A Suze Orman exclusive

Once you reach your 50s you should consider adding a long-term care policy to your insurance coverage. This will provide you with a payout to cover nursing home costs as well as a variety of in-home health care expenses.

Long-term care coverage can be costly, but with nursing home residency pushing $50,000 or more a year in many areas, the insurance is well worth it. I recommend buying a policy when you are between 50 and 60 years old. Wait any longer and you will face much higher premiums, as well as run the risk of being denied coverage if you have a pre-existing condition.

For individuals who spend time in a nursing home, the average stay is about three years. So to play it safe, you might want to purchase a policy that would help you cover up to four years of nursing home care. Notice I said “help.” Don’t forget that you will have other retirement income such as your 401(k) and IRA savings as well as Social Security. Long-term care insurance is meant to merely supplement your other income sources. Along the same lines, it’s important to select a policy where you will be comfortable paying the premium not just today but 20 or 30 years from today; realize this is insurance that you will probably not need for a few decades, if ever. Because you are making a purchase for the relatively distant future, you want to be especially careful and stick with an established insurance company. I recommend buying a policy from an insurer that has been in the LTC biz for at least 15 years and has a strong rating of “A” or better.

Given the rapid rise in health insurance costs, you also want to make sure that this policy includes an annual inflation adjustment, just like your homeowners insurance. If you are under 70 years old, the inflation adjustment should work out to a compounded annual rate of 5 percent. If you are over 70, you want a simple 5 percent annual increase each year. And pay attention to the policy’s “elimination period.” This is the amount of time where you will be on the hook for all your costs—it’s essentially the deductible for the policy. Many policies come with a 90-day elimination period. That can put a huge dent in your finances. If you can afford the higher premium, I recommend opting for a LTC policy with a zero-day elimination period.