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Long-term care policies: Costly but worth it

There is a popular misconception that Medicare, Medigap or your private medical insurance will pay for your long-term care needs. This misconception can be your financial downfall, because it's simply not true.

Think about this: 42% of Americans 65 and older will enter a nursing home during their lifetimes, and the current average annual cost of a one-year nursing home stay is $46,000. Even home health care, the least expensive alternative for someone who needs regular medical attention, costs on average more than $1,000 a month. All long-term care coverage is more expensive in metropolitan areas, and women are especially vulnerable because they have a 50% greater likelihood of needing nursing home care than men.

The premiums for this type of insurance are not cheap, but unless you have assets of $2 million or more, you probably need it, especially if you want to preserve some assets for your children. Premiums vary based on your age, sex, geographical location and policy type, but annual costs can vary from $400 a year for a 40-something male to more than $3,000 for a man or woman aged 70 or older.

If you're married with a family, you should start considering long-term care coverage as part of your overall insurance needs. As with life insurance, it's cheaper if you start younger, but if you're less than 30 years old, you may understandably question its value. What you have to ask is, "What would life be like if a debilitating illness hit?"

There are several ways to keep premiums down. Many employers now offer long-term care insurance as an optional employee benefit. Usually the employee, the employee's spouse, and the employee's parents are eligible to buy coverage. Or, you can choose a longer waiting period, lower benefits or coverage that ends after a certain time frame. However, as with life insurance, the amount of the premiums is not the most important consideration when purchasing long-term care insurance -- in fact, it is one of the least important considerations.

What matters most are the policy benefit amounts and the specific terms of the contract. These policies are complicated, but if you ask these 15 questions, you'll come close to finding the best policy for you.

1. Is this policy "qualified" under the Health Insurance and Portability Act of 1996?

Purchase a policy that is "qualified" because only those policies allow you to take a tax deduction for the premiums and pay out tax-free benefits.

2. Is this policy guaranteed for life, or can it be canceled?

Make sure that the insurance company cannot cancel your policy if it finds out that you're in poor health. Note that virtually no companies issue policies with guaranteed premiums because no one can predict future health care costs.

3. What is the waiting period, and does it only have to be met once?

The waiting period should be no longer than six months, and you should only have to meet that requirement once during your lifetime.

4. Does it cover home health care, as well as skilled, intermediate and custodial nursing home care?

These provisions give you an option to stay at home and receive care, as well as to receive all levels of care in a nursing home. That way, if your condition changes, you don't lose any benefits.

5. Do I have to be hospitalized before benefits begin?

Buy a policy where hospitalization is not required. You may simply start needing home health care, and your medical insurance might not pay for a hospital stay, in which case you would have to pay out-of-pocket for a hospital visit.

6. What are the conditions that trigger benefit payments?

The conditions should consist of cognitive impairment of any kind. It should explicitly include Alzheimer's disease, and should include the inability to perform two out of five or six activities of daily living (ADL) -- usually eating, bathing, dressing, using the toilet, "transferring" (moving unassisted from a bed to a chair for example), and continence.

7. What are the daily reimbursements for home health care and nursing home care?

Know the cost of these services in your area so that you can choose a policy that adequately covers those costs. Your insurance agent or a state elder care agency should be able to give you this information.

8. Is there an inflation clause so that my daily benefits increase over time?

The cost of home health and nursing home care has skyrocketed in the past few years, so make sure that your policy benefits keep up with those costs. Again, your agent or state elder care agency can help.

9. How long will benefits be paid?

If possible, you should purchase a policy with the longest benefit payment. Usually this is about six years for home health care and lifetime for nursing home care.

10. How long is the pre-existing clause in effect?

This clause excludes pre-existing conditions (medical conditions or ailments you already have prior to purchasing the policy, which are usually listed on your application). Your policy should have no more then a six-month pre-existing condition clause. After that, all medical ailments should be covered.

11. Are there specific guaranteed protections against policy lapses and reinstatements?

This protects you if you are having physical or mental difficulties and forget to pay the premium. You can have the policy reinstated even if your premium is late.

12. What specific expenses are covered under the policy?

It is very important that you know which medical and ancillary expenses will be covered, because you'll want to choose a policy that reimburses you for expenses rather than one that pays you a flat daily rate (an indemnity policy). The following expenses should be explicitly listed in your policy contract as covered: respite care, home modification, hospice care, caregiver training, professional health care services, therapeutic devices, and personal care adviser and bed registration fees if you are moving to a nursing home.

13. How long has the company been selling long-term care insurance?

Choose a company that has a good track record in the sales and administration of long-term care insurance. Make sure you buy insurance from a company that has been selling long-term care insurance for at least five years.

14. What are the insurer's financial strength ratings from the major insurance ratings services (A.M. Best, Standard & Poor's, Moody's, and Duff & Phelps)?

You want to choose a company with solid financial strength so that if expenses are substantially greater than expected, the company can handle them with ease.

15. May I have a sample copy of the exact contract of the policy I would be purchasing from your company?

Here is where you will probably get the answers to most of the questions listed above. Do not depend on what an insurance agent tells you verbally; it's what's in the contract that counts.