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December 3, 1999
Buying (into) Long Term Care Insurance: Are You Going to Need It?
By Louisa C. Brinsmade

Illustration: Long Term Care

Forget blackouts, erroneous bank balances, stock market fluctuations, and other millennial mayhem. For the 75 million American baby boomers who will soon be turning 65, the real Y2K fear is this: Will you be able to afford nursing home care if you need it in your old age?

Nursing homes and home health care companies are emerging as huge growth industries, and it's no mystery why -- they are about to have a huge increase in clientele. Federal statistics show that more than 43 percent of people over 65 will need long-term care at some point in their life. Most will need it for a few months, but many will need care for years. Even now, the cost of long-term care at a nursing home is alarming. Current fees hover around $40,000 per year, and even up to $100,000 per year in urban areas. And given projected inflation rates, baby boomers will have to pay twice that amount.

Living with children is no longer an option for everyone, and it remains unclear whether Medicare and Social Security will be able to meet people's basic needs. Insurance companies are betting, therefore, that long-term care (LTC) insurance will be an attractive option. A policy that, at the very least, guarantees unlimited coverage for both home and nursing facility care, covers Alzheimer's disease, has a low deductible, and costs an average of $2,000 or less per year could provide peace of mind for many older Americans.

How costs are covered now

Today more than half of nursing homes costs are covered by Medicaid, the federal health care program for certain low-income and needy people. Recent government figures show that because of average nursing home charges of nearly $100 per day, many seniors with financial assets are forced to deplete their life savings before Medicaid can kick in. For people who must stay in a nursing home for several months or years, nothing is left in the bank if they recover and are able to return home.

How LTC insurance might help

A good LTC insurance policy covers nursing home or home health care costs for you after meeting a standard annual deductible. When you purchase your policy, you decide whether you want short-term coverage, for only a few months or years, or the more expensive "unlimited" coverage, which ensures payout for your care for as long as you require it. If you think you may need long-term care or if you have large assets to protect -- such as a home, savings, and other property -- it may be prudent for you to purchase the more expensive policy before you turn 65, the age at which premiums increase significantly.

Proceed with caution

The same large companies that carry your health insurance also sell LTC coverage -- which means the same claim reimbursement conflicts can occur. There are certain companies that take longer to reimburse than others, and many companies question the claims being made.

You should also know that LTC insurance brokers get paid much higher commissions than brokers for other kinds of insurance; whereas most brokers get a 5-10 percent commission, LTC insurance brokers receive an average of 48.5 percent on the first year's premiums and 13 percent on each year's renewal. There is a much higher incentive, in other words, for brokers to get greedy and hide important, though unattractive, aspects of the policy you're about to sign. Research done in 1991 by Consumer Reports shows that many agents skip over the "fine print" when dealing with potential customers. They also found that in order to make a sale, brokers frequently downplay vital coverage, like inflation protection, or emphasize coverage that may not be feasible.

Ironically, insurance companies rarely have to worry about making good on their promises. Eighty to 90 percent of LTC insurance policyholders are forced to drop their policies at around age 80 -- the age when coverage will most likely be needed -- due to financial difficulties. Federal research shows that as premiums rise with the age of the policyholder, the burden becomes too much for most retirees on fixed incomes. Be prepared, then, to choose a policy that fits your retirement budget well into your 90s so that your years of investment are not wasted.

If you're shopping for LTC insurance, you can avoid pitfalls hidden in the fine print that your sales agent may be avoiding. For instance, you can guarantee that your premiums stay within a reasonable level throughout your elder years and that your payout is secure. How? It's the same as shopping for a new car -- research and price comparison. The insurance companies use tactics just like any other sales outlet. Be prepared by knowing exactly what kind of policy you want before you sit down at the table. Read the following FAQ for information on the best and worst kinds of policies and on the highest standard of care coverage you should require from your insurance company. This won't be shopping at its cheeriest, but it you choose carefully, the right insurance might save more than money -- it might just save your retirement.


Q: Who sells LTC insurance?

A: More than 100 private insurance companies sell LTC policies, many as part of a life insurance policy.

Q: What are the standard benefits?

