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Do You Have the Right Insurance?

Advice to help you determine whether a long-term care policy makes sense for you.

En español | It's no small number: Each year, about 11 million Americans over age 18 receive some type of long-term care. Women are more likely to need care, and for longer periods of time—on average, about 3.7 years versus 2.2 years for men. Still, many people are confused about what long-term care is and how long-term care insurance works.

"Long-term care" refers to all the different kinds of help that people with chronic illnesses, disabilities, or other conditions need to function each day, for an extended period of time. Most people only need help with simple daily activities, such as bathing, dressing, and eating. Others may also need skilled care from nurses, therapists, or other professionals.

Long-term care includes a full range of services and support that people can receive in their homes, in their communities, or in an alternative-living arrangement, such as assisted living residences or nursing homes.

But long-term care can be expensive. How much the care services cost depends on the type of care you need, how much you need, and how long you need it. Costs vary depending on where you live. According to the Genworth 2009 Cost-of-Care Survey, the average price in the United States for a one-year stay in a nursing home, in a private room, was roughly $74,000. One year in a private, one-bedroom, assisted living arrangement was $35,000. And one hour of help from a home-health aide was about $19.

Neither employer-based health insurance nor Medicare pays for long-term care services for extended periods, so some people choose to buy long-term care insurance to help cover potential expenses. Depending on the policy options you select, long-term care insurance can cover home care, adult day care, assisted living, nursing home care, care coordination, and other services—sometimes including fees for modifying your home so that you can keep living in it safely.

Keep in mind that long-term care insurance usually doesn't cover all your long-term care expenses; you'd still have to pay some out-of-pocket costs. There are several factors to consider before deciding whether long-term care insurance is right for you.

Your Age and Health

Policies cost less if you purchase them 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 find it, you may have to spend considerably more.

Cost of Premiums

Decide whether or not you can afford to pay the premiums for long-term care insurance, now and in the future, without breaking your budget. Premiums often go up, and your income may go down. If you find yourself unable to afford the premium, you could lose all the money you may have already invested in your policy.

Reduced 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 each year for long-term care insurance might not make sense.

If your income is low and you need long-term care, however, you may quickly qualify for Medicaid. Unlike Medicare, Medicaid pays for the cost of your care in a nursing home. However, you must first exhaust almost all your resources before you're eligible for coverage. You'll also have to meet Medicaid's other eligibility requirements. In most states, Medicaid pays for a limited amount of care you receive in your home.

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.

Self-Insuring Through Savings and Investments

A financial adviser or a lawyer who specializes in elder law or estate planning can advise you about saving to cover out-of-pocket expenses for long-term care. If you have enough money to pay for long-term care insurance but want to save your assets for your heirs, consider buying long-term care insurance.

Who Needs Long-Term Care?

According to the most recent data, about 70 percent of people above age 65 will require long-term care during their lifetimes. On average, someone who is 65 today will need some type of long-term care for about three years. And within that time, the person would probably receive almost two years of care at home. A number of factors influence whether or not you're more likely to need long-term care services:

Age: As you get older, your need for long-term care generally increases.

Marital Status: Single people are more likely to need care from a paid provider.

Gender: Women are more likely than men to need long-term care, primarily because women tend to live longer.

Lifestyle: Poor diet and exercise habits can increase your need for care.

Health and Family History: An inherited history of poor health may increase your need for long-term care.

Why People Buy Long-Term Care Insurance

There may be a number of reasons you'd choose to purchase long-term care insurance. Perhaps you want to ensure that your family members won't have to pay for your care. Perhaps the insurance would help you remain independent in your own home for a longer period of time. Or you may decide to buy a policy because it allows you to get into the assisted living facility or nursing home of your choice. Or maybe you simply want to save your assets for your heirs.

What Type of Policy Can You Buy?

In 2009, most people bought individual policies directly from agents or insurance brokers. Companies can also sell such polices by mail and over the phone. When working with an agent or broker, find out whether he or she has had additional training in long-term care insurance (many states require it). Be sure to check with your state's insurance department to find out if the agent holds the required license to sell insurance in your state.

