Nursing home insurance is receiving a lot of coverage in the financial press. A common sales pitch: You don't want to have to liquidate all of the assets that you worked so hard to build, and that you want to pass on to your children, in order to pay for long-term care. The solution, of course, is buying nursing home insurance.

Insurance is a risk-management tool. If you can't afford to replace your home, your livestock, or your business property, you buy an insurance policy that guarantees to replace the asset in the event of a loss. If you have the resources, and can afford the loss, you probably don't need insurance. The same holds true with nursing home insurance

The statistics, depending on whom you ask, is that 40 percent of the adult population will need some form of long-term care. If an individual needs nursing home care, the average length of stay is 2.5 years. If the average cost per day in a nursing home is $120, then an "average" stay for an "average" consumer would cost more than $100,000!

What is the risk to the farming operation?
Many dairy farms are family-owned businesses. Older generations often remain part of the operation, with some form of ownership, even after they retire. If a nursing home stay becomes necessary, it could prove rather costly. The family business must have the financial strength to buy out the older generation, or the heirs might be forced to liquidate the operation to pay for the parents’ care.

If older family members don’t have the resources to pay for their own long-term care, your state government will step in and pay it. The amount of assets an individual may retain varies by state. Often, for the state to assume responsibility, most of the individual's assets must be liquidated.

Sure, you don’t want to have to rely on the charity of the state. And, sales representatives for insurance companies often question the quality of care that you might receive. In reality, if you pay taxes you have earned the right to receive care from the state. And, as my wife can verify — she is a nursing-home surveyor for the State of Illinois Department of Public Health — the care given to individuals supported by the state may actually exceed the care given to private pay patients. That’s because the inspection process is more vigilant for "state patients" due to the regulatory process.

Do you need a long-term-care policy?
The answer depends on your financial position. I've spent some time evaluating the problem and have developed some guidelines that might help your family analyze your risk exposure.

Basically, if your net worth is below $300,000, you probably can't justify taking the funds out of your cash flow to purchase long-term-care insurance. If your net worth exceeds $1 million, you can self-insure unless you have a goal to preserve a specified amount of cash for the next generation or you have little liquidity in your assets.

Can you afford the premiums?
Cash flow is another consideration. A rule-of-thumb that I picked up at a continuing education workshop a few weeks ago suggests that you can afford long-term-care insurance as long as the premiums don’t exceed 7 percent of your net income.

Uncle Sam will help you pay for long-term-care insurance. If you are self-employed, an active partner, or a “S” corporation stockholder, you can deduct up to 70 percent of the premium cost for qualified long-term-care policies in 2002. That’s in addition to your self-employed health insurance deduction. If you itemize, you can deduct the premiums also.

Purchasing a long-term-care policy is a tool that you could use to reduce the risk in your business succession plan. But before you do, consider all of the options, both legal and financial.