Few financial transactions are more complicated than buying long-term health insurance. moreover, few individual transactions have potentially larger and more lasting consequences. we’ve covered the basics and more in previous visits, most recently in June 2002 (available on the website archive). Let’s take a look at the next level of problems you’re likely to encounter when looking at long-term care policies and considering buying one.
do your homework. start shopping with the items in the website archive. these will give you a good background on important decisions and factors to consider. In addition, the National Association of Insurance Commissioners offers a free brochure, A Buyer’s Guide to Long-Term Care Insurance. It is available at www.naic.org. Agents are supposed to give you a copy by law before you buy a policy, though many offer the booklet when you’re about to sign a check.
Find your partners. Generally, you need a broker or agent to buy a policy, and most brokers and agents handle policies from one to three companies. To find the best policy for you, talk to several brokers or agents. The largest insurers that offer policies are American Express, General Electric Capital Assurance, John Hancock, and Prudential. you should contact the local agents of these companies. Also, consider speaking with one or more independent agents. they usually offer policies from more than one company. If you’re working with a fee-only financial planner, he or she should be able to help you compare policies and locate a broker or two.
One source for insurance brokers for health policies is the Association of Health Insurance Advisors at www.ahia.net or 703-770-8200. Also, be sure to ask your friends and associates for agents they know and like.
You will find that agents have different levels of knowledge and different biases about the various options. don’t make a big deal out of professional designations anyone might have. experience and self-education are the most important qualities in this field.
Decide your approach early. A relatively new option is to choose between a single long-term care policy and a multi-benefit policy. For example, you can buy a whole life policy with a feature that allows you to receive benefits early to pay for long-term care.
The advantage of a multi-benefit policy is that someone will eventually benefit from your premiums. With a direct long-term care policy, peace of mind is the only benefit of your premiums if you die without needing long-term care. One disadvantage of a multi-benefit policy is that it can be more expensive than separate policies. we will discuss multiple benefit policies in more detail next month.
When you start talking to agents and brokers, you need to decide ahead of time whether you want a direct policy or a multi-benefit policy. otherwise it will be difficult to compare the options offered.
establish the daily cost basis. the basis of a long-term policy’s benefits is the reimbursement rate. it is usually a daily fee. for example, a policy may insure you for $150 for each day of covered long-term care. Determining the average daily cost you want to be insured for is one of your most important decisions. is the biggest determinant of premiums, and other options add to or subtract from this benefit. Unfortunately, many people make mistakes when choosing the basic daily rate.
The temptation is to use the average daily rate for nursing homes in your area as a base. most people adjust that based on what they can afford and the extras they want.
The local average daily rate may not be a good starting point. First, do you want to be in an average nursing home, especially if you can afford more? If you think so, tour several nursing homes and assisted living facilities in the area. compare an average priced place with one that charges a higher rate. you’ll probably notice differences, and if you can afford the premiums, you’ll want more than just the average rate.
second, the daily rate covers only the basics. any extra service you need has an additional cost. If you don’t increase the daily reimbursement rate on your policy to account for possible additional charges, your assets will have to pay the excess. this is especially true for assisted living and home health care. while the basic rates for these may be lower than those for nursing homes, they also cover fewer basics. everything else has an additional cost. With home care, you may need to hire home help in addition to medical or nursing care.
Third, your area may not be the right one to consider. If you need a nursing home or assisted living facility, you can go to one near one of your adult children, which may not be where you live now. If your adult children live in areas with higher costs, your policy benefits may not pay as much as you thought.
Compare individual and group coverage. Many employers offer group long-term care policies to employees. Employers rarely pay any of the premiums, instead using their purchasing power to negotiate favorable terms and premiums for employees. if a group policy is available to you, compare it to non-group offerings.
A big advantage of group policies is that you’re less likely to be denied coverage for ongoing health problems. Another advantage is that premiums are likely to be lower than comparable non-group policies. Plus, your employer has done most of the hard work of the buying process.
Group policies are not without their drawbacks.
A group policy often limits the available options. That’s one way employers simplify the process and cut costs. there is no disadvantage unless you want a feature that is not offered. for example, the federal government offers its employees automatic reimbursement for home health care at 75% of the nursing home’s daily rate. that may or may not be a good guess for your area.
Another consideration: A married couple who purchase two individual policies typically get up to a 20% premium discount. you won’t get that discount on most group plans.
Tax-qualified or not? In our previous discussions of long-term care, I’ve covered the controversy over tax-qualified long-term care policies. A tax-qualified policy is one that meets certain standards in the tax law. qualification means premiums are deductible as medical expenses and any benefit payments are automatically tax-exempt. The tax status of any of the features is unclear for non-qualified policies, because the IRS never ruled on the issues. Most tax advisors say premiums are not deductible, but there is no example of IRS tax benefits paid under a long-term care policy.
More importantly, the tax benefits of a qualified policy are likely to be slim. Premiums are deductible only as medical expenses listed on Schedule A and only to the extent that total medical expenses exceed 7.5% of adjusted gross income. Few people qualify to deduct medical expenses.
In addition, the requirements for a tax-qualified policy limit its features. Most people who review long-term care policies believe that non-qualified policies offer more flexibility and better benefits than tax-qualified policies.
shared benefits. a relatively new feature allows married couples, and sometimes other family members, to share coverage limits. For example, suppose your spouse died without using your policy’s maximum benefits. A benefit sharing feature would allow her to add a spouse’s unused benefit period to her coverage if she needs it. there are many variations of these shared benefits.
The key, of course, is how much that feature costs. you should consider all the other features and benefits first. consider adding a benefit sharing option only if the cost is reasonable for the benefit and you can afford it without cutting other benefits.
Check underwriting. If you’re in good health, you’ll want an insurer that thoroughly checks your health before issuing a policy. inexperienced insurers take just about anyone and come to regret it. the result is a sharp increase in premiums in the future. strict underwriting is protection against drastic premium increases.
Buying a long-term care policy involves many trade-offs between additional benefits and the cost of the premium. The key is to buy a policy that you can comfortably afford now and one that you can pay well into your 70s or 80s. if you need long-term care, you’re more likely to need the policy in those later years. There’s no use buying a policy now and canceling it in later years if premiums seem uncomfortably high.