As households are trying to reduce debt and increase savings, taking on additional expenses in the form of insurance premiums seems counterintuitive, especially when many people perceive the insurance as non essential. Instead of writing a “long-term care 101” article that could cure insomnia, I’ve focused on why you may need it, and how to save money if you decide to purchase a policy.

If you’ve attended a long-term care (LTC) seminar, or read literature from insurance companies, then you know how dire they make the statistics look. In fact, the estimates and projected probabilities for care look so abysmal, you might dismiss it all together as insurance propaganda. Unfortunately, independent sources only confirm their accuracy. According to the American Association of Retired Persons (AARP) in a report titled “Beyond 50.2003: A Report to the Nation on Independent Living and Disability” the lifetime probability of becoming disabled in at least two activities of daily living or of being cognitively impaired is 68% for people age 65 and older. An exhaustive list of studies and statistics from universities, associations and think tank organizations all support favorable odds of a long-term care event occurring.

When considering how to plan for LTC, don’t count on Medicare or Medicaid. Medicare doesn’t cover LTC expenses, and Medicaid requires you to go broke before going into a welfare nursing home. Aside from the complications in applying and qualifying for Medicaid, simply visiting a government run nursing home and a private pay nursing home will illustrate why Medicaid is also called “impoverished care”.

The costs of self insuring for LTC Home health services run $29 an hour, which adds up to $36,000 a year for assisted living and $56,000 a year for a nursing home (Health Care Financing Administration, Office of the Actuary, National Health Statistics Group). Moreover, nursing home costs are expected to quadruple by 2030. Consider this example: A 60-year-old client who wants long-term care insurance that would pay $120 of daily expenses for five years of assisted living would face a premium of $2,000 per year. For the 40 year old client, paying on the policy for 20 years is still less costly than one year of care.

 

Complexity and Confusion of Policies Work Can Against You

Today’s LTC policies are complex and can overwhelm you with the different features. According to the Kaiser Commission, policies with the same design elements can differ from one insurance carrier to another in even more subtle ways such as the definition of certain services. For example, some policies may state two out of five activities of daily living (ADL) instead of two out of six. What’s the difference?

With a good policy, LTC benefits start when you can’t perform two of six activities of daily living (ADLs): eating, bathing, dressing, toileting, continence, and transferring (getting in and out of a bed or chair). The most common activity lost first is bathing. Some insurance companies will list only five ADLs and leave out bathing, a major red flag.

Another area of confusion involves cognitive impairment. A good policy covers the likelihood of Alzheimer’s, senility, irreversible dementia, and mental dysfunction caused by a stroke. Stay away from a policy that doesn’t have these cognitive impairments listed. Furthermore, coverage for cognitive impairment should not be tied to your ability to perform the activities of daily living, as some inadvisable policies state “you have coverage if you can’t do two out of six activities of daily living AND are cognitively impaired.” You may very well loose your cognitive ability and still perform these ADLs but need supervision. AND is a red flag.

 

Must Have Features

You should also scrutinize the scope of benefits to make sure you have coverage on things such as home care, adult day care, and assisted living. Again, the contract language is important because you will want a policy that pays for all levels of doctor ordered care, in any state licensed facility, including nursing home, assisted living or adult foster care. Put a red flag on policies that restrict you to selected nursing homes. Those facilities are often not the level of care you would want.

Scott Foster, CLU, a State Farm agent in Conyers offers helpful advice about some “must have” features when shopping for a policy. “If you’re under the age of 65, you must have inflation protection in your policy. Over the age of 65, maybe or maybe not. Also, make sure the per day pay amount is adequate for where you want the care. The cost of care in Boston is three times more expensive than the cost of care in Atlanta.” Foster adds that “Another must have is the ability to use your own doctor. Reputable companies allow you to use your own doctor. To do otherwise, is a conflict of interest.”

 

How Long, When and Where to Buy

You can trim the policy costs by changing the duration of the policy and elimination period of the policy. Consider shortening a policy’s benefit period to three years. A Milliman actuarial study estimates that only 8 percent of 70-year old claimants will have a claim going beyond five years. Second, an elimination period of 60 or 90 days will probably coordinate with the termination of Medicare benefits. The big question often asked is when to buy a LTC policy. I recommend you start shopping for a policy after the age of 55. After the age of 60, the premiums jump considerably.

Only buy LTC insurance from a company with an A.M. Best Rating of A++ or A+. Clarkhoward.com has a link on his website that takes you to his list of recommended LTC insurance companies. Financial strength is crucial, especially in light of last year’s financial meltdown when companies like Genworth Financial went from $20 a share to a dollar and change. Aside from the strength of the insurance company, I advise clients to look at the expertise and knowledge of the individual selling you the policy. I recommend buying from someone who is a full time insurance agent with a strong background in LTC, rather than buying from someone who sells LTC insurance as an incidental add on to his or her main profession.

We use insurance to transfer the risk of an event away from draining our savings on to the resources of an insurance company. We pay for this transference of risk for different perils like fire, death, collision and health. Why not long-term care?

Andrew Brown is a Certified Financial PlannerTM and a Fee-Only Registered Investment Advisor.