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November 02, 2009 at 07:00 PM
A growing number of families are confronting an extremely vexing problem for which there is an excellent and elegant insurance solution–a special type of annuity.
This solution is rarely considered and not broadly available today, but the need will certainly come up more and more as the population ages.
Let’s first review the problem and then see how it can be addressed through insurance.
1) As people age, their likelihood of becoming disabled and needing long term care rises rapidly. Actuarial studies show that relatively few individuals in their 60s are disabled but disabilities rise exponentially in the 80s and beyond.
2) Almost all people are “self-insuring” this risk.
3) Long term care can be very costly and often the disabled person faces a cascade of increasing costs running into thousands per year, whether for home care, assisted living care or nursing home care. The wealthy are likely to strongly desire care for the disabled at home, although a 24/7 aide could run well over $150,000 a year. 
There are affluent people who can tolerate these costs for a few years, but if the frail person lives for an extended period, even a substantial net worth can be seriously eroded or destroyed.
There is the possibility of spending down to Medicaid–which many people do–but this can bring problems. Medicaid often does not pay for the best of care. It usually pays for semi-private rooms only, and there are some excellent nursing homes and hospices that do not accept Medicaid patients. Medicaid will allow a non-disabled spouse to remain in a home owned by the person turning to Medicaid, but can, in some states, claim home equity when the spouse dies. For single people, Medicaid can claim the home equity to cover LTC costs. Thus, spending down to qualify for Medicaid is not a perfect solution.
Also, since Medicaid programs are in dire financial straits, it would be imprudent for those with reasonable assets to depend upon a spend-down strategy.
One positive is that most older people own their homes, often without the encumbrance of a mortgage. Even among people age 75 and over, four in five own their homes. Consequently, home equity is available to pay for a good deal of LTC costs. The real risk is the sufficiency of that money to cover all of the potential costs.
