by Archie M. Richards, Jr., CFP^®
June 3, 2002

The premiums for long-term care insurance are expensive, but you can take measures to cut the costs.

The costs of skilled nursing care for the elderly range from $140 to $300 a day. The median is about $200 a day - a whopping $73,000 a year. If you acquire a long-term care insurance policy, the premiums of most companies remain level until skilled nursing care is needed. You then stop paying premiums, and the insurance company begins paying for the care.

Each year you delay the purchase of a policy, the premiums increase. If you wait until your health worsens and the need for nursing is just around the corner, the company will refuse to issue a policy at all.

For over a decade, TIAA-CREF has offered a long-term care policy to teachers. The company began offering it to the public a year ago. So far, it's available in 39 states. Discussions continue with the others.

The company pays no commissions. Its premiums are lower than those of many insurance companies. For detailed information, see www.tiaa-cref.org or call 800-223-1200.

Let's say you're 60 years old, in good health. You purchase a long-term care policy that starts paying benefits 30 days after you begin receiving skilled nursing care. Whether the care is rendered at home, in a nursing home, or in an assisted living facility, the insurance company pays the full benefits for the rest of your life. (The first 30 days you cover with your own money.)

The premiums are based on the assumption that the cost of care will compound at 5 percent a year. For example, if you enter a nursing home in 20 years, the benefit paid by the insurance company would be $531 a day, not $200.

For all this, the annual premiums, which remain level, would be $5,480 - a hefty cost. Here are policy options you may select to reduce the premiums:

1. Let's say you choose to pay for the care with your own funds for the first 90 days, not just 30. At $200 a day, skilled nursing care for 90 days comes to $18,000. Your willingness to pay this cuts the annual premiums from $5,480 to $4,580. Bear in mind that you might suffer a fatal accident and never need to pay the $18,000 at all. The number of days you pay for the care yourself is in effect the deductible. The higher the deductible, the lower the premium.

2. On average, skilled nursing home care for the elderly lasts for 2½ years. Only 20 percent of patients live for five years or more. On the assumption that your need for care won't last much longer than five years, you limit the insurance company's payout period to seven years, not lifetime. This reduces the premiums from $4,580 to $3,940.

3. Skilled nursing care administered at home usually costs less than the care provided elsewhere. You therefore select a 50 percent home benefit. Under this option, TIAA-CREF pays half as much for your care at home as it does for the care elsewhere. This cuts the premiums from $3,940 to $3,240.

4. The cost of skilled nursing care has risen faster than overall inflation. I don't expect this trend to continue. Many assisted living facilities that include skilled nursing care are being built, and competition among them moderates the costs. Also, more accurate diagnoses and drug treatments will make medicine less costly and more effective. I look for the cost of care to rise no faster than the overall rate of inflation.

TIAA-CREF offers an "inflation adjustment" option. Recall that the initial daily benefit is $200. Under this option, the daily benefit would rise each year according to the previous year's increase in the nation's rate of inflation. Choosing this option reduces the starting premium substantially from $3,240 to only $1,300.

Unlike the premiums for the other options mentioned above, the premium for the inflation-adjustment option would not remain level. If the Consumer Price Index rises by 2 percent, for example, the premium would increase modestly.

For many people, long-term care is a financial burden heavy enough to be insured. But the premiums can be cut significantly by selecting policy alternatives with care.