Long term care insurance

Buying a long-term care insurance policy can be expensive, but there are steps you can take to make it more affordable and flexible.

En español |The phrase «long-term care» refers to the help that people with chronic illnesses, disabilities or other conditions need on a daily basis over an extended period of time. The type of help needed can range from assistance with simple activities (such as bathing, dressing and eating) to skilled care that’s provided by nurses, therapists or other professionals.

Employer-based health coverage will not pay for daily, extended care services. Medicare will cover a short stay in a nursing home, or a limited amount of at-home care, but only under very strict conditions. To help cover potential long-term care expenses, some people choose to buy long-term care insurance.

Policies offer many different coverage options. Since you can’t predict what your future long-term care needs will be, you may want to buy a policy with flexible options. Depending on the policy options you select, long-term care insurance can help you pay for the care you need, whether you are living at home or in an assisted living facility or nursing home. The insurance might also pay expenses for adult day care, care coordination and other services. Some policies will even help pay costs associated with modifying your home so you can keep living in it safely.

Factors to consider

Your age and health: Policies cost less if purchased when you’re younger and in good health. If you’re older or have a serious health condition, you may not be able to get coverage — and if you do, you may have to spend considerably more.

The premiums: Will you be able to pay the policy’s premiums — now and in the future — without breaking your budget? Premiums often increase over time, and your income may go down. If you find yourself unable to afford the premiums, you could lose all the money you’ve invested in a policy.

Your income: If you have difficulty paying your bills now or are concerned about paying them in the years ahead, when you may have fewer assets, spending thousands of dollars a year for a long-term care policy might not make sense. If your income is low and you have few assets when you need care, you might quickly qualify for Medicaid. (Medicaid pays for nursing home care; in most states it will also cover a limited amount of at-home care.) Unfortunately, in order to qualify for Medicaid you must first exhaust almost all your resources and meet Medicaid’s other eligibility requirements.

Your support system: You may have family and friends who can provide some of your long-term care should you need it. Think about whether or not you would want their help and how much you can reasonably expect from them.

Your savings and investments: A financial adviser — or a lawyer who specializes in elder law or estate planning — can advise you about ways to save for future long-term care expenses and the pros and cons of purchasing long-term care insurance.

Your taxes: The benefits paid out through a long-term care policy are generally not taxed as income. Also, most policies sold today are «tax-qualified» by federal standards. This means if you itemize deductions and have medical costs in excess of 7.5 percent of your adjusted gross income you can deduct the value of the premiums from your federal income taxes. The amount of the federal deduction depends on your age. Many states also offer limited tax deductions or credits.
Long-term care policy sources
Individual plans: Most people buy long-term care policies through an insurance agent or broker. If you go this route, make sure the person you’re working with has had additional training in long-term care insurance (many states require it) and check with your state’s insurance department to confirm that the person is licensed to sell insurance in your state.

Employer-sponsored plans: Some employers offer group long-term care policies or make individual policies available at discounted group rates. A number of group plans don’t include underwriting, which means you may not have to meet medical requirements to qualify, at least initially. Benefits may also be available to family members, who must pay premiums and might need to pass medical screenings. In most cases, if you leave the employer or the employer stops providing the benefit, you’ll be able to retain the policy or receive a similar offering if you continue to pay the premiums.

Plans offered by organizations: A professional or service organization you belong to might offer group-rate long-term care insurance policies to its members. Just as with employer-sponsored coverage, study your options so you’ll know what would happen if coverage were terminated or if you were to leave the organization.

State partnership programs: If you purchase a long-term care insurance policy that qualifies for the State Partnership Program you can keep a specified amount of assets and still qualify for Medicaid. Most states have a State Partnership Program. Be sure to ask your insurance agent whether the policy you’re considering qualifies under the State Partnership Program, how it works with Medicaid, and when and how you would qualify for Medicaid. If you have more questions about Medicaid and the partnership program in your state, check with your State Health Insurance Assistance Program.

