About This Shopper's Guide
The National Association of Insurance Commissioners (NAIC) has written this guide to help you understand long-term care and the insurance options that can help you pay for long-term care services. The decision to buy long-term care insurance is very important and one you shouldn't make in a hurry. But state law, insurance companies or agents must give you this guide to help you better understand long-term care insurance and decide which, if any, policy to buy.
Take a moment to look at the table of contents and you'll see the questions this guide answers and the information that is in it. Then, read the guide carefully. If you see a term you don't understand, look in the glossary starting on page 29. (Terms in bold in the text are in the glossary.) Take your time. Decide if buying a policy might be right for you.
If you decide to shop for a long-term care insurance policy, start by getting information about the long-term care services and facilities you might use and how much they charge. Use the first worksheet that starts on page 38 to write down this information. Then, as you shop for a policy, use Worksheet2, starting on page 40. There you can write down the information you collect to compare policies and buy the one that best meets your needs.
If you have questions, call your state insurance department or the insurance counseling program in your state. The telephone numbers are listed starting on page 31 of this guide.
What Is Long-Term Care?
Someone with a long physical illness, a disability, or a cognitive impairment (such as Alzheimer's disease) often needs long-term care. Many different services help people with chronic conditions overcome limitations that keep them from being independent. Long-term care is different from traditional medical care. Long-term care helps one live as he or she is now; it may not help to improve or correct medical problems. Long-term care services may include help with activities of daily living, home health care, respite care, adult day care, care in a nursing home, and care in an assisted living facility. Long-term care may also include care management services, which will evaluate your needs and coordinate and monitor the delivery of long-term care services.
Someone with a physical illness or disability often needs hands-on help with activities of daily living (see pages 16-17). People with cognitive impairments usually need supervision, protection, or verbal reminders to do everyday activities.
The way long-term care services are provided is changing. Skilled care and personal care are still the terms used most often to describe long-term care and the type or level of care you may need.
People usually need skilled care for medical conditions that require care by medical personnel such as registered nurses or professional therapists. This care is usually needed 24 hours a day, a physician must order it, and the care must follow a plan. Individuals usually get skilled care in a nursing home but may also receive it in other places. For example, you might get skilled care in your home with help from visiting nurses or therapists.
Note: Medicare and Medicaid have their own definitions of skilled care. Please refer to The Guide to Health Insurance for People with Medicare or The Medicare Handbook to find out how Medicare defines skilled care. Contact your local social services office for questions about Medicaid's definition of skilled care. For copies of these publications, contact your state insurance department or State Health Insurance Assistance Program listed on pages 31-37.
Personal care (sometimes called custodial care) helps one with activities of daily living (ADLs). These activities include bathing, eating, dressing, toileting, continence, and transferring. Personal care is less involved than skilled care, and it may be given in many settings.
How Much Does Long-Term Care Cost?
Long-term care can be expensive. The cost depends on the amount and type of care you need and where you get it. In 1997, the average cost was more than 46000 for a year of nursing home care. If a nurse came to your home to give you skilled care three times a week for two hours each visit for the entire year, the bill would be about $19,300. Personal care in your home from a home health aide three times a week for a year, with each visit lasting two hours, would cost you about 10,600. These costs are different across the country.
Who Pays For Long-Term Care?
People pay for long-term care in a variety of ways. These include: using the personal resources of individuals or their families, long-term care insurance, and some assistance from Medicaid. State Medicaid programs pay about one-half of the costs of nursing home care nationally. Medicare, Medicare supplement insurance, and the major medical health insurance you may have at work usually will not pay for long-term care.
Individual Personal Resources
Individuals and their families pay one-third of all nursing home costs from their own funds. Many use savings and investments. Some people sell assets, such as their homes, to pay for their long-term care needs.
Medicare and Medicare Supplement Insurance
Medicare's skilled nursing facility (SNF) benefit does not cover most nursing home care. Medicare will pay the cost of some skilled care in an approved nursing home or in your home but only in some situations. The SNF benefit only covers you if a medical professional says you need daily skilled care after you have been in the hospital for at least three days. You should not rely on Medicare to pay for your long-term care needs.
Medicare does not cover homemaker services. Medicare does not pay for home health aides to give you personal care unless you are homebound and are also getting skilled care such as nursing or therapy. The personal care must also relate to the treatment of an illness or injury and you can only get a limited amount of care in any week.
Medicare supplement insurance is private insurance that helps pay for some of the gaps in Medicare coverage, such as hospital deductibles and excess physicians' charges above what Medicare approves. Medicare supplement policies do not cover long-term care costs. However, four Medicare supplement policies--Plans D,G,I, and J-- do pay up to $1600 per year for services to people recovering at home from an illness, injury, or surgery. The benefit will pay for short-term, at-home help with activities of daily living. You must qualify for Medicare-covered home health services before this Medicare supplement benefit is available.
Medicaid pays for nearly half of all nursing home care. Medicaid also pays for some home and community-based services. To get Medicaid help, you must meet federal and state guidelines for income and assets. Many people start paying for nursing home care out of their own funds and "spend down" their financial resources until they are eligible for Medicaid. Medicaid may then pay part or all of their nursing home costs. You may have to spend down or use up most of your assets on your health care before Medicaid is able to help. Some assets and income can be protected for a spouse who remains at home.
State laws differ about how much money and assets you can keep and be eligible for Medicaid. (Some assets, such as your home, may not count when deciding if you are eligible for Medicaid.) Contact your state Medicaid office, office on aging, or state department of social services to learn about the rules in your state. The insurance counseling program in your state also may have some Medicaid information. (Please see the list of counseling programs on page 31.)
Long-Term Care Insurance
Long-term care insurance is one other way you may pay for long-term care. This type of insurance will pay for some or all of your long-term care. Long-term care insurance is a relatively new type of insurance. It was introduced in the 1980s as nursing home insurance but has changed a lot and now covers much more than nursing home care. The rest of this shopper's guide will give you information on long-term care insurance.
