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Investing Specialists

Five Key Questions About Long-Term Care Insurance

How likely are you to need it, and what kind of coverage should you buy?

When to purchase long-term care insurance--or perhaps more significantly, whether to purchase it at all--is on your mind, judging from the many responses to last week's article on the topic.

Many readers argued that this coverage is an essential component of their financial plans, for peace of mind as much as its role in preserving their nest eggs. Others, meanwhile, are forgoing this coverage because they question the likelihood that they'll incur long-term care costs or they have worries over insurance companies' financial health.

My previous article centered around the timing of a purchase of a long-term care policy, which is a key consideration for this type of coverage. If you buy a long-term care policy in your early 50s and don't need the coverage until you're 82 (or not at all), you'll pay a steep opportunity cost. But if you wait too long to buy a policy, it might be prohibitively expensive or you may have encountered a health condition that makes you uninsurable.

As readers' many worthwhile comments prove (and I urge you to read their comments below my article), timing isn't the only consideration when purchasing this type of coverage. Here are some of the key questions to keep in mind as you make decisions about long-term care.

How Likely Are You to Need It?
How likely are you to need long-term care over your lifetime? And even more important from a planning standpoint: What's your total out-of-pocket tab likely to be for this type of care? Those are the key questions to ask when making informed decisions about whether to buy long-term care insurance, but it's tough to find unbiased information about the average person's need for this type of coverage and what it will cost. In my admittedly informal Internet search for unbiased statistics about long-term care, I found scant information from non-insurance-company sources.

That's not to say you should completely dismiss all the long-term care statistics you see. But as this blog posting astutely points out, it's likely that many of the long-term care statistics you see parroted in various articles, including "Two thirds of people age 65 or over will need long-term care," overstate the financial impact of long-term care on the typical individual. That said, if your family has history of serious medical conditions, dementia, or Alzheimer's Disease, you automatically have a greater reason to consider this type of coverage than does the general population.

What's Your Asset Level?
Whether long-term care insurance is appropriate depends, at least in part, on your asset level. Those who come into retirement with less than $250,000 in assets will almost certainly have better uses for their money than paying premiums for this type of insurance; they may also be eligible for Medicaid if they should need long-term care. (If your portfolio is in this ballpark, consult with an estate-planning attorney to determine whether it's advisable to gift assets or create a trust to pass assets to your heirs.)

Meanwhile, those with more than $2 million in assets may be able to pay for this type of care out of pocket. If your portfolio falls in the middle of that range, however, you're a good candidate for long-term care insurance. And even if your total assets weigh in at $2 million or above, don't forget to consider intangibles. This type of insurance may be a good idea if it gives you peace of mind and the permission to spend your money during your lifetime; ditto if leaving a substantial legacy for your children and/or grandchildren is a big priority for you.

What Kind of Coverage Do You Need/Want?
The price you'll pay for a long-term care policy will vary depending on the amount of coverage, as well as the flexibility of your policy. As you assess these issues, be sure to weigh the additional costs against the intangibles: Adding features that promise extra coverage and flexibility can also provide substantial peace of mind.

The key differentiator in the pricing of long-term care insurance policies is the amount of daily benefit you're buying--you'll obviously pay more for a policy that pays $150 of your long-term care costs per day versus one that pays just $100. You'll also be able to specify whether you'd like your daily benefit to step up with inflation; even though such a rider will cost you, it's highly advisable given that health-care inflation rates have been far outstripping inflation as a whole during the past few decades.

Another key swing factor is the total lifetime benefit--for example, a policy may cover $250,000 in lifetime long-term care benefits, or the lifetime benefit may be unlimited. Policy pricing also varies depending on what type of care is covered. Owing to increasing demand, many policies are what's called comprehensive, meaning the patient can obtain care in a variety of settings, from a traditional nursing home to care at home. Cheaper policies, meanwhile, will only pay for care in a traditional setting, usually a nursing home.

Policy costs will also vary based on the length of your elimination period, which is similar in concept to an insurance deductible. If your policy has an elimination period of 30 days, for example, that means you'll be on the hook for any long-term care costs you incur in the first 30 days of your illness; after that period has elapsed, your insurer will pick up all or part of the tab, up to your daily benefit amount.

How Would You Like to Pay for That?
Under a traditional long-term care policy, you make regular payments during the life of that policy. But as one commenter below last week's article pointed out, you can also customize your payment program, paying for your policy in a single payment, over 10 or 20 years, or until you hit age 65. Such payment options allow you to front-load your payments and reduce your fixed costs in retirement.

How Likely Is the Company to Pay?
Last but not least, if you're considering a long-term care insurance policy, you must also check up on the insurer's financial strength. Insurers are highly regulated, but the recent financial crisis cast doubt on the viability of some of the industry's most venerable names. Don't just rely on name recognition. A.M. Best's rating system is widely considered to be the industry's toughest; focus on companies with ratings of A or higher. (You'll need to register, but you don't need to pay to obtain financial-strength ratings.) Also ask your agent about the insurer's history of raising client long-term care premiums. Although such maneuvers can improve a firm's financial health, they can also present a financial hardship to the insured, a lesson many long-term care policyholders learned the hard way during the past few years.

See More Articles by Christine Benz


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