Buying Wisely

• What are the biggest mistakes to avoid when buying long-term care insurance?
• What about inflation protection?
• What's the best age for buying LTC insurance?
• When is it too late to buy?
• What's an average premium?
• Any other choices that need to be made?
• How do we evaluate the need for long-term care coverage versus other financial needs?

What are the biggest mistakes to avoid when buying long-term care insurance?
There are two really criticial decisions -- finding the right company and buying enough inflation protection.

First, you must find a company that is big enough to be there when you need it. It's not enough to find a company with good ratings from A.M. Best, Moody's or Standard & Poor's, you must also find a large company, one with assets that are well into the billions. You want a big, big company with deep, deep pockets.

You also want to ask if the company has had any rate increases on policies that had guaranteed level premiums. One way to be certain you get an accurate answer to your question is to contact your state insurance commissioner. Rates are public information.

While we all like quick service, in this case it's important not only that you take your time to be sure you find the best company ... but also that the company takes its time evaluating you. You want to be sure the company is doing a full underwriting procedure -- checking you out to be sure you're a good risk. If it takes the company five or six weeks to check you out, so much the better. You don't want a company that will write a policy for just anyone. That's the road to rate increases ... or worse.

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What about inflation protection?
Well, like everything else involving long-term care, you have to think long-term. If the cost of health care rises by 5% per year -- a conservative estimate -- it will double in less than 20 years. So it's crucial to buy inflation protection.

The next question is whether you want to buy simple or compound inflation protection. If you buy a rider that increases the daily benefit by 5% simple interest, then the benefit grows by 5% of the original amount each year, and doubles in 20 years. If you buy a rider that increases the benefit by 5% compound interest, then it will double faster, in about 15 years, because the 5% is based on the previous year, not the first year. Obviously, compound riders will cost more; they will also deliver more.

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What's the best age for buying LTC insurance?
There's really no answer to that. Since disability can occur at any age, it's prudent to buy coverage as soon as you can afford to. Remember, the potential payback is a lot higher if you are unlucky enough to need coverage sooner rather than later.

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OK, so when is it too late to buy?
Some companies will insure you to an almost unlimited age. It's not at all unusual for people in their 60s and 70s to buy policies. In fact, the average age of new policyholders in the individual market is 65. It's lower in group plans, around 42. Obviously, premiums will be higher when you're older but you will presumably be paying for a shorter period of time.

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What's an average premium?

Age	Premium
40	$828
50	$1,108
60	$1,783
70	$3,484

Here are some annual premiums for the average benefit purchased in the U.S. in 2000: $110 daily benefit, a five year benefit period, a 60 day waiting period (deductible), 100% home health care and 5% compound inflation for life. These premiums are for married individuals, because that's what most purchasers are. Is this expensive? It depends what you compare it to. I don't think it's expensive compared to shelling out $60,000 a year or more for care, a figure that's likely to triple in 20 years.

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Any other choices that need to be made?
Yes, there are several. You need to elect a deductible, which is called a waiting period. How long do you want to wait before payments begin, in other words. Then, you must select a benefit period -- how long the policy will pay benefits. Then you must elect a daily or monthly benefit as well as the level of inflation coverage and home health coverage.

It is more complex than many other types of insurance, no question. But the good news is that long-term care insurance has been getting simpler over the last few years. It's also getting better, with more options for home health care, more conditions being covered and so forth.

An excellent reference to see exactly how it all works along with a quick guide for customizing a plan for yourself is found in Chapter 2 of my book, Long-Term Care: Your Financial Planning Guide.

It is more complex than many other types of insurance, no question. But the good news is that long-term care insurance has been getting simpler over the last few years. It's also getting better, with more options for home health care, more conditions being covered and so forth.

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How do we evaluate the need for long-term care coverage versus other financial needs?
Well, it depends what's important to you. As I said earlier, below a certain net worth level, long-term care insurance is probably not appropriate. But for those who can afford it, it can make an enormous difference in quality of life, not just for the insured person but also for his or her family.

We're just starting to get some good, large-scale studies of how LTC benefits are being used in the real world. Of people who are receiving benefits for home care, half of them said they would have been in a nursing home were it not for the long-term care insurance. And the caregivers are saying they're twice as likely to keep their job because of the benefits from the LTC insurance. In other words, because the insurance is paying for home health care, the person's spouse or adult child doesn't have to quit working and stay home to take care of her or his relative.

That's why I always say that long-term care insurance is about so much more than financial benefits. It give families the money and the help they need to keep their dignity and maintain their lifestyle.

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