How To Choose Long-Term Care Insurance (LTC)

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As the older adult population grows and life expectancies continue to increase, more and more Americans face the difficult prospect of having to pay for costly long-term care. One of the ways consumers are answering this challenge is by purchasing long-term care insurance in order to help manage the sometimes overwhelming costs of care. However, long-term care insurance can be expensive and like any other insurance plan it has differing levels of coverage and varying premiums. Therefore, long-term care insurance may not be right for you. Even if, after careful research, purchasing long-term care insurance seems like the right thing to do, you will still need to carefully review the plans you are considering and decide if the long-term care insurance provider you have chosen can offer a plan that is adequately catered to your needs. This article is intended to help you make these difficult decisions by providing unbiased information about the pros and cons of long-term care insurance. However, it should be seen as an introduction to the marketplace and not as a substitute for a consultation with an insurance or care expert. Following the article, there is a list of resources consulted for this article, which provide more in-depth information about all of the topics covered.

*What is Long-Term Care?*
Individuals with a long-term physical illness, disability, or cognitive impairment are likely to need long-term care. Unlike traditional medical care, long term care generally helps an individual maintain their current lifestyle. This type of care may not help an individual to get better, but it will help to ensure that they remain stable and comfortable. Although one generally thinks of stays in a nursing home when they think of long-term care, long-term care is actually more often administered through adult day care centers, home health care agencies, assisted living facilities, and retirement communities.

*What is Long-Term Care Insurance?*
Long-Term Care Insurance is a relatively new type of insurance that helps to cover the expenses accrued from all types of long-term care, including nursing home care, the costs of assisted living facilities or retirement communities, and at-home care. It is often a purchase you will make once in your life, which is why educating yourself before purchasing is so important. Individuals with a physical illness or a cognitive impairment may require long-term care, which Medicaid will not pay for until an individual has “spent down” their assets; therefore, this type of insurance can prevent a family from financial ruin due to the costs of care. Additionally, long term care insurance can provide the funds that can help you to remain in your own home safely, allowing you to maintain your independence.

*Will You Need Long-Term Care?*
The decision whether or not to purchase this type of insurance is a very personal one; still, individuals should begin to consider long-term care insurance for themselves or for a loved one before they begin to have difficulty performing the activities of daily living without assistance. It is important to consider insurance early, while you are still healthy, because an individual with health problems may not be insurable. An individual may also require long-term care following a serious injury or illness. Since it is impossible to predict whether or not you or a loved one will need long-term care or for how long, you should consider your health and family history in your decision-making process. The chart below may also give you some idea of the odds of needing nursing care. These figures do not, however, include the chances of needing assisted living care or at home-health care, which can be considerably greater. According to Group Long Term Care – Flexibility, Innovation & Experience, for every person living in a nursing home, there are four others receiving care at home.

*Will You Need Long-Term Care Insurance?*
Long-Term Care insurance may be necessary to cover the costs incurred from long-term care. Major Medical insurance will not pay most of these costs because conventional plans only cover skilled care, as opposed to the intermediate or custodial care normally provided in an assisted living or nursing facility or by a home-health care worker. Medicare also only pays for skilled care, and patients are normally able to collect for only about 23 of 100 days spent in a nursing home. This leaves Medicaid, which pays for 40% of the nation’s of long-term care annually. Most patients in the Medicaid program have exhausted their financial resources before going on Medicaid, which means they leave no inheritance for their descendants. More importantly, the quality of care provided to Medicaid patients has declined sharply since the 1970s. Also, nursing homes are only required to accept a federally regulated number of Medicaid patients if they decide to participate in the program. This means that a Medicaid patient may have to choose a facility far from home to receive care. Once a participating facility has reached its quota they may also refuse Medicaid patients, who can be a financial drain on institutions. The limited coverage already provided by private insurance and government programs led to the development of long-term care insurance, which helps individuals to cover the costs of long-term care while preserving their assets and insuring that family members do not have to struggle to pay for their care.

