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What to Look for in a Long-Term-Care Policy

Consumber Reports Editors

In the past, financial planners told us that people with a net worth below $200,000 to $300,000 (not including a house and depending on the regional cost of care) would probably not be able to afford a long-term-care policy, and should plan to rely on family, friends, or government programs if they needed help. People with assets of about $2 million or more should be able to pay for the care themselves. If you fall in between, you're a more likely candidate for an LTC policy.

But the recent hikes in premium costs make buying these policies an even riskier bet. If you're tempted to buy one anyway, we suggest you get some unbiased advice first. For guidance, consider consulting a fee-only financial adviser. Members of the National Association of Personal Financial Advisors are paid by the hour and accept no commissions on products they recommend. You can find one in your area by going to NAPFA's website, at www.napfa.org.

Here are some things to consider in choosing a long-term-care policy:

Calculate How Much You Want to Cover

You can check out the average costs in your area from the National Clearinghouse for Long-Term Care Insurance (www.longtermcare.gov; click on "Cost of Care"). Estimate how much of your savings you'll be able to apply toward your care costs, then try to buy an LTC plan that will pay as much of the remaining costs as you can afford. Ideally, the plan should also include 5 percent compound inflation protection, although that can quadruple your premium. Also, the daily benefit (the amount the plan will pay per day for your care) might not cover extras like drugs, supplies, and special services, which could add another 20 percent to the cost. When comparing plans, make sure they have similar coverage caps (the maximum amount the plan will pay).

Look for Flexibility

Try to find a plan that lets your doctor (not the insurance company's doctor) decide if you qualify for benefits. Also look for one that requires you to be unable to perform just one or two activities of daily living (some require more). A good policy will cover care in nursing homes, assisted-living facilities, and some home care. A home-care benefit should include adult day care, hospice services, and temporary overnight care.

Decide How Long Your Benefits Will Last

Since most people who enter nursing homes stay an average of two to three years, you might want to play it safe by considering a four-year benefit. If you need more care, you and your family will have some time to figure out how to pay for it.

Consider Your Deductible

The time you have to wait until the policy starts to pay is called the elimination period. You choose how long it will last—say, 20, 30, 60, or 90 days. The longer the elimination period, the lower your premiums will be. But if you need nursing-home care, you'll have to cover the daily cost (an average of $198 for a semiprivate room in 2009) every day until coverage begins. That amount could be higher in the future, so consider how much you'll be able to afford.

Investigate Partnership Plans

Numerous states now allow you to buy a "partnership" plan that protects some or all of your assets from being depleted. As with other group plans, however, you won't be able to tailor coverage to your needs. To learn more about state plans, go to the Long Term Care Partnership Program website, at www.dehpg.net/ltcpartnership.

Check the Insurer's Financial Health

Since you might not use your long-term-care policy for decades, you'll want to choose a solid company. We recommend you stick with insurers that fall in the "A" ratings tier at TheStreet.com, available to consumers free at www.thestreet.com/insurers/index.html, as well as the "AAAq" grade at Fitch and the "AAApi" grade at Standard & Poor's.

This article appeared in Consumer Reports Money Adviser.

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