How to Shop for a Long-Term Care Insurance Policy

The last few weeks, we have discussed the basics of long-term care insurance and taken a deeper dive into why everyone needs long-term care insurance.   Now that you’re convinced of the necessity of long-term care insurance, the question is: what do you need to know when buying it?

The first question to answer in shopping for long-term care policies is: what type of policy should you buy?  There are two types of policies one should evaluate:

1. Indemnity policy.  An indemnity policy is a policy that will pay a predetermined amount for your cost of care regardless of the expenses you incur.

For example, if you have an indemnity policy that covers the predetermined amount of $300 per day, but you only incur $232 in costs, you still receive the full amount of $300 per day, despite the excess of $68 per day.

The benefit of an indemnity policy is that any excess payment you receive can be used to offset expenses that may not be otherwise covered under the policy.

2. Expense reimbursement policy.  An expense reimbursement policy pays the actual long-term care expenses, up to the daily benefit amount.

For example, if your daily cost of care is  $232, with an expense reimbursement policy, the policy will pay exactly $232.

The advantage of this plan is that excess benefits remain in the policy and extend the benefit period.

Once you have determined which type of policy will be best for you, there are several options that must be decided for each specific plan.  When looking to purchase a policy, the key points to look for are:

1.  The daily benefit amount.  The daily benefit amount is the fixed dollar amount that is payable from a long-term care insurance policy.  You want to make sure that you choose a sufficient daily benefit amount to protect yourself from spending down your assets if you need long-term care.  Your cost of care range will be determined by where you live, which should be tied into evaluating how much of a daily benefit one should purchase.

According to the Genworth Financial 2013 Cost of Care survey:

  • In New York, the annual cost for
    • Private room in a nursing home: $125,732 (requiring $350 of benefit per day)
    • Home health aid: $50,336 (requiring $140 of benefit per day)
  • Compare this to the annual cost in the state of Alabama
    • Private room in a nursing home: $69,543
    • Home health aid: $36,608

2.    Inflation protection.  Most long-term care policies offer inflation protection, which is a valuable way to plan for the ever-increasing cost of long-term care.  Inflation protection allows you to purchase premiums at a fixed cost; in other words, you can increase your coverage over time without increasing your premiums.  Inflation protection gives you peace of mind tomorrow with prices today. The younger you are, the more important it is to have inflation protection.

For example, as noted above, the 2013 cost of a home health aid in New York was $50,336.  Assuming a 5% rate of inflation, in 15 years, that same care now costs $144,575.  With inflation, long-term care can become costly quickly; it is important to hedge against inflation.

There are several rider options for consumers including: no inflation, compound inflation, and simple inflation.  Inflation protection is the costliest rider for long-term care policies.

 3. The elimination period. The elimination period refers to the waiting period before the policy coverage kicks in.  Some people view long-term care insurance as catastrophic coverage; therefore they purchase a long-term care policy with an elimination period.  You can determine the appropriate length of an elimination period based on how much out-of-pocket cost you are willing to pay.

For example, if you put a 100 day elimination period into your policy, and something happens wherein you incur $300 a day in care costs, you will be liable for that $30,000 out-of-pocket until the elimination period ends (on day 101).

4.    Length of coverage.  To determine the length of coverage, many people look at the average stay in a nursing home.  Determining the length of coverage on your policy – whether it’s 3 years, 5 years, or a lifetime benefit – is a function of how much money will be used up over what period of time.  Of course, the longer the period of time, the more expensive the policy is.  It is important to note that most long-term care premiums are not guaranteed; insurance companies generally can increase the cost of premiums.

 

For more information on long-term care policies and retirement planning, contact us.

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