Buying
Long-Term Care Insurance
Author:
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 5% of those over age 65 will
move into a nursing home and finish their lives there. And that it costs
an average of over $40,000 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,
unless you pay an extra premium. 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!
About
the author:
Gary Foreman has worked as a Certified Financial Planner and currently
edits The Dollar Stretcher newsletter and website www.stretcher.com
