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What should I look for in a Long-Term Care Insurance Policy?

August 27, 2010

Choosing benefits and understanding reimbursement:
Long-term care insurance policies work like any insurance policy: you pay a premium, which is based on your age when you apply and is projected to stay the same year after year, and in return the insurance company gives you access to a “pool of money.” This pool of money is available to you if you need long-term care in the future. When you buy a policy, you can design a plan to fit your needs and budget.

To do so, you make four choices:

  1. A benefit period. This is the length of time after you file a claim that the insurer will pay for your care. You can choose any time period, from one year (365 days) to 10 years (3,650 days), or you can choose a Lifetime/Unlimited policy.
  2. A daily benefit. This is the maximum amount per day the insurer will pay for your care. You can choose between $30 and $300 in $10 increments.
  3. An elimination period, or deductible. This is the number of days that you must pay out of pocket before the insurance will reimburse. You can choose to have coverage take effect after one day or up to one year later.
  4. An inflation protection option. This option, which is available for an additional premium, increases your daily maximum amount of reimbursement in line with inflation. You can choose either a “5% simple” or a “5% compound.” For applicants younger than 65, 5% compound may be the most cost-effective option, while applicants age 66 to 75 may be better off selecting 5% simple. People aged 76 and older may want to forgo this option.

Determining the total value of your “pool of money”:
The total value of your policy is determined by multiplying the number of days in your benefit period by your daily benefit. For example: If you selected a benefit period of 5 years (or ,825 days) and a daily benefit of $100, your total policy value would be $182,500 (1,825 days multiplied by $100). Of course, if you elect inflation protection, this amount will increase over time.

Coverage Necessities:

Some experts recommend a compounded cost of living rider for applicants younger than 65 and 5% simple for those age 66 to 75. For people 76 and older, foregoing the added expense of inflation protection in order to purchase a slightly higher daily benefit than you may need may be wise. There is not a whole lot of difference between compound and simple during the first 10 years. Some plans now offer to let you buy more coverage (that is, increase your daily benefit amount) in the future without having to be approved.

Tax-qualified vs. non-tax-qualified long-term care policies:
In 1996, the U.S. Congress enacted the Health Insurance Portability and Accountability Act (HIPAA). HIPAA created “qualified long-term care insurance.” If a policy meets the Act’s requirements, it receives certain tax advantages. As of January 1, 1997, premiums paid for qualified long-term care insurance may be deductible as a medical expense for Federal income tax purposes, up to a specific limit, based on your age. This means you can claim your premiums as itemized medical deductions in Schedule A, Form 1040, if they (when coupled with other medical expenses) exceed 7.5% of your adjusted gross income. Also, benefits you receive from a qualified long-term care insurance policy are not subject to Federal income taxation. All other policies are considered to be “non-qualified.”

Note: Corporations and self-employed individuals were given exceptionally favorable tax incentives under the HIPAA legislation.

Policy Cost:

Note: There is a new policy on the market that guarantees your premium won’t change for the life of the contract and gives you the option of paying off your policy in 10 or 20 years. Ask your insurance company or broker for more information.


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