Should I Buy Long-Term Care Insurance?

 Long term care insurance is a great hedge against the high costs of elderly care, but it's not for everyone.  Even if it is a good choice for you, be very careful of which policy you select.

Sales of long term care insurance suffered in the early '90s from a scathing article in Consumer Reports that cited heavy-handed sales tactics and inadequate policies. Plans for a government universal health care program also hurt sales.

In response to this negative momentum, the insurance industry finally addressed some of the problems inherent in long term care policies.  Today with escalating health care costs, medical advances leading to longer lives, and the development of a greater number care alternatives, there is renewed interest in long term care insurance.

Harder to qualify for Medicaid 
Changes in Medicaid law makes it much less likely that the government will pick up the tab for that long term care.  Prior to these changes, an increasing number of middle-class and wealthy people used creative estate planning to impoverish themselves so they could qualify for Medicaid instead of buying insurance or paying for their care themselves.

This tactic, widely thought of as welfare for elderly rich people, threatened to eventually bankrupt the some states with large populations of older people.  The Health Insurance Portability and Accountability Act of 1996 made it a crime to deliberately spend down assets to go on Medicaid.  The penalty was jail time.  Politicians realized that not only was it unenforceable, but threatening elderly constituents with jail terms would be bad. As most politicians know, older constituents are more likely than the average person to vote.

The law was rewritten to penalize attorneys and estate planners instead.  The new law makes it illegal for a lawyer to advise you to give away your assets, but only if you're later ruled ineligible for Medicaid.

Tax Incentives for Long-Term Care
The 1996 law did add incentives for purchasers of long term care insurance in the form of tax deductions.  Medical expenses above 7.5 percent of adjusted gross income are deductible.  Long term care insurance premiums can now be included up to these amounts:

• for those 40 and younger, $200
• for those 41 to 50, $375
• for those 51 to 60, $750
• for those 61 to 70, $2,000
• for those 70 and older, $2,500.

The long term care policy must be qualified, which means that it meets certain conditions laid down by the government.  For example, coverage must kick in after the beneficiary is unable to perform two of five or six specified activities (generally including bathing, dressing, eating, using the toilet and moving from one place to another) without help from another person. Severe cognitive impairment also triggers coverage under federally qualified plans.  Less extreme impairment can include meal preparation, cleaning, grocery shopping, managing money and taking medicine. Be certain to ask your advisor when you are considering that the one you have selected meets Federal guidelines.

Is it right for me?
All of these changes make long term care more attractive for the average person. But the question still remains: Should you buy it?  The United Seniors Health Cooperative says you should buy the insurance only if you meet these guidelines:

• You have more than $75,000 in assets per person in the household.
• Your annual income is $30,000 or more per person in the household.
• You can afford the premiums without making a lifestyle change.
• You could still afford the premiums even if they increase by 20 percent to 30 percent in the future.

The last two provisions are particularly important. The fact is that long term care insurance policies are abandoned at fairly high rates. This is partly because people upgrade their policies, but often people find that paying the premiums cuts into their incomes, and lifestyles, more than they anticipated.

The single biggest disadvantage of long term care policies is that they are expensive.  A study on long term care insurance by the Health Insurance Association of America shows that cost is still the main reason why people don't buy the coverage.  The amount you will pay for the coverage varies according to where you live, how healthy you are, and the benefits you select. Benefits can also vary.  Here are some of the more important variables:

• Your age. The younger you are, the lower your premiums. Also remember that the younger you are, the longer you pay. A good age to consider buying long term care insurance is 50 to 55. The one exception to that is if you work for an employer that provides attractive benefits at a younger age.
• The deductible or elimination period. This is the amount of time you are confined to a facility or you meet another specified criteria for a certain number of days. During this time you pay for benefits, or another policy pays for benefits. The longer the period, the lower your premium.
• Benefits paid. The variables here are the daily benefit amount and the length of the benefits period. The higher the amount and the longer the period, the higher your premium.
• Inflation calculation. Some policies calculate inflation using a simple interest rate, while others use an annual compounded rate. The latter, while ultimately providing you with a higher daily benefit, is more expensive.

The rates, of course, can vary significantly from one company to another and according to where you live.