Financing long-term care for the elderly.

If you had to put your mother or your husband in a nursing home tomorrow, how would you pay the bill? According to three Purdue University finance experts, too many people are uniformed about how they could pay for long-term care for their parents or themselves.

"People don't realize how expensive long-term care can be, and they are ill-prepared to deal with the inevitable," indicates Sharon A. DeVaney, assistant professor of consumer sciences and retailing. "Waiting until the last minute, or until there is a crisis, can be economically catastrophic."

Medicare covers less than five percent of the cost of nursing home care in the U.S. Medicaid, which pays an estimated 48%, will not pay the nursing home bill in most states until assets are reduced to $2,000. (Spouses at home can keep approximately $70,000 of the couple's combined assets.) Government efforts to balance the budget by cutting annual increases in Medicaid and Medicare reinforce the need for financial planning.

"According to the U.S. Department of Health, the most rapid population increase over the next decade will be among those over 85 years of age," DeVaney points out. "Studies show that by the year 2020 there will be 12,000,000 elderly who need some sort of long-term care. Seven percent to 12% of workers are already caring for an elderly relative. By 2020, that number is expected to be 33%."

Janet C. Bechman, an Extension Service specialist, says long-term care expenses are rising fast. "Right now, it costs approximately $32,000 a year for nursing home care. Experts predict that today's 50-year-old will pay approximately $141,000 a year at age 80. That's why it's so important to educate people now about financial alternatives."

Financial planners and counselors need to know how knowledgeable their clients are in order to give sound advice, maintains Flora L. Williams, associate professor of family and consumer economics. She and her colleagues studied the awareness of four main alternatives: private long-term care insurance, accelerated death benefit, reverse annuity mortgage, and housing lease-back. About half of the study participants said they were knowledgeable about long-term care insurance, but in-depth knowledge about premium costs and restrictions was sparse.

Private long-term care insurance, which pays about one percent of the long-term care costs in the U.S., certainly isn't for everyone. "Simply put, this type of coverage is for people who can afford it, and many...