Question: “My parents have told us they’re buying long term care policies. Can you explain how these policies work so we can help them review their options?”
Answer: It’s great that you are able to assist them. The first thing to know is that you need to educate yourself on this subject as there is no such thing as a standard long-term care insurance policy. Some policies are comprehensive (including most group LTC policies), building many important features into the base plan–while charging a higher premium. Other lower-priced policies provide only basic coverage but offer you the choice of buying greater benefits at an additional cost. That’s why, when comparing policies, you should look at both the basic coverage an LTC policy offers and the optional benefits you can add.
The basics to Long Term Care Insurance
LTC policies today can cover a full range of services, including full-time nursing home care (skilled care), part-time nursing home care (intermediate care), or assistance with daily living activities (custodial care). Coverage for mental incapacity (including Alzheimer’s disease) is now standard in most policies.
Coverage options and pricing on LTC policies will vary depending on the:
- insurance company
- the age and health rating of your parents
- extra features added
- the amount of dollar coverage selected, may be referred to as daily allowances or pooled amounts
- the maximum time frame the selected policy covers such as a maximum number of years versus lifetime coverage
- the exclusion period or waiting period before the policy will begin paying out
- optional or bundled extra provisions.
A good basic policy won’t require you to spend time in a hospital before receiving long-term care benefits and nearly all LTC policies are renewable, as long as premium payments continue. You should be able to find a basic LTC package that includes many of these features. If not, find out how much it will cost to add these provisions.
Now that you have an idea of what a good basic LTC policy should include, consider some of the following options and riders. But because they can significantly increase the LTC premium, you’ll need to balance the cost of these options with their importance to you:
Home health care and other alternative care options
Most LTC policies will cover care in alternative care settings, such as the home, adult day-care facilities, and assisted-living facilities. But this important option is not standard in every policy. Alternative care makes sense when you don’t require the constant skilled nursing care that a nursing home provides but still need the services of a health aide at least a few times a week. It can also help you transition from a hospital or nursing home and become self-sufficient.
Inflation protection
When you buy an LTC policy, you choose a daily benefit level–the amount the policy will pay for your daily care if you need it. But how do you know this will be enough to adequately cover your costs? An inflation rider automatically increases your benefit amount by a specific percentage each year, either by simple interest or compound interest to help your benefit amount keep pace with rising costs. Five percent is a typical inflation factor. The younger you are when you buy an LTC policy, the more important inflation protection may be. Keep in mind, though, that a simple-interest inflation rider can increase your premium by 20 to 30 percent or more, while a compound-interest inflation rider could more than double your premium. A possible alternative is to buy a policy with a larger benefit amount today in anticipation of rising nursing home costs in the future.
Guaranteed insurability
With this rider, you may increase your level of coverage without submitting to further health questions. This may be important to you if you’re concerned that your health condition may change after you purchase your LTC policy and you may want to purchase more insurance in the future. This option is particularly attractive if you’re buying your LTC policy when you’re young.
Non-forfeiture of premium feature
Should you decide you no longer need LTC or if you are unable to keep up the premium payments, you may be able to salvage a portion of the policy’s benefits. Some contracts contain a return-of-premium option whereby the insurer returns all of the premiums you have paid beyond a certain date, minus any benefits used up to that point. Others may pay a stipulated percentage of the paid premiums, depending on the number of years you’ve held the contract. Aside from the cash option, another method of preserving the benefits of your LTC policy is through a non-forfeiture conversion. This involves changing your policy to one with a lower coverage amount or coverage for a shorter period of time compared with your original policy. These reduced benefits will be available when needed, and no further premium payments are necessary.
Waiver of premium
This provision allows you to stop paying premiums once you are in a nursing home and the insurance company has started paying benefits to you. Depending on the provisions of your contract, the insurance company may waive the premium as soon as it makes your first benefit payment, or you may have to wait 60 to 100 days after the onset of your nursing care. Note that the waiver of premium might not apply if you are receiving home care.
Third-party notification
This benefit allows you to name a third party who would be notified by the insurance company if your policy is about to lapse because of your nonpayment of the premium due to mental or cognitive impairment. Many states require that insurance companies offer this option at no additional cost to you.
What determines if you’re entitled to benefits?
LTC policies differ on how benefits are triggered, so it’s crucial to examine your individual policy. Here are some typical ways you can become eligible for benefits:
- You’re unable to perform a certain number of activities of daily living (ADLs) without assistance, such as eating, bathing, dressing, continence, toileting (moving on and off the toilet), and transferring (moving in and out of bed). Look in your policy to see what ADLs are included, the number you must be unable to perform, and how your policy defines “unable to perform” for each ADL, as criteria can vary from one company to another (e.g., does the definition require someone to physically assist with the activity or simply to supervise the activity?)
- Your doctor has ordered specific care
- Your care is medically necessary
- Your mental or cognitive function is impaired
- You’ve had a prior hospitalization of at least three days (this is rare with newer policies)
An LTC policy may contain one or more of these provisions. The more specific the language in the provision, the less room for disagreements about coverage.
Who determines if you’re entitled to benefits?
Just as important as what triggers benefits is the question of who decides if you’ve triggered them. These gatekeepers are an integral part of any LTC policy–after all, they’re the ones the insurance companies rely on before paying out claims. In some cases, a policy may have more than one gatekeeper.
The best policies let you qualify for benefits if your own doctor orders specific care, rather than require that you be examined by an insurance company physician. Similarly, it’s insurance companies that define performance criteria for ADLs, as well as create and administer tests to see if you satisfy the mental impairment threshold. Make sure you know who the ultimate decision maker is under your policy.
When will benefit payouts start?
Most LTC policies have a waiting period, commonly known as an elimination period, before you can start receiving benefits after you’re judged medically eligible. Common waiting periods are 20, 30, 60, 90, or 100 days. During any waiting period, you’re responsible for paying for your care, whether it’s in a nursing home, an assisted-living facility, or in your home.
Some LTC policies have no waiting period–you can start receiving benefits on the first day you need care. However, this type of policy is more expensive than a policy with a waiting period. Generally speaking, the longer the waiting period, the less expensive the policy.
Keep in mind that the calculation of the waiting period can vary from company to company. Some companies may count the days cumulatively (e.g., adding up the total number of days you spend in a nursing home, even with gaps), while others may count the days consecutively (e.g., adding the total number of days you spend in a nursing home without interruption). Also, some companies require only one waiting period for the life of the policy, while others require a waiting period every time you apply for benefits (unless you become eligible for benefits again within a certain period of time, such as six months or a year, in which case only one waiting period will need to be satisfied).
Before buying long term coverage, it’s very important to understand exactly what the policy covers and what set of conditions will trigger coverage. This information is the core of a LTC policy. In addition, make sure you and your parents keep their policies records accessible for quick reference. Talk to your parents to make sure they have you or their power of attorney on file with the insurance company as being authorized to speak on their behalf. This is critical if you need to discuss your parent’s coverage with the insurance company and your parents are unable to grant permission. And finally, know the procedures for filing a claim before the time comes when care is needed.
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