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Long-Term Care Insurance: Research The Options Before You Buy

The growing interest in long-term care insurance can be attributed largely to the aging of America. According to the U.S. Census Bureau, the median age in the United States was 35.9 in 2003 — the highest ever. This demographic shift is due to the 76 million Baby Boomers, the last of which will reach age 65 by 2030.

The U.S. Department of Health and Human Services estimates that about 40% of people aged 65 or older have at least a 50% lifetime risk of entering a nursing home. At a time when the average cost of a private room in a nursing home is $192 per day — or about $70,000 annually — long-term care insurance can be viewed as a solid investment for those who have assets to protect or who want to avoid becoming a financial burden to their families.

Unlike other types of insurance, in which policies are fairly standardized, long-term care policies are complex and vary widely.

Virtually every company's policy differs on such matters as who qualifies for coverage, when the policyholder can begin receiving benefits, premium costs, etc. Therefore, before you begin comparing policies, it is important to understand some of the basics.

What Long-Term Care Insurance Is — And Is Not

Long-term care insurance is not life insurance, disability insurance, or health insurance. Instead, long-term care insurance includes a range of nursing, social, and rehabilitative services for people who need ongoing assistance due to a chronic illness or disability. Long-term care insurance can be used by anyone at any age who suffers an accident or debilitating illness, but it is most frequently used by older adults who need assistance with essential physical needs, such as bathing, dressing, or eating.

Neither Medicare, nor Medicare supplemental coverage, also known as Medigap insurance, nor standard health insurance policies cover long-term care. That leaves most of us with two options when faced with such expenses: pay out-of-pocket or rely on private long-term care insurance.

Most long-term care policies are "expense-incurred," meaning they pay a fixed-dollar amount toward the cost of daily care. Policies tend to cover a variety of care settings, including nursing homes, home health care, assisted living facilities, and adult day care. Premium costs increase depending on your age at the time of enrollment, so the younger you are when you purchase a policy, the lower the premium you're likely to pay.

Shopping for Long-Term Care Insurance: Know What to Look For

When shopping for long-term care insurance make sure you take your time and compare the features of several policies. In general, pay special attention to the following:

Company Reputation and Legitimacy
. Make sure the insurance companies under consideration are licensed in your state and carry favorable financial ratings from well-known ratings agencies such as A.M. Best Company, Duff & Phelps, Inc., Standard & Poor's Insurance Rating Services, and Moody's Investor Services, Inc.

Coverage Parameters. Policies will differ in the types of services they support. Some cover nursing home care others cover custodial or personal care in a variety of settings such as assisted living, adult day care, and home health care. Some include a combination of services. Be sure to choose a policy that best meets your potential needs.

Benefits Payout. How much does the policy pay per day for care in a particular setting (e.g., nursing home or assisted living)? How does the policy pay out services (e.g., a fixed daily amount or as reimbursement for the cost of care up to a daily maximum)? Does the policy have a maximum lifetime limit? If so, what is it for nursing home care? Home health care?

Eligibility. Does the policy use "benefit triggers" to determine when you will be eligible to receive benefits? Such triggers could include activities of daily living that the insured needs help with, such as bathing, eating, and dressing; cognitive impairment, such as Alzheimer's disease; or a prerequisite hospital stay for nursing home benefits. The number of activities of daily living covered is state specific. Please check with your financial advisor for specific information.

Benefits Protection. The policy should include an inflation adjustment feature to ensure that benefits stay in line with rising care costs. Additional protections include a "guaranteed renewable" clause, which states that the policy cannot be canceled when you get older or if you suffer physical or mental deterioration, and a "non-forfeiture" benefit, which ensures that some portion of your benefits are still available to you if you cancel your policy or unintentionally let it lapse.

Tax Implications. Most long-term care policies sold today are federally tax-qualified, which means premiums paid, as well as out-of-pocket expenses for long-term care, can be applied toward the 7.5% medical expense deductions contained in the federal tax code. Additionally, long-term care benefits received are not taxed as income up to certain limits. Consult with a tax advisor to learn more about the tax implications of long-term care insurance.

Because of the many variables involved in determining whether long-term care coverage is right for you, it is important to do your research. Luckily there are many information resources available on long-term care and related health care issues.

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