7 Tips to Buy Long-Term Care Insurance

Here are seven tips to help you purchase a long-term care insurance policy that fits in your retirement plan.  Long-term care insurance has many moving parts and features, but basically you are buying a daily dollar amount that pays for care in different settings for a certain amount of time.  The more the policy pays for a longer period of time means the premium will be higher.  Remember, you are responsible for the costs of care above the daily amount purchased or if the care you receive lasts longer than the policy you purchased.

Because there are multiple ways to structure a long-term care policy that meets your individual needs and budget, its best to work with an independent insurance agent to get multiple quotes that vary the qualitative and quantitative features described below.  If you are or were a member of the federal government work force, you also may consider looking at the Federal Long-Term Care Insurance Program.

Qualitative Features

1. Eligibility Criteria: You generally become eligible for benefits from a long-term care policy when you need help with two or more activities of daily living (ADLs). These ADLs are: (1) cooking, (2) eating, (3) bathing, (4) dressing, (5) using the toilet and maintaining continence, and (6) moving from place to place within the living environment. Check the policy for how eligibility is determined – whether it is your own doctor or rather than the insurance company’s representative. Your doctor is the better sign off.

2. All Types of Care and Caretakers: You want a policy that would pay the daily amount in all types of care settings: nursing homes, assisted living centers, or in your home with a home care professional. If you have a facility in mind such as an assisted living facility that offers multiple levels of care, make sure the policy does not have narrow network facility restrictions. If you are thinking of home health care, the policy should cover not only skilled nursing care, but also someone who can help you with the daily activities of living such as meal preparation. Look for policies that pay for care that is “skilled, intermediate, or custodial.”

Finally, make sure the policy does not restrict the diseases covered. Examine the policy for any health-related exclusions or any other reasons for denying coverage – there shouldn’t be any exclusions.

Quantitative Features

3. Maximum Daily Benefit Amount: This is the maximum amount the insurer will pay out per day. The higher the amount, the higher the policy’s premium. Check how the daily benefit will be calculated. Is it each day’s actual charges, or the daily average, calculated each month? The latter is better for home care because caretakers may visit many times one day, but very little the next day.

Average home health aides cost approximately $115/day and a private nursing home room is about $300/day in the Washington DC area. Get quotes for average daily benefits of $175 and $300/day.

4. Benefit Period: Anywhere from one to an unlimited number of years. The average nursing home stay is three years. A three-year benefit period may be sufficient, unless there is a family history of long-term debilitating illness or mental illness (e.g., dementia). Get quotes for two- and four-year policies. You can always take the difference to see the cost of a three-year policy.

5. Elimination Period: You have a choice about how soon the policy begins to pay for care after you become eligible. The elimination period is counted in the number of days. You pay out-of-pocket for your care until the elimination period is over. A longer elimination period means a lower premium. A long period, however, can deplete your remaining assets. Also elimination periods can be calculated as calendar day or service days. Calendar days are the better basis for calculation. Get quotes for 30- and 90-day elimination periods.

6. Inflation Adjustment: An inflation adjustment option increases the dollar value of your benefit each policy year, to keep pace with estimated inflation in the cost of long-term care. The kinds of inflation adjustment are:

(a) Compound-interest increases: The annual benefit-increases compound at x% per year. The premium is highest on this type of inflation protection because this is the highest increase in benefit. This is probably the best choice if you are under age 65 because of escalating costs of health care;

(b) Simple-interest increases: There is a x% benefit increase each year, calculated as simple interest. This choice might be best if you are 65 to 70. The compounding interest-rate benefit doesn’t overcome the simple interest-rate benefit until 12 to 14 years into the policy.

Obtain quotes for 3% and 5% inflation adjustments under both types of calculations.

7. Tax-Qualification of the Policy: Long-term-care policies must meet specific standards for the premium to be tax deductible. If the policy is tax-qualified, you can deduct your premiums up to a maximum limit, according to tax laws (medical costs exceed 7.5% of your adjusted gross income, and you itemize deductions).

Trade-Offs to Help Get the Best Policy

Remember, you don’t necessarily need to obtain a Cadillac of a policy if you some assets that you could use should you need long-term care. If you want to reduce the premium, look for a longer elimination period if you have sufficient assets to cover six or nine months of care. You can also look for a lower daily amount of $150 or $100/day to supplement the cost of care should it be needed. Avoid lifetime benefits and instead look for policies that pay for two or three years.

You also can look for policies that you pay the premium upfront and have no payments during retirement.  If you go this route, the financial stability of the company is key. You want to make sure the company is around 10 or 20 years from now when you may need the care.

Finally, if you are married, you may want to obtain a policy on your joint lives. For example, a five-year policy that covers two people. If the first person needs four years of care, there would only be one year left for the other spouse. These types of policies are a great to help reduce the “waste” of a policy.

Use these tips and trade-offs to obtain a long-term care policy that meets your needs and your budget.

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