Long Term Care Facts

HAS A FINANCIAL adviser suggested a long-term care policy as part of your retirement plan? Perhaps you've watched an elderly parent struggle to pay for nursing care and wondered whether there's a better way. Or your employer has recently rolled out group coverage. No matter how the subject comes up, thinking about long-term care insurance stirs up a swirl of confusion. These policies are complicated. And expensive. Do I need one? Doesn't health insurance or Uncle Sam pick up the tab? By not buying insurance am I putting my health - or my kids' inheritance - at risk?

The question of whether to buy a policy would have been easy to answer a few years ago - and the answer probably would have been no. Until the mid-1990s, long-term care insurance was decidedly fringy, with policies so poorly designed that they were hard to afford indefinitely or collect on. Thanks to federal and state laws and the development of industry standards, a policy you buy today permits you to guard against inflation and receive care at home, and it should come with fewer hard-to-meet triggers. Plus, pricing reforms have reduced the chances that you'll face a big premium spike.

But deciding whether to invest in a policy is still a tough call. Long-term care insurance, which much improved, remains a young and relatively untested product - not to mention a sizable financial commitment, both now and after you retire.

The real news is that you're now much more likely to hear about long-term care policies. Insurance companies have been busily turning out innovations - combination life / long-term care policies and several variations of annuities with long-term care riders. Although only 6.8 million policies had been sold in total by 1999, according to the Health Insurance Association of America, the growth rate is high - 40% a year at least count. Spurring that growth are that workplace plans. This past summer, the government started selling group policies through John Hancock and MetLife to 20 million federal employees and retirees (for detail, go to www.ltcfeds.com). While only 10% of large employers offer group coverage, according to Hewitt Associates, that's up from less than 6% two years ago.

Just because more policies are available doesn't mean you should buy one. In what follows, we walk you through the questions to consider before deciding whether to buy insurance. THen, we suggest how to shop. First, the questions.

What am I insuring against? Long-term care insurance helps defray the cost of the help you need when when a prolonged illness or mental incapacity such as Alzheimer's disease makes it hard to bathe and dress yourself, say, or take your medicine properly. That includes nursing homes, of course, but also services that help you live independently.

When you consider how expensive these services are, it's not surprising that you'd look to insurance to help. Last year, the average cost of a nursing home was $56,000, or $153 a day. (Costs vary widely, from an average of $99 a day in Louisiana to $247 a day in New York.) Home health-care aides run about $16 an hour, ranging from $12 in Texas to $24 an hour in Connecticut. Assisted-living facilities - apartments that often include services like often include services like meals and medication supervision - average $1,873 a month, or $22,476 a year. Numbers like these can derail the best-laid retirement plans.

So how do you gauge your chances of incurring such costs? Look at an insurance brochure and you'll likely see a claim that one in two people will need long-term care. If this seems suspciously high, you're right. This number grows out of a 1991 projection of nursing-home admissions published in the New England Journal of Medicine, widely considered the most reliable study to date. The finding: 43% of those who were 65 in 1991 would enter a nursing home. But this included short, relatively affordable stays of days or weeks. What's more relevant are these numbers: 23% of all 65-year-olds would spend a year or more in a nursing home, and 9% would spend five or more years. (Nursing-home figures are used as a proxy for long-term care because no good data exist for assisted living, home care or caregiving by family or friends, which experts put at 80% of all care and some policies will cover).

Am I at greater than average risk? Your chances of needing such expensive care depends, in part, on your family history, your own health and your support network. Does Alzheimer's run in your family? Heart disease? If you're a married woman, you're statistically likely to outlive your husband. "Women have a greater chance of needing institutional care, and they tend to need it longer," says Bonnie Burns, director of consumer education at California Health Advocates. Singles and childless people are also more likely to enter a nursing home.

How else would I pay for care? Medicare pays for a portion of the first 100 days of nursing-home stays, provided you've been hospitalized for at least three days prior to admission and a doctor says you need skilled nursing care or rehabilitation. Usually Medicare covers the first 20 days in full; for the next 80 days you have a co-pay ($101.50 a day in 2002), which a Medigap policy covers. In limited cases, usually if you're homebound and have been hospitalized, Medicare pays for skilled home care. Health insurance covers some short-term costs when you go into a nursing home after hospitalization.

When you've exhausted most of your assets, Medicaid, the state and federal program for the poor, will pick up the nursing-home tab. If you're married, your spouse can keep half your joint assets (plus your home), up to a maximum. This is the reason that some adviers say you should buy a long-term care policy only if you have at least $100,000 in assets (excluding your house) to protect - less and you may quickly qualify for Medicaid.

The other option is to self-fund whatever health-care expenses arise later in life. There are two ways to do this. The first is to put aside a long-term care reserve. If you never incur big health-care costs, you haven't thrown away money on premiums for a policy you never used, and the funds you put aside can go to your heirs. Plus, for couples, either spouse can use the money.