Joint policies: These plans let you buy a single policy that covers more than one person. The policy can be used by a husband and wife, two partners, or two related adults. However, there is usually a total or maximum benefit that applies to everyone insured under the policy. For instance, if a couple has a policy with a $100,000 maximum benefit and one person uses $40,000, the other person would have $60,000 left for his or her own services. With such a joint policy you run the risk of one person depleting funds that the other partner might need.

Long-term care policies and preexisting conditions

Insurers often turn down applicants due to preexisting conditions. If a company does sell a policy to someone with preexisting conditions, it often withholds payment for care related to those conditions for a specified period of time after the policy is sold. Make sure this period of withheld payments is reasonable for you. If you fail to notify a company of a previous condition, the company may not pay for care related to that condition.

Most companies will provide an informal review to determine whether you are eligible for the policy. This is helpful if you’re likely to be denied coverage since another company may ask whether you’ve ever been turned down for coverage.
Covered services
Some insurance companies require you to use services from a certified home care agency or a licensed professional, while others allow you to hire independent or non-licensed providers or family members. Companies may place certain qualifications — such as licensure, if available in your state — or restrictions on facilities or programs used. Make sure you buy a policy that covers the types of facilities, programs and services you’ll want and that are available where you live. (Moving to another area might make a difference in your coverage and the types of services available.)

Policies may cover the following care arrangements:

  • Nursing home: A facility that provides a full range of skilled health care, rehabilitation care, personal care and daily activities in a 24/7 setting. Find out whether the policy covers more than room-and-board.
  • Assisted living: A residence with apartment-style units that makes personal care and other individualized services (such as meal delivery) available when needed.
  • Adult day care services: A program outside the home that provides health, social and other support services in a supervised setting for adults who need some degree of help during the day.
  • Home care: An agency or individual who performs services, such as bathing, grooming and help with chores and housework.
  • Home modification: Adaptations, such as installing ramps or grab bars to make your home safer and more accessible.
  • Care coordination: Services provided by a trained or licensed professional who assists with determining needs, locating services and arranging for care. The policy may also cover the monitoring of care providers.

Future service options: If a new type of long-term care service is developed after you purchase the insurance, some policies have the flexibility to cover the new services. The «future service» option may be available if the policy contains specific language about alternative options.

Policy coverage amounts and limits
Long-term care policies can pay different amounts for different services (such as $50 a day for home care and $100 a day for nursing home care), or they may pay one rate for any service. Most policies have some type of limit to the amount of benefits you can receive, such as a specific number of years or a total-dollar amount. When purchasing a policy you select the benefit amount and duration to fit your budget and anticipated needs.

«Pooled benefits» allow you to use a total-dollar amount of benefits for different types of services. With this coverage option you can combine services that meet your particular needs.

To determine how useful a policy will be to you, compare the amount of your policy’s daily benefits with the average cost of care in your area and remember that you’ll have to pay the difference. As the price of care increases over time, your benefit will start to erode unless you select inflation protection in your policy.

Qualifying for benefits
«Benefit triggers» are the conditions that must occur before you start receiving your benefits. Most companies look to your inability to perform certain «activities of daily living» (ADLs) to figure out when you can start to receive benefits.

Generally, benefits begin when you need help with two or three ADLs. Requiring assistance with bathing, eating, dressing, using the toilet, walking and remaining continent are the most common ADLs used. You should be sure your policy includes bathing in the list of benefit triggers because this is often the first task that becomes impossible to do alone.

Pay close attention to what the policy uses as a trigger for paying benefits if you develop a cognitive impairment, such as Alzheimer’s disease. This is because a person with Alzheimer’s may be physically able to perform activities but is no longer capable of doing them without help. Mental-function tests are commonly substituted as benefit triggers for cognitive impairments. Ask whether you must require someone to perform the activity for you, rather than just stand by and supervise you, in order to trigger benefits.

Coverage exclusions

All policies have some conditions for which they exclude coverage. Ask the agent to review these exclusions with you. Most states have outlawed companies from requiring you to have been in a hospital or nursing facility for a specific number of days before qualifying for benefits. However, some states permit this exclusion, which could keep you from ever qualifying for a benefit.