You should know that a federal law, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, gives some federal income tax advantages to people who buy vertain long-term care insurance policies. These policies are called Tax-Qualified Long-Term Care Insurance Contracts, or simply Qualified Contracts. The tax advantages of these policies are outlined on pages 8-10. Your state may have taken action to offer additional tax advantages. You should check with your state insurance department or insurance counseling program for information about tax-qualified policies. Check with your tax advisor to find out if the tax advantages make sense for you.
Who May Need Long-Term Care?
The need for long-term care may begin gradually as you find that you need more and more help with activities of daily living, such as bathing and dressing. Or you may suddenly need long-term care after a major illness, such as a stroke or a heart attack.
If you do need care, you may need nursing home or home health care for only a short time. Or, you may need these services for many months, years, or the rest of your life.
It is hard to know if and when you will need long-term care, but there are some studies that may help.
Do You Need Long-Term Care Insurance?
With the passage of the Health Insurance Portability and Accountability Act, more individuals are becoming aware of the need for long-term care insurance. Whether you should buy a long-term care insurance policy will depend on your age, health status, overall retirement goals, income, and assets. For instance, if your only source of income is a Social Security benefit or Supplemental Security Income (SSI), you probably shouldn't buy long-term care insurance.
On the other hand, if you have a large amount of assets but don't want to use them to pay for long-term care, you have a large amount of assets but don't want to use them to pay for long-term care, you may want to buy a long-term care insurance policy. Many people buy a policy because they want to stay independent of government aid or the help of family. They don't want to burden anyone with having to care for them. However, you should not buy a policy if you can't afford the premium or aren't sure you can pay the premium for the rest of your life.
If you already have health problems that are likely to mean you will need long-term care (for example, Alzheimer's disease or Parkinson's disease), you probably won't be able to buy a policy. Insurance companies have medical underwriting standards to keep the cost of long-term care insurance affordable. Without such standards, most people would not buy coverage until they needed long-term care services.
Some states have a regulation requiring the insurance company and the agent to go through a worksheet with you to decide if long-term care insurance is right for you. The worksheet describes the premium for the policy you're thinking about buying and asks you questions about the source and amount of your income and the amount of your savings and investments. You don't have to fill out this worksheet, but it might help you decide if long-term care insurance is right for you.
Not everyone should buy a long-term care insurance policy. For some, a policy is affordable and worth the cost. For others, the cost is too great, or the policy they can afford doesn't offer enough benefits to make it worthwhile. You should not buy long-term care insurance if the only way you can afford to pay for it is by not paying other important bills. Look closely at your needs and resources, and discuss it with a family member to decide if long-term care insurance is right for you.
Insurance companies must be licensed in your state to sell long-term care insurance. If you decide to buy a policy, be sure the company and the agent, if one is involved, is licensed in your state. If you're not sure, contact your state insurance department.
IS Long-Term Care Insurance Right For You?
You should NOT buy Long-Term Care Insurance if:
You should CONSIDER buying Long-Term Care Insurance if:
What Is a Federally Tax-Qualified Long-Term Care Insurance Policy?
You may be asked to choose between a "tax-qualified" long-term care insurance policy and one that is "non tax-qualified." There are important differences between the two types of policies. These differences were created by the Health Insurance Portability and Accountability Act (HIPAA). A federally tax-qualified long-term care insurance policy, or a qualified policy, offers certain federal income tax advantages. If you have a qualified long-term care policy, and you itemize your deductions, you may be able to deduct part or all of the premium you pay for the policy. You may be able to add the premium to your other deductible medical expenses. You may then be able to deduct the amount that is more than 7.5% of your adjusted gross income on your federal income tax return. The amount depends on your age, as shown in the table. Check with your personal tax advisor to find out how much you can deduct.
Regardless of which policy you choose, make sure the benefits and triggers will meet your needs. For example, benefits paid by a qualified long-term care insurance policy are generally not taxable as income. Benefits from a long-term care insurance policy that is not qualified may be taxable as income.
If you bought a long-term care insurance policy before January 1, 1997, that policy is probably qualified. HIPAA allowed these policies to be "grandfathered", or considered qualified, even though they may not meet all of the standards that new policies must meet to be qualified. The tax advantages are the same whether the policy was sold before or after 1997. You should carefully examine the advantages and disadvantages of trading a grandfather policy for a new policy. In most cases, it will be to your advantage to keep your old policy.
Long-term care insurance policies that are sold on or after January 2, 1997, as tax-qualified must meet certain federal standards. To be qualified, policies must be labeled as tax-qualified, must be guaranteed renewable, include a number of consumer protection provisions, cover only qualified long-term care services, and generally can't have a cash surrender value. (See Benefit Triggers, pages 16-17.)
Qualified long-term care services are those generally given by long-term care providers. These services must be required by chronically ill individuals and must be given according to a plan of care prescribed by a licensed health care practitioner.
You are considered chronically ill if you are expected to be unable to do at least two of five (out of six) activities of daily living without substantial help from another person for at least 90 days. Another way you may be considered to be chronically is if you need substantial supervision to protect your health and safety because you have cognitive impairment. A policy issued to you before January 1, 1997, doesn't have to define chronically ill this way. (See Benefit Triggers, pages 16-17)
Some life insurance policies with long-term care benefits may be tax-qualified. You may be able to deduct the premium you pay for the long-term care benefits that a life insurance policy provides. However, be sure to check with your personal tax advisor to learn how much of the premium can be deducted as a medical expense.
The long-term care benefits paid from a tax-qualified life insurance policy with long-term care benefits are generally not taxable as income. Tax-qualified life insurance policies with long-term care benefits must meet the same federal standards as other tax -qualified policies, including the requirement that you must be chronically ill to receive benefits.
