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:

  • Find a plan that covers all types of care. Most long-term care policies cover nursing-home care, home-based care, assisted-living care, adult day care, respite care and hospice care. This is called a “comprehensive” or “integrated” policy. This type of policy is beneficial because it’s difficult to predict what type of care you may need; however, it is often the most expensive type of policy. If you can’t afford this comprehensive policy or don’t want to invest the money in one, apply for a policy that covers facility care only or one that covers care at your home only. Both are about 20% to 40% less expensive than comprehensive policies. If you go for a facility-only policy, check to see if it covers care in an assisted-living facility, too.
  • Insist on a plan that pays sufficient benefits for an adequate period of time. This may sound obvious, but it’s important to note. Consider the cost of care in your area – or where you intend to retire – and purchase coverage that would cover 80% to 90% of that cost. The national average cost per day for skilled nursing home care is about $110. The average length of a nursing home stay is 2.3 years. Therefore, a policy that has at least a three-year benefit period should be considered. (The benefit period is the length of time the insurance company will pay for your care, if and when you need it in the future.) Most good plans offer longer benefit periods, including unlimited “lifetime” coverage. If you can afford a longer policy, get one. If not, go with a policy that covers at least three years.
  • Insist on a policy that pays 100% of actual expenses – up to the daily amount you’ve selected – regardless of where you receive care. Avoid polices that require you to make a co-payment for personal home and community care and avoid policies that use the term “usual and customary” or “prevailing” expenses. It’s generally up to the insurance company’s Claims Department to determine what’s usual and customary.
  • Insist on a policy that covers Alzheimer’s, Parkinson’s and senility in writing, does not require a hospital stay prior to receiving benefits, and is offered only after the company has done a full check of your health history. For most policies on the market, these are standard features and practices. And for most companies, full underwriting (having to answer health-related questions and possibly having and interview with a nurse) is a given.
  • Make sure your plan has reasonable and straightforward “benefit triggers”. These are the requirements you have to meet before the insurer pays you your benefits. Generally, there are either two or three, depending on the type of policy you select. Of course, regardless of whether there are two or three different triggers, you only have to satisfy one. The triggers include:
    • Medical necessity. You need “medically necessary” care due to an injury or sickness. Note: Only non-tax-qualified policies include medical necessity (see “Tax-qualified vs. non-tax-qualified long-term care policies,” below).
    • Inability to perform certain activities of daily living. You need care because you’re having trouble performing basic activities of daily living. Typically, policies require an inability to perform at least two of either five or six activities of daily living (ADLs). These usually include bathing, eating, dressing, going to the toilet, transferring (moving from one place to another) and continence. Some policies have a seventh, mobility. Also, some newer policies require deficiency in only one activity. Avoid plans that require you to demonstrate an inability to perform more than two ADLs, or one that omits bathing altogether as an ADL. Studies show that bathing is the first ADL people have difficulty performing. Also, look for a plan that covers both “hands-on” and “stand-by” assistance.
    • Suffering a cognitive impairment. You have suffered a deterioration or loss in your intellectual capacity that requires continual supervision to protect yourself or others, as measured by clinical evidence and standardized tests. These tests reliably measure your impairment in the following areas: Your short- or long-term memory; your orientation as to who you are, where you are, what time and day it is; and your deductive or abstract reasoning.
  • Try to get a policy that lets your doctor certify your eligibility for benefits. Some policies give the authority to a doctor they hire and others share the control with “care coordinators” or “personal care advisors”. A care coordinator is typically a registered nurse who specializes in long-term care and geriatrics and who lives and works in your community. A personal care advisor is typically a home office employee who specializes in long-term care services. A policy that allows your doctor to certify eligibility and one that offers care coordination and personal care advisors as an option may be most beneficial. Also, look to see who pays for this care coordination feature – you or the company. The better plans make this optional and cover the cost.
  • Insist on a plan that offers some type of built-in inflation protection. This is extremely important, especially for those 75 and younger. Basically, it allows your benefits to increase over time while your premiums stay level. Without it, your benefits could shrink to obsolete levels by the time you need care. Most plans offer you a choice of two types of inflation protection, also called “Cost of Living Riders”:
    1. “Simple,” or “Equal” – a 5% increase over your original amount each year.
    2. “Compounded” – a 5% increase over the previous years’ premium. Compounded is better because it increases your insurance benefits faster, but it’s also more costly.