Coverage exclusions for drug and alcohol abuse, mental disorders and self-inflicted injuries are common. Be sure that Alzheimer’s disease and other common illnesses, such as heart disease, diabetes or certain forms of cancer, aren’t mentioned as reasons not to pay benefits.

Waiting and elimination periods
Most policies include a waiting or elimination period before the insurance company begins to pay. This period is expressed in the number of days after you are certified as «eligible for benefits,» once you can no longer perform the required number of ADLs. You can typically choose from zero up to 100 days. Carefully calculate how many days you can afford to pay on your own before coverage kicks in. (The shorter the period, the higher the price of the policy.)

Choose a policy that requires you to satisfy your elimination period only once during the life of the policy rather than a policy that makes you wait after each new illness or need for care.

Many policies allow you to stop paying your premium after you’ve started receiving benefits. Some companies waive premiums immediately while others waive them after a certain number of days.

Long-term care benefits and inflation
Since many people purchase long-term care insurance 10, 20 or 30 years before receiving benefits, inflation protection is an important option to consider. Indexing to inflation allows the daily benefit you choose to keep up with the rising cost of care.

You can increase your benefit by a given percent (5 percent is often recommended) with either compound or simple inflation protection. If you’re under age 70 when you buy long-term care insurance, it’s probably better to have automatic «compound» inflation protection. This means that the amount of your daily benefit increase will be based on the higher amount of coverage at each anniversary date of the policy. «Simple» inflation protection increases your daily benefit by a fixed percentage of the original benefit amount. Typically, the simple option won’t keep pace with the price of services.

In lieu of automatic increases, some policies offer «future-purchase options» or «guaranteed-purchase options.» These policies often start out with more limited coverage and a corresponding lower premium. At a later, designated time, you have the option of increasing your coverage — albeit at a substantially increased premium.

If you turn down the option several times, you may lose the ability to increase the benefit in the future. Without increasing your coverage this option may leave you with a policy that covers only a fraction of your cost of care. The younger you are when you buy long-term care insurance, the more important it is to buy a policy with inflation protection.

Premium increases and policy cancellations
Companies can’t single you out for a rate increase. However, they can increase rates on a class of similar policies in your state. Most premiums do increase over the life of the policy. The National Association of State Insurance Commissioners has established rate-setting standards and about half of the states, along with several of the large insurance companies, have adopted these measures.

Long-term care policies are «guaranteed renewable,» which means that they cannot be canceled or terminated because of the policyholder’s age, physical condition or mental health. This guarantee ensures that your policy won’t expire unless you’ve used up your benefits or haven’t made your premium payments.

Problems paying the premiums

If you stop paying your premium or drop your benefit, a «nonforfeiture option» will allow you to receive a reduced amount of benefit based on the amount of money you’ve already paid. Some states require policies to offer nonforfeiture benefits, including benefit options with different premiums.

Since nonforfeiture provisions vary by location, check with your state’s insurance department or your state’s listing at the National State Health Insurance Assistance Program (SHIP)before dropping your policy. If your policy doesn’t have a nonforfeiture option and you stop paying the premiums, you’ll lose all the benefits for which you have paid.

Policy shopping
If you’ve determined which long-term care insurance options best meet your needs and you’re ready to buy a policy, do the following:

Ask your state insurance department for a list of companies approved to sell long-term care insurance policies in your state. Find out whether there were complaints about any of the companies that sold them.
Check the stability of the company and be sure it has a long history with this type of insurance. You can check this information at websites for companies including Moody’s Investors Service, Standard and Poor’s and A.M. Best.
Compare information and costs from at least three major insurance companies. Find out how often and by how much the companies have increased their premiums.
Get a written copy of any policy you’re considering. Review it carefully, perhaps with the assistance of your attorney or financial adviser. Write out your questions, and have a representative of the insurance company respond to your questions in writing.
Never let anyone pressure or scare you into making a quick decision.
Never pay any insurance premium in cash, and always make your check payable to the company and not an individual.
Nearly all states require insurance companies to give you 30 days to review your signed policy. During this time, you can return a policy for a full refund if you change your mind.
Still have questions or concerns? Contact the agency listed for your state at the State Health Insurance Assistance Program (SHIP).
Deciding whether long-term care insurance is right for you can take a significant amount of time and research, but making the effort will be time well spent.
1. Traditional policies have fewer fans

