You’ve decided to buy a long-term health care insurance policy. Now you need the right policy to cover your needs at a reasonable cost. The wrong policy won’t cover everything you want or will cost too much. Here’s how to shop for a long-term care policy.
First, decide how much care to finance. Many stays in long-term care facilities are for rehabilitation following an illness or injury for 90 days or less. These short-term stays often are at least partly covered by health insurance or Medicare. You probably can rely on these sources and your own money for these stays.
Use long-term care insurance for longer stays. The average nursing home stay lasts two to three years, and you have a 9% chance of spending at least five years in long-term care. The costs vary widely by region, by the type of facility (assisted living or nursing home), and the quality of the facility. Across the country annual costs range from $38,000 to $90,000 and are expected to double in some areas over 15 years. An alternative is home care. Three weekly visits can cost about $12,000 annually.
After deciding how much care to insure, you must decide if you want a “tax qualified” policy or a nonqualified one.
Tax qualified policies were created in the 1996 tax law. Their premium payments can be deductible, and any benefits received from these policies are tax free. That looks tempting, but let’s dig a little deeper.
- The tax deductions are limited. The first limit is by your age. Currently the maximum premium deductions are: age 40 and under, $210; ages 41-51, $400; 51-60, $800; 61-70, $2,120; over 70, $2,660. The amounts are indexed for inflation. But you must itemize expenses on Schedule A to take any deduction. In addition, as medical expenses the premiums are deductible only to the extent that when added to your other medical expenses the total exceeds 7.5% of adjusted gross income. Few people get to deduct any of their medical expenses.
- A qualified policy pays only if you cannot perform at least two of the daily activities of living (eating, dressing, bathing, walking, etc.) or are suffering from Alzheimer’s disease. In addition, your doctor must certify that you will need care for more than 90 days. A nonqualified policy often pays benefit if you have a “medical necessity,” and a minimum stay of 90 days is not required. So nonqualified policies can provide more coverage.As you’ll learn shortly, you should plan on paying for the first 90 days or more of care from your own resources. But you might want a policy that covers more medical conditions than a qualified one would. A nonqualified policy generally costs 5% to 20% more than a qualified one.
- It’s not clear whether benefits from a nonqualified long-term care policy would be taxable. Neither the IRS nor Congress has ruled. If you are worried about taxes on benefits, you could choose a nonqualified policy and increase the benefits enough to cover possible taxes.
Once you’ve decided on the type of policy you want, consider the detailed provisions. These greatly affect the amount of your premiums. A 65-year-old typically pays $2,000 annually for a long-term care policy. But you can bring that cost down by looking at these features:
- The waiting period. Also known as the elimination period, this is the amount of care you need to incur before the policy pays benefits. The standard policy kicks in only after you have paid the first 30 days of care. But you can extend that. Self-insure for a longer period and your premiums will fall. Most advisors recommend a waiting period of 90 days. But you really can slash premiums by planning to pay the first year of care out of your estate and letting the insurance company pay after that. That can drive a $2,000 premium down to about $1,500.
- Maximum benefits. The average stay in a nursing home lasts two to three years. But if your goal is to keep long-term care from depleting the estate, you want a longer-term stay covered. You probably want to cover a minimum of five years, and a lifetime of care if you can afford the premiums.
- Daily benefit. You’ll need to check prices at long-term care facilities in your area, but generally you want a daily benefit maximum of $100 to $110 a day. You want a higher benefit if you live in a high cost area. There usually are separate benefit levels for home care, assisted living care, and nursing home care.
- Triggering events. Don’t assume that certain injuries or illnesses are covered. Check to be sure Alzheimer’s and “cognitive impairment” are covered. And be sure you are covered if you cannot perform two or more of the activities of daily living. You want to be covered without a hospital stay. Most nursing home residents don’t go to a hospital first, especially for Alzheimer’s disease. Make sure the definitions are clear, not fuzzy words that the insurer can later use to deny coverage.
- Waiver of premiums. This means future premiums are not required when coverage is triggered.
- Noncancellation. The policy cannot be cancelled if you become ill or are injured, as long as you pay the premiums.
- Lifetime premium. There are several ways of setting premiums. You probably want the same annual premium for life, rather than one that changes as you age. You also want the premium to be increased only on an entire class of policyholders. Beware of policies that reserve the right to dramatically increase premiums if the insurer’s claims experience is worse than anticipated. Some allow a doubling or tripling of premiums.
- Covered services. The policy should cover nursing care (skilled and unskilled), custodial care, home-based care, and all nursing-home services. Otherwise you might be on the hook for everything other than medical-related expenses. Some policies now just pay a lump sum daily benefit if you meet certain medical conditions, and you decide how to spend it.
- Cost of living. The daily benefit payment should increase automatically with inflation. This is well worth the expense. Keep in mind that most COLAs use a 5% industry standard, but costs are increasing at about a 7% annual rate. So you still might have to pay for some of your care.
Work with these provisions to get the right combination of solid coverage at a premium you can afford.
After deciding on the type of policy and provisions you want, shop around. Prices vary considerably. And the insurer that offers the best policy at one age doesn’t offer the best at another age. So don’t go by the experience of friends or relatives. One broker that will give you quotes from several insurers is Long-Term Care Quote 800-587-3279.