The basics of long term care insurance

The harsh realities of aging in America are coming into sharp focus. Soon, a 96-year-old baby boomer without long term care insurance may have to rely on a 88-year-old spouse or a 68-year-old son or daughter for personal care.

Consumers can't rely on Medicare, Medicare supplementary insurance, or health insurance to help them meet long term care costs. They don't cover most long term care expenses.

When to buy a long term care policy

When buying long term care insurance, your age is a primary factor in determining its cost. The younger you are when you get the policy, the cheaper your premiums will be. Of course, you also will be paying those premiums for a longer period of time before taking any benefits.

A good time to buy long term care insurance is between ages 50 and 55, according to the American Health Care Association (AHCA), a federation of 50 state health organizations representing assisted living, nursing facility, long term care, and subacute care providers. A policy that costs you $800 annually when you're 55 will cost you nearly twice as much if you wait to buy it when you're 65.

There is an exception, however. You might want to purchase a long term care policy before age 50 if your employer sponsors an attractive long term care group plan at an affordable price.

Most insurers won't sell you long term care insurance if you're over 85 or if you have a pre-existing medical condition such as heart disease or diabetes. A reputable insurer only sells long term care policies to reasonably healthy people who are at low risk of needing their benefits in the foreseeable future. So beware of policies and premiums that sound too good to be true.

Important policy features

The most crucial factor when choosing a long term care policy should be its benefit triggers, the set of conditions that must exist before you begin receiving coverage. Ordinarily, you must have an acute medical condition that requires skilled nursing care before your benefits kick in. The best, and most expensive, policies allow you to start receiving benefits if you suffer from a cognitive impairment such as Alzheimer's disease, even if you can bathe and dress yourself.

Bathing is one of several activities of daily living, or ADLs, which are the most commonly used benefit triggers. Your benefits begin when you are no longer able to perform a certain number of ADLs without assistance. (Your policy will determine that number. A good LTC policy will require the inability to perform two ADLs.)

A good long term care policy also will cover all levels of care including custodial or personal care in a variety of settings. Those settings include:

• Adult day care: Sites that provide personal and skilled care, and recreational services.
• Assisted living facilities: Living quarters that provide individualized personal care and health services for people who need help with personal care.
• Facility care services: Licensed agencies that provide skilled nursing care, speech, physical, or occupational therapy, or help from health aides.
• Nursing facilities: Residential sites for people who need daily medical care. Many nursing home stays are for a short rehabilitative period after an acute illness or injury such as a hip fracture.

Make sure you know exactly what types of services and facilities are covered by your long term care policy. If you don't go to the right kind of facility, your insurance company can refuse to pay for your care.

You also should investigate whether your policy has a nonforfeiture benefit, which is additional long term care coverage you can buy that protects some of your policy's value if you drop your policy or let it lapse. While this benefit offers some protection for your investment, it will raise your premiums. If you are confident you will be able to pay your premiums, even if there are future rate hikes, you can lower your costs by passing up this option.

Waiver of premium is another important feature in a long term care policy. This provision lets you stop paying premiums during the time you are receiving benefits. Read your policy carefully to see whether there are any restrictions on this feature, such as a requirement to be in a nursing home for a period of time (60 to 90 days is standard) before your premiums are waived.

Most long term care policies sold today must be guaranteed renewable, which means the insurer guarantees you the chance to renew your policy. It doesn't mean the insurer guarantees you a fixed premium. Note: Your premium will probably increase over time. While you can't be singled out for a rate increase no matter how many claims you file you should know that state regulators routinely grant increases to insurance companies to cover whole classes of policies that experience a large number of expensive claims.

When you're deciding how much insurance to buy, it's important to remember that most retirement income is fixed and does not keep pace with inflation. If you buy too much insurance now, you may not be able to afford the premiums later.

You decide your policy's fixed dollar amount and the length of time your benefits will run. The four major components used in calculating how much insurance to buy are:

• Benefit amount: The maximum fixed dollar amount your policy will pay for each day you need care. This figure determines your policy's total value. If you buy a policy that pays $150 per day for three years, then your policy value is $164,250 ($150 x 365 days x 3 years).

When figuring your benefit amount, call a reputable nursing facility in your area and find out what it charges its residents per day. (On average, round-the-clock long term care services in a nursing home cost about $115 per day, according to the AHCA.) Your LTC agent should also know the average nursing home cost in your area. Then decide how much of your own income you could afford to spend per day to stay there.

The difference between the cost of a nursing home and the amount from your own income is the benefit amount you should consider buying. Note: Couples shouldn't figure that any of their fixed income will go to cover long term care costs, because the spouse who does not need the care will probably need the entire fixed income for bills and living expenses.

• Inflation adjustment: Increases the benefit amount to "cover" inflation. While this protection is essential when buying long term care insurance, beware of any salespitch that promises your policy will keep pace with inflation. No one can predict the vagaries of the medical inflation rate.

Even with the best, and most expensive, inflation adjustment which increases your benefit amount by a certain percentage (usually 5 percent annually) compounded over your lifetime increases in your benefits are not going to completely cover your increased medical costs.

• Benefit period: The length of time your policy will pay for covered services. Because the average length of stay in a nursing home is 2 years, according to the Health Insurance Association of America (HIAA), most people choose a two- or three-year benefit period when selecting policy features. The more years your policy covers, the higher your premium. An unlimited benefit period is another option. But remember, the longer your benefit period, the higher the premiums.
• Deductible (elimination period): The number of days that you pay for care before your policy begins your coverage. (The standard deductible period is between 20 and 100 days.) Many policies have longer waiting periods with much lower premiums, but you will have to pay for needed care until you reach that deductible. Again, it all depends on your assets and how much you reasonably can afford to pay in premiums.