Have you thought about long-term care insurance? Most people don’t until they are approaching retirement and the thought of turning over their life savings to a nursing home drives them to consider it. Statistics vary from source to source, but roughly 70% of those over age 65 at some point will need long-term care, defined as the services needed when you are unable to care for yourself. Those services can range from help with bathing, feeding and walking in your home to full-time care in a facility. Long-term care insurance can help cover the costs of care, but how do you know what kind of policy to buy, or even if you should purchase a policy in the first place? Here are some tips.
The costs of long-term care can be paid for out of pocket (self-funded), by Medicaid, covered by an insurance policy, or some combination of these. Often people assume that Medicare or health insurance will cover their care, but in reality these only cover a small portion of the necessary care, and typically for skilled nursing care only, not for the custodial care usually required in the case of a long-term illness or condition. Medicaid, on the other hand, will pay for custodial care — most often in a facility. But while we all are entitled to Medicare, not everyone qualifies for Medicaid — only those whose assets do not exceed their state’s eligibility limits.
Living on a fixed income in retirement can be tough to begin with, so for many, adding in the cost of a long-term care insurance policy is out of the question. For them the only option may be to pay for care out of pocket and then go on Medicaid when their assets are depleted. Others may have a surplus that can cover the cost of care should it be needed. But those in the middle, for whom long-term care insurance premiums are within their budget, should at least consider purchasing a policy to cover some of the costs associated with care in a facility or at home.
How & When to Buy a Policy
Purchasing long-term care insurance can be viewed as protection for your portfolio in that sense; if you can use your insurance benefit rather than your assets, you have preserved them for yourself or your heirs. Even those who can afford to self-insure may choose to purchase long-term care insurance for that exact reason.
When should you buy a policy? The best time to buy any insurance policy is the day before you need to use it, but since none of us can know that, the next best time would be when you are in your late 50s or early 60s. The initial premiums go up the older you get, so even though you are paying the premium for a longer period of time, buying earlier can save you money in the long run.
Long-term care insurance policies can be customized to fit your needs and your budget. The choices you make affect the premium, so it makes sense to look at various combinations.
When Does It Kick In?
In choosing your elimination period, or the number of days of care you pay for before the insurance kicks in, consider how much you can afford (or want) to cover. Typical elimination periods range from 30 to 365 days. Clarify with the insurance company if those are calendar days or days of care. If you start out needing care three days a week, a 30-day elimination period may actually be 10 weeks. Some policies offer a zero elimination period when the policy is used for home care.
Paying for Care
The benefit amount is the dollar amount available to pay for care each day you are on claim, in today’s dollars. With the high cost of care, funding the entire amount of care with insurance is likely to be very costly. Some policies aggregate the daily benefit amount into a monthly or lifetime limit amount, so when you don’t need coverage every day of the month, even if the cost exceeds your daily benefit amount, you still may be covered. According to Genworth’s Cost of Care estimation, the average annual cost of nursing home care in a private room in the Johnstown, Pa., area is $87,600, while in Manhattan you’d pay a hefty $182,500!
Don’t Forget About Inflation
Inflation protection riders are an important part of a policy. Without this kind of rider, your benefit amount may be dwarfed by the quickly increasing costs of care. You may choose a rider that increases your benefit amount yearly by a specified percentage based on a simple interest calculation or a compound calculation. The compound will increase faster and more readily keep up, but it is also more expensive. Some companies offer an increase based on the consumer price index, and others allow you to purchase additional insurance at specified intervals in the future, with those additional benefit amounts calculated on your then-current age.
How Long Will It Last?
The benefit period is the number of years your policy will pay for, usually between two and 10 years, or even a lifetime. The lifetime benefit, as you might expect, is very expensive. The average nursing home claim is two and a half years, and the average home care claim is about four years. If you have a spouse or domestic partner, a shared care policy may be right for you. These policies combine your individual benefit periods to be used by either one of you or both. Instead of two single three-year periods for instance, you would have six years combined; one could use four, leaving the other two, or any other combination.
Look for Partnerships
To encourage more people to purchase their own insurance and not rely on government aid, many states partner with insurance companies. If you purchase one of the eligible “partnership” policies, for every dollar your insurance policy pays, you are able to retain an additional dollar above the Medicaid guidelines and still qualify for assistance when your benefits run out.
You’ll want to make sure your policy includes 100% of your daily benefit amount as coverage for home health care. In many ways, long-term care insurance can be thought of as nursing home prevention insurance, if it allows you to be cared for at home as long as possible. Also find out what you have to do to make a claim; when you are dealing with a health crisis, you certainly don’t want the aggravation of fighting an insurance company for your rightful benefit.
Shop Around & Do the Math
When comparing quotes from different companies, in addition to the premiums, you’ll want to consider the financial stability of the issuing company. And before deciding to purchase, make sure your budget can handle potential premium increases. It was unheard of to raise premiums on existing policy holders until recent years, when premiums on some policies increased more than 25%. Dropping the policy because you can’t absorb the future increases is counterproductive.
Finally, when you are ready to start the buying process, work with an insurance agent, broker or financial adviser you trust, who can explain all of your options and steer you to the policy that is best for your individual circumstances.
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