The average cost of a private room in a nursing home today is nearly $78,000 per year, according to the 2007 MetLife Market Survey of Nursing Home & Home Care Costs. Top facilities can cost well into six figures a year. Recently revised government rules make it more difficult than ever to obtain Medicaid assistance to pay these bills.

Most people never require an extended nursing home stay, but for those who do, the result can be financial devastation. By understanding the ways you can finance long-term care, you can reduce the chances that it will have such a devastating impact on your finances.

How to decide which options are best for you…

LONG-TERM-CARE INSURANCE

Insurance that pays long-term-care bills sounds like a “no brainer” idea—until you take a close look at the details. These policies cost thousands of dollars a year. You may pay premiums for decades before coverage is needed, if it is ever never needed at all…and the premiums can increase significantly over the years, even with a so-called “fixed-rate” policy. For these reasons, long-term-care insurance generally is not an effective investment. Also, collecting on the policies is often difficult. Between 2003 and 2006, complaints to state regulators over denied claims soared 74%.

So why even consider this form of insurance? If you would sleep better at night knowing that a long stay in a long-term-care facility would not deplete your assets, consider purchasing a policy.

However, as a rule of thumb, if coverage costs in excess of 5% of the combined total of your pension, Social Security, retirement plan distributions and any other income, it is too expensive, because you would be sacrificing too much elsewhere in your retirement budget. Speak with a financial planner to determine your projected monthly budget in retirement.

Despite the drawbacks, the popularity of these long-term-care policies has grown. Total premiums collected have jumped 21%, from $8.2 billion in 2004 to a total of $10 billion in 2007.

The best time to consider long-term-care insurance is when you are between the ages of 50 and 65 and still healthy—any sooner and you would have to pay premiums for too many years…any later and the annual premiums would become so expensive that you probably would be better off paying for long-term care out of pocket. (Most insurance companies charge sharply higher premiums for people over age 60 or 65.)

MEDICAID

Half of all nursing home residents depend on Medicaid, the government health insurance program for the poor, to pay for their stays. (Some states have different names for Medicaid, such as Medi-Cal in California, and Medicaid laws vary from state to state.) Unfortunately, Medicaid will not pick up your nursing home bills until you have depleted virtually all of your assets. In the past, many people who thought that they were likely to need a nursing home stay in coming years gave their assets to their children, making themselves poor enough to qualify for Medicaid.

New, stricter rules make this much more difficult. Any assets given away or sold for less than their true value within five years of applying for Medicaid are included in calculations of your wealth, and that could delay the date on which you qualify for Medicaid.

Medicaid recipients are allowed to own a car, a burial plot, a limited amount of life insurance, a wedding ring and a few other possessions. A recipient can keep his/her home if his spouse is living in it.

Many nursing homes will not be available to you if you use Medicaid to pay for long-term care. Those with the strongest reputations and highest demand for beds often don’t accept Medicaid as payment…or have space for only a few Medicaid patients.

On the bright side, once you are in a nursing home, you cannot legally be forced to leave just because you have run out of money. Even facilities that do not accept Medicaid patients still must let you pay with Medicaid once you have been accepted, should you outlive your assets or a long-term-care insurance policy. (You might, however, be demoted to smaller or less appealing accommodations after Medicaid starts paying your bill.)

VA FACILITIES

The Veterans Administration (VA) operates a large number of surprisingly well-funded and well-run long-term-care facilities. They are free for former military personnel—but because millions of former service people are in need of nursing home care, demand far exceeds supply.

The VA has a complex formula for determining which applicants are accepted into its facilities. Top priority is given to veterans suffering service-related disabilities…those in extreme financial need…and retired career service people. Veterans should contact the VA (877-222-8387, www.va.gov/directory) as soon as it becomes apparent that a stay in a long-term-care facility is likely in the future.

OTHER TYPES OF CARE

Twenty years ago, nursing homes were virtually the only option. Today, there is a range of long-term-care facilities. Most of them are less expensive than nursing homes, and they may be covered by long-term-care insurance…

  • Independent-living residences are small apartments that provide limited assistance as needed and cost less than assisted-living facilities. Twenty-four-hour security and emergency response systems are usually provided.
  • Assisted-living facilities cost perhaps one-third to one-half less than nursing homes. They do not provide 24-hour care, but their services, including assistance with transportation and shopping, bathing and eating, are sufficient for many seniors.
  • Continuing-care retirement communities. Some senior-care facilities have different types of accommodations ranging from senior residences to nursing home care on one site. Residents move from one level of care to the next as their needs dictate.
  • PAYING OUT OF POCKET

    If you choose not to buy long-term-care insurance…have too much money to qualify for Medicaid…and are not eligible for VA care, you likely will have to pay for long-term care out of your own pocket. To stretch your money, depend on in-home care from family members for as long as possible before resorting to professional care. Some seniors postpone their nursing home stays by months or years with the assistance of spouses or adult children. Discuss this with your family before your health deteriorates.

    If you must move to a long-term-care facility, do not pay for more assistance than you actually need. Consider independent living and assisted living first.

    If you have only enough assets to pay for three to six months of long-term care, consider moving into a nursing home even if an assisted-living facility or independent-living residence would be sufficient for your needs, particularly if you have a degenerative condition. Once you are in a nursing home, you cannot legally be kicked out for lack of funds.