Most people think of long term care insurance as something you buy if you plan on ending up in a nursing home. In reality, long term care insurance is a versatile product that can provide coverage for a variety of age groups and health conditions. Depending on what type of policy you choose, it can cover you in the event of a disability or degenerative disease. Long term care insurance can also be used to supplement your existing health insurance or pay for assisted living.
Types of Policies
Long term care policies have come a long way since they were first introduced in the late 1970s. Today's policies are not limited to the elderly or those whose needs are restricted to nursing home care. Insurance companies usually offer three different variations of coverage, each with its own benefits and potential drawbacks.
Considered the traditional option, stand-alone policies offer a number of pros and cons. With a stand-alone plan, you pick your term and monthly benefit amount up front. Term limits are generally available in increments ranging anywhere from two to ten years.
You can also opt for an unlimited plan that never expires or a combined policy that covers both you and your spouse. While this option offers a great deal of flexibility, there are also some downsides. Depending on your provider, your premiums can increase unexpectedly. If your premiums outgrow your budget, and you stop making payments, you risk losing your coverage and years of investment.
Life Insurance Rider
A second way to purchase long term care insurance is to bundle it with a life insurance policy. In this type of hybrid policy, you buy life insurance with a long term care rider. If you die before needing the care component of the coverage, your heirs collect the death benefit. If, on the other hand, you end up needing extended care, your policy starts paying out during your lifetime. Any remaining benefits are paid out when you pass away. As one might expect, these policies tend to be more expensive than straightforward stand-alone coverage policies.
A relatively new option in retirement planning, the long term care annuity allows you to deposit a lump sum into a tax-deferred account, where it sits until you need it. Unlike other policies, which can be restrictive about the types of illnesses they cover, annuities provide the most flexibility in terms of how you're allowed to use the money. However, most plans require a deposit of at least $50,000, so annuities are too expensive for many people contemplating retirement.
There are other drawbacks, too. Most plans don't include a death benefit, so your estate receives nothing if you die without using your funds. The money is also locked in the annuity until you meet the minimum withdrawal age.
Before You Buy
As with any investment, you should do your research before choosing a long term care policy. Insurance contracts might not provide the most stimulating reading, but it's important to thoroughly review a provider's terms before signing the dotted line. Many plans are quite specific when it comes to when and how they will pay out benefits. Consider the following guidelines before deciding on coverage:
Don't assume that your policy will automatically kick in every time you file a claim. Most insurers will only provide coverage when the policyholder needs assistance with two or more "activities of daily living." These activities are routine self-care tasks that include eating, getting dressed, bathing, getting in and out of bed, and using the restroom.
Read between the lines to determine which health care workers and providers your carrier covers. Many plans distinguish between so-called skilled and unskilled care. Some plans will not cover home health aides or might not fully cover the cost of in-home skilled nursing care. Other plans might exclude health care workers who don't meet specific education or licensing requirements.
Some companies will cover your care only in a skilled-care nursing facility, while others will provide coverage for at-home care. Other providers will pay for care in a variety of nursing facilities and rehabilitation centers, with coverage depending on the size of the institution and the services it offers.
Check your policy for a mandatory waiting period. Many insurers impose a 30, 90, or 180-day delay in benefits.
Premiums generally cost much less if you purchase a policy when you're healthy. If your physical condition deteriorates, and you need to renew your coverage, your premiums will likely increase.
When to Purchase
Most retirement advisors suggest purchasing a policy after your kids have left the house but before you've hit retirement age. For most people, this is anywhere between the ages of 55 and 64. If you wait until you're sick to buy long term care insurance, you will pay much higher premiums than if you apply for benefits when you're in good health.
You also risk being denied coverage. Providers calculate your premiums based on your projected longevity and your likelihood of falling ill in the future. The older you are, the more risk you pose to the insurance company, so it pays to apply when you're relatively young and healthy.
A number of insurance companies offer long term care policies. A few of the most widely recognized names in the industry include:
- Genworth Financial - As the biggest name in long term care, Genworth provides a broad menu of insurance products, including stand alone plans, life insurance riders, and annuities. With eight brick and mortar branches and a comprehensive website, the company's reach extends to all 50 states. Genworth is the first long term care provider to charge women higher premiums due to the fact that women live longer than men on average. Historically, men and women have paid the same price for long term care insurance, but industry experts predict that other companies will shortly follow Genworth's lead.
- Mass Mutual Life Insurance Company - If you're looking for a company with staying power, you can't do much better than Mass Mutual. The company has been in constant operation since the Civil War and provides its policyholders with a broad menu of insurance options.
- New York Life - When you're looking for answers about your retirement options, it can be frustrating to wait for an agent to return your calls. New York Life's website provides users with a virtual help center where you can obtain information and receive live assistance.
- State Farm - One of the most recognized names in the insurance business, State Farm's long term care coverage kicks in when a doctor, nurse, or social worker determines that a policyholder is chronically ill and needs assistance performing two or more activities of daily living.
Factors to Consider Before Buying
Long term care insurance has improved considerably in the past two decades, but it is still plagued by several drawbacks. If you're thinking about adding a longevity policy to your retirement package, consider the following factors before investing your hard-earned cash:
Is the insurance company stable?
Generally, it's best to stick with a name you recognize. A fly-by-night operation offering a discount package might not be around long enough to pay out benefits. Well-established companies offer their customers peace of mind and stability, which is important when you're buying a product you probably won't use for a decade or more.
Can your budget handle premium increases?
Many people purchase long term care insurance while they're still working. Estimate your retirement income, and calculate whether your future lifestyle will support gradual rate increases.
What if you have financial difficulty?
Under many plans, you risk losing your benefits -- along with any money you paid into the policy -- if you stop paying your premiums. Some policies include provisions that allow you to freeze your premiums in exchange for reduced benefits if you encounter financial difficulty.
If you are deciding whether or not you need a long term care policy, it's best to shop around and compare several different companies. Remember that insurance brokers are trying to sell you a product. Consider policies from various providers before choosing one that suits your budget and lifestyle.