Part II: Shopping for long-term care insurance

by Don Kuehn

In the March 2003 Your Money column, we looked at the nature of long-term care insurance and who might want to consider purchasing such coverage. In this April 2003 column, we consider what to look for when buying coverage.

The first thing to consider when looking for a long-term Care (LTC) insurance provider is stability. If you thought taking out a mortgage was a long-term relationship, this could last even longer. You want a company that will be around when you need benefits. Look for a company that has earned the highest rankings from the three dominant rating services: A.M. Best, Standard & Poor's, and Moody's.

A recent study predicted that, by 2005, elder care will replace child care as the number one dependent care issue in America. One out of three workers will be caring for an aging family member.

Size matters. The broader the base of the pyramid of policyholders, the less likely a company will have to jack-up prices. Your state insurance department will have information on the "market share" various companies have as well as how long they have been in the market and their record of rate increases.

When it comes to size, no one matches the federal government. Last year, Uncle Sam entered the LTC market by offering a plan to active and retired federal employees, postal workers and military, their immediate families (including adult children), parents, parents-in-law and stepparents. If you can qualify, most analysts seem to think this is a good, fairly priced plan that meets most of the important criteria. For more information go to www.ltcfeds.com.

It's not easy to compare policies offered by different companies because there are no "standard benefits" when it comes to LTC insurance. Where one may cover home care, another may severely limit what is covered outside of an approved or licensed facility.

Shop for a policy that covers more than simply nursing homes. Your policy should pay for:

• Skilled services such as physical, respiratory or speech therapy;
• Coverage for mental and nervous disorders such as dementia and Alzheimer's disease;
• Adult day care;
• Home health aides and personal care attendants to help with the activities of daily living (ADLs) such as bathing, toileting, transferring, dressing, continence and eating.
• Hospice care;
• Care in an assisted living facility;
• Nursing home care; and
• Private duty nursing when confined to a facility.

Who decides to cover a given condition? Your personal physician or the company's doctors? These are often referred to as the "gatekeepers" who can decide whether your policy pays or doesn't. You can anticipate conflicts if the company makes the final decision or if there is disagreement among you, your doctor and the insurer as to the appropriate service. The company has a vested interest in holding down costs by keeping you from receiving benefits.

What degree of disability must one demonstrate in order to qualify for benefits under the plan? One policy may require admission into an approved facility before coverage begins, another may count home care against your elimination (waiting) period. Some policies set a threshold at needing help with three ADLs before you are covered; with others it may be two. Approximately 2.9 million people need help with only one or two ADLs. A policy that withholds benefits until you need help with three or more is designed to keep you from collecting.

And where do you turn when you're on your own, with no family around to provide the help you need?

How much does LTC insurance cost?

Costs are driven by several factors: your age, the level of daily benefits and the degree to which you can "co-insure" some of the costs, the waiting period you select before benefits kick in, and the length of time that benefits will be paid.

Before you decide to buy a policy consider whether you are going to be able to afford to continue paying premiums (along with Medicare, Medicare supplemental insurance and the other normal costs of living) for the rest of your life. Just because the policy is guaranteed "renewable" doesn't mean that it will be renewed at the same cost as when it was issued. You should expect rate increases with most companies (particularly the smaller ones).

The older you are, the greater the potential that you will need the benefits of the policy, therefore the higher the monthly costs. A policy for a person who is age 55 will cost less than for a person who is 75. You also must be in relatively good health to qualify. The company isn't going to accept a losing bet on your health. You can be medically disqualified for any of a number of health-related reasons.

A policy that pays a high daily benefit will be more expensive than one where the insured is willing to shoulder part of the cost. Say the average cost of a nursing home in your area is currently $140 per day or about $51,000 per year. You can save on premiums with a policy that covers only $100 per day if you can afford to pay the remainder out of your own financial assets.

Another variable that will greatly influence costs is how long your policy will provide benefits. A policy that pays for life will be much more costly than one that has a six- or eight-year benefit limit. Keep in mind that the average nursing home stay is less than two years.

All policies now have an inflation factor. The difference is whether it is compounded or simple. Under a 5 percent simple inflation rate, after 20 years a $100 per-day policy will have doubled to $200. At 5 percent annual compounded inflation, the reimbursement would grow to $265 after the same 20 years.

Finally, there is the elimination (or waiting) period. That is how long you must be confined to home by your doctor, need assistance with ADLs or be in a nursing home before policy benefits begin. The range may be from 20 days to one year, and the method of calculating it may vary from company to company.

Because many patients move in and out of nursing homes several times during the course of an illness, a cumulative calculation makes the most sense. Generally speaking, the longer you can afford to self-insure, the cheaper the policy will be.

How about a little good news: In many states, the premiums for LTC insurance are at least partly deductible when figuring state income taxes. My home state of Missouri, for example, allows 50 percent of the costs to be deducted in calculating adjusted gross income. Neighboring Kansas, however, currently makes no allowance for LTC insurance premiums. At the federal level, premiums apply toward the 7.5 percent floor in determining qualified medical expenses. The applicable amount depends on your age.

According to Phyllis Shelton, president of LTC Consultants, the average costs for policies being purchased for one married person (most policyholders are married) at age 40 is $828; at 50 years of age the typical premium is $1,108; a 60-year-old would pay $1,783 and a 70-year-old would pay $3,484. Spend a few minutes on her Web site--especially in the "articles" and the FAQ sections--to learn more about LTC coverage (www.ltcconsultants.com/).

There are enough variables to allow anyone interested in LTC insurance to customize an affordable plan. If you are a candidate for coverage, take time to check out several policies and compare options (don't rely on slick brochures or sales pitches; the terms of the policy--not a salesperson's assertions--control the services you are buying). Don't buy more than you need, but buy as much as you think you'll be able to afford for the rest of your life. And you should arrange for automatic premium payments to ensure there's no lapse in coverage should illness prevent you from making a payment on time.

Like any financial decision, do your homework and shop around. The bottom line: Let the buyer beware. It's your money, and it will be your future.

see Part I: Who should think about long-term care insurance?