*What are the Potential Drawbacks of Purchasing Long-Term Care Insurance?*
While this type of insurance can help you to preserve assets for the next generation and to insure that you are guaranteed the care that you need either in a facility or at home, these policies are expensive and they may not be right for everyone. Long term care costs are extreme and the costs are only going to increase in the future. For instance, nursing home costs are expected to increase to almost $200 a day just for basic care by 2005. Nevertheless, in deciding whether or not to purchase insurance, you need to consider whether or not you can afford long-term care insurance premiums now and into the future, taking into account that the premiums will likely increase over time. You also need to consider whether or not your assets are worth protecting. If paying the premiums requires you to utilize your savings or to make lifestyle changes, then the insurance is not worth it. A general rule of thumb is the five percent rule, which states that if premiums are 5% or less of your anticipated annual retirement income, insurance is an affordable option; if premiums are more than 5%, you should seriously scrutinize your budget before purchasing long-term care insurance. If you have less than $25,000 a year in retirement income and less than $150,000 in assets, Medicaid can absorb the costs of long-term care for you once you have depleted these limited resources, and therefore you will most likely not be able to afford the insurance. If you have over $1.5 million in assets, you may have enough to self-fund your long-term care needs and insurance may not be necessary.

*Buyer be Aware*
If you decide to purchase long-term care insurance, you should be aware of the following factors.

Age
The younger you are when you purchase the policy, the lower the premiums will be. However, you will be paying these premiums for a longer period of time before collecting benefits, and there is no guarantee that premiums will not go up. The advantage to buying younger is the greater net value, as illustrated by the chart below.

Type of Policy
The two basic types of policies are facility and comprehensive. Facility policies generally cover only nursing home care. Most of them include the option to add a rider for home care or alternate forms of care. With comprehensive policies, which are more expensive, your benefits are a pool of funds that you can utilize to meet any of your long-term care needs-from home health care to nursing home care.

Benefit Period to Be Covered
This is the length of time that the policy will pay you the daily benefit for covered services. You can generally choose to buy coverage from 2-5 years or for a lifetime. While the average length of a nursing home stay is two years and three months, some conditions, such as Alzheimer’s, may require up to 8 years of care. A three year benefit period will cover 85% of claims; a 5 year benefit will cover approximately 95% of filed claims. The benefit period that is right for you is dependant upon the amount of assets you want to protect. Using today’s rates, calculate how much you would need to protect your assets. Don’t forget that this number does not account for inflation.

Daily Benefit Amount
Insurance policies offer daily benefit amounts ranging from $50 to $250 per day. You should research the cost of nursing homes, assisted living facilities, and at home care in your community in order to determine how much insurance you should purchase. Bear mind, however, that you may incur charges over and above the listed daily facility costs for medical supplies and special assistance. Do not purchase more insurance just for security purposes; be careful to buy only what you can afford without necessitating a drastic lifestyle change.

Elimination Period
This is the deductible period, or the time during which you must incur an expense for needed care before the policy begins to pay the daily benefit. It is important to note that for long-term care insurance this should generally be a number of days, not a dollar amount. Generally, you will be given a choice of between 20 and 100 days for your elimination period. Keep in mind that you must self-insure or rely on Medicaid or private major medical insurance, which may cover some of your costs, during the elimination period. While purchasing a policy with a shorter elimination period will lead to higher premiums, it may be a better value for the consumer because there is less time during which expenses are incurred.

Benefit Triggers
These determine when benefits are payable. The two major triggers are functional disability and cognitive impairment. It is important that these are listed in the policy as “stand-alone triggers,” i.e. you don’t have to exhibit both in order to start collecting benefits. Functional disability is related to the inability to perform two or more activities of daily living. Your policy should have specific definitions of the activities of daily living and what qualifies as an inability to perform them. Cognitive impairment includes mental incapacities, such Alzheimer’s disease and other forms of dementia. This trigger should not be linked to any illness, disability, or medical necessity, as these type of cognitive illnesses usually have no physical side effects but do require constant care and supervision for sufferers. Medical necessity is also often mentioned as a benefit trigger in some non-tax qualified policies. This simply means that with a physician’s certification that the insured requires long-term care the insurance company will begin to pay benefits.

Levels of Benefits
Be sure that your policy covers all levels of care-home health, assisted living facilities, adult day care, group homes, hospice care, and nursing homes. A long term care policy should also pay for skilled care, as well as custodial or personal care (see Levels of Care above). Your policy should clearly state coverage for facilities that only offer custodial care. Also, keep in mind that what is an institutional setting to you may be considered a home setting by the insurance company-such as group homes for seniors and certain retirement communities. Covered home care benefits should include home care aides, adult day health services, and personal aides. While most policies will not reimburse a family member who is your caregiver for their time, home health care assistance can ensure that your primary caregiver receives adequate assistance in order to retain their job and maintain their lifestyles. Some policies do include “cash benefit riders” that allow you to spend the money for any provider of your choice (this option may add additional premium to your coverage). The most important consideration is that your policy leaves you room to make decisions about the type of care you need and desire.

