What is long-term care insurance?

Well, long-term care insurance is not a disability policy. Long-term care insurance is not medical insurance. Long-term care insurance is not covered by Medicare. Long-term care insurance is not Medicaid. And yes, the fly in the ointment is that you may never even use it.

Long-term care coverage helps pay for varying levels of care: for caregivers in your home, for care in assisted living facilities, and, finally, for care in nursing homes.

Who needs to buy long-term care insurance? The very poor do not. The very rich do not. But most middle-income Americans need to consider it. Area nursing home costs can run from $60,000 to $80,000 per year and more. If your retirement portfolio is $480,000, that will purchase four years of care for one person.

How much does it cost? According to one source, if you're a healthy male, age 58, you might expect to pay $2,250 per year for a policy with a $158 daily limit.

One way to save on the annual cost of such a policy is to self-insure some of the cost. For example, you might pay for enough insurance to cover 75 percent of the expected cost and plan to use your retirement funds to pay for the remainder.

Or you might purchase long-term care insurance with a long "elimination period," where the policy doesn't start paying until 180 days or even 365 days of care have transpired. Once you qualify for care, a typical elimination period of 30 or 90 days means that you foot the bill in those early days and the policy starts covering once you've exceeded that elimination period.

The shorter the benefit period you purchase, the lower your premium will be. One source says the average stay in a nursing home is three to four years. A second source quotes two and a half years as the average stay, but states that the average Alzheimer's stay is seven years.

Some factors to consider when purchasing coverage are health care inflation costs, group versus individual coverage, and comparison shopping. Because health care costs are increasing faster than general inflation, purchasing a policy with inflation protection is important. Although that raises the premium, it's a better option than purchasing incremental coverage as you age, because buying coverage becomes increasingly expensive. It costs more to buy more coverage when you're 65 than when you're 58.

For many types of insurance, group coverage is a better deal—but long-term care may be an exception. Group long-term care insurance usually has a more expensive premium than individually issued coverage. That's because group coverage is normally issued on a guaranteed basis, where unhealthy persons who wouldn't otherwise qualify are able to obtain coverage. So healthy policyholders subsidize unhealthy folks in the group. On the other hand, if you're one of the unhealthy people unable to buy individual coverage, you may be able to get coverage through a group policy if your employer offers it.

Comparison shopping with a trustworthy agent or two is important. An agent can help you be sure that the insurer is fundamentally solid and will stay in the market.

You need to make sure premiums won't increase at some point to a level at which you can't afford to keep the policy. John Hancock asked state regulators for an average premium hike of 40 percent on some of its policies.

Although long-term care insurance is not an enjoyable purchase, you may need it.