Buying Long-Term Care Insurance

by Gary Foreman

Last week we looked at a question from Vivian who was considering whether to buy long-term care insurance. We learned that about 7.4% of Americans aged 75 will move into a nursing home and finish their lives there. And that it costs an average of over $67,000 per year to stay in a nursing home. Getting help in your own home and other intermediate care for the elderly are equally expensive.

So if you decide that you want to consider long term care insurance what should you look for? And how old should you be before you begin coverage? Let's see if we can't shed some light on the subject.

We'll begin by finding a good insurance agent. Select your agent carefully. For most buyers this is an area where they have very little knowledge. That means you'll be relying on your agent for advice on which policy and coverage level to buy. You'll also want an agent who can work directly with the home office to help present your medical history in the best possible light. That can be important since many companies will exclude pre-existing conditions like Alzheimer's or heart disease. If your medical history is bad, they could turn you down altogether.

After you've found a good agent it's time to compare policies. Remember that policy benefits don't actually "pay for" medical or nursing home bills. The policy will pay a predetermined amount if you meet certain conditions or incur certain expenses (like being in a hospital or nursing home). But your benefit can be less than or more than the actual cost of the service covered. The amount of the bill does not determine the amount of the check you'll receive.

When comparing policies you'll want to ask a number of questions. First, find out whether it covers care provided in the hospital, in a nursing home or in your own home. Don't assume that it will cover all three. How long will you wait before the policy begins to pay? That's called 'the elimination period'.

What exclusions are in the policy? Does it exclude certain causes (diseases) that are part of your personal or family history? How long will skilled or intermediate care be covered? Will the policy pay as long as you live? Or is there a maximum benefit?

Will the benefits be adjusted for inflation? What about premiums? Can they be increased? And, if so, how often and by how much?

It is important to read the policy and ask questions of a qualified agent on portions that you don't understand. Don't expect to understand every paragraph in the policy. Even if you work in the medical or insurance industries you'll have some questions. Even the agent may not be able to answer every question.

You also need to remember that there are no refunds if you don't use the policy. And, for you baby boomers, you can't buy a policy for your parents. You can help pay for the policy, but the covered person needs to apply.

Once you've compared what the policies cover, it's time to take a look at premiums. They vary widely. Yearly rates can range from $500 to $2,500. On the low end is a person who's young (age 40) and looking for a minimal level of benefits. The rates will go up as you get older, get sicker or want more coverage.

Then check the actual costs of nursing homes in your area. That will give you an idea of how high your bills would be. Pay them a short visit to decide if you'd be willing to live there. You're trying to find out what it would cost for a level of care that's acceptable to you.

Next, begin to think about the how much coverage you want. You don't need to insure for the entire amount. For instance, if you expect the annual cost of care to be $40,000 and you have annual income of $25,000 you might want to buy a plan that would pay the difference of $15,000 a year. That would be about $45 per day.

Also, remember that it doesn't take much inflation to significantly increase costs. As we mentioned last week, a 5% inflation rate will double the cost of an item in 14 years. If you're 65 today it's possible that you could live 28 more years. And in that time a $100 a day room would increase to $400 per day!

One way to reduce the cost of the insurance is through careful selection of deductibles and elimination periods. You can choose how long you want to be in a hospital or nursing home before the benefits begin. If your goal is to protect your assets, a one year elimination period could make sense. That will reduce your premium.

Once you've collected quotes from the different sources it's time to rank the companies. If you decide to apply for insurance you'll want to start with the top of your list. Then, if you're turned down by your first choice, you can apply to the next until you find coverage.

Should everyone buy long term care insurance? Of course not. But you need to be aware that you could incur a huge bill. And you need to think through how you would handle that if it did occur.

Thanks to Vivian for launching us on an interesting discussion. We hope that she and her husband, as well as all of our readers, never have the need to use a long term care insurance policy. Even if you've paid for one!

Updated December 2013

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.

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