Q: Should I buy a supplemental nursing home policy? I need to come to some type of decision for my own peace of mind.
A: There is no simple answer for everyone. It varies so much depending upon age, family history, state of health, income, size of estate, amount of the premiums, alternative choices, etc. I prefer to try to pull everything together by looking at liquidity and seeing what effect nursing home expenses might have on one's equity assets (net worth).
Although we all know of people who have been in nursing homes for years, the average stay for a person over 70 is a bit over a year (also remember that as many as 25% of that population segment will never be institutionalized).
If matters are properly orchestrated, currently Medicare will pay for up to 100 days. Therefore, on average, true exposure might be as low as 10 months.
Now if the average cost of the nursing home per month amounts to about $4500, the monetary drain for a person would be about $45,000 ($4500 per month times 10 months).
Income stream flow is next plugged in to determine the true financial drain on one's resources. For example, if income were $4000 a month or more, then the impact on assets probably would be small. If income were about $2500, then the true impact on assets is $2000 per month ($4500 - $2500), or a total exposure of $20,000 on average ($2000 times 10 months).
Next, I have people look at their alternatives, such as benefits through the military, union membership, help from their church, etc. Surprisingly, there is often some further help available besides the 100 days under Medicare. Income can also be supplemented by, for example, renting out the house, readjusting investments to produce more income as opposed to growth, actually using income or dividends that were just previously reinvested, doing a reverse mortgage, etc. Often, after these adjustments are added to existing income, the $4500 per month exposure is covered by income, leaving little exposure of assets.
Finally, the amount of the premiums needs to be considered. If the cost is $500 per year for the coverage and if that amount of disposable income is available, then that is one thing. If payments for the insurance are $1000 per month then, depending upon income and health, it might make more sense to just try to save the amount for the next 20 months.
But remember, peace of mind is most important. Regardless of age, health, income, size of estate, and available assets, if having such a policy gives you comfort, and you can afford it, then buy it. Or after weighing all the factors you reasonably conclude that you are in the small percentage of the population where nursing home expenses could be devastating, and you can afford the premiums, then yes, buy it.
Unfortunately, the choice of supplemental coverage is highly emotional and people can be exploited very easily, especially by those individuals with their own agendas. But even if there is a disagreement as to the figures that I use or the length of the average stay (some argue that it is closer to two years), these principles still apply. Quibbling is not necessary. Just use the approach set out in this column to determine exposure.