Many people assume long-term care insurance is strictly to pay for a nursing home stay, and who wants to plan ahead for that?
But this type of insurance covers much more. And with more reputable companies getting into the business --
, the teacher pension manager, is the most recent entrant -- long-term care insurance will become more accepted, and more people will understand their options.
Granted, long-term care insurance is not for everyone. But if you decide you need it, there are some things you should be aware of.
One in three people will need some type of long-term care in the future, according to John Noble, director of product development at insurance company
. Today, around 12 million Americans receive some type of long-term care, and 40% of that group is under age 65.
If you don't have long-term care insurance, or LTCI, to pay for your future medical needs, you can rely on
. But you'll have to impoverish yourself and use up all your assets, including your IRAs and 401(k) plans, before you qualify for a nickel. You may have family that will be willing to help you, although parents are becoming increasingly realistic about the difficulties of living with their kids. And the same goes for kids who are thinking about taking in their parents. You also can pay for those costs out of your own savings. Of course, you risk using up the money you planned on leaving to your heirs.
So for many people, even the wealthy, LTCI is worth a look. If you're approaching age 50, now's the time to get serious. It may seem early, but you don't want to risk getting ill and becoming uninsurable, says Tom Foley, director of the accident and health division at the Kansas state insurance department. By waiting until age 65, your premiums could jump 40% over what they would have been had you signed up when you were 50.
As I said, LTCI covers much more than nursing home stays. It also includes the costs of living in a residential care facility (a place for seniors who are no longer able to perform all the activities of daily living but do not require medical care), an assisted-care living facility (a place for people who are able to care for themselves except for a few activities, like bathing or meal preparation), an adult daycare center, or having someone come to your home to care for you.
You start to receive benefits when a licensed health care practitioner certifies that, for specified period of time, say 90 days, you require "substantial assistance with at least two activities of daily living," such as bathing, dressing, eating and transferring (getting in and out of a bed or a chair). Benefits also kick in if you require "substantial supervision" because of a disease like Alzheimer's.
Whether your employer offers a plan at work or you have to go out on your own, you must determine what options will suit your needs.
The Decision Process
There are a few questions you need to ask yourself when determining the right plan, suggests Foley.
What kind care do I want?
There are three kinds of policies.
The first is just for institutional care, like a nursing home, assisted living or elderly daycare facility. The second is just for home health care. The third policy is a comprehensive plan that offers both options.
How much will I fund out of my own pocket?
Policies offer a daily benefit limit -- anywhere from $50 to $300, depending on how much you're willing to pay in premiums. Do some research in the area where you're planning to retire. How much does care cost? In New York, for instance, a nursing home stay could cost $300 a day, whereas in the Midwest, it might cost as little as $100.
In addition, determine how much money you have to subsidize the cost. If you're going to need $250 a day but you'll be able to cover $100 from your own savings, you'll just need to insure $150 per day.
How long do I want these benefits?
Most policies will start paying benefits after you've needed care for a specified period of time, such as 60 to 100 days. The longer the wait time for your benefits to kick in, the lower your premiums will be.
You also need to decide how long you think you'll need long-term care. The average nursing home stay is approximately three years, so you may only want three years of coverage. You also could elect to have coverage for the rest of your life, even though that would increase your premiums.
What to Look for in a Policy
Now you've made some big decisions. Next is to start comparing policies.
Look for an Established Company
"There are over 100 carriers selling LTCI, but about 10 of them carry 80% of the market," notes Camella Amadio, a TIAA-CREF research and development manager for long-term care products. Look for a stable company that's going to be around 30 years from now when you'll need your benefits.
Also, check out the company's financial rating. Organizations like
Standard & Poor's
check the financial stability and soundness of companies and give them ratings. Depending on the method, A++ may be the best, while B- may be the worst. Companies like
and Unum, have high ratings. The state of Kansas compiled a long-term care guide that lists the financial rating of various insurance carriers that's available on its
Stay Away from Rate Increases
Since this is still a relatively untested market, the claims experience is not fully known. Some carriers have had to increase their premiums. But you do not want to be 75, on a fixed income, and find out your LTCI premiums are going up.
So ask the company for its rate increase history, suggests Foley. Again, check out Kansas' guide for a great chart of which companies have had rate increases and which have not.
Go With a Tax-Qualified Plan
Tax-qualified plans and non-tax-qualified plans are available. The
Health Insurance Portability and Accountability Act of 1996
gave LTCI plans that meet certain requirements tax-free status, says Noble. "This was a gray area before." The benefits received from these plans, now dubbed tax-qualified plans, are tax-free. In addition, the premiums paid may be deductible if your out-of-pocket medical expenses exceed 7.5% of your adjusted gross income.
The service has been silent on whether the benefits received from a non-tax-qualified plan are taxable, says Amadio. It would be horrible to find out that they might be, so for now, stay away from them.
Adjust for Inflation
Make sure your benefits keep up with inflation. If you purchase a daily benefit of $100 a day in 2000, when you start to need that coverage in, say, 2030, that $100 might not buy a whole lot.
So buy an inflation rider, even though your premium may be significantly higher, says Arthur Stein, an LTCI specialist at
Cassady & Co.
in McLean, Va. Say your premium is $1,000. If you buy a 5% inflation rider, that premium may double. But then your daily benefit will increase 5% each year, and your premium will remain stable at $2,000.
Stay away from an index adjustment or a CPI inflation adjustment. "It goes by lots of different names but so does the devil," says Stein. These adjustments increase your benefit levels as inflation rises, but they raise your premiums as well.
By basing your benefits increase on an index, you could end up paying more as you get older. Your premiums may start off cheaper than they would be for the inflation-adjustment option. But as you get older, adding benefits to catch up with the index becomes very costly. Stein has seen annual premiums as high as $70,000 to $90,000 because of these adjustments.
This is by no means a comprehensive list. Unfortunately, choosing the right long-term care insurance policy requires lots of research and reading the fine print. But it's never too early to begin to understand your options.
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