What is long term care insurance?

By Irene Card, NorthJersey.com -- Continuing on our them of long term care insurance, today's article will explain to you just how long term care policies are structured. Long term care insurance is designed to pay you a daily or monthly benefit when you need substantial assistance for 90 days or more with two out of six activities of daily living: Eating, bathing, dressing, toileting, transferring, or continence.

Or, if you have a cognitive impairment such as Alzheimer's Disease or senile dementia, you will go into claim and be eligible to receive benefits. Most policies will pay wherever you hang your hat – at home, in an assisted living facility, adult day care center, nursing home (all three levels of care, i.e., skilled, intermediate or custodial). Most people buy long-term care insurance to protect their assets. When you are looking at $300 a day for care, it doesn't take long to spend down your hard-earned savings.

Can you imagine yourself writing out a check for $9,000 EVERY month? How long do you think you will be able to do that before you run out of money? Other reasons people buy long term care insurance are because they don't want to be a burden on their children or other family members, they want to remain independent and choose where they get the care they need.

Most folks want to remain at home for as long as possible; long term care insurance will help pay for the care you need at home. You purchase long term care insurance from a reputable insurance agent who represents financially strong insurance companies.

You want to purchase a policy from an insurance company who consistently gets high financial ratings from independent rating firms such as Standard & Poors, A.M. Best, etc. You also want to make sure you are comfortable with the insurance agent selling you the plan.

Ideally, you should be able to develop a "reasonably high trust level with the person who presents a coverage plan to you," according to the Health Insurance Association of America (HIAA). Your agent will make suggestions as to combinations of benefits that he/she feels may best meet your needs but you should feel very comfortable to ask to see other combinations of benefits as well.

Your life and or health insurance agent may be able to sell you long term care insurance. I say, "may" because although their state insurance license qualifies them to sell long term care, not all life and health insurance agents sell this product. If you do not have an agent, you are certainly welcome to call our office or look in the yellow pages under "insurance."

Long term care insurance is custom designed to meet your particular needs. You choose how much money you want the policy to pay you. Do you want $200 daily, $300? The higher the daily benefit, the higher the cost.

Currently, $250 seems to be the average that people purchase in this part of the country. After deciding how much you want the policy to pay, you choose an elimination period. I don't like that word.

Think of it as a deductible. How many days will you be paying benefits out of your pocket before the policy kicks in? 20 days, 60 days, 90 days? Some companies will begin to pay benefits on the very first day of care if you receive that care at home and if you use their care coordinator.

You get credit for all of these days so that if you choose a 90 day waiting period, for each day you are getting care at home, you get the credit toward the 90 days. If you are home for three or four months and get transferred to a nursing home, or assisted living facility, the policy pays immediately because you used up the waiting period while receiving benefits at home.

Your next decision is to determine how long the policy will pay benefits. Standard choices are two years, three years, five years, six years, 10 years or unlimited. Again, choosing a policy with unlimited benefits over a policy with a three year pay out period will increase the premium. What is best for you? What is your family history?

While statistics tell us that the average nursing home stay is 2.76 years, you also need to look at your family history to see the other side of the story. Certainly if we had a crystal ball and knew what the end of our life looked like, we would know exactly whether or not we even needed a long term care policy, and if so for how long. That not being an option for us, we must make informed decisions given the information at hand.

For our clients who are purchasing long term care policies when they are in their 50s, unlimited lifetime benefits are often appropriate. For individuals wishing to purchase long term care that are in their 60s and 70s, a 3 or 5 year benefit may be fine. Now you have to look at inflation protection. If you purchase a policy today that offers a daily benefit of $250, and you don't start collecting on the policy for 15 years, will $250 still be adequate? Not at all likely. Therefore, the final component to a good long term care policy is the handling of inflation.

We are seeing more and more combinations of inflation protection but the top three still are 5 percent simple inflation protection which means every year your $250 daily benefit will increase by $12.50. Or, you may choose 5 percent compounded which means every year your daily benefit goes up by 5 percent compounded.

At the end of 20 years, the $250 should be worth approximately $632 per day based on a 5 percent compounded inflation rider. The third option is to choose no inflation protection whatsoever. People that are in their mid to late 70s will frequently opt for this benefit but they will start out by choosing a higher daily benefit, building inflation protection into the policy from the very start.

The premium that you pay is based on the inflation protection option that you choose. If you choose no inflation, some companies will allow you to increase the daily benefit every year or two, based on the current inflation rate. The premium for this additional benefit will be based on your attained age.

You can see that a substantial amount of study is needed to determine which combination of benefits is best for you. Your agent can be very helpful to you with making the right choices. In addition to the features I listed above, many companies offer other riders that can be added (and sometimes they are automatically included) such as a "survivorship benefit" which means if husband and wife each pay their premiums for 10 years and there are no claims in the 10 year period, they continue to pay their premiums but when one of them dies, the policy is paid in full for life for the surviving spouse. This is a nice benefit. Another option might be to choose a "shared benefit" whereby if one of the partners uses up all of their benefits, they can use benefits from their spouse's policy. There are a lot of exciting choices to make with long term care insurance. The government has made it very clear to us that they have no intention of paying for our care so we must take this very seriously.