer you take care of yourself.

 But here’s why I think they’re worth considering:

•  You can get more income out of the same amount of money. A rule-of-thumb safe withdrawal rate from your retirement portfolio is 4%. So let’s say you have $250,000. You can probably safely withdraw $10,000 per year/$833 per month. Now let’s say you purchase an annuity for $250,000. Even at today’s really crappy rates, you will probably get a payment of around $13,125 per year/$1,093 per month. Makes a difference.
•  You won’t ever run out. One big risk many of us face thanks to the improvements in medicine is living long enough to outlive our money. The market hasn’t been helping much, either. You can win the lotto, sort of, if you beat the odds and live past 85—a properly structured annuity will keep on paying
• They can provide you more money when you’d really like to spend it. That is, when you’re still young enough retired to travel, etc. If you can cover your expenses with a combo of Social Security and an annuity, the rest of your portfolio can be allowed to grow longer. Beats working until 85.

 So, if you’re anywhere near retirement age, ask yourself if you’d feel better if you had a guaranteed source of income, like a pension or say, double the amount of Social Security you’ll actually get. If so, it’s worth looking into an annuity. Even if you’re not too thrilled with the current rates, it’s worth considering for the future. If rates improve, you can jump on it then; if they don’t, an annuity is still likely to be the best available.

 Of course, selecting one requires some serious thought (hint: get some objective planning advice before you pay a commission to that nice man) and comparison shopping. But for a lot of people, it could make the difference between just barely making it, and having some serious breathing room.