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The ABCs of Long-Term Care Insurance

Buying a policy now can help you fend off potentially devastating costs in the future

By Jeanne Lee | August 30, 2012
health insurance form
Your health could keep you from qualifying for a long-term care policy
Hemera | Thinkstock

If you haven’t heard about the astronomically high costs of long-term care, prepare for some sticker shock.

The median cost for a private room in a nursing home is $77,745 a year, according to the 2011 Genworth Cost of Care Survey.

And if you’re in your 50s, expect that figure to top $336,000 a year by the time you reach your 80s. The cost for a room in an assisted-living facility is about $39,000 a year, on average. Home-health care? Hiring a health aide to visit six hours a day, five days a week, runs close to $30,000, on average. Considering that roughly 70 percent of people over age 65 will eventually need some type of long-term care, you’re likely to want to look into buying a long-term care insurance policy to help defray those costs.

Trouble is, long-term care insurance can be very expensive and the contracts maddeningly complex. What’s more, if you buy a policy in your 50s or 60s, it may be decades before you’ll need the benefits to kick in, so you’ll be betting that your insurer will still be around by then. On top of that, in recent years, major insurers, like Genworth Financial and John Hancock, have raised premiums by as much as 40 percent. It's impossible to predict how much premiums will go up in the future, but experts say you can count on price increases.

Here are the basics you’ll need to know before buying a long-term care policy:

What long-term care insurance covers

Long-term care insurance covers the cost of ongoing assistance with the daily tasks of normal activities such as dressing, eating, or bathing. Most policies pay for services delivered at home, in an assisted-living facility or in a nursing home. These types of services are not covered by private health insurance or by Medicare, which reimburse you for medical expenses. (In most states, Medicaid reimburses some of the long-term care costs, but only if you fall below certain income threshholds.)

How much long-term care insurance pays

Once you qualify for benefits, there’s a waiting period known as an “elimination period” before the policy kicks in — this period is typically 30 to 180 days. You need to pay for long-term care costs out of your own pocket during the elimination period. After that period is up, how much you’ll receive depends on the type of policy and the specifics of the contract. There are three main types of policies:

A reimbursement policy: This is the most common type and the least expensive. It pays you back for services based on the features you select, like the maximum amount of reimbursement per day (for example, $100 to $500), the number of years the policy will last (typically two to 10 years), and the lifetime maximum benefits (which might be, say, $200,000 or $1 million). So if you buy a $200-a-day policy and your approved expenses come to $150 a day, you’ll receive $150. These policies usually won’t reimburse a family member for caregiving.

Indemnity and cash-benefit policies: These allow more leeway if you will pay a relative for caregiving and want to get financial help for those costs. Indemnity and cash-benefit policies typically cost 20 to 30 percent more than reimbursement policies, says Curt Horowitz, founder of LTC Connects, an independent long-term care insurance broker.

With an indemnity policy, you receive a set amount per day for qualified services, regardless of the amount of your actual bill. So if you have a $100-a-day indemnity plan and spend $60 for an approved home-care visit, for instance, you’ll get $100 a day. The monthly payout could also be less than the actual bill. In that case, the policy will help defray costs, even if won't totally cover them.

A cash-benefit policy (sometimes offered as a cash-benefit option for a reimbursement plan) is the most straightforward of all. Once the elmination period ends and you're eligible for benefits, you simply get a monthly check for the dollar amount listed in the policy.

“You can use the money for anything, even airfare for your child to visit you, or paying a neighbor to do errands. They don’t have to be qualified expenses,” says Marilee Driscoll, a long-term care planning expert and author of The Complete Idiot’s Guide to Long-Term Care Planning.

What affects the cost of a long-term care policy

There really isn't an average cost for a long-term care policy, because premiums are based on your age, health and marital status at the time you buy the insurance, as well as the dollar amount of coverage and features you select. (Married people get a discount because they tend to be healthier than singles and take care of each other.)

Perhaps the most important thing to know about the cost of long-term care policies: They become increasingly expensive to purchase as you get older. That’s why most long-term care experts recommend shopping for a policy in your 50s. By the time you’re in your 70s, coverage can be exhorbitant — if you can even find an insurer who’ll sell it to you.

Here’s an example showing how much premiums can vary by age: A 50-year-old married couple would pay about $1,974 a year per person for the TransAmerica TransCare II plan (with coverage of $170-a-day for three years, a lifetime cap of $186,150, inflation protection and a 90-day elimination period), but the same policy for a 70-year-old couple would run about $4,485 a year.

All carriers have at least two rate classes based on health, with the preferred rate for healthier people typically running 15 to 20 percent lower, Horowitz says. If you have a chronic condition, like Parkinson’s disease or Alzheimer’s disease, you might be turned down altogether. Long-term care insurance is "really a pre-retirement purchase, because frankly, by age 65, many have the kind of health conditions which preclude buying it," Driscoll says. You'll need to fill out a medical questionnaire or get a physical when applying for a policy.

Some features raise or lower your costs. You’ll pay extra for inflation protection, which will boost your coverage in line with the cost of living. Many long-term care insurance experts recommend buying 3 percent compound inflation protection, or 5 percent if you can afford it. But you’ll cut your premiums by choosing an elimination period longer than 30 days.

Avoiding long-term care insurance rate increases

Once you’ve signed a long-term care contract, it’s possible for your premiums to increase — a lot. Although insurers can’t single you out for a rate rise, they can ask your state’s insurance department for permission to raise rates for everyone who bought policies during a certain period of time, as John Hancock, Genworth, and Prudential (among others) have done. Mass Mutual, New York Life and Northwestern Mutual are three companies who have never raised rates.

You can mitigate the risk of a rate increase by choosing an insurer with a top financial strength rating (from a rating agency such as A.M. Best, Standard & Poors or Moody’s) and shopping for a policy with a rate that’s guaranteed for a few years.

If you buy a policy and your premiums ultimately become unaffordable, you may be forced to resort to shortening the number of years of coverage or lowering the dollar amount of your benefits.