How Can You Buy Insurance to Pay for Long-Term Care?
Private insurance companies sell long-term care insurance policies. You can buy an individual policy from an agent or through the mail. Or, you can buy a group policy through an employer or through membership in an association. You can also get long-term care benefits through a life insurance policy.
Today, most long-term care insurance policies are sold to individuals. Insurance agents sell many of these policies but companies also sell policies through the mail or by telephone. You will find that individual policies can be very different from one company to the next. Each company may also offer policies, companies, and agents to get the coverage that best fits you needs.
Policies From Your Employer
Your employer may offer a group long-term care insurance plan. The employer-group plan may be similar to what you could buy in an individual policy. One advantage of an employer-group plan is you may not have to meet any medical requirements to get a policy. Many employers also let retirees, spouses, parents, and parents-in-law apply for this coverage. Relatives must usually pass the company's medical screening to qualify for coverage and must pay the premium.
Insurance companies may let you keep your coverage after your employment ends or your employer cancels the group plan. You may be able to continue your coverage or convert it to another long-term care insurance policy. Your premiums and benefits may change, however.
If an employer offers long-term care insurance, be sure to think about it carefully. An employer-group policy may offer you options you can't find if you buy a policy on your own.
Many associations let insurance companies and agents offer long-term care insurance to their members. These policies are like other types of long-term care insurance. Like employer-group policies, association policies usually give their members a choice of benefit options. Policies sold through associations usually let members keep their coverage after leaving the association. Be careful about joining an association just to buy any insurance coverage. Review your rights if the policy is terminated or canceled.
Policies Sponsored by Continuing Care Retirement Communities
Many continuing care retirement communities (CRRC) offer or require you to buy long-term care insurance. A CCRC is a retirement complex that offers a broad range of services and levels of care. You must be a resident or on the waiting list of a CCRC and meet the insurance company's medical requirements to buy its long-term care insurance policy. The coverage will be similar to other group or individual policies.
Some states have long-term care insurance programs designed to help people with the financial impact of spending down to meet Medicaid eligibility standards. These programs, usually called "partnerships," let you buy certain long-term care insurance policies from insurance companies. You then have full or partial protection against the normal Medicaid requirement to spend down your assets to become eligible.
Check with your state insurance department or counseling program to see if partnership policies are available in your state. Please keep in mind that partnership programs have specific requirements in each state in which they are offered.
Life Insurance Policies
Some companies let you use your life insurance death benefit and cash value to pay for specific conditions such as terminal illness, for permanent confinement in a nursing home, or for long-term care expenses. A life insurance death benefit you use while you are alive is known as an accelerated death benefit. A life insurance policy that uses an accelerated death benefit to pay for long-term care expenses may also be known as a "life long-term care" policy. It may be an individual or a group life insurance policy. The company pays you the actual charges for care when you receive long-term care services, but no more than a certain percent of the policy's death benefit. Policies may pay part or all of the death benefit for long-term care expenses. Some companies let you buy more long-term care coverage than the amount of your death benefit in the form of a rider.
It is important to remember that if you use money from your life insurance policy to pay for long-term care, it will reduce the death benefit the beneficiary will get. For example, if you buy a policy with a $100,000 death benefit, using $60,000 for long-term care will cut the death benefit of your policy to $40,000. It may also affect the cash value of your policy. Ask your agent how this may affect other aspects of your life insurance policy. If you bought life insurance to meet a specific need after your death, your survivors may not be able to meet that need if you use your policy to pay for long-term care. If you never use the long-term care benefit, the policy will pay the full death benefit to your beneficiary.
You may be able to buy a long-term care insurance policy that covers more then just one person or more than one kind of long-term care service. The benefits provided by these policies are often called "pooled benefits."
One type of pooled benefit covers more than one person, such as a husband and wife, or two partners, or two or more related adults. This pooled benefit usually has a total benefit that applies to all of the individuals covered by the policy. If one of the covered individuals collects benefits, that amount is subtracted from the total policy benefit. For example, if a husband and wife have a policy that provides $150,000 in total long-term care benefits, and the husband uses $25,000 in benefits from the policy, $125,000 would be left to pay benefits for either the husband or the wife, or both.
Another kind of "pooled benefit" provides a total dollar amount that can be used for various long-term care services. These policies pay a daily, weekly, or monthly dollar limit for one or more covered services. You can combine benefits in ways that best meet your needs. This gives you more control over how your benefits are spent. For example, you may choose to combine the benefit for home care with the benefit for community-based care instead of using the nursing home benefit.
Some policies provide both types of pooled benefits. Other policies provide one or the other.
How Do Long-Term Care Insurance Policies Work?
Today, long-term care insurance policies are not standardized like Medicare supplement insurance. Companies sell policies that combine benefits and coverage in different ways.
How Benefits Are Paid
Insurance companies that sell long-term care insurance generally pay benefits using one of two methods: the expense-incurred method or the indemnity method. It is important to read the literature that accompanies your policy (or certificate for group policies) and to compare the benefits and premiums.
When the expense-incurred method is used, the insurance company must decide if you are eligible for benefits and if your claim is for eligible services. Benefits are paid either to you or your provider up to the limits in your policy. Your policy or certificate will pay benefits only when you receive eligible services. Most policies bought today pay benefits using the expense-incurred method.
When the indemnity method is used, the benefit is a set dollar amount. The insurance company only needs to decide if you are eligible for benefits. The specific services are not important. The insurance company will pay benefits directly to you up to the limit of the policy.
What Services Are Covered
It is important that you understand what services your long-term care insurance policy covers and how it covers the many types of long-term care services you might need to use. Policies may cover the following.
NOTE: Most policies don't pay benefits to family members who give care in the home.
Where Services Are Covered
You should know what types of facilities are covered by your long-term care insurance policy. If you're not in the right type of facility, the insurance company can refuse to pay for eligible services. New kinds of facilities may be developed in the future and it's important to know whether your policy will cover them.
