By: Investor Solutions
According to the Clearinghouse for Long-Term Care Information, approximately 70% of individuals over 65 years of age will need long term care at some point. On average, women will need 3.7 years of care compared with only 2.2 years for men.
Long-term care insurance is sometimes seen as a luxury rather than a necessity. Although this may be true for the ultra wealthy who have the ability to self-insure, for everyday working people, long-term care insurance should be an integral part of everyone’s estate plan. It’s not only important for the individual who will be covered by the policy but also for his or her family members. The long-term illness of a loved one can have a rippling effect to members of the family. And the results are not only sad but usually catastrophic.
There are many issues to consider when purchasing a long-term care policy. These include:
- Age at time of policy purchase
- Cost of the policy
- Benefits received under the policy
- Inflation protection
- Length of time to receive benefits
- Applicable elimination period
- Maximum lifetime benefit
Like some other forms of insurance (life, for example), long-term care insurance is usually less expensive when it is purchased at a younger age. Although the premiums would be lower for a 30 or 40 year old than a 60 year old, it really is unnecessary for a 30 year old unless that person suffers from a chronic disease. Insurance agents will try to sell you a policy as early as possible for the upfront and recurring commissions they receive on the sale but don’t be fooled. Even though your premiums are lower the earlier you purchase the policy, it is not financially savvy to buy a policy at 30 that you will not need until you are 80. That is 50 years of premiums that can be diverted to retirement savings or the like. A happy medium would be 60 years of age.
The cost of a long-term care policy varies greatly depending on the type of coverage, the length of time care is needed, the insurance provider and where you live. Although long-term care insurance can be costly, paying for long term care without coverage carries a far greater price tag. In 2008, the average annual cost of long-term care ranged from $18,000 to $68,000 for a home health aide and a semi private room in a nursing home, respectively. If you are financially secure, opting for a lower cost policy might be appropriate to “supplement” your potential future needs. However, this is one of those times where you shouldn’t let the cost of the policy drive your decision. This is an important purchase and you shouldn’t skimp on coverage to save nickels and dimes.
Depending on the policy you purchase, the benefits you receive will vary. An “indemnity” or “per diem” policy will pay up to a fixed amount of benefits regardless of the expenses incurred. That is, if your policy allows for $200 per day but you only actually receive $150 worth of care, you still receive the full $200. An “expense incurred” policy will reimburse you for the actual expense incurred up to your benefit amount. For example, if your benefit amount is $200 per day but you only incurred $175 on a given day, you will only be reimbursed for the $175. The remaining $25 will be carried over and added to a pool of future benefits.
Care can be received at home, in an assisted living facility, a nursing home and retirement communities, among others. The benefits themselves range from activities of daily living to health care needs. These are all important considerations. For married individuals, inquiring about sharing benefits with your spouse might be advantageous. In these situations, a policy may cover both spouses who share the benefits. For example, if a policy covers each spouse for three years but one spouse needs four years of care, the healthy spouse can give up one of his/her years for the ill spouse to receive the additional care. This sharing benefit might also be available even if spouses have their own policies.
Another option to consider when purchasing long-term care insurance is the inflation protection rider. There are two different types of these, annual compounded or simple inflation. The addition of such a rider to your policy will increase the dollar value of your benefit each year. The younger you are, typically, the more sense it makes to purchase the annual compounded inflation rider. This is to ensure that your policy will keep up with the increasing cost of health care. The older you are, the more sense it may make to include the simple inflation rider or none at all. It really depends on how long into the future you would realistically expect to need the benefit.
Length of Benefit
Long-term care insurance policies can be purchased for a set number or years, say 2, 3, 4 or 5 or for an unlimited number of years. Again, this is a personal decision but remember that on average, women will need 3.7 years of long term care whereas men, only 2.2. To be on the safe side, a 5 year policy might be the better option if you can afford it. However, remember that it is better to have a robust policy for a shorter period of time than a frail one for a longer period.
The elimination period is the length of time before your benefits begin and during which you are paying out of pocket for the cost of your care. Typically, the longer the elimination period, the lower the cost of the policy is. If you decide to choose a longer elimination period, make sure that you have enough funds set aside to pay for your care for the time before your benefits begin.
Maximum Lifetime Benefit
This is the maximum amount you are entitled to under your plan. The calculation is simple; simply multiply your daily benefit amount with your benefit period in days. For example, if your daily benefit is $200 and your policy is for 4-year coverage, your maximum lifetime benefit would be $292,000 (4*365*$200).
A final consideration when purchasing long term care insurance is the insurance provider. Because long term care insurance is something you will be paying for for a long period of time, sometimes 20 years, it is important to shop around for providers that receive high ratings from insurance rating companies such as A.M. Best (www.ambest.com) or Moodys (www.moodys.com). You want to buy a policy from an insurance company with financial integrity; one that is experienced, well established and has been around for a long time.
Although it is hard to plan for difficult situations such as one’s own incapacity or ill health, the repercussions of not doing so are costly, both financially and emotionally. Well intentioned and loving family members often volunteer to take on the role of caregiver but that always proves to be a long, lonely road where relationships are strained and dreams are put on hold. The financial and emotional cost of these caregivers usually outweighs the financial cost to you of buying such a policy. So the next time you ponder long term care insurance, think of those who would be forced to undertake the task of being your caregiver. Because, you know, it’s not just about you.