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Insurance for long-term care promises peace of mind, but at a dear price

It's not only people nearing retirement who are being pitched the concept of insurance to cover long-term nursing or other assisted care. Even people in their early 50s, or younger, may find they are the target of insurers who view the aging of America as an opportunity to sell more of their stock in trade–peace of mind. While long-term-care insurance can salvage family finances and ease worries about having a nursing home bed if you need one, its provisions are often misunderstood. And people frequently develop unrealistic expectations of the amount of help such insurance can provide. Buying too soon–or too much–can be a waste of money. Waiting too long can make you ineligible because of health problems. And, because it's so expensive, you may decide it's a safety net that you can't afford or don't need at all. Here's some help to make sense of all this:

Once someone hits 65 and qualifies for Medicare, won't that pay for a nursing home stay?
Sometimes. Medicare pays for 20 days at a nursing home for recuperation and rehabilitation after a hospital stay, and it picks up part of the cost for an additional 80 days. A supplemental Medigap policy could pick up the share that Medicare won't. But neither covers custodial care that elderly people may need when they can't bathe, eat, dress, or get around without help–or when they need supervision because of Alzheimer's disease or other forms of dementia.

What about Medicaid?
This welfare program is often confused with Medicare, the federal insurance program that helps older people pay doctor and hospital bills regardless of income. Medicaid, run jointly by the federal government and the states, is a haven for people with few assets and a low income. It may pay for long-term custodial care and, in some cases, for at-home care or assisted living in communities for the elderly. But it won't kick in until those bills eat up most of a person's assets and income. Provisions vary by state, but protections apply when one spouse is institutionalized and the other stays at home. The at-home spouse can typically retain about half the family's assets but no more than about $84,000, plus the family home–and keep as much as $2,100 a month of income, and perhaps more.

Despite those safeguards, many people worry about a reduced living standard for the at-home spouse or an erosion of the assets they can leave to their children. As a result, many people transfer the title to their assets–at least in part–and make other financial moves to appear poor on paper and thus prematurely qualify for Medicaid. That's part of the reason there are so many more elder-law attorneys, who specialize in helping people with the complexities of aging.

How does insurance help?
It can reduce the incentive to manipulate finances and provide peace of mind about getting care. Insurance can also increase a family's leverage to choose the care it wants. Not all facilities accept Medicaid patients, and those that do may limit the number of such occupants because Medicaid pays a discounted rate. Residents who pay full price from their own assets or insurance may get preference even in cases where regulations bar discrimination against Medicaid patients. "It's like flashing $20 to the maitre d'," says Barbara Kate Repa, an attorney in San Francisco. It can help if you use insurance or private funds to start off before turning to Medicaid. A nursing home that accepts Medicaid patients can't force out paying occupants when they go on Medicaid, but lawyers tell of patients being moved to a less desirable room or a different facility. Complaints by family members may help.

Middle-income people are the prime target for this insurance. Their income may not cover long-term care, but they can have sizable assets that could be sliced away. Couples with modest assets and income may need little or no insurance, as Medicaid may protect all or most of that for the at-home spouse. The rich can probably afford to take care of themselves.

What does a policy cover?
This is where you must read the fine print; terms vary widely. Generally, insurance may pay $100 to $200 a day for custodial care in a nursing home for two to four years–but sometimes for life. A similar or reduced amount may be paid for assisted living or care at home. A policy with such options can be useful because alternatives to nursing homes are becoming more popular and available.

Keep anticipated costs in mind. Nursing homes currently charge about $100 to $300 a day, so insurance may not cover everything unless you pay an outsize premium for very extensive coverage. For many people, the insurance may have to serve as a supplement to other savings and retirement planning. A policy that raises its daily compensation each year helps protect against inflation even before the first claim is made. It's a costly added feature that in some cases may almost double the premium, but it's worthwhile, particularly for younger buyers who may not claim benefits for many years. The most generous adjustment compounds the rise in benefits–similar to interest compounding in a savings account.

Buying minimal protection is unwise, as it will hardly dent the bills. A better way to economize is to accept a wait of up to 90 days after entering a nursing home before benefits begin–not unreasonable if you view the policy as a last-ditch backstop against the financial drain of long-term care.

To trigger benefits, a person must generally be unable to handle two or three "activities of daily living" from a list of five or six. Make sure bathing is on the list; that is typically one of the first chores that can't be done. Good policies also provide coverage for dementia. Check for restrictions that might, for example, rule out a preferred smaller facility. If you're considering assisted living, check the policy's definition of what qualifies.