Some policies may pay for care in any state-licensed facility. Others only pay for care in some state-licensed facilities, such as a licensed nursing facility. Still others list the types of facilities where services will not be covered, which may include state-licensed facilities. Policies often will not cover homes for the aged, rest homes, and personal care homes. Some policies may list specific points about the kinds of facilities they will cover. Some will say the facilities must care for a certain number of patients or give a certain kind of care. When shopping for a long-term care policy, check these points carefully and compare the types of services and facilities covered in the policy. If your policy lists kinds of facilities, be sure to check if your policy requires the facility to have a license or certification from a government agency.
NOTE: If you are NOT placed in the kind of facility specified by your policy, the insurance company may not pay for the services you require.
What is Not Covered (Exclusions and Limitations)
Most long-term care insurance policies usually do not pay benefits for:
NOTE: In most states, regulations do not allow insurance companies to refuse to pay for covered services for Alzheimer's disease that may develop after a policy is issued. Ask your state insurance department if this applies in your state. Nearly all policies specifically say they will cover Alzheimer's disease. Read about Alzheimer's disease and eligibility for benefits in the section on benefit triggers on pages 16-17.
How Much Coverage You Will Have
The policy or certificate may state the amount of coverage in one of several ways. A policy may pay different amounts for different types of long-term care services. Be sure you understand how much coverage you will have and how it will cover long-term care services you receive.
Maximum Benefit Limit. Most policies limit the total benefit they will pay over the term of the policy, buy a few don't. Some policies state the maximum benefit limit in years (one, two, three, or more. or even lifetime). Others write the policy maximum benefit limit as a total dollar amount. Policies often use words like "total lifetime benefit," "maximum lifetime benefit," or "total plan benefit" to describe their maximum benefit limit. When you look at a policy or certificate be sure to check the total amount of coverage. In most states, the minimum benefit period is one year. Most nursing home stays are short, buy illnesses that go on for several years could mean long nursing home stays. You will have to decide if you want protection for very long stays. Policies with longer maximum benefit periods cost more. Read your long-term care insurance policy carefully to learn what the benefit period is.
Daily/Monthly Benefit Limit. Policies normally pay benefits by the day, week, or month. For example, in an expense-incurred plan, a policy might pay a daily nursing home benefit of up to $100 per day, and a weekly home care benefit of up to $350 per week. Some policies will pay one time for single events, such as installing a home medical alert system.
When you buy a policy, insurance companies let you choose a benefit amount (usually $50 to $250 a day or $1,500 to $7,500 a month) for care in a nursing home. If a policy covers home care, the benefit is usually a portion of the benefit for nursing home care. It is important to know how much skilled nursing homes, assisted living facilities, and home health care agencies charge for their services BEFORE you choose the benefit amounts in your long-term care insurance policy. Check the facilities in the area where you think you may be receiving care, whether they are local, near a grown child, or in a new place where you may retire. The worksheet on page 38 can help you track these costs.
When You Are Eligible for Benefits (Benefit Triggers)
"Benefit triggers" is the term a company usually uses to describe the way it decides when to pay benefits. This is an important part of a long-term care insurance policy. Look at it carefully as you shop. The policy and the outline of coverage usually describe the benefit triggers. Look for a section called "Eligibility for the Payment of Benefits" or simply "Eligibility for Benefits."
Different policies may have very different benefit triggers. Some policies use more than one way to decide when to pay benefits. Some states require certain benefit triggers. Check with your state insurance department to find out what your state requires.
NOTE: Companies may use different benefit triggers for home health care coverage than for nursing home care.
Types of Benefit Triggers
Activities of Daily Living. The inability to do activities of daily living, or ADLs, is the most common way insurance companies decide when you are eligible for benefits. The ADLs most companies use are bathing, continence, dressing, eating, toileting, and transferring. Typically, a policy pays benefits when you can't do a certain number of the ADLs, such as three of the six or two of the six. It will be harder for you to be eligible for benefits when a policy requires you to be unable to do more ADLs. Federally tax-qualified policies are required to use being unable to do certain ADLs as a benefit trigger. A qualified policy is allowed to require you to be unable to do at least two of a list of five ADLs to collect benefits. Or, it can require that you be unable to do no more than two of six ADLs. The ADLs that trigger benefits in a tax-qualified policy must come from the list in the preceding paragraph. These triggers are specified in your policy.
If the policy you're thinking of buying pays benefits when you can't do certain ADLs, be sure you understand what that means. Some policies spell out very clearly what it means to be unable to feed or bath oneself. Some policies say that you must have someone actually help you do the activities. That's known as hands-on assistance. Specifying hands-on assistance will make it harder to qualify for benefits than if only stand by assistance is required. The more clearly a policy describes its requirements, the less confusion you or your family will have when you need to file a claim.
NOTE: The six activities of daily living (ADLs) have been developed through years of research. This research also has shown that bathing is usually the first ADL that a person can't do. Qualifying for benefits from a policy that uses five ADLs may be hard if bathing isn't one of the five.
Cognitive Impairment. Many long-term care insurance policies also pay benefits for "cognitive impairment" or mental incapacity. The policy usually pays benefits if you can't pass certain tests of mental function.
Coverage of cognitive impairment is especially important if you have been told you have Alzheimer's disease or other dementia. If being unable to do ADLs is the only benefit trigger your policy uses, it may not pay benefits if you have Alzheimer's disease but can still do most of the Adls on your own. But if your policy also uses a test of your mental ability as a benefit trigger, it is more likely to pay benefits if you have Alzheimer's disease. Most states do not allow policies to limit benefits solely because you have Alzheimer's disease.
Doctor Certification of Medical Necessity. Some long-term care insurance policies will pay benefits if your doctor orders or certifies that the care is medically necessary. However, tax-qualified policies can't use this benefit trigger.
