Insurance isn’t necessarily the best answer. It’s very expensive. And despite the alarming statistics that are bandied about, a little more than half of all 65-year-olds will never set foot in-or be wheeled into-a nursing home. Only 21 percent will stay in a nursing home for more than a year, according to the Brookings Institution. Why insure against something that may never happen? Baby boomers face a special quandary. If they buy now, at a relatively young age, long-term-care insurance is cheap. But it’s a good bet that by the time baby boomers need help dressing or moving around, a not-yet-invented form of care will exist. Will 25-year-old policies cover such new species of nursing homes?
Still, there are three compelling reasons to consider this insurance. The first is to protect your assets. The tab for a three-year stay m a nursing home in New York state, for example, can easily top $200,000. Most folks would rather give that kind of money to their children. The second is that in addition to nursing homes, policies now cover home health care and assist-ed-living facilities. “Nobody in their right mind wants to go into an institution, but most of us will need some form of daily assistance,” says Deena Katz, president of Evensky Brown & Katz, a financial-planning firm.
Then there’s the fear factor. Some experts believe we’re going to have to compete fiercely to get good care in our old age. “If you take a look at how fast the population is aging and the supply of nursing homes, you can see that a lot of people will have no access” to care, says Ed Graves, an insurance professor at the American College in Bryn Mawr, Pa. Here are the questions to ask before buying long-term- care insurance:
Do I need it? You can’t predict the future, but you can make some educated guesses. Married couples are far less likely to use a nursing home than are singles, but may need support at home. Because they outlive men, women are better candidates for insurance–75 percent of the nursing-home population is female. Ask yourself if you’re willing to be helped by–or even move in with–your kids. Does your family history include Alzheimer’s disease–or five generations who chopped wood into their 90s? Don’t make the mistake of thinking that Medicare will pay. Medicare does shell out for up to 100 days in a nursing home, but only if you’ve been released from a hospital and require hard-core medical care. The program pays for home health care over longer periods, but again, only if you need skilled nursing care or physical, occupational or speech therapy.
Even if you conclude that you’ll need substantial assistance in the future, long-term-care insurance may not be the answer. A 65-year-old with assets over $2 million will be able to pay her own way, as long as she doesn’t mind forking over the money to caretakers instead of leaving it to her children. At the other end of the spectrum, anyone with less than $75,000 in assets ($150,000 for couples), or retirement income of less than $30,000, should not buy. It’s too expensive for your budget. Instead, consider alternative sources of funding, such as part-time work now or a reverse mortgage later.
When should I buy? Timing is critical. Signing up early not only makes the coverage cheaper; it makes it possible. Once you’ve developed early symptoms of a disabling disease, you may not be able to buy a policy at any price. Purchase it between the ages of 50 and 60, when you’re young enough to be healthy, but old enough to begin contemplating your retirement. Will you live in your house as long as possible? Or will you opt for a continuing-care retirement community, where an entry fee may cover nursing-home services? Buying while young also affects your policy’s future cost. Most companies offer “level” premiums. This does not mean your premiums are frozen; they could go up. But it does mean that if you bought coverage at 50, the insurer can never charge you a higher premium than it later assesses 50-year-olds who buy a similar policy.
Which company? Be tough in analyzing an insurer’s financial soundness. Settle only for a company with an A+ rating from A.M. Best and an AA rating by two others such as Moody’s or Standard & Poors. Also look for a company with enough experience and policies in force to suggest that it’s committed to staying in this business. Between 1987 and 1992 the number of insurers selling long-term-care insurance jumped from 75 to 148 and then dropped down to 185. Companies with good reputations in the field include CNA, Travelers and John Hancock. Be encouraged by a company that requires a medical history as well as access to your doctor’s records. It’ll be in a strong position to honor your claims. Insurers who offer open-door group policies to every member of an organization may not. For an overview of contracts look at the December issue of Life Insurance Selling. (Send a $3 check to 330 North Fourth Street, St. Louis, Mo. 65102.) Read and compare three policies before you buy.
What should be covered? Look for great flexibility here. In addition to nursing-home costs, get a contract that covers home health care, personal care, assisted-living facilities and adult day care. These are the features that will allow you to stay independent and out of an institution. You want a policy that will pay not only for skilled and intermediate care, but also custodial care, which includes homemaker services and assistance with the “activities of daily living.” These last, called ADLs, are eating, bathing, dressing, going to the toilet and moving from one place to another.
Promises of such coverage aren’t enough. Examine a contract’s triggers–conditions you have to meet to collect the benefits. Beware of contracts with open-ended language or undefined triggers. When a policy specifies that it won’t pay until the insured needs help with two out of five ADLs, ask the insurer to clarify–in writing ff necessary–how it defines “needs help.” Also avoid policies that require prior hospitalization or a doctor’s statement of medical necessity before the insurer begins to pay. The best policies will be activated upon proof of disability, either physical or cognitive. Cognitive impairment should not be based on ADLs. The best definition: deterioration in intellectual capacity requiring supervision.
How much and for how long? Here is where most buyers stumble. On average, purchasers choose coverage lasting 5.6 years, according to a 1992 study by the Health Insurance Association of America. Yet only 12 percent of 65-year-olds stay in a nursing home for more than three years. A three- or four-year policy makes more sense, unless you have a family history of degenerative disease. To pick the best daily benefit amount, find out how much nursing homes in your region cost. The national average is $38,000 per year, or $105 a day. But in New York state they run $75,000 to $80,000 a year. Pick a daily benefit that’s at least equal to the average cost in your area. And definitely buy a policy with an inflation-protection option. A compounded inflation rate will give you far more protection than a simple rate.
How long until I can collect benefits? The longer you choose to foot your long-term-care bills yourself before the insurance company takes over, the less expensive your policy will be. This waiting time, called the “elimination period,” ranges from 20 to 150 days. Because Medicare, at least for now, will help pay for most short nursing-home stays, it makes sense to elect a 100-day elimination period. You may have higher out-of-pocket expenses, but your premiums will be lower and you’ll be covered for the worst-case scenario: a lengthy disability. Study the way an elimination period is calculated. Does every episode of impairment count against the elimination period–the best choice–or does the clock reset at zero each time? Do home-care days count toward the nursing-home elimination period and vice versa?
One of the most important things anyone planning ahead can do is heed the message coming out of Washington. You may not be able to craft the perfect old-age-care strategy until you know how much of a safety net is left intact. But you should prepare to embrace the hard truth of our era in personal finance: you’re on your own.
