The Right Long-Term Care Insurance Policy for You

Many of you should at least consider purchasing a long-term health care policy. In high cost of living areas, anyone with net assets between $200,000 and $2 million should take a look at the policies. In lower-cost areas, a lower net worth merits a look at the policies.

That doesn’t mean each of you should buy a policy. In past issues, I’ve presented alternatives to long-term care policies. These include buying life insurance to leave your heirs, self-insuring, and partial self-insuring.

Before buying a policy, or even deciding whether any long-term care policy is for you, you need a specific policy to consider. Policy terms are flexible. You can craft a policy to fit your specific needs. You can create a policy that gives you solid coverage while cutting premiums. Here are the key policy provisions and trade-offs in long term health care policies.

Types of policies. Most major policies are “reimbursement contracts.” The bills are sent to the insurer. It pays the expenses that are covered under the policy and that meet your daily limit. You pick up the rest. UnumProvident offers a “per diem” policy. You get paid a fixed amount for each day of covered care, regardless of your actual expenses. Decide if you have a preference between these two types.

Tax qualified or not. A tax qualified long-term care policy ensures premiums are deductible and benefits are tax free. The tax status of nonqualified policies is unclear. I’ve covered other differences in past visits, and this information is available on our web site. Generally, tax qualified policies are more expensive. Some advisors believe you can craft better coverage with a non-qualified policy.

Covered care. All the policies offered should cover both skilled and custodial care, whether at a nursing home, assisted living facility, or at home. But some home-care provisions will cover only professional home-care services. GE and CNA, on the other hand, also will cover chores such as cooking and cleaning. If you are single, you might want to save money by dropping home care coverage.

Coverage triggers: Under tax-qualified policies, these are dictated by law. Coverage begins when you need help to perform at least two activities of daily living and are expected to need help for at least 90 days. Severe cognitive impairment, such as Alzheimer’s, also triggers coverage. Under non-qualified policies, you might be able to get earlier triggers. Also, review who decides whether coverage is triggered. Is it an outside care coordinator or your own medical provider?

Waiting period. Coverage doesn’t begin until a certain period after your care begins. This can have a big effect on premiums, and you decide the length of this waiting period or elimination period. Most policies offer periods from zero days to 365 days. The standard period is 90 days. You pay for all care during the waiting period. The longer the waiting period, the lower your premiums and the more of your assets that will be spent on the initial care.

More importantly, look at how days are counted. Some policies use calendar days. The first day you receive care triggers the count, and six days later is the end of your first seven days. Other policies use “care days.” Only each day of actual care received counts toward the waiting period. If you begin with weekly care visits at home, you have used only four days of the waiting period after a month.

Another issue is how long it takes to meet the waiting period. UnumProvident, for example, says that if you haven’t finished the waiting period within three times the waiting period, then the counting starts over. If you have a 90 day period, you have 270 days to use up those 90 days. Some policies also re-start the count if you move from one type of care (home care) to another (nursing home).

Maximum daily benefit. This is also greatly affects premiums. Determine the average daily cost of care in your area (or the area where your kids live). You can get a policy that covers that rate, or decide to partially self-insure by getting a lower daily rate in the policy. If you have a steady source of income that will continue after you are receiving care (such as Social Security, annuity, or pension), you might want to self-insure part of the daily coverage and get a lower premium. But if your spouse might need all your income, consider paying higher premiums now to get a higher daily benefit.

Maximum lifetime benefit. Few elderly need the stereotypical years of nursing home care. Most are out of long-term care within three years. To be safe, you want a policy with at least three to five years of coverage. Three-year coverage costs about half of lifetime coverage. If you are pressed for cash, inflation protection is more important than a lifetime benefit.

Inflation protection. Most people don’t expect to need long-term care until years after a policy is purchased. Medical care inflation is rising faster than consumer inflation, so inflation protection is essential. Otherwise within a few years you will be self-insuring to a much greater extent than planned. The standard inflation protection is 5% annually. But be sure to get the 5% compound protection. Some policies offer a simple interest option. After 10 years and longer the difference is substantial.  Compound interest protection is worth the cost if you have the money.

An alternative if you are at least age 70 is to exchange inflation protection for a higher daily benefit. Instead of a $150 daily benefit with inflation protection, get a $200 or higher daily benefit. Oddly enough, the premiums will be lower.

Premium increases. Your premiums will increase. The policies are relatively new, and insurers are learning. They made mistakes in the past by grossly underestimating claims. In the last few years, premiums on many policies increased annually by 20% and more.

You might be told a policy has a level premium. That just means the premium cannot increase because you are older. Premiums still can be raised for all policyholders in a class in the same state. Check with your state insurance department for the rate increase history of an insurer you are considering. If you can barely afford a long-term care policy now, odds are you won’t be able to afford it in five years.

The ideal time to buy a policy probably is between ages 60 and 70. If you are younger, premiums will be much lower but the field probably will change quite a bit before you need the care. You should wait for developments. The policies cost significantly more after age 70. But if you can barely afford the premiums at age 65, you might want to defer a purchase until your seventies. You’ll pay premiums for fewer years, and that could make the policy affordable.

Stick with insurers that have ratings the equivalent of A or better from A.M. Best or another rating agency. Most insurance brokers recommend policies from CNA, GE, John Hancock, Transamerica, and UnumProvident. Prices will vary among insurers. You can get a quick check at quotesmith.com on the Internet. Don’t be rushed. These are complicated products, and you have many options. Take six months or more to decide what to do.

Average Long-Term Care Policies

Here are the average terms of 5,407 long-term care policies, separated by age group, issued in 2000, as surveyed by LifePlans and the Health Insurance Association of America.