Prior Hospitalization. Other long-term care insurance policies sold in the past required a hospital stay of at least three days before paying benefits. Most companies no longer sell policies that require a hospital stay.
NOTE: Medicare still requires a three-day hospital stay to be eligible for Medicare payment of skilled nursing facility benefits.
When Benefits Start (Elimination Period)
With many policies, your benefits won't start the first day you go to a nursing home or start using home care. Most policies have an elimination period (sometimes called a deductible or a waiting period). That means benefits can start 0, 20, 30, 60, 90, or 100 days after you start using long-term care. Elimination periods for nursing home and home health care may be different. How many days you have to wait for benefits to start will depend on the elimination period you pick when you buy your policy. You might be able to choose a policy with a zero-day elimination period, buy expect it to cost more.
During an elimination period, the policy will not pay the cost of long-term care services. You may owe the cost of your care during the elimination period. You may choose to pay a higher premium for a shorter elimination period. If you choose a longer elimination period, you'll pay a lower premium buy must pay the cost of your care during the elimination period.
For example, if a nursing home in your area costs $100 a day and your policy has a 30-day elimination period, you'd have to pay $3,000 before your policy starts to pay benefits. A policy with a 60-day elimination period would mean you'd have to pay $6,000 of your own money. You'd spend $9,000 of your own money for nursing home care if the elimination period was 90 days.
If you only need care for a short time and your policy has a long elimination period, your policy may not pay any benefits. If, for example, your policy had a 100-day elimination period, and you received long-term care services for only 60 days, you would not receive any benefits from your policy.
On the other hand, if you can afford to pay for long-term care services for a short time, a longer elimination period might be right for you. It would protect you if you need extended care and also keep the cost of your insurance down.
You may also want to think about how the policy pays if you have a repeat stay in a nursing home. Some policies count the second stay as part of the first one as long as you leave and then go back within 30, 90, and 180 days. Find out if the insurance company requires another elimination period for a second stay.
What Happens When Long-Term Care Costs Rise (Inflation Protection)
Inflation protection can be one of the most important additions you can make to a long-term care insurance policy. Inflation protection increases the premium. However, unless your daily benefit increases over time, years from now you may find that it hasn't kept up with the rising cost of long-term care. A nursing home that costs $110 a day will cost $292 a day in 20 years, if inflation is 5% a year. And the cost of nursing home care has been rising at an annual rate of 8% for the past several years. Obviously, the younger you are when you buy a policy, the more important it is for you to think about adding inflation protection.
You can usually buy inflation protection in one of two ways: automatically or by special offer. The first way automatically increases your benefits each year.
Policies that increase benefits for inflation automatically may use simple or compound rates. Either way, the daily benefit increases each year by a fixed percentage, usually 5%, for the life of the policy or for a certain period, usually 10 or 20 years.
The dollar amount of the increase depends on whether the inflation adjustment is "simple" or "compound." If the inflation increase is simple, the benefit increases by the same dollar amount each year. If the increase is compounded, the dollar amount of the benefit increase goes up each year. For example, a $100 daily benefit that increases by a simple 5% a year will go up $5 a year and be $200 a day in 20 years. If the increase is compounded, the annual increase will be higher each year and the $100 daily benefit will be $265 a day in 20 years.
Automatic inflation increases that are compounded are a good idea but not all policies offer them. Some states now require policies to compound inflation increases. Check with your state insurance department to find out if this applies in your state. All individual and some group tax-qualified policies must offer compound inflation increases as a required optional provision. Compounding can make a big difference in the size of your benefit.
The second way to buy inflation protection lets you choose to increase your benefits periodically, such as every three years. With a periodic increase option, you usually don't have to show proof of good health, if you regularly use the option. Your premium will increase if you increase your benefits. How much it increases depends on your age at the time. Buying more benefits every few years may help you afford the cost of the additional coverage. If you turn down the option to increase your benefit one year, you may not get the chance again. You may get the chance later, buy you may have to prove good health, or it may cost you more money. If you don't accept the offer, you need to check your policy to see how it will affect future offers.
Note: Most states have adopted regulations that require companies to offer inflation protection. It's up to you to decide whether to buy the coverage. If you decide not to take the protection, you may be asked to sign a statement saying you didn't want it. Be sure you know what you're signing.
Third Party Notice. This benefit lets you name someone who the insurance company would contact if your coverage is about to end because you forgot to pay the premium. Sometimes people with cognitive impairments forget to pay the premium and lose their coverage when they need it the most.
You can choose a relative, friend, or a professional ( a lawyer or accountant, for example ) as your third party. After the company contacts the person you choose, he or she would have some time to arrange for payment of the overdue premium. You can usually name a contact without paying extra. Some states now require insurance companies to give you the chance to name a contact. You may even have to sign a waiver if you choose not to name anyone to be contacted if the policy is about to lapse
Other Long-Term Care Insurance Policy Options You Might Choose
You can probably choose other policy features. Each may add to the cost of your policy. Ask your insurer what features increase your policy's cost.
Waiver of Premium. This option lets you stop paying the premium one you are in a nursing home and the insurance company has started to pay benefits. Some companies waive the premium as soon as they make the first benefit payment. Others wait 60 to 90 days. The waiver of premium may not apply if you are getting home health care.
Restoration of benefit. This option gives you a way to keep the maximum amount of your original benefit even after you policy has paid you benefits. With this option, if you go for a stated period without getting more long-term care services, your benefit goes back to the amount you first bought. For example, assume your policy paid you $5,000 in long-term care benefits out of a policy maximum of $75,000. You would have $70,000 in benefits left. With a restoration of benefits option, if you didn't use any long-term care services for a specified time, your maximum benefit would go back to the original $75,000.
