No one (except insurance agents) likes to think about the possibility that, without insurance, a long illness could eat up hard-earned assets. But as any purveyor of long-term-care coverage will tell you, it happens. As the tens of millions of baby boomers age, and as life expectancy rises, insurers are busy rolling out new and, they say, improved long-term-care policies. While such oft-criticized products are getting somewhat better, the policies still merit a long look before you grab your checkbook.

In the past, the policies have been slammed for their narrow definitions of what type of care qualified and for their rigid guidelines on what triggered coverage. Newer policies broaden the scope of coverage to include such things as adult day care, have more triggers for the insurance to kick in, and offer more options, such as inflation protection. "We're seeing contracts plump up," says Rae Lee Olson, an agent at Vita Insurance Associates in Mountain View, Calif. "They're better for the dollar." Coverage has become less expensive in recent years, but it remains costly: A 65-year-old couple could pay annual premiums of $1,800 apiece for lifetime care, says Ralph Solomon, of Ralph Solomon & John Bardes Organization, a Boca Raton (Fla.) insurance agency.

Such high costs make it imperative that consumers do thorough research before plunking down any cash. The best candidates for such policies are people from 55 to 75 years old with assets, excluding homes, of $500,000 to $2.5 million. If premiums are more than 3% to 4% of income, it might create too much of a financial strain--unless the children want to pay for it. "We're finding more and more that children are buying policies for their parents and paying half or splitting it with siblings," says Solomon. That's fine as long as their support won't wane. When deciding how much coverage to buy, factor in how many helpful relatives live nearby and whether disabling illnesses such as strokes or Alzheimer's disease run in the family.

To make deciding even tougher, there's the question of whether health reform will make it largely irrelevant. It will probably take a year or two to find out, but the chance that reform will result in a significant level of home care for most Americans is not high.

TRANSFER CREDIT. In any case, insurers are designing policies that take reform into account. UNUM Life Insurance in Portland, Me., just announced that if a long-term-care plan providing home care is signed into law by July, 1995, policyholders who bought after Jan. 1, 1994, can cancel the home-care portion and get full premium credit applied to future nursing-home coverage. John Hancock is seeking state regulatory approvals for its own "nonduplication benefit."

The first thing potential buyers should examine is the financial strength of the insurer. After all, you want the company to be around if you need coverage 15 or 20 years from now. A quick trip to the library can tell you if a company falls into at least the "excellent" category of rating agencies such as Standard & Poor's or A.M. Best. Also check the rating guides to see if the company has a good record of paying claims. And choose one that's established in the long-term-care field. Well-regarded names include John Hancock Mutual Life Insurance, UNUM, Continental Assurance, and AMEX Life Assurance.

Good policies cover home-health-care and nursing-home costs. The crucial question is what triggers benefit payments. It's usually when the insured person can no longer perform two out of five "activities of daily living," such as eating, dressing, and getting up and sitting down without assistance, or if there is a doctor's statement of medical necessity. Another trigger in many states is cognitive impairment from senile dementia or Alzheimer's.

FINE PRINT. The second most important feature to check is what type of care is covered: skilled, intermediate, or custodial? Do costs of adult day care and assisted-care living facilities or residences get picked up? Most insurers have "indemnity" policies that reimburse policyholders according to how much has actually been paid out, and they require the person giving care to have some sort of certification. UNUM is one of the few companies that uses a disability model, paying people a set amount, perhaps $100 a day, even if that exceeds the cost. Also, UNUM allows payments to family or friends who are giving care.

Determining how much coverage to buy is difficult. Policies offer daily benefits ranging from $50 to $250. Some experts recommend buying 80% to 100% of current nursing-home costs in your area. Keep in mind that the average long stay in a nursing home is just over two years. The average cost of a year in a nursing home, nationwide, is about $40,000 ($110 a day), but in cities such as New York it can reach $70,000.

Coverage periods range from one year to life. Many buyers choose policies that offer three years of coverage. Lifetime policies are costly, adding as much as 40% to the premium for a 65-year-old. Buyers must also decide how long they could shoulder the cost of care themselves. The longer the so-called "elimination period," the lower the premium. Some companies offer coverage from the first day someone needs home care or the first day of a stay in a nursing home. Most consumers opt for the 100-day elimination period, though there are other options, including 20, 30, and 90 days. John Hancock may come out with a policy that kicks in after buyers pay one year of costs.

Various options jack the tab up further. One of the most expensive is the inflation rider, which increases the benefit level as the cost of living rises; it can be as much as 40% of the premium. An inflation rate of 5% is common, and consumers can often choose how they would like inflation to be calculated. Ten years into a policy, one option--a 5% "simple" rate of inflation--would have raised a $100 daily benefit to $150 a day. A compound-inflation option would raise the daily amount to $163 during the same period by taking previous years' increases into account when factoring for inflation. Companies may also offer an inflation adjustment that's pegged to the consumer price index.

A WAY OUT. A newer, hotly debated option is the "nonforfeiture benefit." This would allow buyers to recoup some of their premiums if, after a certain period of time, they cancel their policy. The National Association of Insurance Commissioners (NAIC) is suggesting that such a benefit be mandatory. Insurers object, saying it would greatly hike policy costs. AMEX Life Assurance says its nonforfeiture benefit adds 20% to 25% to a policy's cost. The NAIC's richer proposal would make a policy 40% to 55% more costly for a 60-year-old, estimates Ron Hagen, AMEX's vice-president for product development.

Of course, the costs are substantial already. With a John Hancock policy, a healthy 60-year-old would pay $933 a year for a $100 a day benefit for three years of nursing-home care and a $50 a day benefit for three years of home care. The benefits would kick in after 100 days, with 5% simple inflation factored in. The same coverage would cost $1,991 a year if purchased at age 70; $693 at age 55. Inflation protection adds to the premium: without it, the 55-year-old would pay $467 a year.

Confronting the idea that you or your spouse may need long-term care isn't pleasant. But careful planning can lessen the fear and uncertainty. For those who can afford it, that's a pretty good benefit in itself.


-- A company that is financially sound--rated in the "excellent" category by the major rating agencies--and well-established in this insurance specialty.

-- A policy that covers a wide range of care levels, including skilled, intermediate, and custodial.

-- Broad benefits that include payment for adult day care centers and assisted living facilities or residences.

-- A policy that doesn't require a person to be hospitalized prior to entering a nursing home. That could limit coverage for Parkinson's or Alzheimer's disease, which may not necessitate hospitalization.

-- A cost-of-living clause that would adjust benefits to inflation. Companies should offer a variety of formulas to choose from, using simple or compound inflation or pegging the increase to the consumer price index.



-- BEAT THE NURSING HOME TRAP: A Consumer's Guide to Choosing & Financing Long-Term Care ($18.95; NOLO Press; 800 992-6656).

-- THE NATIONAL ASSN. OF INSURANCE COMMISSIONERS: A Shoppers Guide to Long-Term Care Insurance. Write to: Publications, NAIC, 120 West 12th St., Suite 1100, Kansas City, MO 64105

-- NAT'L ASSN. OF LIFE UNDERWRITERS: Has provider survey. Send self-addressed envelope with 75 cents postage to NALU, PR-BW, 1922 F St., Washington, DC 20006

-- UNITED SENIORS HEALTH COOPERATIVE: Long Term Care, A Dollar and Sense Guide. Send $10 to LTC Guide, 1331 H St. NW, Suite 500, Washington, DC 20005


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