Five Key Decisions to Make Before Choosing a Long Term Care Insurance Policy

The cost of long-term health care is rising, and individuals bear most of the cost. That’s why more people are considering long-term health care insurance. Before buying, know the true risks of your needing long-term care and the types of long-term care available. Then, if long-term care insurance is for you, learn how to customize the policy terms to get the coverage you need at a price you can afford.

Long-term health care no longer means nursing home care. Some experts estimate that only about 20% of long-term care is given in a nursing home. The care might be given at home, in adult day care, or in an assisted living facility. The Health Insurance Association of America estimates that everyone has a 50% chance of needing some type of long-term care. But the “long-term” care might be only a few days or weeks of rehabilitation or recovery after an illness or injury, and that care might be received at home. Others will need years of care at either an assisted living facility or a nursing home.

That’s why long-term care insurance no longer is “nursing home insurance.” You might never enter a nursing home yet still need to pay for long-term health care. Last month I explained different ways of financing long-term care costs. In this month’s visit, for those who decided to buy insurance I’ll review the key decisions you must make to get the best policy for you. Through these decisions, you decide to what extent you will self-insure for potential long-term care costs and to what extent you will rely on an insurance policy to pay the expenses.

Daily benefit. Long-term care policies promise to pay you a maximum daily benefit for each day of covered care. There usually are separate daily benefit levels for home health care and for nursing home and assisted living facility care. You pick the daily benefit and count on your family income and assets to make up any difference between that and the actual cost. The average daily cost of a nursing home is $131 for a semi-private room. Most residents are charged about an additional 20% for expenses beyond the basic room and board, such as prescription drugs. But costs are higher in urban areas and lower in rural areas. The home health care benefit is set at a percentage of the nursing home benefit. You should get 75% to 100% of the nursing home benefit as your home care benefit.

Survey nursing home costs before picking a daily benefit. But keep in mind you might not be in a facility near where you live now. The choice of a nursing home or other care facility often is made by a woman in her 40s or 50s. In other words, a daughter or daughter-in-law usually decides. That’s why you also should check costs in areas where your children live.

Waiting period. This also is known as the deductible or elimination period. It is the length of time that you receive covered care before the policy starts paying benefits. Insurers usually let you choose a waiting period from zero to 365 days. Most people choose 90 days. You pay for all care during the waiting period.

Benefit period. This is the length of time the policy pays benefits. Many policies call this the maximum lifetime benefit. For example, a three year benefit period is a maximum lifetime benefit of 365 days times three years times your maximum daily benefit. At a $150 daily rate, this comes to a lifetime benefit of about $165,000.

Inflation protection. The younger you are, the more important this is, but it can be important even if you are relatively young. The cost of long-term care is rising between 5% and 6% annually. At 6% inflation, the cost of care doubles in 12 years. You want compound inflation protection, not simple protection. Otherwise you aren’t fully protected from inflation. Someone age 70 or older might consider a higher daily benefit as an alternative to inflation protection. The premiums are likely to be lower.

Covered care. To be protected, you want a policy that covers both skilled and custodial care. You want to be covered whether the care is given at a nursing home, assisted living facility, or at home. Avoid home-care provisions that say only professional home-care services will be covered. If you need home care, you’ll also need help with chores such as cooking and cleaning. But if you are single, you might want to save money by dropping home care coverage.

The main reason people don’t buy long-term care insurance is that it is expensive. For a 40-year-old, the average annual premium is $828. At 50 this rises to $1,108. A 60-year-old pays $1,783, and at 70 the premium rises to $3,484. If you are married, you should buy two policies, because you don’t know which spouse will need the coverage. But you can juggle and modify these provisions to come up with an affordable long-term care policy that covers your needs.

Don’t cut the inflation protection. The policy’s benefit is to be there over the long-term, and its value decreases quickly if you do not pay for inflation protection.

One great influence on premium cost is the maximum lifetime benefit. A maximum of three-years’ coverage costs about half of unlimited lifetime coverage. A five-year limit reduces the premium by about 25%. But that leaves the open-ended risk on you and your family. While most long-term care needs are relatively short-term, those whose needs are greater tend to need care for a considerable time. One study reported that long-term home care lasted on average 4.5 years, while nursing home care lasted for 2.4 years. About 20% of nursing home stays are for five or more years.

An alternative to shortening the maximum lifetime benefit is to set the waiting period at one year. Your own income and assets will pay for all the short-term care and for the beginning of a long-term need. Then the insurance will kick in only for truly long-term care. Have an insurance agent do the comparison, and you’ll see that the cost falls dramatically if you self-insure for the first year. That might make lifetime benefits affordable, or at least let you stretch the benefit period to at least five years.

The next big cost factor is the maximum daily benefit. Reducing this might make sense if you have steady income and no spouse or your spouse has sufficient income and assets. For example, suppose Social Security pays you $10,000 annually.  That will be available to pay for long-term care if your spouse won’t need it for living expenses. Then, you can reduce the daily benefit by about $27 ($10,000 annually). You want to be careful about reducing the daily benefit, because you will pay the share of the daily benefit as long as you need the care, and also will fund annual cost increases.

The key to structuring a policy is to determine the amount of income you can devote indefinitely to paying for long-term health care. Add up your sources of reliable income, then subtract the amount that must support your spouse and pay for other continuing expenses. The remainder is the extent to which you probably can self-insure for long-term care. Consider buying insurance to pay for the rest of your possible long-term care expenses.

In the July 2001 issue (available on the web site archive) I covered some details of policy provisions that you should know. Review that article to be aware of traps, such as the difference between compound and simple inflation protection.

Before choosing a policy, be sure to check on the financial safety ratings of the insurer. You want an insurer that has a lot of assets. Also, check on the history of premium rate increases for the company. You want an insurer that checks out your health before issuing a policy. Otherwise, the insurer is likely to incur higher claims than anticipated and end up increasing premiums. Even so, premiums on many long-term care policies increased greatly over the last few years.

These are the key decisions you make that determine the cost of long-term care premiums and the benefits. What they boil down to is determining the risks you want to retain for you and your estate and which you want to shift an insurance company. They can mean the difference between making a policy affordable and not being able to purchase one.