Premium Refund At Death. This benefit pays to your estate any premiums you paid minus any benefits the company paid. To get a refund at death, you must have paid premiums for a certain number of years. Some refund premiums only if the policyholder dies before a certain age, usually 65 or70. The premium refund option may also add to the cost of a policy.
Downgrades. While it may not always appear in the contract, most insurers let policyholders ask to change the policy if they have trouble paying the premium. When you downgrade to a less comprehensive policy, you probably will pay a lower premium. This may allow you to keep the policy in force instead of dropping it.
What Happens If You Can't Afford the Premiums Anymore?
Nonforfeiture Benefits. If, for whatever reason, you drop your coverage and you have a nonforfeiture benefit in your policy, you will receive some value for the money you've paid into the policy. Without this type of benefit, you get nothing even you've paid premiums for 10 or 20 years before dropping the policy.
Some states may require insurance companies to offer long-term care insurance policies with a written offer of nonforfeiture benefit. In this case, you may be given benefit options with different premiums costs. In one type of benefit, when you stop paying your premiums, the company gives you a paid-up policy with shorter benefit period. That means the policy will pay the same daily benefit that you bought but for fewer years. How many years depends on how long you paid premiums. Since it's paid-up, you won't owe any more premiums.
You have the option to add a nonforfeiture benefit if you're buying a tax-qualified policy. The "return of premium" nonforfeiture benefit isn't available in tax-qualified policies, but you may be able to get "reduced paid-up policy" if you drop the policy. You should consult a tax advisor to see if adding a nonforfeiture benefit would be good for you.
Contingent Nonforfeiture. In some states, if you don't accept the offer of a non-forfeiture benefit, a company is required to provide a "contingent benefit upon lapse." This means that when your premiums increase to a certain level (based on a table of increases), the "contingent benefit upon lapse" will take effect. For example, if you're 70 years old and have not accepted the insurance company's offer of a non-forfeiture benefit, when the premium rises to 40% more than the original premium you will be offered the opportunity to accept one of the "contingent benefits upon lapse." The benefits offered are: 1) a reduction in the benefits provided by the current policy so that premium costs stay the same; or 2) a conversion of the policy to paid-up status with a shorter benefit period. You may also choose to keep your policy and continue to pay the higher premium.
Will Your Health Affect Your Ability to Buy a Policy?
Companies that sell long-term care insurance "underwrite" their coverage. They look at your health and health history before they decide to issue a policy. You may be able to buy coverage through an employer or another type of group without any health underwriting.
Insurance companies' underwriting practices affect the premiums they charge you now and in the future. Some companies do what is known as "short-form" underwriting. They ask you to answer a few questions on the insurance application about your health. For example, they may want to know if you have been in the hospital in the last 12 months or must use a wheelchair.
Sometimes companies don't check your medical record until you file a claim. Then they may try to refuse to pay you benefits because of information found in your medical record after you file your claim. This practice is called "post-claims underwriting." It is illegal in many states. Companies that thoroughly check your health before selling you a policy aren't as likely to do post-claims underwriting.
Some companies do more underwriting. They may ask more questions, look at your current medical records, and ask your doctor for a statement about your health. These companies may insure fewer people with health problems. Having certain conditions that are likely to mean you'll soon need long-term care (Parkinson's disease, for example) probably will mean you can't buy coverage from these companies.
No matter how the company underwrites, you must answer certain questions that the company uses to decide if it will insure you. When you fill out your application, be sure to answer all questions correctly and completely. A company depends on the information you put on your application. If the information is wrong, an insurance company may decide to void, rescind, or cancel your policy and return the premiums you have paid. It can usually do this within two years after you buy the policy. Most states require the insurance company to give you a copy of your application when it delivers the policy, At this time, you can review your answers again. You should keep this copy of the application with your insurance papers.
What Happens If You Have Pre-Existing Conditions?
A long-term care insurance policy usually defines a pre-existing condition as one for which you received medical advice or treatment or had symptoms within a certain period before you applied for the policy. Some companies look further back in time than others. That may be important to you if you have a pre-existing condition on your application might not pay for treatment related to that condition and might even cancel you coverage.
Many companies will sell a policy to someone with a pre-existing condition. However, the company may not pay benefits for long-term care related to that condition for a period after the policy goes into effect, usually six months. Some companies have longer pre-existing condition periods; others have none.
Can You Renew Your Long-Term Care Insurance Policy?
In most states, long-term care insurance policies sold today must be guaranteed renewable. When a policy is guaranteed renewable, it means that the insurance company guarantees you a chance to renew the policy. It does not mean that it guarantees you a chance to renew at the same premium. You premium may go up over time as your company pays more and larger claims.
Insurance companies can raise the premiums on their policies but only if they increase the premiums on all policies that are the same in that state. No individual can be singled out for a rate increase, no mater how many claims have been filed. In some states, the premium can't increase just because you are older.
If you bought a policy in a group setting and you leave the group, you may be able to keep your group coverage or convert it to an individual policy buy you may pay more. You can ask your state insurance department if your state requires this option.
What Do Long-Term Care Insurance Policies Cost?
A long-term care insurance policy can be expensive. Be sure you can pay the premium and still afford your other health insurance and other expenses. It's not unusual for a couple aged 65 to spend around $7,500 per year for all of their health insurance coverage. The annual premium for long-term care insurance policies with inflation protection can be as much as $2,000 or more for a person aged 65.
The premium will be lower if you're younger, higher if you're older. If you buy a policy at age 75, the premium will usually be much higher and can be more than double than if you had bought the policy at age 65. If you buy a policy with a large daily benefit, a longer maximum benefit period, or a home health care benefit, if will also cost you more. Inflation protection can add 25% to 40% to the premium. Nonforfeiture benefits can add 10% to 100% to the premium, as noted on page 21.
When you buy a long-term care policy, think about how much your income is and how much you could afford to spend on a long-term care insurance policy now. Also try to think about what your future income and living expenses are likely to be and how much premium you can pay then. If you don't expect your income to increase, it probably isn't a good idea to buy a policy if you can barely afford the premium now.
