Makin' Money

Ouch! Price hikes loom for long-term care insurance

Chris Farrell Jan 3, 2011

One of the hardest insurance products to figure out is long-term care insurance. The case for it is compelling. The daily cost of a private room in a nursing home averaged $229 last year. It’s easy to run up a bill in the tens of thousands of dollars. Home care can be even more costly. Yet Medicare and regular health insurance policies don’t cover these astronomical costs.

Problem is, the case for buying long-term care insurance isn’t as compelling because it’s a complicated, expensive product with plenty of twists and turns. It just got even tougher to evaluate since long-term care insurance price hikes are coming.

So, if you have a policy you’ll have to decide whether to pay the higher premium, reduce your coverage to keep down premiums, or drop the policy altogether. And if you’re in the market for the first time the price of old age protection has gone up. Still, Kiplinger’s favors owning long-term care insurance:

Despite the proposed rate hike, insurance is the most cost-effective way to protect yourself from the potentially devastating expense of long-term care. The latest annual survey by the MetLife Mature Market Institute found that the national average rate for a private room in a nursing home increased 4.6% in 2010, to $83,585 per year ($229 per day). The average hourly rate for a home health aide remained unchanged at $21, totaling $210 for a ten-hour day (look up costs in your area at www.metlife.com/mmi).
Finding a way to pay for these potential costs is an essential part of retirement planning. “We talk about risk management with our clients before we talk about how their portfolio is going to be invested,” says Matthew Jarvis, a financial planner in Seattle. “Who cares if you outperform the markets by x% if you lose it all to long-term-care expenses?”

*A Random Walk Down Wall Street *by Princeton University finance professor Burton Malkiel is a classic. I’ve recommended it again and again over the years. It was first published in 1973 and it’s now in its 10th edition. The basic investment advice hasn’t changed: Invest in index funds; don’t try to time the market; diversify; keep fees low.

Yet a lot has happened in recent years. (Now that’s an understatement, isn’t it?).Among the more earth-shattering events: The fall of Lehman Brothers, the federal government takeovers of mortgage giants Fannie Mae and Freddie Mac, the semi-nationalization of AIG and GM, the worst downturn since the 1930s, the European sovereign debt crisis, the rapid rise of China, India, and other emerging markets.

Little wonder Reporter Ben Steverman interviews Malkiel on what is new and different in the book. For instance:

Q: Your new edition has much more about investing abroad. Why?
Burton Malkiel: When that book was first published, the U.S. was almost half the world economy. Emerging economies are almost half of the world economy now. China is now the second-largest economy in the world. People are inadequately diversified and really need to be much more internationally diversified.

Commodities are hot. The speculation makes me wary. But this article by columnist Merryn Somerset-Webb of the Financial Times on protecting your assets with commodities has a smart take on the issue. (The setting and examples are from Britain, but the good advice holds no matter where you call home):

First, what you shouldn’t do: buy commodities (gold excepted) for the long term. Do so, says Société Générale’s Dylan Grice, and you are not just buying commodities, you are “selling human ingenuity”. What he means is that commodities aren’t productive assets in themselves. They are simply lumps of stuff that in general become cheaper to produce over time thanks to the fact that “human ingenuity has a good track record of overcoming nature’s constraints”. Look at it like that and a commodity bull market is really just a “bottleneck”. So instead of betting against ingenuity we should be betting on it, by buying into the companies whose job it is to figure out how to get rid of the bottlenecks – deepsea drillers or fertiliser companies, perhaps.

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