Guaranteed Renewable
This benefit guarantees that an insurer cannot cancel your policy as long as the premiums have been paid on time. Be wary of policies that are conditionally guaranteed, which means that the insurance company has the right to cancel policies for a group of policyholders. While the company can still not cancel just your policy, it could opt to cancel all the policies within a group of which you are a member.

Waiver of Premiums
This allows you to stop paying premiums after you begin receiving benefits from your policy. It is important that this waiver apply to all levels of benefits.

Tax Concerns
Long-Term Care Insurance Policies can either be tax-qualified or non-tax-qualified. Tax-Qualified policies allow you to deduct your premiums as medical expenses; however, before any deductions for premiums can be taken, an individual’s total allowable medical expenses must exceed 7% of his or her adjusted gross income, which is the case for only 4% of filers. There are also maximum deduction limits based on age. Income from benefits paid from a tax-qualified policy is specifically exempt from federal taxation. These policies generally have standardized benefit triggers. Any disability must last for at least a 90 day certification period before payment will begin. Benefits will also be trigged if you are unable to perform two activities of daily living or if you suffer from a cognitive impairment. Non-Tax-Qualified Policies may include more lenient benefit triggers; however, income from these benefits is not specifically exempt from federal taxation. There is as of yet no precedent in tax cases and no specific regulations which address the taxation of these benefits. It is important to realize that in addition to federal deductions many states offer credits or deductions for tax-qualified long term care insurance premiums.

Financial Stability of the Company
In order to select a financially sound company, you should consult independent financial ratings of insurance companies. You can review ratings from the following rating services in the reference section of your library, or you can call them for information: A.M. Best Company (1-800-424-BEST); Fitch Investors Service (212-908-0800); Moody’s Investor Service (212-553-0377); Standard & Poor’s (212-488-2000); Weiss Research, Inc. You should also inquire about the claims-paying history of any company you are considering. Finally, you should consider the number of long-term care insurance policies the company has sold. It is important that a company demonstrate a long-term commitment to the long-term care insurance industry. Finally, it is important to keep in mind that larger companies are generally more reliable and may be less likely to increase rates dramatically. You can research the history of rate increases by the major companies currently selling LTC insurance at www.insurance.ca.gov.

Inflation Protection
Inflation protection can dramatically increase your premiums, but it can help to ensure that your policy accounts for the ever-increasing costs of care; therefore, you must consider your age, current health, gender, family history, and industry statistics in order to determine if it is an appropriate feature to purchase. If you decide to purchase this feature, you will need to look into both compound and simple inflation protection, depending on your age and health. One other option to consider is purchasing a higher daily benefit rate instead of inflation protection.

Non-Forfeiture Clause

This feature allows you to receive reduced benefits if you are unable to continue paying premiums after a certain number of years. This benefit can also be considerably expensive. Unless you have some doubt as to whether or not you will eventually need long-term care or unless you feel that you may eventually be unable to cover your premiums, this feature may not be worthwhile to purchase. Less than 1% of all policies sold include this feature because of the enormous expense it incurs.

Further Resources

State Health Insurance Assistance Program (offers counseling and assistance to people with Medicare and their families).
Toll Free: 1-800-633-4227

On-line: www.medicare.gov

D.C.: 202-739-0668
Maryland: 1-800-243-3425
Virginia: 804-786-6145

State Insurance Departments (can offer information on the claims and complaint history of insurance companies).

D.C.: Department of Insurance and Securities Regulation
Government of the District of Columbia
810 First Street, NE, Suite 701
Washington, DC 20002
202-727-8000 Ext. 3018
Fax: 202-535-1196

Maryland: Maryland Insurance Administration
525 St. Paul Place
Baltimore, MD 21202-2272
410-468-2020
Fax: 410-468-2020

Virginia: State Corporation Commission Bureau of Insurance
Commonwealth of Virginia
P.O. Box 1157
Richmond, VA 23218
804-371-9694
Fax: 804-371-9873

Special thanks to John Haslett, President of Haslett Management Group, and his associates for their advice and guidance while compiling this article.

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