Care Insurance Basics
Long-term care insurance covers much of the cost of nursing-home care, at-home care, assisted living, and adult daycare. But policies are not standardized, and coverage can vary greatly depending on what you choose in a policy.
The national average cost of nursing home care is more than $51,000 a year, according to the General Accounting Office, and those costs are expected to triple by 2020. Additionally, the average annual cost of limited home healthcare is more than $36,000, and basic care in an assisted living facility costs $26,000 on average, according to the GAO.
Compare those costs to premiums for long-term care insurance. According to the Health Insurance Association of America, long-term care policies cost, on average, $888 a year at age 50, $1,850 a year at age 65 and $5,880 a year at age 75.
There’s no hard-and-fast rule as to when you should buy a long-term care insurance policy. The younger you are, the less expensive the premiums will be. And there will be a point as you age when premiums become prohibitively expensive, if you’ll qualify for a policy at all. If you buy a policy when you’re younger, and can lock in premiums, you’ll still pay the same premium when you’re older.
Long-term care insurance is generally purchased between the ages of 40 and 84, but the most common age is in the mid 50s, says Laura Schoenborn, a certified financial planner with Legacy Capitol Partners in Milwaukee, Wisconsin. When you reach age 85, it might be hard to find a policy at all, because as you get older, you’re more likely to need care and insurers may reject your application.
Many people decide to buy based not just on their age, but on whether they can afford to pay the premiums. Schoenborn says many people in their 50s, for example, may wait until their kids are out of college to buy so they can better afford the expense. Others in their 60s may wait until they near retirement, and then they can stop paying disability insurance and transfer those premium payments to a long-term care policy.
What to Buy
No matter when you buy, you have a lot of control over how much your policy will cost, depending on the coverage you choose. Here’s a look at the biggest decisions you’ll have to make when you choose a policy.
- What triggers the benefit? Long-term care insurance benefits don’t kick in simply because you say you need the funding to pay for care. You have to fit criteria stated in your policy. "It’s critical to know what you have to do in order to get paid," says Lassus. "You want to make sure it won’t be too difficult to be reimbursed for your expenses." Typically, a doctor’s certification that care is needed, or a demonstration that the patient cannot perform certain activities of daily living, are needed. A showing of mental incompetence can also be a qualifying event to trigger long-term care coverage.
- What’s the elimination period? The elimination period, also called a waiting period, is the amount of time that elapses after you and a physician feel you need care but before the policy kicks in. When you purchase the policy, you can choose a 30-day period, for example, which would mean you’d pay costs for care in the first 30 days, and after that, your policy would pay. A 30-day elimination period is more expensive than a 90-day elimination period because you’d be expected to cover costs for less time before the policy would kick in. Lassus says if you can afford it, a longer elimination period can bring down the cost of your premiums substantially.
- What’s the daily benefit? The daily benefit is how much the policy will pay per day for care. The most expensive choice, in terms of premiums, would cover 100 percent of your daily care. You can lower your premiums by choosing, say, an 80 percent option. That would mean you’re responsible for 20 percent of the costs of care. If you’ve got the savings to cover such costs, you’ll save in premium costs. You’ll also bear a heavier burden at the time you need care.
- What’s the benefit period? The benefit period is the length of time the policy will provide benefits, from the time you start receiving care. You can choose a lifetime policy, or one that covers you for a certain number of years. The lifetime policy may make the most sense, despite the higher cost. If the policy only covers you for five years but you need care for longer, you’d be responsible for the full cost of care in the later years. If you’re forced to draw on your assets, it could negate the purpose of buying a policy in the first place.
- What’s the inflation protection? This is one area in which planners say you should not skimp on a policy. Inflation protection means your benefits will increase each year, with the hopes of keeping up with the rising costs of medical care. "The cost of medical inflation is rising faster than the general inflation rate — between 8 and 11 percent annually," Schoenborn says. She says if you don’t have inflation protection, your policy may not pay enough to cover your costs years into the future. She also notes that, in some states, you can’t buy a policy without an inflation protection rider, but in others, it’s up to you to make sure you’re covered. Also, you don’t get to choose how much inflation protection you want. It’s determined by the policy.
When deciding which coverages to scale back on and which to boost in a long-term care insurance policy, Schoenborn says you have to assess your tolerance for risk.
"Long-term care insurance is like any other insurance plan, where you’re going to share risk with an insurance company, but don’t cut back in the wrong places," she says. While you may insure your house for its full replacement cost, you might be tempted to insure for less than full coverage on a long-term care policy. But understand that doing so increases the amount you may have to pay for part of your care.
When you’re shopping around, consider doing business with someone who specializes in long-term care policies. Though your local insurance agent may offer policies, he or she may not be an expert in the area. And when you’re dealing with an agent, make sure you get to see a copy of the real policy you’re considering, not just a generic sample policy. An agent may remind you that you have a 30-day so-called "free look" period, during which time you can cancel the policy, but you don’t want to wait until after you’ve bought the policy to compare the benefits to other policies on the market. Do your legwork in advance.
Also, check out the insurance company’s financial status before you buy. If a company goes out of business before you need care, you’re out of luck. Companies such as A.M. Best, Moody’s, and Standard & Poor’s all offer insurance company ratings.
Schoenborn offers a special note to people who live, or plan to live, part-time in two different states when they retire. She says you should examine the definitions of terms in both states where you’ll be living to make sure you’ll be covered by your policy, equally, in both states. Because policies aren’t standard, it’s possible that your home state’s coverage is better or worse than that in your warm-weather second home.
Finally, if you’re married, consider buying policies for both spouses from the same company. You’ll probably get a discount, just as you do for buying homeowners and car insurance from the same carrier.
For More Information
These organizations can give you additional information on long-term care insurance.
National Council on the Aging
National Association of Insurance Commissioners (NAIC)
State Health Insurance Assistance Program (SHIP). For the program nearest you, call 800-677-1116.