The Savings Game: Is long-term care insurance right for you, and if so, what kind?

Approximately two-thirds of all Americans who reach the age of 65 will require long-term care at some point in their lives, whether it be in their own homes or in a nursing home or assisted-living facility.

The cost of this care is considerable -- more than $50,000 per year for a nursing home stay in many parts of the country -- so it makes sense to consider this information when you do your long-range financial planning.

Long-term care is not covered by conventional health insurance or by Medicare, but you can get long-term care (LTC) insurance on the private market. As you might expect, premiums are much lower for those who take out policies when they are younger and in better health.

According to a recent article in the Wall Street Journal, a typical policy for a 45-year-old would be $1,617 per year, but at age 65 it would be $3,526. The longer you wait to take out a policy, the higher the cost will be, and you will run the risk of being uninsurable.

This type of insurance makes the most sense for upper-middle-class married couples; others may find it unaffordable. For families with low incomes and low assets, Medicaid can assist in paying for long-term care, but only after most assets have been used.

Some employers offer their employees LTC insurance group rates, but very few pay anything toward premiums. However, premiums are likely to cost less than in individual policies. Those who buy employer policies are able to maintain them even after changing jobs or retiring.

The federal government offers LTC coverage through the Federal Long-Term Care Insurance Program to all federal and U.S. Postal Service employees and annuitants, active and retired members of the uniformed services and dependents. Detailed information is available at www.ltcfeds.com. This program has benefits that may not be available from other programs.

Two basic types of LTC insurance policies that are available, “indemnity” and “reimbursement.” Indemnity policies pay a flat rate regardless of the cost. Once you qualify for benefits, no proof of expenses is required. “Reimbursement” policies pay a percentage of actual cost up to a daily maximum. Reimbursement plans are generally less expensive but require more paperwork.

To determine how much coverage you require, estimate what you can afford to pay for long-term care by analyzing your expected income from all sources. Compute the difference between the cost of nursing care in your area and the expected income that you can allocate for it. For example, if you can afford $100 per day, and the nursing cost is $200 per day, you should be insured for $100 per day. (You can use an inflation-protection option to cover anticipated increases in nursing home rates.)

Another important consideration is a policy’s “elimination” or “waiting” period, the length of time you must pay for covered services before the insurance activates. Naturally, the longer the period you choose, the lower the premium.

Discuss these important issues with your agent. Once you buy a policy, you have 30 days to review it and receive a full refund if you change your mind. Make sure the terms are accurate. Depend neither on a preliminary sales document nor the presentation. All issues will be covered in your contract.

Here are some considerations to weigh before signing a contract:
1. Determine the circumstances under which the policy will pay you benefits.
2. Review any restrictions about facilities you can use.
3. Determine whether there are home-care options. (This option is more expensive, and you may not want it.)
4. Consider an “inflation option.” This is expensive but worthwhile, especially for young policyholders.
5. Find out if the premiums are fixed. Make sure you understand the circumstances under which premiums may be increased. (In many states, insurance companies can raise premium rates with the approval of the state department of insurance. Find out whether premiums have been increased in your state.)
6. Make sure there is a “waiver of premium” when you start collecting benefits.
7. Understand any and all stipulations about pre-existing conditions. For group policies, there may be a six-month waiting period.
Long-term care is a very important issue, and potentially very expensive for you and your family members without adequate insurance. Whether you choose to buy insurance or not, it merits careful consideration.