Last Week, we gave the basics of the different levels of long-term care. This week, we zoom in on the basics of paying for long-term care.

Imagine sitting in a nursing home administrator’s office and being told, for the first time, that someone will have to come up with $6,000 to $9,000 per month or your loved one, who needs help with all of his or her activities of daily living, will be discharged. Or sitting in a lawyer’s office trying to put together the financial pieces of the puzzle as your loved one is discharged from the hospital to the nursing home. Being hit with the reality of how to pay for long-term care when the length of stay is unknown and the options are limited makes planning most challenging.

Although Medicare, Medigap insurance, and Veterans Administration benefits may provide some time-limited coverage, generally speaking, there are three ways to pay for long-term care over the long haul: (1) private pay from personal income and resources, (2) long-term care insurance, and (3) Medicaid. Each payment method carries with it serious consequences to the family of a person who has long-term care needs.

Because the issues of creating a suitable long-term care plan vary from family to family and from situation to situation, experienced professional advisors who are sensitive to the impact of various consequences on families with varying financial resources are essential. While wealthier families may be able to develop a plan that uses a combination of private pay, insurance, and tax savings, the vast majority of middle-income families find themselves developing plans that use a mixture of out-of-pocket private pay and Medicaid. Families with limited resources are forced to look solely to Medicaid.

Brief synopses of the more obvious advantages and disadvantages of the three methods of pay follow:

PRIVATE PAY: Private pay over the long haul is not an option for most families because they simply can’t afford the current cost of between $5,000 and $10,000 per month to maintain someone in a nursing home. And, keeping a loved one at home with sitters 24/7 costs even more. It is obvious that expenditures like these will quickly exhaust the resources of most elderly persons and their families, especially if the family has financial obligations other than care. While there are some tax breaks available that will reduce or eliminate income taxes, the cost of care is significant.

LONG-TERM CARE INSURANCE: While long-term care insurance is a relatively new product, it works in a manner similar to life coverage. The owner of the policy pays monthly premiums (or sometimes varying forms of lump sums) to the insurance company so that, should long-term care become necessary, the insurance company will foot the bill based on the extent of the coverage purchased. Like life insurance, long-term care insurance spreads the cost of long-term care claims over a large segment of the population, thus lowering the cost to those who need long-term care at the expense of those who do not. While comparatively few Americans now maintain long-term care insurance, as the number of persons who purchase these policies increases, the premium cost of the policies should drop.

But long-term care insurance has disadvantages: (1) Only those in reasonably good health can purchase it; (2) While it is much less expensive than the cost of a nursing home, it is not cheap. In other words, depending on age and health, the cost could easily be several hundred dollars a month; and (3) the terms of the policy should be reviewed thoroughly because the contract may restrict the types of care you receive and/or the facilities you choose.

MEDICARE AND MEDICARE SUPPLEMENTAL COVERAGE: Generally, your Medicare and Medicare Supplemental coverage will pay up to a total of 100 days in a nursing home following a hospital stay of three days or more, so long as the patient requires rehabilitation or some type of skilled nursing services.

Next Week: Medicaid, which pays for upwards of 65 percent of all nursing home beds in America.