A: There are no standard benefits. This is a relatively new insurance product, and every company has a different policy. Look for a company that:

  • covers both nursing home care and home health care.
  • provides for skilled, intermediate, and custodial care in a nursing home.
  • does not exclude Alzheimer's disease.
  • does not restrict your benefits to skilled nursing only -- this would only cover you in an intensive-care unit, but not in recovery, where intermediate and custodial care is more common.
  • allows your own doctor to determine your need for long-term care. Read the fine print here; if the company has a "gatekeeper," usually a physician on staff, this person may have the power to overrule your own physician's order and deny benefits.
  • has specific details on its "activities of daily living" standard, which is how the company will measure your ability to take care of yourself. This comes into play with Alzheimer's patients who may be able to function normally in many home duties but then may unpredictably wander or get lost on an errand. The more specific the company is, the less chance there is for disagreement later.
  • has a guaranteed renewable policy at a reasonable price.
  • has a good nonforfeiture benefits package. This amounts to getting back at least some of the equity you have paid into the insurance company if you must cancel the policy. With most companies reporting cancellation rates of almost 90 percent as their customers approach 80, this benefit guarantees that even if you cannot afford to keep paying premiums, you get something for all the money you put in. The nonforfeiture package may be in the form of a reduced payout or an extended period of coverage.

Q: How much does an LTC policy cost?

A: It will vary with your age and health condition, but the average price for a 65-year-old in good health is about $2,000 per year. For someone 75 years old, the price is more than double that amount.

Q: What factors make the price fluctuate?

A: Several factors influence the price of LTC insurance. Be aware that many of these factors also create loopholes that help the company deny coverage later.

  • Age -- Premiums are significantly lower for people younger than 65. Starting premiums will rise as the companies begin to pay out more (as their baby-boomer customers age), so it may be possible to lock in a certain price if you get in early.
  • Health status -- Certain conditions are not covered, including mental illness, disabilities inflicted during wartime, drug and alcohol addiction, afflictions covered by the government, and injuries sustained during a suicide attempt. Alzheimer's disease is generally covered if diagnosed after coverage goes into effect, but beware of policies that are vague about the coverage they offer for the disease.
  • Benefit period -- You may specify that you want coverage for several months, several years, or for an unlimited time. The premiums will be significantly higher for unlimited coverage, but if you have assets you want to protect, such as a house, property, or savings, a longer benefit period may be right for you.
  • Elimination period -- Similar to the deductible on your health insurance, this is the amount of time you will be required to pay for nursing home care or home health care before your policy kicks in. Obviously, a shorter elimination period means higher premiums, so determine how much of your personal assets you can afford to expend before you need assistance. Also remember that insurance companies have different methods for counting elimination days. Some companies add up all the days spent in a year and count them toward your "deductible," while others count each stay as a separate elimination period.
  • Inflation protection -- Most policies offer different inflation-protection packages -- some that will protect you, and many that don't:

    1. A straight inflation protection plan that increases your benefit by 6 percent per year throughout the life of the plan is not compounded annually and will not keep pace with rising nursing home fees.

    2. The 5 percent compounded inflation protection plan will nearly keep pace with rising prices, but because inflation is predicted at 6 percent annually, you still may end up with only 80-90 percent coverage.

    3. The indexed inflation option is tied to the real inflation rate through the Consumer Price Index and allows the policyholder to change the amount of benefit payout every three years. With any increases in payout, however, come increases in premiums, and eventually the premiums may be too high for people on fixed incomes.

    4. Options to purchase additional coverage may not be worth the extra cost. Although sales agents call this flexibility, policyholders will pay current rates for the added benefit, without inflation protection.

Q: What factors make the price fluctuate?

A: There are at least three things to do to check up on an insurance company:

  • Call your State Department of Insurance to make sure the company is registered with the state and is following regulations. Ask for the number of consumer complaints, and compare those figures with those for other companies. Get the phone number at .
  • Ask the agent for the company's business rating. Accept no less than an "A" rated company. Verify the agent's answer by looking at insurance-ratings information published by companies such as A. M. Best ( ), Moody's ( ), or Standard and Poor ( ). You can find this information online or in publications at the public library.
  • Call the Better Business Bureau -- both in your area and in the area where the company is headquartered, and ask for the number of consumer complaints. Again, compare this number with those for other insurance companies.

Related Resources

Here are some helpful sources for individual questions: