Long-Term Care Insurance

Long-term health care contracts are arrangements designed to provide insurance that will meet your health care needs should you become chronically ill or disabled after reaching a specified age. As is apparent from the name, long-term care policies greatly expand the time period over which benefits will be paid out, when compared to standard accident and health policies. Another advantage is that, unlike Medicare coverage, long-term care contracts will cover the cost of custodial care, as well as skilled nursing care. These two advantages often make long-term care contracts a preferred way of pre-funding nursing home care for the elderly. The disadvantage is the high cost of this sort of coverage, attributable to two main factors:

• the escalating cost of medical care
• the unknown long-range utilization of this type of coverage by the burgeoning elderly population

Why would one want long-term care coverage? The two main motivators for choosing to buy this expensive coverage are (1) estate preservation and (2) security. An LTC policy that pays a daily indemnity to offset the costs of care will go a long way toward preserving a nest egg to pass down to the next generation or a surviving spouse. If an individual has no heirs, this kind of coverage won't be a priority in most cases. But an LTC policy can nonetheless provide a sense of security for one's old age when one might be disabled and need custodial care, assisted living arrangements or even skilled nursing. And it can also provide a sense of security for a younger person in the event of an unexpected long-term illness or devastating accident.

How much do the various levels of care cost? LTC policies provide varying benefit amounts, depending on geography. Costs for skilled nursing care, assisted living, custodial care, intermediate care, adult day care and home health care can run anywhere from $40,000 to $80,000 or more a year.

What are some funding options? Relatively affluent individuals can afford to self-insure for long-term health care risks. Well more than half of the nation's long-term health care expenses are paid via Medicaid, which is a combination state-federal program requiring the participant to "spend down" his or her assets in order to become eligible. Medicare, on the other hand, does not pay for long-term care costs except in a very limited context, and the Medicare Supplement policies don't pay for costs unless Medicare is paying a portion. Some employers offer group policies, and hopefully this trend will continue in the future. But as of now, individual coverage is the most direct and reliable way to prepare for this category of risk, in spite of its steep price.

What are the basic elements of LTC coverage? The main policy elements include the daily benefit, the benefit period definition (usually 2-6 years or "lifetime"), the elimination period (usually 20 or 100 days to synch with Medicare,) an inflation rider, a waiver of premium, and a pre-existing condition clause (which you should avoid if at all possible.) There may also be a return of premium rider and a bed reservation guarantee that pays for a number of days to hold a nursing home bed in case you need to be hospitalized. Guaranteed renewability is extremely important.

How would one choose a carrier for LTC coverage? If an employer or other group policy is not an option, your insurance agent can probably obtain quotes for you from individual LTC providers. You'll want to compare coverages, see if there are discounts available, ask what their rate history has been and even call your state's department of insurance to learn about the overall financial rating of the firm you're considering going with.

Are there any tax considerations for LTC policies? Due to legislation there are some tax benefits accruing to this class of coverage. However, employer-provided long-term care insurance premiums are not excludable from an employee's income if provided through a cafeteria or other flexible spending arrangement. But premiums paid on long-term care contracts by self-employed persons qualify for a tax deduction for health insurance expenses. The rules are too complex to discuss here, but be sure to consult with your tax advisor if and when you choose to purchase LTC coverage.