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Buyer’s Guide to Long-Term Care Insurance

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Leading a healthy lifestyle, eating right, exercising regularly, even being considered the ‘greatest boxer of all time’ doesn’t guarantee you’ll never need help with daily activities. Case in point – three-time World Heavyweight Champion Muhammed Ali, who is now trading punches with Parkinson’s disease.

The chances that you might need long term increase as you advance in age, but a serious injury or chronic illness could also land you in the same boat. Take a look at some of the alarming facts related to long term care:

  • There’s a 70% chance you’ll need long term care at some point in your life.
  • Only on in every 10 people actually have a financial plan that caters for long term care expenses.
  • Most people expect their existing private medical insurance policy would cover expenses for long term care, but they rarely do.
  • Even Medicare usually won’t cover costs unless you’ve been hospitalized for at least three days and need skilled and rehabilitative care beyond assistance with daily activities.

Keeping all of this in mind, you should consider opting for a long term care insurance (LTCi) policy to handle these expenses if you ever need them, whether it’s because of an accident, illness or just old age.

 Benefits of Long Term Care Insurance

According to a Harvard University study, if you don’t have a contingency plan for dealing with it, long term care can bulldoze your financial plan. The study revealed that over 72% of Americans who required just a year of nursing home care were pushed into poverty.

Based on a 2012 survey, the national average for a private room in a nursing home was $83,950 and growing at 5-8% annually. This steady rise in costs, and the high probability of long term care being needed at some point, have combined to result in increasing awareness of the need for LTCi policies.

  • LTCi plans can minimize the impact long term care expenses would have on your finances and help you maintain standard of life.
  • 40 hours a week of in-home care costing upwards of $50,000 annually. You won’t have to sell your assets or borrow money just to pay medical bills if you have coverage in place.
  • LTCi policies give you the flexibility of choosing where you stay, with provisions for care at home, in community or nursing homes, or even in assisted living facilities.
  • These policies also offer cover for a wider range of costs like home-delivered meals, chore services, visiting nurses and more.

The chart below summarizes how most users of long term care require assistance with everyday activities like bathing and dressing, which are not necessarily covered by Medicare or even major medical insurance plans.

 Features of LTCi Policies

LTCi insurance policies are not standardized and you should research the terms and features thoroughly. If you’re new to comparing contracts or unsure of which one would fit your needs, it might be a good idea to consult a financial advisor who has experience with LTCi policies of different kinds.

The features can vary significantly between policies and providers, but here are some common items you should pay close attention to, since they can have significant impact on premium payments, scope of the coverage and how easily you can access the cover:

Daily or Monthly Benefit Amount

This is the maximum amount the insurance company will pay, either on a per-day basis, or on a monthly basis. For example, imagine you’ll need qualifying assistance once a week and it costs $250 each time. If your policy has a daily benefit amount of $100, you’ll have to pay $150 yourself every time. On the other hand, if it has a monthly benefit amount of $3000, the entire cost will be covered.

Duration of Benefits

Insurance providers have stopped offering lifetime benefits, so the duration of benefits clause limits the period the company will pay for long term care. Typically, you’ll find policies offering between 12 months and five years of coverage.

The duration that the benefits pay for is a major factor that affects the premiums, and policies with longer coverage can get quite expensive. You should try to find a balance between what you can afford and the likelihood of you needing care for longer periods.

Triggers or Benefit Triggers

Benefit triggers are a very important aspect of your LTCi and you should give this aspect a lot of thought. The triggers are conditions that have to be met before the insurance company will start paying for long term care. The payments will start only after you are unable to perform at least two activities of daily life (ADL).

The triggers include:

  • Dressing
  • Transferring
  • Eating
  • Toileting
  • Continence
  • Cognitive Impairment
  • Dementia
  • Ambulating (Walking)

Inability to walk without assistance is not included as a trigger for tax qualified LTCi plans, so it’s generally easier to qualify for payments with non-tax qualified plans. Impairments caused due to conditions like Alzheimer’s, which make long term care necessary, also qualify for LTC benefit payments.

Waiting Period

The waiting period is also called an elimination period and it’s similar to a ‘deductible’. It defines how long you’ll have to wait after you’re eligible for the benefit payments, before the company starts paying you. The clauses attached to the waiting period can incur significant costs that you’ll have to bear on your own, so pay close attention to the terms mentioned in your contract.

Some companies offer a waiting period that is in days, usually 30, 60 or 90, during which you’ll have to bear all the costs. Most policies will not consider care provided by family or friends as part of the waiting period. Here are some common ways the waiting period is calculated:

Calendar day waiting period – The elimination period starts on the first day of care and the company will pay for expenses that are after the 30th day.

Service day waiting period –Some policies may only include the actual number of days you’ve received care. If the LTC is provided for five days a week, the company will not pay for expenses for the first 42 days (5 days a week for 6 weeks= 30 days).
Specific dollar amount –Another method that companies often use is a dollar value instead of fixed premiums. You will only receive benefits after you’ve spent the specified amount from your own pocket.

Policies do come with a zero waiting period that will cover all the costs, as long as you’ve qualified for the benefit triggers, but they are usually more expensive. Depending on your contract, the waiting period may be applicable only once in your lifetime, within a certain number of days, or each time.

Maximum Benefits

Some policies have a maximum benefit amount. This is a single dollar amount which is the maximum the insurance company will pay, usually regardless of how many times you need it. If your long term care costs less than the daily amount, the cover can provide for a much longer period of time.

 Key Considerations for Comparing Policies

Other than the features of the contract, there are some other factors you should consider before you choose a policy:

Inflation Protection

Inflation is a very real problem and what may seem like enough to easily cover long term care at the current rates, will likely fall very short in a decade. To be sure you’ll have enough in the future, you would have to buy a fairly expensive policy if it doesn’t have some sort of inflation protection.

There are two basic methods which you can use to protect your investment:

Adding inflation protection at intervals decided by the company – If you decide to opt for adding inflation protection later on, the additional cost will be added to your premium at the current cost for your current age. The insurance company would contact you at intervals to offer the benefit. Be aware that you may eventually lose this option if you decline it a few times.
Built-in inflation protection – Usually built in inflation protection has a 5% increase in the policies coverage, compounded annually. That means the maximum daily or monthly amounts and the maximum benefits will double every 14 years.

Financial Strength Rating (FSR)

You should always check a company’s financial strength rating and only purchase insurance from reputable vendors. You can check the FSR at www.ambest.com or www.standardandpoors.com. According to Consumer Reports, you shouldn’t consider companies that are rated below a B.

Reimbursement or Indemnity

Most LTCi plans are reimbursement plans, meaning you have to pay your bills, and the insurance company will reimburse the costs that are eligible as per the contract. Indemnity plans are more expensive, but the company will pay the monthly or daily benefit amount in full, regardless of the actual costs you incur.

Free Look Period

The free look period allows you to return the policy within 30 days after you’ve purchased it, so you can shift over to a better one or take advantage of any changes in policies during that time. This is a great way to “try-and-buy” a plan, just like test driving a vehicle to see if it suits your needs!

It’s impossible to anticipate how the future will play out and your state of health in years and decades to come. An LTCi policy is your guarantee that even if you encounter severe health issues, you will at least be able to afford long term care. The premiums for LTCi vary significantly, depending on the features you choose. As a rule of thumb, it’s cheaper to buy them while you’re younger and healthier.

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