Some states have laws that limit rate increases. Check with your insurance department to learn how your state regulates rate increases.
NOTE: Don't be misled by the term "level premium." Some agents might tell you that you long-term care insurance premium is "level" and suggest that it will never increase. Except for whole life insurance policies and noncancellable policies or riders, companies can't guarantee premiums will never increase. Many states have adopted regulations that don't let insurance companies use the word "level" to sell guaranteed renewable policies. Companies must tell consumers that premiums may go up. Look for that information on the outline of coverage and the policy's face page when you shop.
If You Already Own a Policy, Should You Switch Plans or Upgrade the Coverage You Have Now?
Before you switch to a new long-term care insurance policy, make sure it is better than the one you already have. Even if your agent now works for another company, think carefully before making any changes. First check to see if you can upgrade the coverage on your current policy. If not, you may replace your current policy with a different one that gives you more benefits, or even choose a second policy. Be sure to discuss any change in your coverage with your financial advisor.
If you decide to switch to a new long-term care insurance policy, make sure the new company has accepted your application and issued the new policy before you cancel the old one. When you cancel a policy in the middle of its term, many companies will not give back any premiums you have paid. If you switch policies, new restrictions on pre-existing conditions may apply. You may not have coverage for some conditions for a certain period.
Switching may be right for you if your old policy requires you to stay in the hospital or to receive other types of care before it pays benefits. Before you decide to change, though, make sure you are in good health and can qualify for another policy. If you bought a policy when you were younger, you might ask the insurance company if you can improve it. For example, you might add inflation protection or take off the requirement that you stay in the hospital. It might cost less to improve a policy you have now than to buy a new one.
What Shopping Tips Should You Keep in Mind?
Here are some points to keep in mind as you shop. Ask questions.
If you have questions about the agent, the insurance agent, the insurance company, or the policy, contact your state insurance department or insurance counseling program.
Check with several companies and agents.
Contacting several companies (and agents) before you buy is wise. Be sure to compare benefits, the types of facilities you have to be in to get coverage, the limits on your coverage, what's excluded, and, of course, the premium. (Policies that have the same coverage and benefits may not cost the same.)
Take your time and compare outlines of coverage.
Never let anyone pressure or scare you into making a quick decision. Don't buy a policy the first time you see an agent. Ask for an outline of coverage. It outlines the policy's benefits and points out important features. Compare outlines of coverage for several policies. In most states the agent must leave an outline of coverage when he or she first contacts you.
Understand the policies. Make sure you know what the policy covers and what it doesn't. If you have any questions, call the insurance company before you buy.
An agent may give you answers that are vague or different from the information in the company literature. You may have questions about the policy. If either happens, tell the agent you will get back to him or her later. Don't hesitate to call or write the company to ask your questions. Don't trust any sales pitch that claims you have only one chance to buy a policy.
Some companies may sell their policies through the mail, skipping agents entirely. If you buy a policy through the mail, check with the company if you don't understand how the policy works.
Talk about the policy with a friend or relative. You may also want to contact your state insurance department or insurance counseling program. A list of insurance departments and counseling programs starts on page 31.
Don't be misled by advertising.
Most celebrity endorsers are professional actors paid to advertise. They are not insurance experts.
Medicare does not endorse or sell long-term care insurance policies. Be wary of any advertising that suggest Medicare is involved.
Don't trust cards you get in the mail that look as if the federal government send them. Insurance companies or agents trying to find buyers may have sent them. Be careful if anyone asks you questions over the telephone about Medicare or your insurance. They may sell any information you give to long-term care insurance marketers, who might call you, come to your home, or try to sell you insurance by mail.
Don't buy more than one long-term care insurance policy.
You don't have to buy more than one policy to get enough coverage. One good policy is enough. For more information, reread the section "If You Already Own a Policy, Should You Switch Plans or Upgrade the Coverage You Have Now?" on page 24. Be sure to discuss any change in your coverage with your financial advisor.
Be sure you accurately complete your application.
Don't be misled by long-term care insurance marketers who say your medical history isn't important- it is! Give correct information. If an agent fills out the application for you, don't sign it until you have read it. Make sure that all of the medical information is right. If it isn't and the company used that information to decide whether to insure you, it can refuse to pay your claims and can even cancel your policy.
Never pay in cash.
Use a check or money order made payable to the insurance company.
Be sure to get the name, address, and telephone number of the agent and the company.
Get a local or toll-free number for both the agent and the company.
If you don't get your policy within 60 days, contact the company or agent.
You have a right to expect prompt delivery of your policy. When you get it, keep it somewhere you can easily find it. Tell a trusted friend or relative where it is.
Be sure you look at your policy during the free-look period.
If you decide you don't want the policy soon after you bought it, you can cancel it and get your money back. You must tell the company you don't want the policy within a certain number of days after you get it. How many days you have depends on the "free-look" period. In some states the insurance company must tell you about the free-look period on the cover page of the policy. In most states you have 30 days to cancel, buy in some you have less time. Check with your state insurance department to find out how long the free-look period is in your state.
Think about having the premium automatically taken out of your bank account.
Automatic withdrawal may mean that you don't lose your coverage if an illness makes you forget to pay your premium. If you decide not to renew you policy, be sure you tell the bank to stop the automatic withdrawals.
Check on the financial stability of the company you're thinking about buying from.
Several insurer rating services analyze the financial strength of insurance companies. The ratings can show you how some analysts see the financial health of individual insurance companies. Different rating services use different rating scales. Be sure to find out how the agency labels its highest ratings and the meaning of the ratings for the companies you are considering.
You can get ratings from some insurer Rating Services for free at most public libraries. Or you can call the services directly at the numbers listed below and on the following page. (Note that calls to a "900" number will mean an extra charge on your telephone bill.) And now you can get information from these services on the internet.
