Last month, we examined in general terms what long-term care (LTC) is all about and introduced LTC insurance as a key piece of your financial and retirement planning. An accompanying piece, "Long-Term Care Insurance Benefit Basics," provided LTC insurance benefit basics.
Evaluating and comparing LTC insurance policies is more complex than with other forms of coverage. Fortunately, the National Association of Insurance Commissioners has written an informative booklet, "A Shopper's Guide to Long-Term Care Insurance," which is a very straightforward but comprehensive overview. The booklet is widely available for free from insurance agents or online at the Federal Long Term Care Insurance Program Web site. That site is dedicated to federal employees, but its parent site provides a wealth of useful information for all.
This month, let's examine just a few of the more important aspects of this valuable coverage in more detail.
Premiums—They're high, and here's why
There is no other type of insurance where premium cost is more of an issue with consumers. Each year we fork over thousands of dollars to our homeowner, auto, and medical insurers, with no regret if the year passes without a devastating house fire, car wreck or health crisis. When it comes to LTC insurance, however, many folks put off buying it because, in their words, "I may never need it."
It's true that LTC insurance isn't cheap at any age. As with all insurance, the more likely it is that the insurance company will have to pay benefits, the higher will be the premium. The fact is that there's a very good chance you will need LTC coverage someday—that's precisely why the premium is fairly high.
The age of the policy applicant is the biggest single factor in determining the premium quote he or she will be offered. Even a healthy 40-year-old who can't imagine needing LTC for decades should expect to pay about $700—$800 per year for "middle of the road" coverage. At age 70, similar coverage could cost $4,000 to $5,000 per year or even more.
Of course, one's general health is an important factor in the premium to be charged. Recognize, however, that medical conditions that might be unacceptable to one quality insurer may be acceptable to another—at an increased price. So even if you've delayed the LTC insurance purchase until a medical condition has afflicted you, it may still be possible to find at least some coverage with a good insurance carrier. You'll have to shop around.
The high LTC insurance premiums become more understandable when one considers that the annual cost of a nursing home stay already averages about $75,000 per year nationally, and is much higher in metropolitan areas. Adjust that figure for inflation over 10, 20, or more years and the cost of care becomes staggering. Some of us can afford to pay out of pocket, but most cannot.
But you should be realistic about your ability to pay the premium—not just now, but forever. Medicaid exists to provide nursing home and other long-term care services to those with few assets and little income. If premium payment is likely to be impossible going forward, experts advise against purchasing a policy only to have it lapse before you need it. We must hope that the safety net of social and LTC services remains intact for those truly in need, but relying on government assistance as one's "Plan A" is not wise.
LTC policies are designed so the premium remains constant every year, but they have no price guarantee. Especially in the 1990s, several less-than-prudent companies under-priced their policies to attract business, then imposed large and unexpected premium increases later.
With many marginal insurers having left the LTC field, and with more claims-paying experience to inform those that remain, there are good reasons to believe the chance of surprise rate increases on the insurance products sold today is greatly reduced. The key is not to shop strictly by price—stick to well-established, rock-solid, "household name" insurers.
For those who would prefer not to have an annual premium indefinitely, there are "limited pay" plans offered by some companies. The policyholder is given the option of paying all premiums due forever in 10 or 20 large annual installments. Some policies guarantee no premium increase during some or all of this period. With or without a guarantee, a limited pay arrangement is attractive to people who want to satisfy the LTC premium obligation within a known time frame—during their high-earning years just before retirement, for example.
Benefit triggers
Benefit triggers are the events or conditions that must exist before benefits under a policy will be paid. This is a major source of confusion regarding LTC insurance policies. First and foremost, remember that benefit triggers are explained in every insurance policy you'll be examining. So read the policy carefully before buying, because THAT is the contract that will bind you.
With the vast majority of LTC policies sold today, there are two possible paths to receiving LTC insurance benefits: one is through physical infirmity, the other is through deterioration of the mind. Let's start with the latter.
Cognitive impairment
Benefits are triggered when the insured requires substantial supervision to protect himself or herself from threats to health and safety due to severe cognitive impairment. Substantial supervision means "continuous."
"Severe cognitive impairment" is defined in every policy, but in a nutshell, it means a loss of mental capacity such as results from Alzheimer's disease and other forms of irreversible dementia.
Physical infirmity
LTC policy benefits triggered by weakness of the body begin with a certification from your physician. The insured must be unable to perform at least two of the recognized activities of daily living (ADLs) without "substantial assistance."
These ADLs are defined in every policy. While they cover much of what one needs to do every day, it's important to realize that the "official" ADLs for LTC insurance purposes are not unlimited in scope. Any policy you review should include these six:
• Transferring (as in walking from room to room)
• Bathing
• Toileting
• Dressing
• Eating
• Maintaining continence
A key factor is the definition of "substantial assistance." Under newer policies, "substantial assistance" with an activity refers to either hands-on help or standby help (to prevent falling, for example). If the insured person would not be able to safely perform the activity without the assistance, the activity would be considered "substantial." Other factors aside, a policy that includes "standby" assistance in the definition of "substantial assistance" is far superior to one that recognizes only the need for hands-on help. After all, some folks can perform some of the activities of daily by themselves some of the time—but often need someone standing by just in case.
Home health care
Given the choice, virtually everyone would prefer to receive any necessary care at home for as long as possible. Insurers understand that, and also recognize that care at home is often far less expensive than in a nursing facility. So be sure that when you select a daily benefit amount, the policy will pay the full daily amount—not just 50 percent, for example—for care you receive at home.
Elimination (waiting) period
The elimination period is equivalent to the deductible on an auto collision insurance policy. It is the number of days you must wait after qualifying for LTC policy benefits until actually becoming entitled to payment from that point forward.
Every insurer offers a choice of several elimination periods, which typically range from zero to 180 days. Twenty-, 30-, 60- and 90-day elimination periods are common. A longer elimination period tends to decrease the policy cost relative to a shorter one, so many people choose a long elimination period to lower the premium.
That may well be wise, but it should not be done without careful thought: remember, you must pay out of pocket any expenses during the waiting period. If six months of out-of-pocket expenses will be more than you can afford, perhaps it is better to lower the years of coverage or the daily benefit amount you choose.
Inflation protection
This feature adds significantly to the cost of any policy for an obvious reason: the care you ultimately need may not be delivered for decades, and during that time, its cost will increase dramatically.
If history is any guide, the inflation rate for healthcare and LTC services will far outpace the general rate of inflation. For this reason, experts are almost unanimous in advising that inflation protection is a "must have" option for all but the oldest of LTC policy buyers.
Conclusion
LTC insurance should be an important part of many people's financial planning. True, it's complicated and unpleasant to think about. But all of us know a "horror story" that could have been avoided had there been LTC insurance available. It's well worth it to educate yourself and then consult your financial advisor to help you at least consider this coverage.
 | Educated Investor |
