Dear Readers...the following story appears in the July 17 issue of Forbes magazine...feel free to read it as it might give you a guidance on buying long-term care insurance...
Few financial products are as misunderstood as long-term care
insurance. These policies are complicated and expensive and cover a
risk that most of us would rather not think about: the need for help
with personal assistance in frail old age or if you become disabled as a
younger adult. But they can be a critical piece of your retirement
planning, and if you are in your 50s or 60s, long-term care (LTC)
insurance is a product you should at least consider. Here are some
questions to help you decide.
Will you need long-term care?
Almost seven of every ten of us will
need some sort of personal assistance after age 65, and we’ll need that
help for an average of about three years. For many people, however, the
assistance needed will be relatively modest, can be provided by family
members and might not be covered by LTC insurance anyway. That’s because
to qualify for LTC benefits you must need help with at least two of
five “activities of daily living,” such as getting in and out of bed,
bathing, dressing, eating or going to the bathroom. What’s more, you’ll
need it for an extended period, since policies typically don’t cover the
first 90 days of care. On the other hand, 20% of seniors will need care
for five years or more, and 5% will spend more than $100,000 of their
own money on this assistance.
Will the government pay?
There is lots of confusion about government
coverage of long-term care. Medicare may pay for limited nursing
assistance after you have been hospitalized. But neither traditional
Medicare nor Medicare Advantage managed care nor Medicare Supplemental
(Medigap) will pay for long-term services for someone with chronic
disease.
Medicaid does pay for this assistance. But to qualify you need to
have very limited financial assets (less than $2,000 in most states) and
limited income (this varies widely among the states but is rarely more
than a few thousand dollars per month). In addition, while all states
have Medicaid home-care programs, they often are severely underfunded,
have long waiting lists or provide limited services. Thus, if you can’t
pay or don’t have insurance, your only government-funded option may be
Medicaid in a nursing home. And in an era of budget-cutting, Medicaid
benefits may become less generous.
What’s your net worth?
If you have limited income or less than
$200,000 in assets, don’t buy private insurance. Medicaid will provide a
safety net for you. And remember, if you purchase at 60 you’ll likely
need enough retirement income to keep paying premiums for 20 years—and
those premiums are certain to increase over time, perhaps outpacing your
ability to pay.
If you have a nest egg of $2 million or more, you probably can cover
any care you will need out of pocket and can skip buying LTC insurance.
If your wealth is somewhere in between, you could self-insure for
long-term care costs by filling a dedicated pot of money (beyond what
you’ll need for regular retirement living expenses) that can be used for
care if needed and otherwise can go to heirs. But that requires the
discipline to put aside extra money each month for years.
When should you buy?
At 45 you can expect to pay about $100 a month
for a policy that pays $200 a day for three years. If you wait to 65,
you’ll probably pay about $250 a month and are more likely to be
rejected for coverage because of your preexisting health history. But
you’ll pay for 20 fewer years. For most people the sweet spot for buying
may be in their mid- to late 50s.
How much coverage should you buy?
Let’s say you’ve decided to buy.
What kind of policy should you think about? LTC policies are typically
defined by how long they pay benefits and how much they pay each day. So
you might see a policy that covers, say, $150 a day for three years.
Policies also come with a deductible, sometimes called the elimination
period. This is typically 90 days, which means the insurance will not
pay for the first three months of your care.
The average cost of a nursing home now exceeds $200 a day and in some
areas tops $300. Home health aides hired through an agency cost about
$20 an hour. The Society of Actuaries estimates that an average man will
face a period of severe disability of about 18 months, while for women
it will approach three years. Think about how much of this you can fund
yourself. Do you want a policy that covers all of your daily needs, or
do you want to self-insure for part? Do you have a family member who
will provide some care or will you have to pay for all of it? As always,
the more generous the benefit, the higher the premium.
Watch the fine print. Some policies will pay up to the daily amount
but won’t allow you to carry over unused benefits. So if you have a
$200-a-day policy but care costs only $80, you lose the difference. But
with other policies—sometimes called pool-of-money coverage—you won’t
lose untapped benefits. Thus, when you buy a $200-a-day, three-year
policy, you are really purchasing $219,000 in benefits ($200 x 365 x 3).
Should You buy inflation protection?
Absolutely. If you buy a policy
at 55, you are unlikely to claim benefits for 25 or 30 years. Over that
time the value of your benefit could easily erode by two-thirds or more.
You’ll pay higher premiums, but consider buying a compound annual
inflation rider of at least 4%.
Is a group policy a better deal?
If you can buy group coverage
through your employer, it may—or may not—be a better choice than buying
on your own. Shop around. Employers rarely help pay premiums for LTC
policies, as they do for health insurance. So you’ll pay the full amount
either way. And unlike health policies, group long-term care rates can
be more expensive than individual ones. That’s because group policies
often require only limited underwriting and so carry more risk for
insurers. On the other hand, if you have health problems, a group policy
purchased through your employer may be the best deal available to you.
Do combo products make sense?
Some insurers offer annuities or life
insurance with a long-term care rider. These so-called combo products,
which attempt to add a long-term-care component to an annuity or life
insurance, are worth considering, especially if you have a high net
worth. They can provide flexibility and assure some income for a
surviving spouse if it turns out you don’t need long-term care. But
these policies can be complex and often come with very high fees.
Another alternative is longevity insurance—an annuity that pays out
only after you turn 85, when you are most likely to need long-term care.
In general, basic annuities are a better buy, especially for men, than
stand-alone LTC insurance.
What if your insurer folds?
There has been tremendous consolidation
in the industry over the past decade, and you should consider the
possibility that the company you buy from today won’t be around when you
go to claim years from now. If your carrier goes out of the business,
your policy may be transferred to another firm. In the worst case, most
states have special funds to protect you. However, those funds have
never been stress-tested.
Should you buy?
The answer, for a large group of middle- and
upper-middle-class boomers: It depends. Unlike health and auto
insurance, which everyone either should or must have, LTC insurance is a
financial product that works for some but not for others.
Consider your own tolerance for risk. And ask yourself why you’re
buying. To make sure you get needed care in old age? To protect assets
for heirs? To make sure you’re not a burden on your kids? The answer
could go a long way to helping you decide what, if any, type of LTC
product to buy.
Source: Forbes Online Magazine
kumaran nadaraja
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