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.

  • Insist on a policy that offers a wide choice of deductibles, or “elimination periods” – and requires it to be met only once. The elimination period is the equivalent of a deductible. It’s the number of days at the beginning of a claim that you agree to pay out of your own pocket. It works just like your auto insurance deductible: The higher the deductible, the lower your premium. Typically, companies offer a choice of either zero-day (or first-day coverage), 30 days, 60 days or 90 days. Some carriers now offer longer elimination periods, like 180 days and even 365 days. A shorter elimination period means that, for a slightly higher premium (which will usually amount to a few hundred dollars), you may save thousands of dollars for long-term care during the elimination period. While Medicare will pay the first 100 days of a skilled-care need if it follows a three day or longer hospital visit, Medicare will not pay if the beneficiary needs help only with activities of daily living.
  • Insist on a plan that covers homemaker services, and look for one that covers home modifications, in-home medical equipment and safety devices. Most people in need of long-term care would prefer to remain at home, and these benefits can make it possible to live at home longer.
  • Look for a policy that pays you a monthly or weekly maximum instead of a daily maximum for care at home. Since nursing facilities charge you room and board, your cost is fixed and easy to budget. However, costs associated with home-based care can fluctuate tremendously from day to day – for instance, if you had to install a ramp or widen your doors to accommodate a home-care need. Of course, the expense incurred that day would be much higher than a typical daily limit of, say, $100. In fact, you could incur costs of up to $1,000 in one day. This “weekly or monthly maximum” feature gives you more flexibility in how you spend your insurance dollars.
  • Insist on policy language you fully understand. When you receive your contract, you have 30 days by law to review it. Take the allotted time and review the policy carefully. If there is anything you don’t understand, ask your agent to explain it. Insist on an answer you understand. Don’t let the salesperson offer some meaningless response.

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:

  • Look for a company that hasn’t raised premiums on existing policy owners. Typically, long-term care premiums, which are based on your age the day you apply, are “level”. This means that once you are approved for coverage, your rate is projected to stay the same – year in and year out. However, this is not guaranteed in most policies. Most insurers reserve the right to adjust your premium in the future, but only if they do so for everyone within your state who owns the same policy. In other words, you cannot for any reason be singled out for a price increase. Any adjustment to premiums has to first be approved by the Insurance Department in your state. Typically, insurance commissioners will want documentation attesting to the fact that a company’s claims are inordinately high compared to their earlier projections.

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.

  • Insist that your premiums be waived in the event you require care. With many policies, the company will allow you to waive, or stop, paying premiums once you start receiving benefits in a nursing facility. Insist on one that waives it for all types of care, not just nursing-facility care. Plus, look for some creative new premium waivers on the market. One policy waives your premium payments for life (in other words, gives you paid-up coverage) if you’re confined to a nursing home for 120 consecutive days, even if you recover. Some plans waive both spouses’ premiums when one spouse goes on claim. And still others waive premiums for a surviving spouse after the death of his or her partner. This is called a “survivorship benefit”.
  • Look for a policy that offers a discount if you’re married and another if you’re in above-average health for your age. Most insurers offer married couples a discount, usually 10% to 20% off each spouse’s premium. Some companies will extend the discount even if only one spouse applies. Others will extend the “marital” discount to two people living under the same roof. And one company will allow a healthy, insurable spouse to add a rider, or additional feature, to the policy that could help insure his or her uninsurable spouse. If you’re in superior or above-average health for your age, you’re eligible for another discount. It’s referred to as a “preferred health discount” and can range anywhere from 10% to 20% off your premium. Preferred health usually means you haven’t suffered a severe health problem in the recent past; you aren’t scheduled for surgery or medical tests; you have a fairly good height-to-weight ratio; you don’t smoke; you’re still active outside your home at least 10 hours a week; and so on. One company offers a “preferred lifestyle discount” for non-smokers who are active outside their home for at least 10 hours a week.
  • Insist on a plan that is reasonably priced for your budget and needs. This may sound obvious, but it bears mentioning. Make sure your annual premium fits comfortably into your budget – especially if your budget is fixed. According to the America’s Health Insurance Plans (a national trade organization for health insurance companies across the US), your premiums should not amount to more than 10% of your adjusted gross income (the national average is 7%).

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