This site is best viewed using Mozilla Firefox browser.

What's New

2001-05-01 10:25:00

If we were going to buy a long-term care insurance policy... what is most important?

Question:  Were we to buy a Long-Term Care policy, how much should we buy and what should we look for?

Answer:  We are going to make the assumption that you have gone through all of the evaluation regarding whether or not a Long-Term Care policy is for you, and you have decided… it is.  Now, we must match your resources to the policy you need.  When visiting with people about this process, I often make the analogy of buying a mature tree to plant just outside the main window of their home.  When you're at the nursery, you never know how big of a tree to buy.  It is only after it is planted and in place that you can see what you really need insofar as size.  Once planted, you look at it from inside the house and from all directions outside.  Then you begin to trim it down to where it fits and looks good.  In other words, you start with more 'tree' than you need, then make it fit.  This is how I feel one should go about buying a Long-Term Care policy.  Start with everything you should ever want, then… begin paring it down to make it fit the budget.The first and most important element of any Long-Term Care policy is its daily benefit.  This is the amount of money that is available on daily basis to pay for the care you need.  If your policy is a non-indemnity policy, you will have up to this many dollars available for the care.  If your policy is an indemnity policy, you will receive this much money for each day of care.  It will be up to you to negotiate and pay for the costs of care out of the money you receive.  Whatever you have left is yours to keep.  You not only get what you pay for, but the money comes to you and not to the nursing home or residence providing the care.  By them only knowing that you will be paying for the costs yourself may allow you a greater degree of negotiation on the cost of the care.  They never know and never need to know the benefits of your policy.  The first thing you do therefore when buying a policy is to get as much in daily benefits as you will need to cover all or most of the cost of the care when you need it.  If you are 10 or more years away from the 'window of use' (the time, actuarially speaking, that the probability first exists for this type of care… around the age of 83... Source:  The Insider’s Guide to Long-Term care), you will want to factor in inflation.  For instance, today's costs for Long-Term Care in the 6 counties surrounding and including Wichita (Sedgwick, Sumner, Harvey, Cowley, Butler and Reno) varies from $70 per day (for simple, personal, custodial care and assisted living), to $150 and more per day (for skilled, heavy or critical care).  In 10 years, with 3 1/3% inflation (the rate this type of care has averaged increasing over the last 30 years... Source:  The Insider’s Guide to Long-Term care), these costs will vary from $100 to $225 per day.  In 20 years these costs will vary from $140 to $300 per day.  In 30 years (meaning you are in your mid-50's now), these costs will vary from $175 to $375 per day.  That could be as much as over $11,000 per month.  It's hard to believe isn't it?  What is even harder to imagine is what if you had no policy and to pay for the cost of this care out of your monthly income or assets.  Once, based upon your current age, you find the daily benefit number that makes sense, either with an inflation rider (be sure it is 5% compounded annually), or without, then the next most important thing is the benefit period.  This is the amount of time the daily benefit will be payable.  If possible, you will always want to get a lifetime benefit period.  This means the daily benefit will be payable for life.  If you cannot afford a lifetime benefit period (always check to see what the cost is for lifetime versus a shortened benefit period of say 3, 4 or 5 years), then you buy as long of a benefit period as you can.  The average time a man needs some form of Long-Term Care is around 3 years.  The average time a woman needs some form of Long-Term Care is a about 4 and one-half years (Source: U.S. General Accounting Office, Long-Term Care: Diverse, Growing Population Includes Millions of Americans of All Ages).  You will find the younger you are when you apply, the more insignificant the difference in premiums are for a lifetime benefit period versus a shortened benefit period of say 3, 4 or 5 years.  If you have a shortened benefit period, it means that the policy will only pay its daily benefit for this period of time.  When that time is up, the policy is through paying.  There is however a feature most of the better policies have which can assist with shortened benefit periods.  It is called the 'restoration of benefits' provision.  What it means is that if you are receiving benefits under the policy, and prior to the expiration of the benefit period, your doctor certifies that you no longer need to receive benefits under the policy, and you are then benefit-free for a period of 6 months, the benefit period is restored to its original length of time.  There is generally no limit to the number of times this can happen.  In many cases, it would be possible for the person to rehabilitate and no longer require benefits under the policy, thus this provision would be most valuable.  In other cases of course, the affliction, injury or illness may be such that it is progressive and care would be needed from the onset.  Again, you buy a Long-Term Care policy to protect and preserve income, assets, independence, peace of mind, and those of your family.  Unless it is absolutely necessary for the sake of making the budget work on buying a policy, do not fall into the trap of trying to figure out how long you will need benefits.  We all know people who have either not needed care at all, or only for a few weeks.  We also know people who have needed care for many years.  Buying a lifetime benefit period removes all possibilities of benefits 'running out'.  An analogy might be buying homeowner's insurance policy through only April 15th every year.  There are lots of things that can happen after this date.The next thing you want on your policy, given the ability to afford, is a guarantee to be able to get the care you need at home, as well as in a nursing home or assisted living residence.  This is called a Home Health Care Rider.  