Meanwhile, here's a breakdown of the different kinds of policies available:

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 are sometimes also available to family members, who must pay premiums and may need to pass medical screenings.

Typically, if you were to leave your employer or your employer stopped providing the benefit, you'd be able to keep the policy or convert it to another policy. But your benefits and costs may change.

Plans Offered by Professional Organizations

Your professional or service organizations may also offer group long-term care insurance. 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.

Joint Policies

These plans let you buy one policy that covers more than one person. The pooled benefit can be used by a husband and wife, two partners, or two related adults. There is usually a total or maximum benefit that applies to everyone insured under the policy. For example, 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 a joint policy, however, you run the risk of one person depleting funds that the other partner might need.

State Partnership Programs

The Partnership Program is a collaboration among a state government, a private insurance company, and state residents to link long-term care insurance with the state's Medicaid program. This type of arrangement exists or is currently under development in about 40 states. 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.

In general, with a Partnership Program, you'd be able to keep one dollar of assets for each dollar paid by the policy—as long as you meet all the other eligibility requirements for Medicaid, including having a limited income.

Policies that qualify for a Partnership Program must meet specific standards, which vary from state to state. Be sure to ask your insurance agent whether the policy you're considering qualifies under the Partnership Program, how it works with Medicaid, and when and how you would qualify for Medicaid. If you don't get clear answers, or if you have more questions about Medicaid and the Partnership Program in your state, check with your State Health Insurance Assistance Program (SHIP).

Most policies sold today are "tax-qualified" by federal standards. This means you can—under certain conditions—deduct the value of the premiums from your federal income taxes as an itemized medical expense. Of course, this is assuming that you itemize deductions and have medical costs in excess of 7.5 percent of your adjusted gross income.

The amount of the federal deduction depends on your age. Also note that benefits paid out through the policy generally are not taxed as income. Many states also offer limited tax deductions or credits.

How Much Does Long-Term Care Insurance Cost?

Insurers determine the cost of long-term care insurance by the type of coverage you buy, the age at which you buy it, and your health status. The older you are when you buy, the higher your monthly premium is.

For example, in 2008, the average annual premium for a 40-year-old policyholder was $2,050. A 50-year-old paid $2,306—just a couple of hundred dollars more. But the cost increased to $3,109 for a person age 60, and a 70-year-old policyholder paid $6,007.

Picking the Right Policy for Yourself

Unlike Medigap policies—private insurance purchased to supplement Medicare—long-term care insurance does not have standardized options. Different policies offer many different coverage options. Since you don’t know today what your future long-term care needs will be, you may want to buy a policy with flexible options. But before you buy, make sure you approach more than one company, understand all aspects of the policy, and get answers in writing. Here are some important questions to ask:

What services are covered?

Review the types of services covered by the policy you're considering. Find out where you can receive those services, and who is authorized to provide them. Policies may cover the following care arrangements:

Nursing home: A facility with a level of service that provides a full range of skilled health care, rehabilitation care, personal care, and daily activities in a 24/7 setting. Find out if the policy covers more than room and board.

Assisted living: A residence with apartment-style units that makes personal care and other services—such as meal delivery—available and tailors them to meet individual needs.

Adult day 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: A program that can include many 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 monitoring of care providers.

Future service options: If a new type of long-term care service is developed between the time you purchase insurance and the time you need care, some policies have the flexibility to cover the new services—even if the policy doesn't specifically cover them. The "future service" option may be available—on approval of the insurer—if the policy contains specific language about alternative options.

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 are available in the area where you live. Moving to another area might make a difference in your coverage and the types of services available.

How much will the policy pay?

Policies allow you to select the amount of coverage you want, but it's still important to understand how much coverage you'd get over how long a period. Policies may 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 benefit limit set in a specific number of years, a lifetime, or a total-dollar amount.