What if the benefits run out?
In that case, the resident would pay all expenses until he or she eventually qualified for Medicaid. The following projections aren't fun, but the average nursing stay is about two years, and the chances of surviving long enough to need care for more than four or five years is low. Alzheimer's patients, though, tend to have longer-than-average stays.

Some states are trying to reward those who buy long-term insurance. Pilot programs in California, Connecticut, Indiana, and New York allow residents who have bought insurance to retain a larger-than-normal amount of assets when they go on Medicaid. But the individual's income may be tapped to reimburse Medicaid costs.

What does it cost?
A 55-year-old might pay as little as $500 a year for minimal long-term coverage, or $2,500 for comprehensive benefits, estimates the United Seniors Health Cooperative in Washington. An individual who first purchases insurance at 75 might pay $2,000 to $8,000. Changing the level or length of benefits has a big effect on the cost, but also check for specials, such as a discount of perhaps 10 percent to 20 percent for couples who sign up.

Consider whether you can afford the cost–buying a policy and later letting it lapse is generally a bad strategy, and it is something that many buyers of the first generation of unattractive long-term-care policies did. One rule of thumb is that retirees should not spend more than 5 percent of their income on such insurance. Some insurers allow policyholders who get stretched too thin to downgrade the coverage to a level they can afford–a half-loaf-is-better-than-none approach. In some cases, the premium will be waived once benefits begin, a good feature. It's not unreasonable for children who will inherit the protected wealth to help out. But for many, coverage won't be affordable.

Can the premium rise later?
Once you pass an insurer's health requirements–the older you are, the harder that might be–the initial premium can't be increased as you age or as your health falters. But the rate can legally rise if the insurer generally raises it for everybody–not just for you or those your age. That could happen if claims are heavier than forecast or if a firm initially set prices low to drum up business. Some experts believe that sizable boosts may come in a few years; you may want to consider that when budgeting. Ask an agent about a firm's record of recent price increases and be wary of a premium that's way out of line.

Who sells the insurance?
Sellers are life and health insurance companies, including big names such as General Electric Capital, MetLife, and John Hancock. A buyer who wants to be conservative should choose a company that receives at least three of the following ratings, advises Joseph Belth, professor emeritus of insurance at Indiana University and editor of the Insurance Forum. They are: AA- or better by Standard & Poor's, A1 or better by Moody's, AA or better by Duff & Phelps, B- or better by Weiss Ratings, and A+ or better by A. M. Best.

Any tax breaks?
All or part of the cost of a policy that meets certain federal standards can be considered a tax-deductible medical expense. But that may not help much, because most people don't qualify to deduct medical expenses–and those who do can deduct only a portion. Congress is considering an easier-to-claim deduction, but no new break is likely soon. More important: Payouts from such "tax qualified" policies are not considered taxable income. The Internal Revenue Service hasn't definitively ruled on the taxability of payments from other policies, so buying one of those means a possible future liability and other complications. A tax-qualified policy may be more restrictive–a disability must be expected to last for more than 90 days, for example–but it's the better choice.

Is it smart to buy when you're young?
Buying in your 50s or earlier will get you a low rate (chart, Page 82) and protection against being rejected for coverage later on. But most advisers suggest waiting until your early or mid-60s, when coverage makes greater sense. Also, policy features and long-term-care choices are changing, so buying a policy early could leave you with an outdated one. Many policies bought prior to the mid-1990s, for example, are more restrictive than current ones and may require a hospital stay before going to a nursing home, or may make it difficult to get benefits for Alzheimer's disease. (Consumers with those policies may want to look into the cost and feasibility of upgrading, but they should be sure a new policy is officially in force before canceling the old one.) A more important priority for younger people is to build a retirement nest egg, says Robert Pearson, president of CareQuest, an employee counseling firm.

What are the odds of needing care?
Not as high as you might be led to believe by the hoopla–and the trend may be in your favor. At age 75, only about 2 of 100 men and 3 of 100 women are in a nursing home; at age 85, it's fewer than 9 of 100 men and about 13 of 100 women. At 90, it's fewer than 13 men per 100 and about 21 women per 100. Statistics are massaged to advance a point–some studies show that at age 65, the average person has a 40 percent to 50 percent chance of entering a nursing home at some time. But while there are real financial and medical disasters, more than half of the people going into a home are estimated to leave within three months, and a sizable number leave soon afterward. And the long-term outlook is favorable. "People who are 65, 75, or even 85 are in much better health today than in the past," says Shahla Mehdizadeh, a researcher at the Scripps Gerontology Center at Ohio's Miami University. Nursing home occupancy is declining as assisted living and other less intensive care proliferates, she says. That, at least, is good news.


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