A.M. Best Company (900) 555-BEST (billed to telephone) or (800) 424-BEST (charged to credit card) or on the internet at http://www.ambest.com
Rating Services Duff & Phelps, Inc. (312) 368-3157 or (312) 629-3833 or on the internet at http://www.dcreo.com
Fitch Investors Service Inc. (212) 908-0500 or on the Internet at http"//www.fitchibca.com
Moody's Investor Service Inc. (212) 208-1527 or on the internet at http://www.moodys.com
Standard & Poor's Insurance Rating Services (212) 208-1527 or on the internet at http://www.ratings.standardpoor.com
Weiss Research, Inc. (800) 189-9222 or on the internet at http://www.weissinc.com
Accelerated Death Benefit- A feature of a life insurance policy that lets you use some of the policy's death benefit prior to death.
Activities of Daily Living (ADLs)-Everyday functions and activities individuals usually do without help. ADL functions include bathing, continence, dressing, eating, toileting, and transferring. Many policies use the inability to do a certain number of ADLs (such as 2 of 6) to decide when to pay benefits.
Adult Day Care- Care during the day for adults, usually at senior or community centers.
Alzheimer's Disease-A progressive, degenerative form of dementia that causes severe intellectual deterioration.
Assisted Living Facility- A residential living arrangement that provides individualized personal care and health services for people who require assistance with activities of daily living.
Benefit Triggers- Term used by insurance companies to describe when to pay benefits.
Care Management Services- A service in which a professional, typically a nurse or social worker, may arrange, monitor, or coordinate log-term care services.
Cash Surrender Value- The amount of money you may be entitled to receive from the insurance company when you terminate a life insurance or annuity policy. The amount of cash value will be determined as stated in the policy.
Chronic Illness- An illness with one or more of the following characteristics: permanency, residual disability, requires rehabilitation training, or requires a long period of supervision, observation, or care.
Cognitive Impairment- A deficiency in a person's short-or long-term memory; orientation as to person, place and time; deductive or abstract reasoning; or judgment as it relates to safety awareness.
Community-Based Services- Services designed to help older people stay independent and in their own homes.
Custodial Care- (Personal Care)- Care to help individuals meet personal needs such as bathing, dressing, and eating. Care may be provided by someone without professional training.
Daily Benefit- The amount of insurance benefit in dollars a person chooses to buy for long-term care expenses.
Dementia- Deterioration of intellectual faculties due to a disorder of the brain.
Elimination Period- A type of deductible; the length of time the individual must pay for covered services before the insurance company will begin to make payments. The longer the elimination period in a policy, the lower the premium.
Guaranteed Renewable- When a policy cannot be cancelled and must be renewed when it expires unless benefits have been exhausted. The company cannot change the coverage or refuse to renew the coverage for other than nonpayment of premiums (including health conditions an/or marital or employment status).
Health Insurance Portability and Accountability Act (HIPAA)- Federal health insurance legislation passed in 1996 that allows, under specified conditions, long-term care insurance policies to be qualified for certain tax benefits.
Home Health Care- Services for occupational, physical, respiratory, speech therapy, or nursing care. Also included are medical, social worker, home health aide, and homemaker services.
Homemaker Services- Household services done by someone other than yourself because you're unable to do them.
Inflation Protection- A policy option that provides for increases in benefit levels to help pay for expected increases in the costs of long-term care services.
Lapse- Termination of a policy when a renewal premium is not paid.
Medicaid- A joint federal/state program that pays for health care services for those with low incomes or very high medical bills relative to income and assets.
Medicare- The federal program providing hospital and medical insurance to people aged 65 or older and to certain ill or disabled persons. Benefits for nursing home and home health services are limited.
Medicare Supplement Insurance- A private insurance policy that covers many of the gaps in Medicare coverage.
National Association of Insurance Commissioners (NAIC)- Membership organization of insurance commissioners. One of its goals is to promote uniformity of state regulation and legislation related to insurance.
Noncanellable Policies- Insurance contract that cannot be cancelled and the rates cannot be changed by the insurance company.
Nonforfeiture Benefits- A policy feature that returns at least part of the premiums to you if you cancel your policy or let it lapse.
Pre-existing Condition- Illnesses or disability for which you were treated or advised within a time period before applying for a life or health insurance policy.
Rescind- When the insurance company voids (cancels) a policy.
Respite Care- Offers a few hours to several days of help to relieve family caregivers.
Rider- Addition to an insurance policy that changes the provisions of the policy.
Spend Down- A requirement that an individual use up most of his or her income and assets to meet Medicaid eligibility requirements.
State Health Insurance Assistance Program- Federally funded program to train volunteers to provide counseling on the insurance needs of senior citizens. (See list of State Health Insurance Assistance Programs)
Substantial Assistance- Means hands-on or stand-by help required to do ADLs.
Substantial Supervision- The presence of a person directing and watching over another who has a cognitive impairment.
Tax-Qualified Long-Term Care Insurance Policy- A policy that conforms to certain standards in federal law and offers certain federal tax advantages.
Term Life Insurance- Covers a person for a period of one or more years. It pays a death benefit only if you die during that term. It generally does not build a cash value.
Third Party Notice- A benefit that lets you name someone who the insurance company would notify if your coverage is about to end due to lack of premium payment. This can be a relative, friend, or professional such as a lawyer or accountant, for example.
Underwriting- The process of examining, accepting, or rejecting insurance risks, and classifying those selected, in order to charge the proper premium for each.
Universal Life Insurance- A kind of flexible policy that lets you vary your premium payments and adjust the face amount of your coverage.
Waiver of Premium- A provision in an insurance policy that relieves the insured of paying the premiums while receiving benefits.
Whole Life Insurance- Policies that build a cash value and cover a person for as long as he or she lives if premiums continue to be paid.