Long-term Care Insurance Provisions
August 2, 2010
Statistics indicate that one out of every three men over the age of 65 years will spend some time in a nursing home. For women, the odds are one out of two. Long-term care insurance is one means of providing the cost for this type of care.
Cost of Care
Typically, when an individual becomes ill for a longer term, they turn to relatives and, perhaps, friends to help take care of them. However, the increasing cost along with the extra burden put on the caregiver has prompted individuals to consider long-term health care providers, such as a nursing home facility, as an option.
The cost of a year's stay in a nursing home can range from $65,000 to $70,000 or higher, depending on your geographic area and the level of services that you require. If your financial situation allows you to pay for nursing home care for yourself and your spouse with existing assets, you may not need to consider the purchase of a long-term care policy. However, if your assets are not sufficient or if you like the extra financial security that a policy can provide, then you should seriously consider the purchase of a long-term care policy.
Policy Provisions
As with all insurance policies, it is important to evaluate the provisions before you make a decision to purchase. The major policy provisions are discussed below. The premium cost will be based on your selection of benefits and your personal health when you purchase the policy.
Type of Care
One of the primary items to review carefully is the level of care that the policy provides. Nursing home care is broken down into three categories: Skilled, Intermediate, and Custodial. Because you can not predict the extent of care needed, it is recommended that you consider a policy that will pay for all three levels of care.
· Skilled care generally refers to the care given by a registered nurse or therapist under the supervision of a physician. Skilled care follows a treatment plan and generally lasts for relatively short periods of time.
· Intermediate care refers to occasional nursing and rehabilitative care with the supervision of skilled medical personnel. It is typically less specialized and less comprehensive than skilled nursing care and may last considerably longer.
· Custodial care is having the assistance with activities of daily living (ADL), such as bathing, dressing, eating, etc., and often involves non-medical personnel. Much of this care is given in nursing homes and could last for an extended period of time.
Daily Benefit
The daily benefit represents the maximum amount the policy will pay for services per day. Companies offer a wide variation of daily benefits, ranging anywhere from $30 per day to $250 per day. Because nursing home costs vary from region to region, it is important for you to determine the average cost in the area where you would likely require services. The average cost per day in major cities in Indiana is approximately $180.
You may choose to purchase a policy that provides more or less than the anticipated costs per day. By choosing a lesser amount, you are making the conscious decision to supplement the cost of your care with your personal income or by liquidating assets. This is an important consideration since the daily benefit paid by the policy is one factor in determining the premium cost of the policy.
Benefit Period
How long the benefits will be paid will also impact the policy premium. The length of coverage typically ranges from two to ten years. As expected, the policies that are shorter in duration will be less expensive than the longer term policies due to the insurer’s obligation to pay benefits to the insured for an extended amount of time.
Maximum Policy Benefits
The combination of daily benefit and benefit period will determine the maximum amount that the policy will pay. For example, if you choose a policy that pays $180 per day for four years, the maximum benefit of the policy is $262,800 ($180 X 365 days X 4 years = $262,800).
The maximum benefit is the true value of the policy and the actual amount paid out will determine how long before the policy is depleted. In the policy cited above, the maximum daily payout is $180. If the actual cost of the nursing home care is only $160 per day, the policy only pays $160. However, you do not lose the extra $20. The lower cost will allow the policy to pay for services for a time period longer than four years. If the actual costs are $190 per day, the policy will only pay $180, requiring you to pay the extra $10 per day from your personal resources. In this scenario, the policy will last for a minimum of four years.
Waiting Period
The waiting period refers to the number of days that you must be eligible to receive benefits prior to the policy making any payments. During the waiting period, the costs for your long-term health care must be paid out of your personal resources.
The longer the waiting period required by the policy, the lower the policy premium. The waiting period can be equated to a deductible on any other type of insurance coverage. Generally, the waiting period days for a policy will range from zero days to one hundred days.
Inflation Protection
One of the more important provisions of a long-term care policy is the ability for the policy to keep up with inflation. The addition of the inflation rider will increase the premium. However, given the increasing cost of health care, it is important that your policy benefits reflect the rising costs.
An inflation rider can be incorporated into the policy in two different ways: simple interest or compound interest. The policy that uses compound interest will provide "real inflation" protection. For example, a policy with a 5% compound interest rider and a $180 per day benefit will increase to $279.24 per day in the tenth year. Under the simple interest calculation, the policy will pay $180 in year one, but only $261 in year ten. You should choose the policy that provides interest compounded annually for the life of the policy.
Home Health Care
The home health care provision will allow the policy to pay for care services provided to you in your home. The maximum amount for home health care is 100% of the daily benefit received for nursing home care, i.e. $180 in our example, or it may be a lesser amount, such as 50% or 75% of the daily benefit. This is an important provision to include if you wish to stay in your home as opposed to entering a nursing home to receive the necessary care. The higher the amount provided for home health care the greater the premium cost.
Other Provisions
Before selecting a policy, you will also need to understand any other provisions, such as cancellation clauses, coverage exclusions, or requirements to initiate the benefits.
Summary
Long-term care has become a reality for the boomer generation. As boomers work through situations of providing care for their parents or watch their friends do so, the financial impact on the family becomes better understood. Now, as boomers and younger generations do their own financial planning, it is important to include plans for this contingency. Whether you decide to purchase a long-term care policy or fund the need with your personal resources, it is important to understand the implications of long-term care costs on your future financial security and plan according.
Next Week's Article: The state of Indiana provides an incentive for the purchase of long-term care coverage. The features of this public-private partnership, referred to as the Indiana Long Term Care Insurance Program, will be discussed in the upcoming article.
