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What You Need to Know About Long-Term Care Insurance

Long-term care insurance may or may not be the right choice for you. But it remains the only protection against potentially devastating later-life health expenses should you or a loved one be unable to perform common activities such as eating, dressing yourself, using the bathroom, and other so-called "activities of daily living" (ADLs).

Without insurance, you have two choices for financial planning: fund your own expenses out of your personal assets, which amounts to self-insuring, or spend down most, if not all, of your assets and then qualify for Medicaid. With no intended slight to Medicaid, an invaluable program that helps millions of Americans, its level of benefits does not exactly support a Club Med user experience. (And, no, Medicare does not pay long-term care expenses.)

There was voluntary long-term care insurance included in Obamacare, known as the CLASS program. Although enacted into law, CLASS never got off the drawing board. Its structure--voluntary participation and modest benefits--would not have attracted many users, and those it did attract would have overwhelmingly been sicker and very likely to have long-term care (LTC) expenses. The recent tax bill compromise included the creation of yet another long-term care commission but there is no insurance alternative to private policies on the horizon.

And private LTC insurers have been going through tough times. Rising healthcare costs have elevated their payout ratios while low interest rates have made it tough for them to make a buck on the premiums they collect from consumers and then invest. Several companies have pulled out of the market. Many others have raised rates. Consumers, who never flocked to the coverage in the first place, may understandably be even more wary.

Yet, private LTC insurance could be a valuable tool. It merits a close look when you're making your later-life financial plans. Jesse Slome, executive director of the American Association for Long-Term Care Insurance (AALTCI), has assembled useful data about LTC policies and the likelihood you would ever need to use them.

Most LTC policies are sold with 90-day elimination periods, meaning you pay your own expenses for the first 90 days and then the policy kicks in. To file a claim, an insured person must be unable to perform two or three of six ADLs: eating, bathing, dressing, toileting, transferring (walking), and continence.

"For someone with a 90-day elimination period, the lifetime chance of someone buying coverage at age 60 and using policy benefits was 35 percent," Slome said on the association's website. "So, 35 percent will use their coverage and 65 percent will not."

Here are more association statistics about who would need care. Genworth Financial has a detailed cost-of-care tool. By combining these costs where you live with the likelihood that you will need care, and the possible duration of that care, you can project your LTC expense exposure:

Among 1,000 65-year-old males: 302 will need care, including 20 for more than two years, 12 for more than three years, seven for more than four years, and four for more than five years.

Among 1,000 65-year-old females: 555 will need care, including 70 for more than two years, 51 for more than three years, 35 for more than four years, and 23 for more than five years.

Among 1,000 75-year-old males: 351 will need care, including 79 for more than two years, 53 for more than three years, 39 for more than four years, and 25 for more than five years.

Among 1,000 75-year-old females: 417 will need care, including 124 for more than two years, 79 for more than three years, 57 for more than four years, and 39 for more than five years.

Besides elimination periods, LTC policies include daily benefit limits, maximum benefit periods, and inflation protection. Policy premiums are also affected by an applicant's quality of health. Here the key metrics for these choices, in 2011 policy purchases, provided by the AALTCI. They are for individual policies, not group plans. There are a lot of numbers here, but they provide the best cumulative guide I've seen for making an informed decision about LTC insurance:

1. Percentage of applicants qualifying for good health discounts by age:

40-49: 42 percent

50-59: 32 percent

60-69: 21 percent

70-79: 17 percent

2. Percentage of applicants rejected for coverage (individual policies) by age:

Below 50: 11 percent

50-59: 16 percent

60-69: 24 percent

70-79: 41 percent

80 and above: 63 percent

3. Sales by issue age:

45-54: 22 percent

55-64: 56 percent

65-74: 17 percent

4. Benefit periods:

Less than three years: 12 percent

Three years: 34 percent

Four years: 26 percent

Five years: 20 percent

5. Daily benefit amount:

$99 or less: 7 percent

$100 to $149: 36 percent

$150 to $199: 34 percent

$200 to $249: 18 percent

$250 or more: 5 percent

6. Benefits inflation protection

5 percent compound for life: 34 percent

5 percent simple for life: 12 percent

3 percent compound: 24 percent

CPI formula: 8 percent

Future step-up option: 8 percent

None/other: 15 percent

Finally, here's some helpful information on annual policy premiums. LTC insurance premiums often are collected for years by an insurer before a person ever files a claim. Insurers use this time to invest the premiums and make enough money to satisfy future insurance claims and, of course, make a profit. For this reason, premiums are lower for policies purchased at younger ages.

Here is a look at average, low, and high premiums charged in 2012 by 11 private LTC insurers and tabulated by the AALTCI. These premiums are for a specific set of insurance policy terms: for individual policies, standard health, $150 daily benefit, three-year benefit period, 3 percent compound inflation protection, by purchase age:


55 year-old: average, $2,007; low, $1,764; high, $3,446

Couple (combined for both spouses)

55 years old, with shared care*: average, $3,150; low, $2,433; high, $4,824

55 years old, no shared care*: average, $2,466; low, $2,080; high, $4,824

60 years old, with shared care*: average, $3,857; low, $3,240; high, $5,637

60 years old, no shared care*: average, $3,381; low, $2,794; high, $5,637

65 years old, with shared care*: average, $4,940; low, $4,425; high, $7,129

65 years old, no shared care*: average, $4,433; low, $3,815; high, $7,129

*Shared Care means each member of the couple may receive benefits based on both spouses' combined benefit limits.

If you shop for LTC insurance, understand these different policy options and premium levels. They will help you make the right decision for you and your family.

Twitter: @PhilMoeller

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