Close-up: Long-term Care Insurance

Physician's Money Digest, June 2006, Volume 13, Issue 6

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Long-term Care Insurance: Coverage that under specified conditionsprovides skilled nursing, intermediate care, or custodial care for apatient in a nursing home or in their residence.

Insurance is a gamble. Insurance is peace of mind. Bothstatements are completely accurate. When you operatea vehicle as an insured motorist or forego health insurancedue to premium costs, you are gambling that youwon't be seriously injured in an accident and need costlymedical care. However, if you maintain those respectivepolicies, you are now betting that you will be injured andwill need health care services. The premium you pay andthe insurance coverage you receive provide peace of mind.It's no different with long-term care (LTC) insurance.

LTC insurance has been around longer than most peoplerealize. But it was about a decade ago that analystsbegan predicting that the insurance industry would soonsee a dramatic increase in the number of LTC policiesbeing written. For the most part, that hasn't happened.LTC insurance ensures that the assets you've spent a lifetimeaccumulating won't rapidly evaporate should youbecome injured or seriously ill. Many physicians, however,have chosen to gamble. Whichever choice you make, it'simportant to understand how LTC insurance works.

A Brief Overview

In many respects, LTC insurance is similar to automobileinsurance. If your vehicle was badly damaged in an accident,your automobile policy might provide a daily benefitto cover the cost of renting a loaner vehicle. With LTC insurance,should you or an insured family member requiresupervised medical care in a nursing home or even in yourown residence, an LTC policy provides a daily benefit thatcan be applied to the cost of the care received. The greaterthe daily benefit amount, the higher the premium.

Premiums are not inexpensive, and the older you arewhen you take out an LTC policy, the higher the premium willbe. According to an article on MSN Money Central (www.moneycentral.msn.com) written by Ginger Applegarth,annual premiums range from $400 for a 40-year-old maleto over $3000 for a 70-year-old man or woman. If you'rethinking of self-insuring, you might want to talk with yourfinancial advisor and take a long, hard look at the numbers.Most estimates place the cutoff at $2 million in liquidassets, not including real estate.

When do benefits kick in? There are several conditionsthat trigger benefit payments, and these should be clearlyspelled out in any LTC policy. A good LTC policy should nothave a waiting period longer than 3 months. After that,the inability to perform two of five activities of daily living,such as eating, bathing, dressing, transferring (getting inand out of a bed or chair), and using the toilet, should triggeryour benefits.

Avoid the Gamble

New

England Journal of Medicine

If you're thinking about gambling and not taking out aLTC insurance policy, you might want to consider statisticsfrom a study that was recently published in the . A man over the age of 65has a 33% chance of needing LTC during his life. Forwomen, the chance increases to 50%. Or, as Applegarthwrites, "Forty-two percent of Americans who are 65 todaywill enter a nursing home during their lifetime." Perhapsmore importantly, it's not only less expensive to purchasean LTC policy when you're younger, it's also easier whenyou're in good health. If you wait until you're older or in illhealth, you could be turned down for LTC insurance. At thevery least, you could pay a small fortune in premiums.

Also, be aware that the cost of LTC is likely to increase.Applegarth notes that the average annual cost of a nursinghome is approximately $50,000. If you factor that byan annual increase in costs of 5% a year, that same year-longstay at a nursing home 10 years from now will costaround $82,000. Twenty years from now, the annual costwill exceed $134,000. So if you take out an LTC insurancepolicy, be certain to select an inflation rider based on yourcurrent age and life expectancy.

Long-term Care InsurancePurchasing Checklist

Selecting a long-term care insurance product isnot like purchasing an automobile. You can't kickthe tires and take the vehicle for a test drive. Butthe Web site for the Insurance Department of NewYork State (www.ins.state.ny.us/lntmcare.htm)offers a valuable checklist if you're considering apurchase. The checklist includes the following:

•What do you want your maximum policybenefit to be? Keep in mind that the average nursinghome stay is 2½ years.

•What daily benefit amount do you want?Factor in how much you can afford to subsidizethe total care cost.

•Consider which inflation protection benefitbest suits your needs. You could select an increaseof 5% per year, an annual cost-of-living increase, orone that is linked to benefit increases at set ages.

•How long do you want to wait until benefitskick in? The Insurance Department of New YorkState notes that Medicare may pay some or all ofthe first 100 days of required skilled nursing care.

POP QUIZ

1) As you age, LTC premiums

  1. increase
  2. decrease
  3. remain constant
  4. none of the above

2) How much in liquid assets should an individual haveto self-insure?

  1. $1 million
  2. $2 million
  3. $3 million
  4. $4 million

3) LTC benefits generally kick in when you are unableto perform

  1. 1 of 5 activities of daily living
  2. 2 of 5 activities of daily living
  3. 3 of 5 activities of daily living
  4. 4 of 5 activities of daily living

4) What is the chance that a woman over age 65 willneed LTC?

  1. 25%
  2. 33%
  3. 50%
  4. 66%

5) The average nursing home stay is

  1. 1 year
  2. 1½ years
  3. 2 years
  4. 2½ years

Answers: 1) a; 2) b; 3) b; 4) c; 5) d.