Investing the money you would put toward a premium will not fund as much care, but, considering your odds of spending years in a nursing home, that may be a find trade-off. For around $3,300 a year, you could purchase a Northwestern Mutual policy at the age 50 that pays out for six years at $150 a day, with inflation protection; in 20 years it would pay out $870,000 - enough to cover about six years in a nursing home, factoring in inflation. If you invest that same $3,300 a year, assuming a conservative 5% return, you'd end up with $118,000 in 20 years.

A second way to self-fund long-term care: Rely on your accumulated assets. That doesn't mean simply selling stocks and bonds and liquidating retirement accounts. Your life insurance policy may have an accelerated benefits or living benefits clause that you can use; if not, you could tap your policy's cash value, but penalties could wipe out as much as half of it. Or you can unlock the value of your home through a reverse mortgage, home-equity loan or sale.

The decision to tap your assets comes down to who else is relying on them. Is it important to you to leave a sizable estate to your children? If you are married, will enough be left to cover your spouse's expenses?

Can you afford the policy indefinitely? Think about whether premiums will become too expensive later, when your income may be lower and premiums higher. Follow the steps in the shopping guide below to get at least three quotes. Can you comfortably pay that every year, plus as much as 10% more in rate increases, for the rest of your life?

One note: The term level premium merely means that the insurer cannot raise your rate without state premission to raise rates for your entire class of policyholders.

How to shop for a policy:

If you've decided you want a long-term care policy, first keep in mind that the best time to get one is when you're in your fifties or sixties. Much earlier and you have other priorities, such as buying a house or saving for college. Later, the premiums may be unaffordable, and health problems could disqualify you.

A good starting point for comparing policies is Quotesmith.com. (Also, check whether your employer offers policy or pays any of the premium, but don't automatically sign up just to get the group rate.) Type in your age, height, and weight and you'll quickly turn up a half-dozen policies. You can drill down to an outline of the benefits, and you can apply online. Be aware that you may find low "preferred" rates. If you take prescription drugs or have a medical condition, your rates may be higher. Also, if you apply online and get turned down, you may hurt your chances of getting coverage elsewhere.

That's why it's good to talk with an independent agent who offers policies from more than one company. Credentials such as C.L.U. (charted life underwriter), Ch.F.C. (chartered financial consultant) or C.F.P. (certified financial planner) are a plus. Here are the key things to look for in a policy.

Lots of care options. Your goal is coverage for care in your home, an assisted-living facility or a nursing home. In 2000, 77% of policies sold covered both home care and institutional care, up from 37% in 1990. You also want to be covered for different types of care, from an R.N. to an attendant who makes sure you take medications. Policies may also include care management - help from a pro in selecting and arranging services.

A financially strong insurer. When you're buying an insurance policy that may be in effect for decades, it's vital to choose a company that will be around when you want to collect your benefit. Look for an insurer with a rating of A++, A+, or A from A.M. Best ( www.ambest.com ). Grades can also be foudn on Quotesmith.com.

Tax benefits. There are two classes of policies: tax qualified and non-tax qualified, but most people opt for tax qualified. With this policy, a portion of your premium (it depends on your age) counts as an unreimbursed medical expense, which is partially deductible if your total unreimbursed medical expenses exceed 7.5% of your adjusted gross income. Benefits are tax-free if they are less than the cost of care or no more than $210 a day.

Tax-qualified policies usually have somewhat stricter features that non-qualified ones do, including the requirement that a medical professional certify that you'll need care for at least 90 days, and a 90-day wait before you can collect benefits (the so-called elimination period). But the drawbacks are not as severe as they were several years ago. Notes Mark Krivonak, a financial planner and insurance agent in Tampa who sells qualified policies: "I've never had any clients have a problem making a claim."

With a nonqualified policy, you can choose a shorter elimination period. You can also get a policy that lets you collect if you cannot perform only one so-called activity of daily living (ADL). (The major ADLs are bathing, dressing, eating, continence, transferring and toileting.) All qualified policies require two. However, the premium is not deductible and the benefits are theoretically taxable under current law. The government may give all policies the same tax advantages in the future. But you buy a nonqualified policy, ask if you can swap to a qualified one if the benefits end up being considered taxable. Some, like Fortis Long Term Care, allow this.

A sufficient daily benefit. Nursing home costs in your area are a good guage for planning purposes, even if you end up using the money for other care. State averages can be found at Quotesmith.com . Project your income from your pension, Social Security and investments, and then figure the shortfall.

At least six ADLs. Don't buy a policy that doesn't include bathing as an ADL - that's commonly the first thing elderly people have difficulty with.

Inflation protection. This feature boosts your premium by 50% or more, which is why 59% of policies sold don't include it. But there's no point buying the insurance if the payout will be eroded by inflation by the time you need it. Get the 50% compounded inflation option if you are 65 or under, or 5% simple inflation option if you are over 65.

A benefit period you can afford. Most insurers pay benefits for one to six years, or for your life. Lifetime benefits, which cost 5% to 15% more than five or six-year policies, might be a good choise if Alzheimer's runs in the family. Otherwise, pick based on how much you can afford. "Most poeple think of this as the first decision," says Marilee Driscoll, author of The Complete Idiot's Guide to Long-Term Care Planning. "But the reason it is the last one is that if I don't have a big enough daily benefit or inflation, I'm sunk."