Dear Dollar Stretcher,
We are senior citizens who are living the good life by watching our expenses very carefully. We vacation where we find good deals, shop with coupons, read your newsletter, etc. We have discussed long term care insurance a number of times and always conclude that it would limit our lifestyle considerably to spend several thousand dollars a year on it. Recently a woman we know had a stroke. Now the only nursing home that can handle her costs $800/day. She is at the end of Medicare benefits. Her husband will be going on welfare due to her medical expenses. We are once again discussing LTC insurance. Can you give us any input on this issue?
Vivian

Vivian's not the only person asking this question. There are more seniors now and they're living longer than ever. By the end of this decade 17 million people will be over the age of 75. And, unfortunately, with age comes more sickness and a decreased ability to take care of ourselves.

The result is that over $1 billion a year is spent on nursing home care in the U.S. And about one third of that is paid for by individuals.

As Vivian pointed out, not everyone will need professional long term care. Many retirees do fine on their own without any help. Others will rely on family to provide extra care. Only one in ten adults over age 65 will go to a nursing home. And half of them will return home. But, the other half will stay the rest of their lives.

As we grow older the likelihood of needing medical or custodial care increases. Twenty-five percent of adults over age 85 go into a nursing home and remain the rest of their lives.

For those who do stay in a nursing home for extended periods the costs can be breathtaking. Approximately 70% of the people in nursing homes have used up their savings within one year.

The cost of a stay in a nursing home averages about $110 per day. That works out to a little over $40,000 per year. With more people living into their 80's and even 90's, it's not uncommon for someone to spend ten or more years in a nursing home. So it's not surprising that a lifetime's worth of savings can be wiped out.

And nursing home care isn't the only possible expense. Many, like Vivian's friend, need extended stays in the hospital or require home health care.

To help define patients' needs the insurance and medical industries have generally agreed on three levels of care. Skilled care is performed under a doctor's orders. It's generally provided by a licensed registered or practical nurse. The nurse must be available around the clock. Thus most skilled care is provided in a hospital setting. The expectation is that the care will help the patient to recover and get well enough to resume a normal life.

Intermediate care differs from skilled care in that the nurse is only available on a periodic basis. The care may be given in a rehabilitation center or the patient's home. Often it's a matter of administering injections or changing bandages.

Custodial care is provided to meet a person's physical (not medical) needs and can be provided by non-medical personnel. Assistance with eating, bathing, dressing would fall within this category.

Many people think that the government pays for all extended medical and custodial care. That's not true. Medicare pays for almost all of the first 100 days of skilled nursing care. But it will not pay for most home care, assisted living or nursing home care. And Medicare does not pay for any custodial care.

Medicaid does pay for a large amount of extended care. But it's only available for the poor. In the past many people gave their assets to their children when faced with a long term care bill. Then they'd qualify for Medicaid. Recent laws have tightened restrictions on that practice.

Another problem with depending on government funding is that the patient is limited to using facilities that accept Medicaid payment. And these might not provide a level of care that's acceptable to the patient.

Finally, there's the invisible element of inflation to consider. Remember that when you're forecasting years into the future it doesn't take much to significantly increase costs. Just a 5% inflation rate will double the cost of an item in 14 years. So if you're 65 today just a little inflation will double prices by the time you're 79. Will you live that long? Perhaps a better question is: can you afford to gamble that you won't live that long? And, in case you're wondering, nursing home costs have been rising at a 5% annual rate.

What options does Vivian have? First, she and her husband could hope to stay healthy until shortly before death. However, medical advances make this less likely every year.

Another option is to buy insurance only for skilled and/or intermediate level care. In the case of Vivian's friend this type of insurance would be a big help. It's also possible that family can provide nursing home type care. But for many families that's just not practical.

They could also depend on relatives to care for them or pay the cost of extended care if it's needed.

A final option is to purchase long term care insurance. Over the last 15 years more people have chosen this option. While it can be expensive, for many it's the only way to protect assets that they've spent a lifetime accumulating.

As Vivian has already surmised, there's no one right answer that will apply to everyone. Each individual situation is different. Next week we'll attempt to show you how to compare long term care insurance policies and help you decide if they're a good choice for you.

Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. You can also follow Gary on Twitter or on his blog.

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