How to Evaluate Long Term Care Insurance Policies

Few financial transactions are more complicated than buying long-term health care insurance. Also, few single transactions have potentially greater and longer-lasting consequences. We’ve covered the basics and more in past visits, most recently in June 2002 (available on the web site Archive). Let’s take a look at the next level of issues you are likely to encounter as you look at long-term health care policies and consider buying one.

Do your homework. Start your shopping with the articles in the web site Archive. These will give you a good grounding on the important decisions and the factors to consider. In addition, the National Association of Insurance Commissioners offers a free booklet, A Shopper’s Guide To Long-Term Care Insurance. It is available at www.naic.org. Agents are supposed to give you a copy by law before you buy a policy, though many offer the booklet when you are about to sign a check.

Find your partners. You generally need a broker or agent to buy a policy, and most brokers and agents deal with policies of one to three companies. To find the best policy for you, talk to several brokers or agents. The largest insurers offering policies are American Express, General Electric Capital Assurance, John Hancock, and Prudential. You should contact local agents for these firms. Also, consider talking to one or more independent agents. They usually offer policies from more than one company. If you are working with a fee-only financial planner, he or she should be able to help in comparing policies and locating a broker or two.

A source of insurance agents for health policies is the Association of Health Insurance Advisors at www.ahia.net or 703-770-8200. Also, be sure to ask friends and associates for agents they know and like.

You will find that the agents have different levels of knowledge and different biases about the various options. Don’t give great weight to professional designations any might have. Experience and self-education are the most important qualities in this field.

Decide on your focus early. A relatively new option is to choose between a straight long-term care policy and a multibenefit policy. For example, you might buy a whole life policy with a feature that allows you to receive the benefits early to pay for long-term care.

The advantage of a multibenefit policy is that someone eventually will benefit from your premiums. With a straight long-term care policy, peace of mind is the only benefit from your premiums if you die without needing long-term care. A disadvantage of the multibenefit policy is that it can be more expensive than separate policies. We’ll discuss multibenefit policies in more detail next month.

When you start talking to agents and brokers, you should decide early if you want a straight policy or a multibenefit policy. Otherwise, it will be difficult to compare the options offered.

Set the daily cost base. The base of a long-term policy’s benefits is the reimbursement rate. It usually is a daily rate. For example, a policy can insure you for $150 for each day of covered long-term care. Determining the average daily cost you want to be insured for is among the most important decisions. It is the biggest determinant of the premiums, and other options add to or subtract from this benefit. Unfortunately, many people make mistakes when choosing the basic daily rate.

The temptation is to use the average daily rate of nursing homes in your area as the base. Most people then adjust that according to what they can afford and what extras they want.

The local average daily rate might not be a good starting point. First, do you want to be in an average nursing home, especially if you can afford more? If you think you do, tour several area nursing homes and assisted living facilities. Compare an average-priced place with one that charges a higher rate. You’ll probably note differences and, if you can afford the premiums, will want something more than the average rate.

Second, the daily rate covers only the basics. Any extra services you need are an additional cost. If you don’t raise the daily reimbursement rate in your policy to account for possible extra charges, your assets will have to pay for the excess. This is especially true for assisted living and home health care. While the basic rates for these might be lower than for nursing homes, they also cover fewer basics. Everything else is an additional cost. With home care you might need to hire housekeeping help in addition to the medical or nursing care.

Third, your area might not be the right one to consider. If you need a nursing home or assisted living facility, you might go to one near one of your adult children, which might not be where you are living now. If your adult children live in higher cost areas, the policy benefits won’t pay for as much as you thought.

Compare group and single coverage. Many employers are offering group long-term care policies to employees. Employers rarely pay any of the premiums, but use their purchasing power to negotiate favorable terms and premiums for the employees. If a group policy is available to you, certainly compare it to the nongroup offerings.

A big advantage of group policies is that you are less likely to be denied coverage for current health problems. Another advantage is that the premiums are likely to be lower than for comparable nongroup policies. Also, your employer has done most of the hard work of the buying process.

Group policies are not without disadvantages.

A group policy usually limits the available options. That’s one way employers streamline the process and cut costs. There’s no disadvantage unless you want a feature that is not offered. For example, the federal government’s offerings to its employees automatically reimburse home health care for 75% of the nursing home daily rate. That might or not be a good assumption for your area.

Another consideration: A married couple buying two individual policies often gets a premium discount of up to 20%. You won’t get that discount under most group plans.

Tax qualified or not? In our past discussions of long-term care I’ve covered the controversy about tax-qualified long-term care policies. A tax qualified policy is one that meets certain standards in the tax law. Qualification means the premiums are deductible as medical expenses, and any benefit payments automatically are tax-exempt. The tax status of either feature is not clear for non-qualified policies, because the IRS never ruled on the issues. Most tax advisors say that the premiums are not deductible but there is no instance of the IRS taxing benefits paid under a long-term care policy.

More importantly, the tax benefits of a qualified policy are likely to be sparse. Premiums are deductible only as itemized medical expenses on Schedule A and only to the extent total medical expenses exceed 7.5% of adjusted gross income. Few people qualify to deduct any medical expenses.

In addition, the requirements for a tax qualified policy limit its features. Most people who examine long-term care policies believe that non-qualified policies offer more flexibility and better benefits than tax-qualified policies.

Shared benefits. A relatively new feature allows married couples, and sometimes other family members, to share coverage limits. For example, suppose your spouse died without using the maximum benefits under his or her policy. A shared benefit feature would let you add the spouse’s unused benefit period to your coverage if you need it. There are many variations of these shared benefits.

The key, of course, is how much such a feature costs. You first should consider all the other features and benefits. Consider adding a shared benefit option only if the cost is reasonable for the benefit and you can afford it without chopping other benefits.

Check underwriting. If you are healthy, you want an insurer who thoroughly checks your health before issuing a policy. Inexperienced insurers take almost anyone and come to regret it. The result is sharply rising premiums in the future. Tough underwriting is a protection against dramatic premium increases.

Buying a long-term care policy involves many trade offs between extra benefits and premium cost. The key is to buy a policy you can comfortably afford now and are likely to be able to afford well into your 70s or 80s. If you need long-term care, those later years are when you are most likely to need the policy. It does no good to buy a policy now and drop it in those later years if the premiums seem uncomfortably high.