Long-term care insurance: 15 keys

A good policy can keep you out of the poorhouse when illness strikes, but premiums can be steep. Before buying, answer these 15 questions.

Think about this: 42% of Americans who are 65 today will enter a nursing home during their lifetimes.

The current average annual cost of a one-year nursing home stay is almost $50,000, and none of this cost is covered by Medicare, Medigap or private medical insurance. Even home health care, the least expensive alternative for someone who needs regular medical attention, costs on average more than $1,000 a month. These averages tend to understate the cost of care in urban areas.

Women are especially vulnerable because they have a 50% greater likelihood of needing nursing home care than men.

Insurance is costly, but…
The premiums for long-term care insurance are not cheap, but unless you have assets of $2 million or more, you probably need it -- especially if you want to preserve some assets for your children. Premiums vary based on your age, sex, geographical location and policy type, but annual costs can vary from $400 a year for a 40-something male to more than $3,000 for a man or woman aged 70 or older.

Whether you are married or single, with or without children, you should start considering long-term care coverage as part of your overall insurance needs. As with life insurance, it's cheaper if you start younger, but if you're less than 30, you may understandably question its value. What you have to ask is, "What would life be like if a debilitating illness hit or if I was in a serious accident?"

There are several ways to keep premiums down. The first is to buy group coverage if you can, because it's cheaper than a comparable individual policy. Many employers now offer long-term care insurance as an optional employee benefit. Usually the employee, the employee's spouse and the employee's parents are eligible to buy coverage. You can also save money by choosing a longer waiting period, lower benefits or coverage that ends after a certain time frame. However, as with life insurance, the amount of the premiums is not the most important consideration when purchasing long-term care insurance -- in fact, it is one of the least important considerations.

Ask the right questions
What matters most are the policy benefit amounts and the specific terms of the contract. These policies are complicated, but if you ask these 15 questions, you'll come close to finding the best policy for you.

1.	Is this policy "qualified" under the Health Insurance and Portability Act of 1996? Purchase a policy that is "qualified," because only those policies allow you to take a tax deduction for the premiums and pay out tax-free benefits.
2.	Is this policy guaranteed for life, or can the insurance company cancel it? Make sure that the insurance company cannot cancel your policy if it finds out that you're in poor health. Note that virtually no companies issue policies with guaranteed premiums, because no one can predict future health-care costs.
3.	What is the waiting period, and does it only have to be met once? The waiting period should be no longer than three months, and you should only have to meet that requirement once during your lifetime.
4.	Does it cover home health care, as well as skilled, intermediate and custodial nursing-home care? These provisions give you an option to stay at home and receive care, as well as to receive all levels of care in a nursing home. That way, if your condition changes, you don't lose any benefits.
5.	Do I have to be hospitalized before benefits begin? Buy a policy where hospitalization is not required. You may simply start needing home health care, and your medical insurance might not pay for a hospital stay, in which case you would have to pay out-of-pocket for a hospital visit.
6.	What are the conditions that trigger benefit payments? The conditions should include cognitive impairment of any kind and should explicitly include Alzheimer's disease. Other triggers should include the inability to perform two out of five or six activities of daily living (ADL) -- usually eating, bathing, dressing, using the toilet, transferring (moving unassisted from a bed to a chair, for example) and continence.
7.	What are the daily benefits for home health care and nursing-home care? Know the cost of these services in your area so that you can choose a policy that adequately covers those costs. Your insurance agent, or a state elder-care agency, should be able to give you this information.
8.	Is there an inflation clause so that my daily benefits increase over time? The cost of home health and nursing-home care has skyrocketed in the past few years, so make sure that your policy benefits will keep up with those costs. Again, your agent or state elder-care agency can help.
9.	How long will benefits be paid? If possible, you should purchase a policy with a period of six years or more. The benefit period should be the same for nursing-home care and health care.
10.	Is there a pre-existing conditions clause? This clause excludes pre-existing conditions (medical conditions or ailments you already have prior to purchasing the policy, which are usually listed on your application). Your policy should not have a pre-existing condition clause.
11.	Are there specific, guaranteed protections against policy lapses and reinstatements? This protects you if you are having physical or mental difficulties and forget to pay the premium. You can have the policy reinstated even if your premium is late.
12.	How are benefits paid? The traditional long-term care policy is based on reimbursement of eligible expenses -- you submit actual expenses and get reimbursed. Other policies are indemnity-based -- if you qualify for benefits, you receive the daily benefit and pay for your expenses with it. You don't submit bills for approval.
13.	How long has the company been selling long-term care insurance? Choose a company that has a good track record in the sales and administration of long-term care insurance. Make sure you buy insurance from a company that has been selling long-term care insurance for at least five years.
14.	What are the insurer's financial-strength ratings from the major insurance ratings services (A.M. Best, Standard & Poor's, Moody's, and Duff & Phelps)? You want to choose a company with solid financial strength so that if expenses are substantially greater than expected, the company can handle them with ease.
15.	Ask for a sample copy of the exact contract of the policy you would be purchasing from your company. Here is where you will probably get the answers to most of the questions listed above. Do not depend on what an insurance agent tells you verbally; it's what's in the contract that counts.

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