Last week, we began our discussion of long-term care insurance as an important part of any Baby Boomer’s retirement planning. This week, I’ll focus on key elements that should be considered when buying a policy. Long-term care insurance is a specialized form of disability income insurance. Typically, you can buy a daily benefit ranging from $50 to $400. Before deciding how much coverage to purchase, first determine the level of services you want; how long you want benefits to be paid; and the current cost of those services locally. While most insurers offer plans that pay benefits ranging from two years to lifetime coverage, the average nursing home stay is less than three years. Often, people will choose to self-insure a portion of the expected costs of long-term care. According to Babs Hart, long-term care insurance specialist and Founder of The Hart Group in Tuscaloosa, Alabama, “The coverage you purchase should be designed as a safety net considering other assets that could be used to contribute to providing care”.
Insurance companies pay benefits under one of three methods:
- The reimbursement plan pays the actual cost incurred and will not reimburse for services by non-licensed caregivers.
- The indemnity plan pays the full daily benefit regardless of actual expenses, and again, the care provider must be licensed.
- The cash benefit plan pays the full daily benefit regardless of actual expenses and whether the caregiver is licensed. This plan allows you to receive cash benefits even if your caregiver is a family member.
According to Mrs. Hart, “The advantage of the indemnity plan is the record keeping is minimal and, in some cases, the daily benefit received is greater than the costs of services which means there’s extra money for other needs such as prescriptions.”
You must also decide how soon you want to begin receiving your benefits (the elimination period). Most companies offer elimination periods that range from 30 to 360 days. To reduce your premiums, choose the longest elimination period that you can afford to cover yourself.
Here are a few of the most important policy optional coverage for you to consider:
- Inflation Protection Rider will cause your daily benefit to rise each year based on your choice of either simple or compound inflation factor. With healthcare costs rising steadily, this option is very useful.
- Future Purchase Option Rider offers policyholders the ability to purchase additional insurance in later years if they feel it is necessary. This is a safeguard but the major disadvantage is that the premiums of the new insurance are based on your current age, making the policy quite expensive.
- Shared Care Rider Option Rider offers policyholders the ability to borrow from their spouse’s policy once their policy is exhausted.
- Survivorship Rider provides a paid up policy for a surviving spouse once a policy has been in-force for a certain number of years. This is appropriate where the death of one spouse causes family income to drop to a point where it would be difficult for the surviving spouse to continue to pay premiums.
Long-term care insurance is complex coverage. To help select the policy that fits your particular needs, contact your financial advisor or a long-term care insurance specialist. To find a specialist near you, log onto www.ltc-cltc.com or call 1- 877-771-2582.
Stewart H. Welch, III, CFP, AEP, has been recognized by Money, Worth, Mutual Funds Magazine and Medical Economics as one of the top financial advisors in the country. He is the co-author of The Complete Idiot’s Guide to Getting Rich (Alpha Books) and J.K. Lasser’s New Rules for Estate and Tax Planning (John Wiley & Sons, Inc.). Consult your financial advisor before acting on this advice.