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How to Reduce Long-Term Care Insurance Costs

Last Updated: 8/1/2006

While long-term care insurance can be a good way to pay for a nursing home stay or a home health care worker, it doesn't come cheap. Annual premiums vary significantly, depending on your age, health, and the type of policy, but policies can run as high as $5,000 per year. You do not need to pay that much, however. The following are some ways to reduce your costs.

  • Shorter benefit period. The most significant cost-saving step you can take is to not purchase a lifetime policy. Unless you have a family history of a chronic illness, you aren't likely to need coverage for more than five years. In fact a new study from the American Association of Long-term Care Insurance shows that a three-year benefit policy is sufficient for most people. According to the study of in-force long-term care policies, only 8 percent of people needed coverage for more than three years. By purchasing coverage for three, four, or five years instead of a lifetime, you can save thousands of dollars in premiums. If you do have a history of a chronic disease in your family, you may want to purchase coverage for 10 years, which would still be less than purchasing a lifetime policy.
  • Buy younger. Long-term care insurance premiums rise as you age, so the younger you buy, the cheaper your premiums. Be careful, however, because insurance premiums can, and often do, increase considerably from your initial purchase price. Even if you have a policy that is "guaranteed renewable," your premiums can still increase.
  • Shared care policy. If both you and your spouse are purchasing long-term care insurance, a shared care policy might be able to give you more coverage for less money. With a shared care policy, you buy a pool of benefits that you can split between you and your spouse. For example, if you buy a five-year policy, you will have a total of 10 years between you and your spouse. If your spouse uses two years of the policy, you will have eight years. A shared care policy may cost more than separate policies with the same benefit period, but it will allow you to buy a shorter policy, knowing that you have a pool of benefits to work with.
  • Longer elimination period. Most policies have a waiting period before coverage begins, typically 30-90 days. The longer you make this waiting period, the cheaper your premiums. Keep in mind, however, that you will have to pay for your care out of pocket until the waiting period is over and the insurance begins its coverage.
  • Reduce the daily benefit. Instead of purchasing the maximum daily benefit you might need in a nursing home, you can consider paying for a portion of the daily benefit yourself. You can then insure for the maximum daily benefit minus the amount you plan to pay. A lower daily benefit will mean lower premiums.
  • Inflation protection. Inflation protection increases the value of your benefit to keep up with inflation and is almost always recommended. But you can save on premiums by which method of protection you choose: compound-interest increases or simple interest increases. If you are purchasing a long-term care policy and are younger than age 62 or 63, you will need to purchase compound inflation protection. This can, however, more than double your premium. If you purchase a policy after age 62 or 63, some experts believe that simple inflation increases should be enough, and you will save on premium costs. You should also remember that your premiums may be taxdeductible. Premiums for "qualified" long-term care policies will be treated as a medical expense and will be deductible to the extent that they, along with other unreimbursed medical expenses (including"Medigap" insurance premiums), exceed 7.5 percent of the insured's adjusted gross income.

Questions to Ask Before Buying Long-Term Care Insurance

When long-term care insurance first became available about eight years ago, there were few customers. The product was full of holes, untested, and overpriced. Not surprisingly people took a wait-and-see attitude, mainly because it took a while for most people to even become familiar with the need for this type of protection. Fortunately, insurers have responded with significant product enhancements and lower prices. But with so many policies to choose from, it has become more difficult to be sure that you're selecting a policy that's best for you. Because all policies are not the same, we have prepared this guide for helping you understand long-term care insurance and obtain the coverage that best fits your individual needs.

  1. What is the best way to calculate how much coverage you should buy?
    It's difficult to give an ironclad answer because each individual has a different comfort level with risk tolerance and how much of their income and assets they're willing to spend to avoid risk. The amount of coverage depends in part on what you need and in part on what you can afford. As a general guide, you should not spend more than 5 to 10 percent of your income (both earned and unearned) on long-term care insurance premiums. In terms of the size of the daily benefit you purchase, it should make up in the shortfall between your income and the average cost of nursing home care in your area.
  2. How long a period should I insure myself for?
    Again, there is no one right answer for everyone. Most people buy what gives them peace of mind and is affordable. If you're between the ages of 50 to 65, consider lifetime benefits with compound inflation options. If you're 65 to 75, think about a six-year or lifetime benefit period with simple inflation options. Those older than 75 years old should consider buying more daily benefit for as long a period as they can afford.
  3. Will the agent provide you with a sample policy?
    Although sales literature can be helpful to give you a general overview of policies, it's in your best interest to request a sample policy so that you and a family member, friend or adviser can review it with you before you buy. Be sure the sample policy matches the policy quoted by the agent; look for a policy series number.
  4. Is the policy a group certificate type or an individual policy?
    The difference between a group policy and an individual is significant even though the distinction may not be obvious. In some states, individual polices are regulated while group ones are not. Individual policies, however, are guaranteed renewable for life and premium increases for a class of insureds must be approved by the state.
  5. Is the policy tax qualified?
    Under the provisions of the Health Insurance Portability and Accountability Act of 1996 (commonly known as the Kassebaum- Kennedy bill) which went into effect on January 1, 1997, long-term care premiums may be deducted from your Federal income tax within certain limits and to the extent you have medical expenses (including these premiums) that exceed 7.5 percent of your adjusted gross income. Any benefits received under a tax-qualified policy are not taxable if the policy meets certain guidelines. Employers may treat long-term care insurance premiums paid on behalf of their employees just like health insurance and fully deduct the cost. Moreover, the employees do not have to include the premium as income and the benefits when receive will be tax-free.
  6. Are the benefit triggers clearly spelled out?
    A benefit "trigger" is the inability of the policyholder to perform specified Activities of Daily Living (ADL's), such as transferring, toileting, bathing, continence, dressing and eating. Ask your insurance agent for a copy of the actual policy in order to see for yourself how the benefit "triggers" and ADL performance are described. The policy you want must include coverage for ADL Standby Assistance. Otherwise, you will own a policy that is harder to qualify for benefits at claim time. Don't make the mistake of focusing your comparison of companies on less important details like a 21 day vs. 31 day bed reservation benefit. Moreover, check policy language to be sure pre-existing conditions are covered.
  7. Does the policy cover homemaker services?
    Homemaker services include cooking, shopping, changing beds, cleaning the house and doing laundry. Not all policies do provide coverage for homemaker services and some require that they be specifically included in a plan of care. Look for policies that clearly define these services and provide you with a choice.
  8. How does my health history affect the cost of the insurance?
    Your personal health history can make a difference in both coverage and premium cost. Since insurance companies differ in the way they view certain health problems, it's essential that your insurance agent has access to a broad selection of insurance carriers.
  9. Is your agent or broker Certified in Long Care (CLTC)? And do they offer a choice of companies?
    Many insurance agents are now selling long-term care insurance since it has received so much media attention. Because the purchase of this type of protection is so important, we recommend that you do business with an agent or broker who is knowledgeable, experienced and has an established reputation in this area of insurance. Longterm care insurance is a complex product. Look for a CLTC specialist. (See the link to the Corporation for Long-Term Care Certification on our Partners page.) Also, you want an agent who represents a number of insurance carriers so you can choose from a variety of policies.

Although the answers to these questions do not cover every possible issue, they are a guide for helping you evaluate long-term care policies and making the decision that's best for you. (This guide has been provided by Michael B. Uretsky, CLU of Mazonson, Inc.)