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Should I buy long-term care insurance?

Long term care insurance (LTCI) is both complex and controversial. It covers certain nursing home costs and sometimes home health car. Here is a summary of some of the main points for and against purchasing such coverage.

Reasons Against:

  • Inability to afford the premiums, or not having enough assets to protect. In such case, the individual will quickly qualify for Medicaid.

  • Some LTCI policies lack sufficient home care coverage to keep an individual out of a nursing home, unless family members or informal caregivers are available to help in providing care. Thus, if your goal is to avoid nursing homes at all costs, LTCI may not be the best way to go.

  • LTCI policies return from 60% to 65% of total premiums paid in benefits. This is much less than returns from other types of health insurance.

  • The fact that LTCI policies are improving: In a few years, you may be able to get a better deal.

Reasons For:

  • LTCI, although expensive, may provide protection against costly care. While the premiums may be wasted if you never need long-term care, if you do need the care the insurance can effectively pay back your premiums many times over.

  • If you have family caregivers, the extra home care coverage in LTCI might make it possible to remain at home longer.

  • LTCI premium costs increase with age. Once you develop a serious medical condition, you probably won't qualify for coverage. Thus, it is better to buy LTCI early in the game, if at all.

Some Guidelines

Do not buy long term care insurance unless all of the following apply to you:

  • Each person in the household has more than $75,000 in assets (not counting the value of the primary residence)

  • Your annual retirement income per person in the household is over $30,000

  • You can pay premiums without having to "go without"

  • You could continue to afford the premiums, even if they increased by 20% or 30% in the future

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What are the alternatives to long-term care insurance?

Here are some options for paying for long-term care, along with their advantages and drawbacks:

Applying For Medicaid

Eligibility rules vary from state to state, but beneficiaries are generally required to "spend down" their income and assets to qualify. New laws in many states make it possible for the spouses of Medicaid nursing home residents to keep more income and assets than previously allowed.

Reverse Mortgage, Equity Conversion

Reverse mortgages and other forms of home equity conversion are often viable alternatives for those who wish to remain at home. Seniors borrow money against the equity in their homes, and defer repayment until they die or sell their house. However, for these options to make sense, a home must have a high monetary value and be fully or mostly paid for, and the individual must intend to stay in the home for the long term.

Self Insurance

Self-insuranceói.e., just paying for costs if they ariseó is a gamble, but is the current strategy of choice for the majority. Self-insurance makes the most sense for people with major assets; for those who can afford a long nursing home stay; and for people of modest means, who would quickly qualify for Medicaid anyway.

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How much does long-term care insurance cost?

Premiums for LTCI vary greatly, depending on your age at the time of purchase, the comprehensiveness of the coverage, and the company selling the plan.

Here are some guidelines:

Annual Costs for Long Term Care Insurance
Age (at time of purchase) Cost Range (Nursing Home only) Cost Range (Nursing Home & Home Care)
55 $250 to $1,100 $300 to $1,500
65 $450 to $2,000 $600 to $2,600
75 $1,100 to $3,000 $1,170 to $5,000

No matter how good a policy sounds, it's worth little if the company wonít be there when it comes time to pay. Buy from a company with strong financial reserves. Unfortunately, there is no foolproof method for determining which companies are financially strong. However, it pays to look up company's rating by M. Best or Standard and Poor's, both of which evaluate the financial health of insurance companies.

Tip Tip: Purchase long-term care insurance from a company that has an A+ or A++ rating from Best or an A, AA, or AAA rating from Standard and Poor's. Most public libraries have these references.

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What should I look for in a long-term care insurance policy?

When you compare long term care insurance policies, consider the following:

Flexibility. A policy that covers nursing homes should also cover assisted living, a better alternative for many people who can no longer live on their own. If you want a policy with home care, look for one that offers a full range of community-based services, including adult day care, or that pays you a monthly cash allowance to spend as you please for care.

Eligibility. Look for a policy that bases eligibility on the need for help with activities of daily living. Policies that only pay for "medically necessary" care are not usually a good buy. To be sure you are covered for Alzheimer's disease, choose a policy that covers cognitive as well as physical disability and pays benefits if you meet either criteria

Inflation. If you purchase a policy before the age of 75, inflation protection is essential to ensure adequate coverage when you need long-term care at some point in the future. Buy a policy that has an additional cost but automatically increases benefits at the rate of 5% annually.

Duration. Keep in mind that the chances of needing long term care for five years or longer are relatively small. For most people, a policy covering two or three years will be more cost-effective.

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Do I need long-term care insurance?

Experts estimate that about 43% of us will spend some time in a nursing home at some point. But the risk of needing nursing home care before age 75 is relatively low. Also, most people will not need nursing home care for longer than a year.

Your chances of needing long-term care vary with your age, health, family history and longevity, exercise habits, diet, smoking, and gender. Women are at higher risk because they live longer.