In the years I have been working in the Long-Term Care business, I have yet to deliver a policy where both spouses say "We can't wait until we need to go a nursing home."  What they do say is "This is going to be real good if we need it, but you can bet we are going to do everything we can to stay at home, for as long as possible… first."  We all want to stay at home.  I do not recommend buying a Home Health Care policy only, as no one knows what the affliction, illness or injury might be that causes a need for Long-Term Care.  Much of the care one might need can be received at home, but the heavier care (Skilled Care or Critical Care) would be cost prohibitive to receive at home.  This type of care could run as high as $15,000 per month or more at today's costs.  Once you qualify for benefits, you will want the choice to decide where you want to receive the care.  By adding a Home Health Care Rider to your policy, you receive this choice.  This makes your policy a 'Comprehensive' policy… the best kind.If you get one of the better Home Health Care riders included with your policy, you will see that it will not only pay for professional services (that care rendered by a licensed practitioner such as a nurse, CNA, CMA, therapist, etc.), but that it will also pay for ‘basic services’ (someone to come in and cook, clean, shop, run errands, provide companionship, etc.).  These basic services are also called 'homemaker' services in some policies.  As you can see, these are things you normally would not think of, but could prove to be most important at the time of need.  The next most important item is to get a zero-day elimination period.  An elimination period is the number of days that must expire before benefits are payable.  Some agents will tell you that you have coverage under Medicare and your Medicare Supplement for the first 100 days.  This is not true most of the time.  Medicare only pays for the first 20 days of Skilled Care.  They pay nothing for the lower levels of care.  Only 22% of all people in a nursing home, licensed for all levels of care, are receiving Skilled Care (Source: Dept. SRS, 1999).  This is logical.  Generally as one's condition worsens, he or she needs more care.  Skilled Care (that care administered in the presence of a Registered Nurse 24 hours a day), is not the type of care most people need at the onset of an illness or affliction.  If Skilled Care is being received, and all of the conditions have been met, it may be possible for Medicare and your Medicare Supplement to pay up to another 80 days, past the initial 20 days that Medicare would cover.  So, if you buy a 100-day elimination period on your policy, and you have no coverage under Medicare or your Medicare Supplement, you will be paying the entire bill yourself for that first 100 days.  I do not believe you will be too happy with your agent and your policy when you realize you have paid on your policy for many years, and then, before it pays a dime, you have to pay for the first 100 days.  If the cost of care is $100 per day, that's $10,000.  When you run the numbers... generally you will find... you will never save enough in premium between a zero-day and one hundred day elimination period to warrant the exposure you will have.  I cannot imagine a circumstance where you would ever want to buy a policy that the elimination period had to be satisfied more than once in a lifetime.  This could be a financial nightmare.  These are the most important elements of any Long-Term Care policy.  Once you have these taken care of, you can then look at the other options that are available, such as a Paid-Up Survivor Rider (where after a certain number of years of owning the policy, usually 4 or 5, if a spouse should die, the policy is paid up for the life of the surviving spouse), or a Return of Premium Rider (where after a certain number of years, all or most of the premium paid in is returned less any benefits paid out).  These can be very beneficial, but most certainly come after the most important elements about the policy are taken care of which have been detailed above.  Some agents might spend a lot of time talking about other benefits such as a bed reservation benefit, hospice care, respite care, adult day care, etc.  These are nice to have but I liken them to the car dealer throwing in floor mats or undercoating on the car you just purchased.  These are not the main reasons why you buy a policy.  Often times many of these are standard benefits on the master policy anyway.  Once you decide on all of the above, then you need to look at the companies that can offer the same… affordably.  This is where it can sometimes become very frustrating.  If an agent only represents one or two companies, they may spend most of their time telling you how great that company or policy is, instead of telling you what the policy will do.  After all, the policy is always the final and exclusive source for all terms, conditions, schedules, definitions and benefits; and supersedes any and all, prior or contemporaneous negotiations, understandings or agreements..  The frustration normally sets in about the time you sit down in your second situation such as this.  You should always be familiar with how Long-Term Care works, the risks involved of self-insuring, and the role of Medicare and Medicaid.  Only then will you be able to determine how much if any, of your current and/or forecasted income and assets you need to protect.  Health considerations are also very important.  Your health can affect whether or not you can qualify for a policy.  Once you have all of this information, you need to know which of the companies will most likely underwrite the risk, and provide what is needed for the lowest price.  After you decide upon the best option, the application process takes only a few minutes.  You do not have to take a physical or have any kind of medical tests performed.  Most companies use a statement from your Doctor, your medical records, a paramedic interview completed over the phone, and perhaps an in-person visit by an RN in your home for their underwriting.  The entire process usually takes from 4 to 6 weeks before you have your policy.  Then, by law (KLTCA88) you have 30 days unconditionally to decide whether or not you want to keep it.  We like to say... “the decision should never be whether or not to apply, but rather, whether or not to keep the policy if you can get it.”