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How to Insure Your Income: Pros & Cons of LTC Policies

Government health care programs -- including Medicare, Medicaid and state-specific plans -- require people to spend most of their personal assets before receiving government benefits.

Medicaid will pay for nursing home care only when a person has little income and very few assets. This means that many middle-class citizens who enter a nursing home while they have savings and assets are not initially eligible for Medicaid benefits. As a result, they have to exhaust their resources by spending down to the point of poverty -- at which point they may become eligible for Medicaid benefits.

For this reason, the most appropriate candidates for LTC insurance are people in the middle class and upper-middle class, economically. Many members of the middle class accumulate hundreds of thousands of dollars in assets during their working years. They usually are entitled to retirement benefits that will keep them well above the poverty level. They have a lot at risk.

Since these people are not close to being eligible for government programs, uninsured LTC costs could deplete assets at an unacceptable rate for a long period of time. In order to achieve the amount of "spending down" necessary for government program eligibility, assets would have to be liquidated.

For someone starting off with a significant amount of income and assets to protect, this would mean drastic reductions in wealth, economic security and lifestyle.

Example: Jim, age 64, will retire in another year. When he does, he and his wife will have a monthly income of $4,200 from Social Security, as well as Jim's pension and his wife's pension. They plan on selling their home and buying a less expensive home in Florida, in order to take advantage of the equity they have built up over the years. In addition to the home equity, Jim and his wife have about $12,500 in savings accounts, Certificates of Deposit valued at $30,000 and some stock investments with a current market value of $50,000.

Jim and his wife are very good prospects for LTC insurance.

It is not necessary for LTC insurance to cover the entire LTC exposure in order for the benefits to be worthwhile. Premium costs may be reduced by purchasing longer elimination periods or lower benefit amounts, or both. In many cases, this approach may be taken to keep costs more affordable while minimizing the risk. Buying partial coverage may change an unacceptable exposure into an acceptable exposure.

Generally, if you have a low income and little in the way of assets, you are not a candidate for LTC insurance. The coverage can be expensive -- and people with low incomes in most cases simply cannot afford it. The premium payments should never create a hardship, because there is no guarantee that LTC benefits will ever be needed.

People who have not accumulated significant assets usually have very little at risk. In some cases, these people are already eligible for government-subsidized programs that would cover long-term care if the need arises.

Example: Joe and Irene are both 67 years old. Their only source of income is Social Security and a small pension ($200 monthly). They rent an apartment in a senior citizen complex, have a very small amount of life insurance (enough for burial) and usually maintain a savings account balance of no more than $1,000. They have no other assets other than personal possessions and an automobile. They are not prospects for LTC insurance.

On the other end of the financial scale, very rich people probably don't need LTC insurance, either. (This is much like what we saw with regard to disability insurance coverage.)

Example: Carla has had a successful career as an entertainer and has accumulated more than $10 million in assets, consisting of real estate, stocks and bonds, and other investments. These assets will generate hundreds of thousands of dollars in annual income for her when she retires. Even if Carla needs to be confined to a nursing home, the cost will not even make a small dent in her income. Carla does not need LTC insurance.

In the end, you can't know for sure whether you'll ever need long-term care. So, you may conclude that there's no need to buy LTC insurance.

One last thought, though. For some married couples, the need to spend down assets in order to qualify for government LTC insurance presents a particular problem. When one spouse is confined to a nursing home and the other spouse remains at home, the one staying at home can run into serious financial problems.

To remedy the situation, Congress passed the Spousal Impoverishment Act, which protects a portion of the income and assets that a stay-at-home spouse may retain without terminating Medicaid eligibility for a confined spouse.

Under rules that took effect in 1989, an at-home spouse is allowed to keep some of the couple's joint monthly income (a minimum consisting of the first $815 of monthly income, up to a maximum of $1,565 of joint monthly income) and joint assets (a minimum of the first $12,000 of assets, not to exceed a maximum of $60,000 of assets). These amounts are indexed for inflation and increase annually.

The federal law provides a minor degree of protection for a stay-at-home spouse, but it is designed to be a safety net and is not a substitute for insurance. Without long-term care insurance, most middle-and upper-class families would still be exposed to a considerable reduction in family resources if an extended stay in a nursing home became necessary.

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