Despite the recent economic downturn, more and more people of all ages are buying long-term care insurance policies. You, too, may be wondering if long-term care insurance is the smartest decision for you and your family. In this article, Lisa Schork, CLTC - a long-term care industry specialist explains the key factors in making the long-term care insurance decision. The recent interest in long-term care insurance is likely due to three factors: the evolution of these insurance products, limited alternatives for financing care and growing consumer awareness of the benefits of long-term care insurance.

Product evolution

Long-term care (LTC) insurance policies have evolved over time to be far more flexible than they were in the early days, when they were known as nursing home policies. Today, most policies allow the insured to receive care in the setting of their choice, whether this is at primarily at home, in an assisted living facility, adult day care center or nursing home.

Industry standards have developed as well. Most policies offer benefits when a person can no longer perform two out of six “activities of daily living” (such as bathing, dressing, toileting or eating), or when they need substantial assistance due to a cognitive impairment. New benefits have come on the scene, such as additional cash allowances on top of basic coverage which pay for extras, like home modifications and home safety checks. Benefits like this make it easier for people to receive assistance at home.

How would you pay for long term care services such as a visiting nurse, assisted living, therapy or a personal care aid if you needed them? Could you easily pull $200,000 from your retirement nest egg to pay for three-years in a nursing home? According to the Congressional Budget Office, “Financing Long-Term Care for the Elderly,” April 2006, one year in a nursing home or 24-hour home care can cost more than $72,000 today, and that cost continues to rise. Long term care (LTC) insurance is the one financial tool that can help you prepare for these costs in the future. With this protection, you will be able to maintain more independence should you need long term care. You may be able to stay in your home longer, and you’ll have more choices about your long term care services and providers in the future. That’s why it is critical to make a long term care insurance policy part of your overall financial strategy.

While most consumers know something about long term care and can access information about the topic, several misconceptions surrounding long term care insurance still persist. Additionally, there are a number of tips you should think about when buying the product. Let’s look at two of the most common fallacies about long term care insurance and two helpful tips to consider when putting together your long term care plan.

Misconceptions

One pervasive misconception is that other insurance and government programs will cover long term care costs.  Long term care usually involves non-medical assistance with basic daily activities like dressing, bathing or using the toilet.  In fact, many long term care services that help with these tasks are not typically covered by other kinds of insurance, including health and disability insurance. Only long term care insurance policies help cover the day-to-day assistance you need when you have a chronic illness, disability or cognitive impairment and need help with activities of daily living such as eating, bathing, or toileting.
As for government programs, Medicare pays only for short periods of care and Medicaid covers only the very poor -- those whose assets are at or below state-required levels. In addition, Medicaid often will not pay adequately for care received at home, in the community, in an adult day care, or at assisted-care living facilities. It does cover care received in a nursing home, but a new law passed in February 2006 makes it harder to qualify for government-paid nursing home care.  The look-back period has been increased from 3 to 5 years and doesn’t start until the date you actually need care.

Another common misunderstanding is that many people think they can’t afford long term care insurance. In reality, coverage is more reasonably priced than they think and can certainly fit within a budget. For example, using data from the June 2004 AHIP LTC Insurance Market Surveys, the average premiums for top long term care insurance sellers in 2002 ranged from a base premium of $422 a year for a 40-year-old to $1,337 a year for a 65-year-old.  If you consider coverage that also includes compounded inflation protection (in this case 5%), the premium was $890 a year for the 40-year-old and $2,346 a year for the 65-year-old. Remember, the younger and healthier you are when you apply, the lower your premiums will be. So if you plan to buy long term care insurance, it makes sense to buy it sooner than later. The key is to develop a long term care insurance plan that fits your budget and your needs.

Helpful Tips

When you are ready to buy long term care insurance, it’s very important to have inflation protection, especially if you are buying a policy in your 40s, 50s, or 60s. After all, if you buy a specified daily or monthly benefit based on today’s provider costs, that benefit is not going to keep up with rising costs over the 10, 20 or even 30 years that may pass before you need the benefits --- unless you have inflation protection. Most long term care insurance policies have different kinds of inflation protection options, and some can be very expensive. The key is to select the option that gives you an appropriate level of protection at the best price.  Policies may also offer the ability to purchase additional coverage over time without medical screening which may be another way to allow your policy to keep up with inflation. Again, this strategy could be costly.

The good news is that one of the latest options available in some policies is automatic inflation coverage tied to the Consumer Price Index (CPI). The CPI is the tool most often used to measure the rate of inflation in the U.S. and is widely recognized by the public. This index, which has been on the rise for over 50 years, tracks the prices of a basket of goods and services and includes items such as medical care and housing.  In fact, U.S. social security benefits and many pension plan benefits are linked to the CPI. 
Automatic inflation coverage tied to the CPI works like this:  Every year on the policy anniversary, your long term care insurance coverage amounts are automatically adjusted according to the CPI.  When the CPI increases – even during periods of the highest inflation like in the 1970’s – your benefits increase accordingly, but your premium remains the same.  In the unlikely event that the CPI decreases – which last happened in 1955 – your benefit amount will not be reduced. 
In addition to having inflation protection, another tip to buying the right LTC insurance for you is to avoid purchasing more insurance than you need.  The first step is to research the costs of home health care, assisted living facilities, and nursing homes in your area.  Don’t rely on national average numbers because costs can vary greatly from city to city and region to region. For example, nursing home prices in Birmingham, AL are cheaper than they are in Seattle or Bellingham, WA.
Once you know the costs, you’ll have a better understanding of the daily benefit you need to cover those expenses. In addition, be sure to include in your calculations the estimated increase in cost based on the inflation rate or CPI over 10, 20 or 30 years. Remember that a nursing home is probably the worse-case scenario, and that most people receive care at home or in assisted living facilities which tend to be less costly.

So is planning for long term care insurance worth it?  Few people regret purchasing car or home insurance when an accident takes place.  The coverage earned is far greater than the annual premiums paid, especially when you consider the alternative: paying for a new car or a new home out-of-pocket.  The same is true of long term care insurance.  The benefits paid out under a LTC insurance policy for one year alone can often exceed the cumulative premiums you pay into the policy over many years.  More important, long term care insurance helps to protect your retirement savings and allows you more independence and choice in how and where you receive your long term care services when you need them.