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Should I Buy Long-Term Care Insurance?

By Sarah Foster

long term careMet Life reports in its annual marketing survey that the national average rates for a nursing home private room increased by 3.8%, from $239 daily or $87,235 annually in 2011, to $248 daily or $90,520 annually in 2012. National average rates for a semi-private room increased from $214 daily or $78,110 annually in 2011, to $222 daily or $81,030 annually in 2012. In Massachusetts, average costs are closer to $144,000 per year.

About 60 percent of individuals over the age of 65 will require at least some type of long-term care services during their lifetime and over 40 percent will need care in a nursing home for some period of time. In addition to nursing home care, long-term care services include home health, respite, hospice, adult day and assisted living care.

Most health insurance plans, including Medicare, do not cover the costs of long term care. Medicaid (MassHealth in Massachusetts) may cover some of the costs of long-term care if you are financially eligible but many services are not included. Therefore, many Americans turn to long term care (“LTC”) insurance as a means of protecting themselves against the potential need for and the increasing costs of long term care.

However, recent news stories, like this June New York Times article,
highlight some of the obstacles associated with LTC insurance, particularly the problems with collecting benefits when they are needed. Additionally, policyholders have seen dramatic increases in their premiums in recent years.

What should you consider before purchasing LTC insurance?

Can you afford it?

• LTC insurance is typically aimed at people who have enough money so that they won’t qualify for Medicaid but not enough to pay for long-term care out-of-pocket.

• Given the recent increases in premiums consider both whether you can afford the premiums now and whether you will be able to afford the premiums if they increase, i.e., could you afford the premiums if they were to double in 10 years?

• If the premiums are too high, you might consider adjusting your policy, for instance, getting a policy with a lower monthly benefit amount, or by limiting your benefits to fewer years of coverage.

What is covered?

• Eligibility: Most policies require that the policyholder need “substantial assistance” to perform two or more basic daily activities of living for at least 90 days. See examples of daily activities here.

• Waiting periods: Most policies have waiting or “elimination” periods of 30 to 100 days, during this time period you will have to pay any costs out-of-pocket. See Harry Margolis’s blog post on elimination periods here.

• Types of facility: Check to see what types of facilities are covered; some policies may only cover skilled nursing facilities or facilities that are licensed by the state.

• Amount of benefits payable: Typically, policies reimburse the insured for long-term care expenses up to a fixed daily benefit amount, anywhere from $50 to $500, with the average around $150.

• Benefit period: Some policies will pay your long-term care costs for life and this was more common in the past. However, low interest rates have caused a shift away from unlimited lifetime benefits toward fixed benefits. Today, it is typical for a policy to cover 3-5 years of LTC. However, U.S. News reports that only 1 in 10 residents between the ages of 75 and 84 stays in a nursing home for five or more years.

• Inflation: Also important to note is whether the policy adjusts for inflation. Often this is offered as a optional benefit and called an inflation of benefit increase rider. Note that simple and compound inflation are both options. For younger individuals, compound inflation protection is more important where it can be reasonably expected that any claim is 20-30 years away.

When to buy?

• Premiums increase with age, increasing more rapidly beginning at the age of 60. See for example, this recent article by NPR comparing policy costs at 55, 60 and 65.

• On the other hand, the earlier you buy, the harder it may be to predict your future finances and whether LTC insurance is a good fit for you.

• Therefore, ideally, you would want to purchase as soon as possible once you have started the retirement planning process and are confident you have handle the costs of premiums (think 55-64).

• Another risk to consider, however, is the future of long-term care in general. For instance, many policies purchased more than 10 years ago do not include assisted living coverage, though that has become one of the primary providers of LTC.

Who to buy it from?

• Contact several companies and compare prices and benefits using the criteria listed above.

• Ask companies about their rate increase history.

• Call your state insurance department and confirm that the company is licensed to do business in Massachusetts.

• You can also use financial-strength ratings to help decide between different insurance companies.

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