Don't Rush into Long-Term-Care Coverage

You may not need it at all, but if you do, shop around

If you work for a big corporation, you may soon get the chance to sign up for a new benefit: long-term-care insurance. About 18% of U.S. companies with 500 or more employees offer this coverage, usually at workers' expense, and more are expected to come on board. Seeing 76 million baby boomers racing toward old age, the government has provided tax incentives for both businesses and employees to buy coverage. And it's busy signing up its own workers and their relatives.

Do you need it? Financial planners usually don't recommend this coverage for those under 45, who may have more pressing financial obligations and little chance of collecting anytime soon. Even then, the premiums could be onerous for people with few assets and little income. And the well-heeled can often afford to pay for their own care. Since employers usually chip in nothing, even employees who fall in the middle--and therefore should consider coverage--might be able to find a better deal on their own.

Group plans come with major advantages, says Paula Wickland, a health-care consultant at Towers Perrin, an employee-benefits firm. Qualifying is usually simple for employees, who may be guaranteed coverage or face only minimal health questions. (Retired employees, spouses, and any eligible relatives might have to make medical records available, sit for an interview, or fill out a more extensive questionnaire.) Since almost 20% of those who apply for long-term-care insurance are rejected, this is no small bonus. Also, many employees can save 5% to 15% with a group plan--especially if they are in poor health.

For instance, Metropolitan Life Insurance offers a plan at one company providing $150 a day for nursing-home or assisted-living expenses, 60% of that amount for home health care, and a lifetime maximum payout equal to five years' care, or $273,750. It comes with a 30-day deductible--meaning you pay for the first 30 days of care--and guarantees the right to buy additional coverage later rather than providing automatic inflation increases. The policy costs $350 a year for a 45-year-old employee, $750 for a 55-year-old. A healthy, married 45-year-old would spend $493 to buy the same coverage in an individual policy, according to Metropolitan Life.

Some workers, however, can do better with an individual policy, says Robert Davis, president of Long-Term Care Quote, an online shopping service and independent insurance agent. Individual policies often come with discounts for being married, in excellent health, or having an affiliation with an association. A healthy worker in a group plan might wind up subsidizing sicker co-workers. In the example above, a healthy 55-year-old could get an individual Metropolitan Life policy for only $677. It's possible to get a similar plan from John Hancock for as low as $517, after all the discounts, Davis says.

With a group plan, you'll be limited to the options your employer chose. And since the insurance contract is with your employer, not you, your employer might one day change the terms, or allow a premium increase. An individual policy's terms can't be changed, and an insurer normally has to petition the state insurance department for a rate hike.

Start by asking if you need this product. Do you expect a hardy old age? Or does your family have a history of debilitating disease? The cost of a nursing home can be as high as $126,000 a year. Given such costs, those with more than $2 million in assets should be able to pay themselves. Those with less than $100,000 would soon exhaust their savings and qualify for Medicaid, the government's insurance for the poor.

When weighing an employer policy, make sure you can take it with you if you leave the company. Then, ask if it is "tax-qualified"--meaning it meets federal guidelines for coverage and hence pays tax-free benefits and could entitle you to a tax deduction for the premiums.

After that, focus on the quality of the insurer. Remember, you're buying something you may not need for 40 years. Look for a company with top credit ratings from A.M. Best, Standard & Poor's, Moody's, and Fitch. You want a company with at least $1 billion in assets and five years' experience in long-term care. Also, ask an independent agent or your state's insurance department how often the company has raised premiums.

Next, compare benefits with what you could get elsewhere. Make sure the policy pays for skilled, intermediate and custodial care and covers problems such as Parkinson's disease and Alzheimer's. Ask if it is portable between states. All this should be standard. You'll want to know if adult day-care and homemaker services are covered. And find out if there is a forfeiture option entitling you to some coverage if you become unable to pay the premiums before you need care.

Then, ask what is necessary to trigger benefits and who determines if you are eligible--your doctor, or one appointed by the insurer. Policies typically require proof of cognitive impairment or that you need help with a specific number of "activities of daily living," such as eating and bathing. A nonqualified policy might also list medical necessity as a trigger. See if reimbursement is for actual expenses or for the company's notion of customary cost. Indemnity policies pay a set benefit.

After all this, look at the options that can reduce price. Do you want only one year of coverage, three years, or unlimited lifetime payments? Is $100 a day enough? How many months are you willing to pay before the policy kicks in?

If you're 65 or younger, spend for inflation protection. The best is 5% annual compounding of the benefit amount, but 5% simple growth may be enough if you're over 65. Some policies offer a guaranteed purchase option so you can add coverage later without requalifying. But such policies may stop extending this opportunity if you don't add on early.

If you go with a group plan, ask for a copy of the policy, not just the company's description. Long-term-care insurance, like fire insurance, is something you hope you'll never need. When you do, you may be living in a different state or working for a different company and may have long ago forgotten the details of your policy.

By Carol Marie Cropper

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