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Understanding Long-Term Care Insurance

The basics of what you need to know

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. »

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