"Pooled benefits" allow you to use a total-dollar amount of benefits for different types of services. With these benefits, you can combine services that meet your particular needs.

Compare the amount of your policy's daily benefits with the average cost of care in your area. Remember that you'd have to pay the difference. As the price of care increases over time, your benefit will start to erode unless you include inflation protection in your coverage.

How do I qualify for benefits?

"Benefit triggers" are the conditions that must occur before you start receiving your benefits. Most companies consider the inability to perform certain "activities of daily living" (ADLs) to figure out when your benefits should begin.

Generally, policies begin when you need help with two or three ADLs. Bathing, eating, dressing, using the toilet, walking, and remaining continent are the most common ADLs used. Bathing should be included in the list of benefit triggers in your policy, since this is often the first task that becomes impossible to do alone.

It's important that the policy you buy uses a different trigger for paying benefits for a cognitive impairment, such as Alzheimer's disease. This is because a person may be physically able to perform activities, but is no longer doing them without help. Mental-functioning tests are commonly substituted as benefit triggers for cognitive impairments. Ask whether or not you must require someone to perform the activity for you or to stand by and supervise you in order to trigger benefits.

When will benefits begin?

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." You can typically choose up to 100 days. Carefully calculate how many days you can afford to pay on your own before coverage kicks in. And be aware that shorter elimination periods raise the price of the policy.

It's also important to note that some companies count the time from when you're certified and have paid for qualified care for the specified number of days. By contrast, other companies count from the date of certification and come with no paid-care requirement.

Choose a policy that requires you to satisfy your elimination period only once during the life of the policy, rather than a policy that may make you wait each time you need care.

Will my benefits keep pace with 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.

Therefore, if you're under age 70 when you buy long-term care insurance, buying automatic compound-inflation protection is critical. Over the life of the policy, simple, automatic increases in the daily benefit that are based on the original benefit amount typically don't keep pace with the price of services.

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 often 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.

What if I can no longer pay premiums?

If—for any reason—you stop paying your premium or drop your benefit, a "non-forfeiture" option will allow you to receive some reduced amount of benefit based on the amount of money you've already paid. Some states require policies to offer non-forfeiture benefits, including benefit options with different premiums.

Since non-forfeiture provisions vary by state, check with your state's insurance department, or SHIP, before dropping your policy. If your policy doesn't have a non-forfeiture option and you stop paying the premiums, you'd lose all the benefits for which you paid.

Will I need to pay premiums once I receive benefits?

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.

Can the company cancel my policy?

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.

Will my premiums increase?

Companies can't single you out for a rate increase, although they can increase rates on a class of similar policies in your state.

Most premiums do increase over the life of the policy. About 20 years ago, some companies set unrealistically low premiums and were unable to cover costs. They then were forced to request significant rate increases. Many of these companies eventually dropped out of the long-term care insurance market.

Now, the National Association of State Insurance Commissioners has established rate-setting standards that use more conservative estimates when setting premiums. About half of the states have adopted these measures, along with several of the large insurance companies. Some state's insurance departments track benefit-rate increases, and others, such as California and New York, post them online.

Are there coverage exclusions?

All policies have some conditions for which they exclude coverage. Ask the agent to review them 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. Some states permit this exclusion, which could keep you from ever qualifying for a benefit.

Coverage exclusions for drug and alcohol abuse and HIV-related illnesses are common. Be sure that Alzheimer's disease and other common illnesses, such as heart disease, diabetes, or certain forms of cancer, are not mentioned as reasons not to pay benefits.

Can I get a policy if I have a preexisting condition?

Industry experts estimate that roughly 16 to 18 percent of people who apply for a policy are turned down because of 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.

Deciding whether long-term care insurance is right for you can take significant amounts of time and research, but you will spend your time wisely by doing it. By doing your homework, you can make a well informed decision about paying for your long-term care.

For more information about planning for long-term care, visit Decide to plan now for long-term care, create a plan that works for you, and share it with your loved ones. Let AARP help you. Decide. Create. Share.SM

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