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How does long-term care insurance work?

Long-term care insurance policies pay a set dollar amount per day for covered care during the benefit period stated in the policy.

Example Example: You choose a policy that pays $160 per day for five years. The maximum that policy will pay is $292,000 ($160 per day, times 365 days, times 5 years).

The older the individual covered, the higher the premium. For instance, premiums for a set amount of coverage on a 70-year-old individual are about three times those that would apply to a 50-year-old.

Most long-term care policies are indemnity-type policies, meaning they will pay (up to the policyís limits) for actual charges by the care provider. Some long-term care policies, instead of being based on indemnity, pay daily benefit amounts to the insured rather than paying for actual charges. The latter type of policy offers insureds greater flexibility (e.g., allowing them to pay for home care) and less paperwork.

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In a long-term care policy, what is the elimination period?

This period constitutes the number of days the insured must waitóafter becoming eligible for benefitsóbefore coverage actually begins. The elimination period can range from zero to 90 days, or up to one year. The longer the elimination period, the lower the premium.

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How should I select a long-term care insurance provider?

If you decide that long term care insurance (LTCI) is your best option, it is important to shop around for the right company. Some states have enacted important consumer protections in the LTCI area, while others have not. Do not assume the company is a safe bet just because it is licensed by the state insurance department to sell LTCI.

No matter how good a policy sounds, it is worth little if the company wonít be there when it comes time to pay. Buy from a company with strong financial reserves. Unfortunately, there is no foolproof method for determining which companies are financially strong. However, it pays to look up a company's rating by A.M. Best or Standard and Poor's, both of which evaluate the financial health of insurance companies.

Tip Tip: Purchase long-term care insurance from a company that has an A+ or A++ rating from Best or an A, AA, or AAA rating from Standard and Poor's. Most public libraries have these references.

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Should I comparison shop for long-term care insurance coverage?

Seek independent advice before buying. You might find such guidance from a financial advisor; an elder-law attorney; government-funded counseling and information services; or consumer organizations.

Tip Tip: Use a local independent agent or broker who has been recommended by someone reliable. Don't buy from an agent who sells door-to-door.

Read the policy from cover to cover; donít rely on marketing literature.

Don't be pressured to buy the first policy you see. Compare it with at least two others.

Tip Tip: Donít pay more than one monthís premium when you apply for coverage. In most states, after you buy a policy, you have thirty days to change your mind and get a refund.

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Is it worthwhile buying "dread disease" insurance, and other types of special health insurance?

You may receive solicitations in the mail for the following types of health insurance, or you may run across ads for them. They are to be avoided at all costs.

Note Note: We realize that there are worthwhile policies out there that fall into the categories we talk about. But we bring your attention to these categories so that you will be wary of them, and will not buy without careful research.

  • Dread-Disease Insurance. This limited coverage insures against only one specific disease. Further, if you already have this disease (i.e., have been diagnosed) at the time you buy the policy, youíre not covered.

  • Hospital Indemnity Insurance. "Indemnity" insurance means that the policy will pay (up to the policyís limits) for actual charges by the care provider, as opposed to paying daily benefit amounts to the insured regardless of actual charges. The typical "hospital indemnity" policy will provide a very small amount of coverage per day, and is not worth it.

  • Medical-Surgical Insurance. This type of coverage also provides limited payments, and only for specified procedures.

  • Insurance Sold Through the Mail and On Television. Many policies sold through television advertisements and mail solicitations have the following negative attributes: They tend to cover accidents but not illness; they start out with low premiums that later rise unreasonably; they deny claims more than other types of insurance; and they tend to exclude pre-existing conditions.

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Do I need disability insurance? How can I ensure I have adequate coverage?

If you have dependents, youíve probably made sure that you have adequate life insurance coverage. But what about disability coverage? Although the incidence of permanent or temporary disability during the average individualís prime earning years is fairly high, many people neglect to insure adequately against this risk.

Disability insurance generally provides you with an income stream in case you are unable to earn income due to illness or accident. Here are some questions that will get you started in making sure you have adequate coverage.

  • What does your employer provide? Find out what types (if any) of disability coverage are provided. If no coverage is provided, you may be able to purchase coverage through your employer.

  • Is the employer- or state-provided coverage adequate? Find out how much you will receive under any existing coverage you have. If the amount you will receive is not enough to support your family during an illness or other disability, you may wish to supplement it.

If employer and government coverage is insufficient you should purchase a private disability policy.

Before you buy a disability policy, check out the following factors:

  1. Make sure the policy can be renewed every year.

  2. Make sure that if you are able to work part-time when disabled, you will still receive benefits.

  3. Choose as policy with a three- to six-month waiting period, since it will be less costly, and set aside an emergency fund to cover the waiting period.

  4. Be sure the policy covers you until you reach age 65, at which time you can obtain full Social Security benefits.

  5. Be sure the policy pays when you canít perform work in your own field.

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