For years, long-term care insurance entailed paying an annual premium in return for financial assistance if you ever needed help with day-to-day activities such as bathing, dressing and eating meals. Typical terms today include a daily benefit of $160 for nursing home coverage, a waiting period of about three months before insurance kicks in and a maximum of three years’ worth of coverage.

But these stand-alone LTC policies have had a troubled history of premium spikes and insurer losses, thanks in part to faulty forecasts by insurers of the amount of care they’d be on the hook for. Sales have fallen sharply. While more than 100 insurers sold policies in the 1990s, now fewer than 15 do. “This is a classic story of market failure,” says Howard Gleckman, a senior fellow at the Urban Institute, a nonpartisan think tank in Washington, and the author of Caring for Our Parents. “No one wants to buy insurance, and no one wants to sell it.”

2. You might not need insurance … but you need a plan

Premiums for LTC policies average $2,700 a year, according to the industry research firm LifePlans. That puts the coverage out of reach for many Americans. (One bright spot for spouses: Discounts for couples are common — typically 30 percent off the price of policies bought separately.) If your assets are few, you may eventually be able to cover LTC costs via Medicaid, available only if you’re impoverished; if you have lots of money saved, you likely can pay for future care out of pocket. But weigh factors other than cash: Do you have home equity you could tap? Nearby children who can be counted on to pitch in? Or do you have a family history of dementia that puts you at higher risk of needing care?

If you’re pulling less than 4 percent out of your savings each year for living expenses, you may be comfortable going without insurance, Benz says. In that case, though, you’ll need to plan for that possible expense. That means saving more than you may have planned, and segregating your LTC kitty from the portfolio you tap for everyday income.

table showing long-term care data
NICOLAS RAPP

3. There’s a new insurance in town

As traditional LTC insurance sputters, another policy is taking off: whole life insurance that you can draw from for long-term care. Unlike the older variety of LTC insurance, these “hybrid” policies will return money to your heirs even if you don’t end up needing long-term care. You don’t run traditional policies’ risk of a rate hike, because you lock in your premium upfront. If you’re older or have health problems, you may be more likely to qualify, says Stephen Forman, senior vice president of Long Term Care Associates, an insurance agency in Bellevue, Wash.

4. But old-school policies are cheaper

If all you want is cost-effective coverage — even if that means nothing back if you never need help — traditional LTC insurance has the edge. “Hybrid policies are usually two to three times more expensive than traditional insurance for the same long-term care benefits,” says Scott Olson, an insurance agent and co-owner of LTCShop.com in Camano Island, Wash. With hybrids, you’re paying extra just for the guarantee of getting money back.

A hybrid policy may make the most sense if your alternative is to use your savings, says Forman, or you have another whole life policy with a large cash value. “You can roll over an existing life insurance policy or annuity, and that’s a huge part of the business,” he says.

5. Speed and smart shopping pay off

If you want insurance, start looking in your 50s or early 60s, before premiums rise sharply or worsening health rules out robust coverage. “Every year you delay, it will be more expensive,” Olson says. Initial premiums at age 65, for example, are 8 to 10 percent higher than those for new customers who are 64.

As for where to shop, seek out an independent agent who sells policies from multiple companies rather than a single insurer. For extra expertise and a wider choice of policies, Olson says to look for agents able to sell what are known as long-term care partnership policies — part of a national program that has continuing education requirements for insurance professionals.

Ellen Stark, a former deputy editor of Money, has written about personal finance for more than 20 years.