Page 2: The basics of long-term care insurance – How much coverage should you buy?

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When buying long-term care insurance, you first need to decide how much coverage you want and how long you want your benefits to last. There are four major components used in calculating how much insurance to buy.

Daily benefit amount: The maximum 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). According to the “American Association for Long-Term Care Insurance, LTCi Sourcebook,” by the American Association for Long-Term Care Insurance (AALTCI), 36% of people chose a daily benefit amount between $100 to $149 and 33% chose an amount between $150 and $199, based on applications in 2007.

When figuring your benefit amount, call a reputable nursing facility in your area and find out what it charges its residents per day. The average national cost for a private room in a nursing home is $213 a day ($77,745 annually) and $189 per day ($68,985 annually) for a semi-private room, according to the “American Association for Long-Term Care Insurance, 2008 LTCi Sourcebook,” by the AALTCI. Your LTC agent 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.

“Take into account using some of your savings and retirement income, including social security, and use long-term care insurance to co-insure the risk,” says Jesse Slome, executive director at AALTCI. “That will significantly reduce the cost” of your policy.

Some agents recommend buying a benefit amount that is the difference between the cost of a nursing home in your area and the amount of your income. Slome says that you should think of your long-term care policy as a co-pay.

Inflation adjustment: Increases the benefit amount to cover inflation. While this protection is essential when buying long-term care insurance, beware of any sales pitch 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, increases in your benefits are not going to completely cover your increased medical costs. Slome says that there are a number of different inflation benefit options. But generally, the compound inflation option — the most common option that compounds your benefit over your lifetime — will increase your benefit by roughly 5 percent per year.

Benefit period: The length of time your policy will pay for covered services. Most people choose a two- or three-year benefit period when selecting policy features.

“Most people will have some long-term care need,” Slome says. “But the averages are irrelevant because each person’s risk of needing long-term care is 0 percent or 100%.”

Only about 20% of people older than 65 will need more than five years of long-term care, he says. Roughly 48% will need one year or less. When buying a policy, remember that the more years your policy covers, the higher your premium. An unlimited benefit period is available, but that will come at a significantly higher cost.

Deductible (or elimination period): The number of days that you pay for care before your policy begins your coverage. The standard deductible period is 20 to 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.

Roughly 83 percent of people who buy long-term care policies chose a deductible elimination period between 90 to 100 days, according to the “American Association for Long-Term Care Insurance, 2008 LTCi Sourcebook,” by the American Association for Long-Term Care Insurance.

Tax implications of long-term care

Most long-term care policies sold today are tax-qualified. This means your premiums for long-term care insurance, as well as your out-of-pocket expenses for long-term care, can be applied toward meeting the 7.5% floor for medical expense deductions contained in the federal tax code.

There are limits, based on your age, for the total amount of premiums paid for LTC insurance that can be applied toward the 7.5 percent floor. You should check with your tax adviser to see whether you are eligible to take this deduction.

Employers may be able to deduct as a business expense both the cost of setting up a group long-term care insurance plan for their employees and any contributions they may make toward paying their employees’ premium costs. Employer contributions are excluded from their employees’ taxable income.

“Tax advantages are minimal for individuals but significant for business owners,” Slome says.

Although uncommon, there are non-tax-qualified LTC policies. These individual policies typically offer more generous benefits and use less restrictive guidelines to trigger them. However, unless there are changes to the federal tax code, benefits from this kind of policy may be considered taxable income.

Some states offer tax incentives to purchase long-term care insurance, ranging from partial to full deductions of long-term care premiums on state income tax forms. You can call your state’s Department of Insurance to find out whether your state has LTC insurance tax incentives.

In addition, a small number of states offer LTC “partnership” programs to encourage people to buy LTC insurance rather than spend down their assets to qualify for Medicaid. If you buy an LTC policy under one of these partnership programs, and you delete your LTC coverage, you are still allowed to retain some assets and qualify for Medicaid, as long as you meet all other Medicaid criteria. Contact your state insurance department for information on whether your state participates and the specific guidelines.

How to find a long-term care policy

Your first step to finding long-term care coverage is to contact an agent licensed who sells long-term care policies in your area, or shop online. Your state’s Department of Insurance will have a list of the licensed insurers.

In addition, AALTCI’s Web site has a tool that allows you to find a local licensed agent. Finally, you can always ask your family and friends to recommend a reputable agent.

After you find an agent, discuss your long-term care needs. The National Association of Insurance Commissioners, offers a list of criteria to consider when shopping for a long-term care policy. They are:

• At least one year of nursing home or home health care coverage, including intermediate and custodial care. Benefits should not be limited primarily to skilled care.

• Coverage for Alzheimer’s disease, Parkinson’s disease, multiple sclerosis and diabetes should you develop them after purchasing the policy.

• An inflation-protection option that periodically increases the benefit level without the need for you to provide evidence of insurability.

• An outline that clearly describes your policy’s benefits, terms and limitations in detail. Understand how much money the policy would pay and how much you would pay.

• A guarantee that the policy cannot be canceled when you get older or if you suffer physical or mental deterioration.

• The right to cancel the policy for any reason within 30 days of purchase and receive a full premium refund.

• A clear description of your elimination period. Some policies have a set number of days that must be spent in a nursing home before the coverage kicks in.

By discussing your needs with an agent, and asking a lot of questions, you should know exactly what you’re getting for your money. If there’s anything you don’t understand, and the agent can’t give you a satisfactory answer, don’t buy the policy. Walk away from any high-pressure sales techniques or promises that sound too good to be true.

When you’ve found the right coverage, you will need to fill out an application or give information to your agent so he or she can complete the necessary forms. Be honest. If you don’t accurately disclose your medical history, the insurance company can refuse to pay your claims. Back to page 1

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