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Understanding Long-Term Care Insurance

Basics of health care insurance coverage

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.

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Understanding Long-Term Care Insurance

Consider buying a long-term care insurance policy with flexible options. — Photo by Cultura/Getty Images

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.

Next: Long-term care policy sources. »

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.

Next: Covered services. »

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.

Next: Qualifying for benefits. »

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.

Next: Premium increases and policy cancellations. »

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.
  • 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.

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