Growing Older / Liz Taylor
3 more essentials of care insurance to think about
Dear readers: On June 30, I began a six-part series on long-term care insurance, which appears every other Monday through the summer. This is Part Four.
Want a relatively easy way to compare long-term care insurance policies? "Focus on the 'bricks and mortar' " — the six essential elements that distinguish among good, bad and great policies, says long-term-care insurance specialist, Ken Story of the Gjurasic/Story Group (Seattle), who's guided me in this arena since he sold me a policy four years ago.
My last column discussed the first three elements.
Here are the remaining three:
4. Maximum lifetime benefit: This tells you the top amount of money your policy will pay if you need care. It's a tough call, because it requires you to guess how long you'll be impaired.
The maximum lifetime benefit is your daily benefit limit (say, $150/day) multiplied by the number of days the policy will cover (say, 4 years or 1,460 days). In this case, your lifetime benefit is $219,000. Hint: choose the benefit that's expressed in dollars — or "pool of money" — not in days.
Here's why: Let's say your home care costs $75/day, and your policy limits you to 1,460 days of coverage. On the 1,461st day, your coverage ends, leaving $109,500 unspent. But, if your lifetime benefit is expressed as dollars ($219,000), you have access to the entire sum, often stretching beyond four years.
Benefit limits are available in increments of two, four, or five years or more, or lifetime. Lifetime is pricey, so buy it if you can afford it (especially in your 40s or 50s, when insurance is cheapest — I did). Otherwise, says Story, three to five years is recommended.
5. Deductible or elimination period: Like the deductible on your car insurance, this defines what you pay before the insurance kicks in. The longer the elimination period, the lower the premium, so it's one way to reduce your costs.
Elimination periods are expressed in days and vary from zero, 20, 60, 90 — up to 365 days. If you choose a long elimination period, say 100 days, and your care costs $150 a day, understand that you will pay $15,000 before your insurance coverage begins — which is OK as long as you realize it, have the money, and get enough of a price discount to take the risk.
Some policies require the elimination period to restart each time you need care. Others provide one elimination period per lifetime. Choose the latter.
6. Inflation protection: What will care cost in the future? Given the labor shortage that's predicted and high demand, I think we'll see costs soar through the roof — especially when the aides who care for us begin refusing to put up with bottom-of-the-barrel wages. The federal government predicts nursing homes will cost $240,000 to $450,000 per year by 2030.
That's why it's essential to buy a policy that automatically increases your daily and maximum lifetime benefits. Inflation protection options come in several flavors: 5 percent simple, 5 percent compound and 5 percent periodic (also called "guarantee purchase option") are common. The first two increase your benefits automatically every year without increasing the annual premium. Compound is best. The third (such as policies offered by AARP) appears initially cheaper, but as you buy more, the price skyrockets.
Rule of thumb: Don't buy the periodic option. If you're younger than 70, take the compound, automatic-inflation option. If you're between 70 and 80, consider the simple-inflation protection. Those older than 80 can forgo any inflation protection — just buy as much daily coverage as you can afford.
Note: Washington state considers inflation protection so important that, if you choose not to buy it, you must sign a waiver stating you understand the consequences.
So, to compare different long-term-care policies, list the six essential elements, then read the fine print and determine how each is addressed. If you can't answer something, call your agent and ask. Does one policy offer broader coverage than another? How is "home care" defined? Is automatic 5 percent compound inflation included? What's the price for a 30-day elimination period versus 90 days? Then spend a little more time comparing the "bells and whistles" — hospice care, waiver of premiums, respite care, and other details. But first, focus on the fundamentals.
Tax Qualified policies
Most long-term-care insurance policies sold today are Tax Qualified ("TQ"), which has its pros and cons. Here's why.
In 1997, alarmed by the billions of Medicaid and Medicare dollars going to long-term care services each year, Congress passed legislation to encourage people to buy insurance. The carrot: favorable tax treatment. What's different about TQ policies (compared with my non-TQ policy) is their benefit triggers: To qualify, you must be cognitively impaired or need "substantial assistance" with two or more Activities of Daily Living, plus a licensed health-care practitioner must predict you'll need this care for at least 90 days — a major hurdle.
My concerns: TQ policies won't pay your bills for short-term convalescence, such as knee replacement or eye surgery. For those of us without family, this can be important.
There's no common definition for "substantial assistance." Is it "hands-on" or "stand-by" care? This is significant, so find out and choose "stand-by."
The tax "benefits" are overblown. While TQ policies allow you to count your premiums as medical expenses on your income tax, you can't deduct them until your total medical expenses exceed 7.5 percent of your adjusted gross income — not useful unless you have huge medical bills or a modest income.
The law says the money your policy pays isn't taxed as income in a TQ policy — but is silent on my non-TQ policy. Should I worry that my benefits will be taxed someday? I don't think so! If my house burns down and I rebuild, I'm not taxed on the money my home insurance gives me.
If Congress wants to reward private long-term-care financing — which it should — it needs to create meaningful tax benefits and treat all policyholders equally: by providing "above-the-line" deductions on their taxes (regardless of yearly medical expenses) and not taxing the benefits, just like other insurance.
But Story says federal regulations aren't likely to change and, in reality, it's a moot point — there are few non-TQ polices left on the market today. Too bad.
Next time: what influences premium costs and other important issues.
Liz Taylor, a specialist on aging and long-term care, consults with families and teaches workshops on how to plan for one's aging — and aging parents. E-mail her at firstname.lastname@example.org or write to P. O. Box 11601, Bainbridge Island, WA 98110.
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