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By Christine Benz | 12-16-2010 01:51 PM

Alternatives to Long-Term Care Insurance

Retirement specialist Mark Miller discusses the pros, cons, and question marks surrounding self-insurance, Medicaid, and the new CLASS Act.

Christine Benz: I'm Christine Benz for Morningstar.com.

With skyrocketing premiums on long-term care insurance, many consumers are evaluating whether they need this type of coverage at all.

Here to discuss that question is Mark Miller. Mark is a retirement specialist, and he is also author of the Hard Times Guide to Retirement Security.

Mark, thanks so much for being here.

Mark Miller: Thank you, Christine.

Benz: Mark, I'd like to discuss some of the alternatives to long-term care. Let's start with the first one that a lot of people think, well, I'll just self insure. I'll use my own assets if I need to go to a nursing home or need to have some kind of long-term care. How do you size up whether that's a viable choice for you?

Miller: Experts say that you would need about $500,000 to $750,000 to have a 95% assurance of having what you might need. That's a conservative ballpark estimate. So it's a lot of money. The question is, is that really where you'd want all your assets to go, and also from a retirement planning standpoint it raises interesting questions. So, for example, in the case of a married couple, one spouse gets ill, drains those assets for an LTC need, the surviving spouse is left without assets. So the benefit to an insurance product like this is an insurance against loss of assets.

So, I think self insurance can work for the very affluent, and it can make a lot of sense. You can definitely craft a plan there, invest a portfolio to protect for inflation, for example, because the costs are continuing to escalate for long-term care, but it's really something to consider if you are really at that end of the market.

Benz: Right, but I guess on the flipside, too, it seems like if you are very affluent and you want that peace of mind, paying for that long-term care policy can make a lot of sense.

Miller: So this is kind of a retirement planning question. It can even be in an estate planning question. Are these assets you'd prefer to pass along to heirs?

Benz: So the other option that a lot of people think might be a backup for them is Medicaid. Let's discuss that, what it offers and what the limitations are?

Miller: Well it's a backup for about half of the people who need long-term care in the United States. Medicaid provides more than half of the funding for all long-term care needs in the United States.

The downsides to that are, you have to have spent your assets down to a level pretty close to poverty, in most cases. The rules vary somewhat from state to state, so check where you live. For example, in some states you can still have ownership of a home and qualify for Medicaid.

The other thing to consider with Medicaid is less choice of where you'll be from a location standpoint and the type of facility you'll be in. So not as much a range of choice, it may not be the most attractive choice.

Benz: There are also certain criteria that you have to meet to even qualify. So you have to have been in some sort of medical setting or something before it even kicks in.

Miller: Lots and lots of rules. The other thing about Medicaid is it's going to be changing a bunch under Healthcare Reform, and given the budget crisis environment we're living in, you have to ask yourself what the future of Medicaid looks like and be keeping an eye on that.

Benz: I also wanted to touch on this CLASS Act, Mark, which is part of the Healthcare Reform Act. Let's talk about what that promises and what are some of the open questions still with the CLASS Act.

Miller: Yes, this is an interesting new wrinkle in the long-term care insurance space. The CLASS Act is something that was championed by the late Senator Ted Kennedy. It was a real passion of his. It's shorthand for, you would say, it's like a public option for long-term care insurance. So it's a government-sponsored plan. Employers would decide whether or not to sign up for it, and then the employees would sign up for it is well.

The rules are just now being written for what the CLASS Act insurance is going to look like. The first policies won't be coming out until 2012. There's even talk about repealing the CLASS Act under the new GOP-led house and even some of the budget deficit plans that were issued this month talk about repeal of CLASS. So its future is a little uncertain.

Benz: You had also mentioned that the affordability of CLASS is also an open question?

Miller: Yes, the question of what will we be paying on premium, what will the benefits look like, how many employers will decide to sign up for it--all are kind of open questions. For it to succeed, one of the concerns that people have about CLASS is whether it can attract a big and broad enough and diverse enough a pool of insured to make it work as a viable insurance market.

Benz: Right. Well, it seems like it's something worth watching.

Miller: Definitely, but it's still bit of a question mark.

Benz: Thanks for sharing your insights Mark.

Miller: Thank you.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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