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Long-term care insurance: A critical consideration

Some studies indicate that as many as 40 percent of Americans over 65 will spend time in a long-term care facility, that more than 70 percent over 65 will use some form of home health care, and that a year in a nursing home can cost anywhere from $40,000 to $100,000 or more today, with costs likely to more than quadruple 30 years from now.

Considering these factors, long-term care insurance may be the most important purchase you ever make.

The major consideration in shopping for long-term care insurance is that the policies are complex, and seemingly minor details can make a tremendous difference in the level of care you eventually receive.

The following will detail some of the things to consider when shopping for a long-term care policy, including whether you should be shopping for one at all.

But if you do decide to purchase long-term care insurance, make sure you sample a variety of policies, ask lots of questions and have your broker or agent explain the intricacies of the policy in detail because what may seem minor now could mean the difference between being covered or not at a crucial time:

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Why buy long-term care insurance?
There are many elderly people who, due to some physical or cognitive disease, are unable to care for themselves. Long-term care insurance could potentially cover nursing homes, assisted living facilities, adult day care, in-home care and other functions that help us get through everyday life. It is NOT medical insurance; it is simply for everyday life functions and living.

It is also not, however, just for the elderly. If a person in their 30s were to purchase long-term care insurance, and soon after become paralyzed in an accident, or be diagnosed with a degenerative disease, they could then be covered for life as far as functioning care -- depending on the individual policy.

What happens if a person gets sick and doesn't have this insurance?
If a person is in need of, let's say, a nursing home, and is without insurance, the home would need to be paid for out of the person's assets. Government assistance would usually not kick in until not only that person's assets were virtually depleted, but the assets of their spouse as well, if that assistance were available at all. Therefore, anyone with assets to protect may want to consider this insurance.

At what age should long-term care insurance be purchased?
It is sometimes advised that people 60 and over should be looking at this insurance. However, there are a few reasons to reconsider this advice, and instead think about purchasing it as early as possible.

Reason one is that, as stated above, a life-changing occurrence can occur at any age. If you are left paralyzed at 30, you could conceivably need life assistance of some sort for the next 60 years. If you're covered, you could be set. If not, it's too late.

But the second and less obvious reason is that purchasing the policy at a younger age may actually cost less overall than purchasing it when older, even accounting for inflation. If you're shopping for this policy at a younger age, ask your financial adviser to compare your purchase now with a purchase at 60. You may find the numbers work more favorably if you purchase now.

What to look for
Once you make the decision to purchase long-term care insurance, you need to go shopping. While there are several big insurance companies that offer the insurance, you should also consider working with an independent broker.

Clay Cotton is a former broker, and founded the National Advisory Council for Long Term Care Insurance in late 1996. Ironically, Cotton, now 53, hadn't yet purchased this insurance for himself, but was preparing to in 1997 when he was diagnosed with multiple sclerosis. Now, he's ineligible. He did however, purchase a policy for his wife Suzanne, who was soon after diagnosed with hepatitis C.

Cotton is a strong advocate of using independent brokers to purchase insurance, (and has a list of them on the Web site) as opposed to agents bound to one company, who he calls "captive" agents.

"Avoid a captive agent," advises Cotton. "They can only sell you their company's party line. If that company doesn't have favorable wording on things like the deductible, that's all that agent has to offer."

Cotton also recommends consumers read the National Association of Insurance Commissioner's Shopper's Guide to Long Term Care Insurance,a booklet that most insurance agents and brokers who sell that insurance will carry.

As for specifics, here are a few you'll need to consider. All are important, and all cost more money.

In the end, since all insurance is a sort of gamble, you'll need to weigh what's important to you against what you can afford. Either way, make sure you discuss all these factors with your broker or agent before signing on the dotted line:

How expensive is long term care insurance?
Of course, this number can vary wildly depending on numerous factors, age being the most important. For a person in their 30s, the insurance may cost in the $400-per-year range, while that can increase closer to $1,000 per year for those in their 50s and 60s.

What type of setting for coverage does the policy provide?
While the wording may differ per policy, there are three basic categories that care may fall into: home settings, assisted living and skilled nursing facility. The ideal policy will cover all three, since you never know which you'll need. You could wind up with a condition that could be cared for at home, but if your policy covers only nursing home care, you may be out of luck, or maybe even prematurely forced into a nursing home situation.

Conversely, if you're only covered for home and assisted living care, you're out of luck if your condition worsens to the point where you need the full-time skilled care only a home can provide.

How long will the policy pay out once it's triggered?
The best is an unlimited payout, but there are policies that cover smaller increments of time, such as four years or six years. You'll need to weigh what you can afford against how much you're willing to gamble you'll need. Obviously, the longer coverage is provided, the better.

What triggers the policy?
Different policies dictate different reasons for the policy to kick in, such as cognitive impairment, failure of ability to perform daily activities, and medical impairment. But not all policies allow for all reasons, and some policies even refuse to consider medical necessity as a trigger. Make sure you understand the policy's trigger, and try to find one that will include medical necessity.

Also, there are certain policies that require you to be hospitalized before any nursing home or home health care benefits kick in. Try to find a policy without this restriction.

How much will it pay out every day?
Some policies may cover expenses totaling more than $50 or $75 per day, and others may cover $200 and up. All are different. Make sure you fully understand the payout policy on any coverage you're considering. In doing so, take into account the difference in potential nursing home costs where you are. For example, the cost of a nursing home in New York may run $300 to $400 per day, while a home in the Midwest may be less than $100.

What is the deductible?
This part gets especially complex. These policies can measure the deductible not in dollars, but in days. A policy's deductible may run 30 days, 60 or 120. And, the length may mean different things, depending on the policy's wording. The days may be consecutive, or not. The deductible that's right for you will depend on your ability to cover your own costs until the policy kicks in.

Be sure you fully understand the implications of the deductible before signing on, and weigh it against your projected assets at age 70 or 80. This is one topic you should definitely discuss with your financial adviser.

Does the policy have inflation protection?
Many policies include a clause that increases your benefit with inflation without raising your premium. Be sure to ask about it.

Does your policy allow for shared care?
Some policies allow you to link your policy with your spouse's, so that if your coverage runs out, you can draw on your spouse's coverage. Discuss with your spouse if this is something you want to have.

Make sure you fully understand every aspect of a policy before signing on, as any detail could make a big difference come redemption time.

-- Posted: April 23, 2001

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See Also
Protect your finances with disability insurance
Health insurance for the unemployed
How couples maximize health insurance benefits
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