Buying long term care insurance is about risk management. It boils down to how you answer these four questions:
- Would a tragic event (i.e. becoming disabled and requiring long-term care services) overwhelm and deplete everything you own?
- Given your family history what is the probability of you needing long term care?
- Do you have ample retirement assets and income to pay for all the costs of long term care?
- Do you mind reducing your estate if the need for long term care occurs?
How you answer will determine whether long term care insurance is right for you. According to a LifePlans, Inc. survey, about two-thirds of those who buy LTC insurance do so either to avoid dependence on others (69%), protect their assets (67%), make long-term care services affordable (66%), or preserve their standard of living (59%).
It’s been estimated that for folks 65+ about two-thirds or more are eventually going to need long term care. But what’s often not mentioned is that more than half of those needing care will need it for less than 3 months, which just happens to be the time period before most long term care insurance coverage kicks in. In addition, the average stay in a long term care facility is between one year and one and a half years – longer for women, shorter for men. That should somewhat soften the risk of blowing through your entire assets. Furthermore, just because you want LTC insurance, you may not qualify. There’s a chance the insurance companies might not be willing to take the risk on you, especially if there’s a history of early onset dementia, coronary disease, or diabetes in your family.
Nevertheless, if preserving your estate is critical to you, and the fear of losing everything keeps you up at night, you should consider purchasing long term care insurance. The first decision you need to make is which company. While there are thousands of insurance companies currently doing business in the U.S., not all of them offer LTC insurance. So selecting the right insurance carrier and policy becomes a challenge. The selection of the company may even be more important than the policy itself since, essentially, you are purchasing a promise to pay a claim in the future.
William J. Gillett, a financial advisor and president of the firm, The Commonwealth Agency, Inc. in Fishkill, NY, offers these guidelines in choosing the right long term care policy.
Steps to Choosing the Right Policy
Step 1: Determine your need
Find out the average annual nursing home costs in your area, subtract fixed income sources (e.g. Social Security or pensions), and subtract streams of income derived from your assets. If a shortage remains, then long-term care insurance should be considered.
Example: Cost of nursing home care is $100,000 per year. Fixed income sources (i.e. Social Security, pensions, etc.) available are $50,000 per year. Nest egg is $500,000. Assuming a 5% return, another $25,000 per year becomes available.
Formula: $100,000 (cost) – $50,000 (fixed income) – $25,000 (investment income) = $25,000 per year shortage.
In the above example, the individuals would experience a shortfall of $25,000 per year. They would be wise to consider a long-term care policy that would cover this shortfall. Alternatively, some individuals may elect to cover the entire $100,000 per year through long-term care insurance in order insure their retirement nest egg.
Step 2: Begin the search
If you decide you want LTC insurance, select a core group of insurance companies you can choose from. If you already have an insurance agent you trust, check with him or her to make a recommendation. The most important concern at this point is that the company will be around if and when the benefit is needed. So pick companies with high financial ratings from the four main rating companies within the insurance industry: A.M. Best, Standards & Poors, Duff & Phelps, and Moodys. A safe bet would be to consider companies that are rated no lower than “A” or its equivalent.
Step 3: Narrow the search
Examine the size of the company’s assets and investigate how long a company has been in operation, especially in the business of long-term care insurance, and have a track record. Pay particularly close attention to history of rate increases. Also, call your state Superintendent of Insurance Department to see if there are any problems with the company. Finally, make sure you consider companies that offer a variety of policies: individual coverage, joint coverage, family coverage and partnership plans, where applicable.
Step 4: Customize the policy and choose the plan that’s best for you
This is the most complicated step since the number of variations available is staggering.
The three areas that will most influence the cost are:
- How much benefit is purchased (received either as a daily or monthly benefit)
- How long the benefit will last (usually defined by a specified number of years)
- How soon the benefit begins (defined by a specified number of days).
Keep in mind that there is no “right” policy, just more appropriate ones for you and your partner. It’s likely that several companies will offer excellent programs for pretty much the same price.
Guaranteed Renewability: Most long-term care insurance policies are guaranteed renewable, meaning the insurance company must renew your coverage as long as your premiums are paid in a timely manner. But guaranteed renewable also grants the insurance companies protection against adverse claims experience. That means that while a company cannot single you out and increase your personal premium, it can increase the cost of insurance across the board within a certain group.
Cost of Living Adjustment Rider (COLA): If you don’t submit a claim until later, you’ll want to be sure that you still have enough coverage to account for increases in the cost of care. To protect against inflation increases, you’ll want the policy to include protection against inflation both prior to and once you’ve made a claim.
Non-forfeiture Benefit: If you eventually suffer from a cognitive impairment and are either unaware of receiving the premium bill or forget to pay it, the policy coverage could lapse due to nonpayment of premium. With a non-forfeiture benefit, the policy would not be canceled.
Waiver of Premium: Waiver of premium means that if you submit a claim against the policy, the company will waive all future premiums for a specified time while you are receiving benefits. The time period for premium waiver varies from carrier to carrier: some offer a 90 day period, some a 100 day period, and others a 180 day period. Preferably, choose a policy with a waiver of premium that becomes effective after a short time period.
Given all the considerations, here is a list of questions you should get answers to before signing onto a long term care insurance plan.
15 Questions to Ask about Long-Term Care Insurance
- What kind of care is covered? (Skilled nursing care, Intermediate care, Custodial care Home health care)
- How much will be paid for each level of care?
- Is there a waiting period before benefits are payable?
- How long will the policy pay benefits?
- Is there a maximum policy benefit?
- Will benefits increase with inflation?
- Are preexisting conditions covered? If so, what is the waiting period?
- Does the policy impose any eligibility requirements?
- Prior hospitalization to receive skilled nursing home benefits?
- Need for skilled nursing care prior to payment of custodial care costs?
- Prior coverage in a custodial-care facility or hospital to receive home health care?
- Coverage only in a Medicare-certified facility?
- Is Alzheimer’s disease or other dementia specifically covered?
- Can the insurer cancel the policy?
- Can the premium increase over the life of the policy?
- Does the policy contain a waiver of premium?
- Does the insurer have an A+ or A rating from Best’s Insurance Reports or other insurance rating organizations?
- Is the insurer experienced in handling health insurance claims?
- Is the policy guaranteed renewable?