Long-term Thinking

Spend enough time sorting through the intricacies of long-term-care insurance and you may decide that John Maynard Keynes's famous axiom, "In the long run, we are all dead," is positively comforting. While almost no one would dispute that longevity is good, it comes at a price: as baby boomers in the United States turn 60 at a rate of 7,918 per day, some will encounter health problems that will require constant and expensive care, the sort of assistance that can seriously erode if not wipe out a person's assets.

Whether handled by home-based services, assisted-living facilities, or nursing homes, long-term care is a booming industry — almost $200 billion was spent on LTC in 2004, according to the Government Accountability Office. LTC insurance, which offers a wide array of options to pay for a policyholder's LTC needs, is suddenly a hot topic.

"We don't want our children to be concerned with our long-term care," says Edward Reed, a 76-year-old retired bank president whose LTC insurance premium is included in the fees he and his wife pay to live in a "lifecare" community. Reed says that building LTC insurance into his estate planning comes naturally to him because his father, who lived into his 90s, also had such coverage.

But Reed is unusual. LTC insurance "is a very new marketplace compared with other lines of insurance," says David Simbro, vice president of LTC at Northwestern Mutual, which sells the coverage. Accordingly, he says, "policies are still evolving." In other words, shop carefully.

In essence, LTC insurance works like many other types of coverage. Buyers pay premiums based on (in this case) age, health, marital status (married couples receive discounts of 15 percent or higher), and policy features. In exchange, the insurer pays benefits for qualified claims. A policyholder usually qualifies for a reimbursement when he or she can no longer perform at least two of the activities that constitute "daily living" (bathing, eating, dressing, transferring, and toileting/continence) or requires substantial supervision due to a cognitive impairment.

That's where the simplicity ends. There is very little collective wisdom regarding how much insurance to carry, what benefit period to specify, which payout options to choose, or whether to buy the insurance at all. Making the best decisions may require some research, not only into the vagaries of the policy itself but also into the cost of LTC in your area and even into your family tree, as you attempt to divine your susceptibility to various medical conditions.

The tough choices begin when you try to decide whether and when to buy LTC insurance. Affluent individuals can self-fund their own long-term care, although estimates vary as to just how affluent you need to be. Some experts put the figure as high as $5 million in net worth. One key selling point for LTC insurance is its potential to protect your nest egg by funding long-term care, so even individuals who could handle such expenses may want to explore the coverage in that light.

As for when to buy it, estate-planning attorney Neil Schauer of Conn Kavanaugh Rosenthal Peisch & Ford says that he broaches the subject of LTC insurance with all clients over the age of 55, but believes that the most cost-efficient time to purchase such coverage is between 60 and 65. Bruce Schmidt, an estate-planning attorney at Howd, Lavieri & Finch, favors the sooner-rather-than-later strategy and suggests that buyers in their 40s and 50s take advantage of lower premiums, although he agrees that buying coverage at 65 is still not cost-prohibitive. Premiums vary greatly, but Schauer estimates that a 60-year-old with no preexisting health conditions can usually buy a policy with good coverage for $4,500 to $7,000 annually.

Aside from age, the key determinant of premiums is the payout cap, which can run from as little as $50 a day to as much as $500 or more. Michael B. FitzPatrick, managing partner of The LTC Partnership, an insurance broker, says that a good benchmark to use when calculating future LTC needs is the cost of nursing-home care. Daily costs at nursing homes range from $150 to $400 per day, and it is reasonable to assume that higher-quality care will cost at least $300 per day (in today's dollars), or about $110,000 per year.

Buyers also need to consider the length of the benefit period, which can range from six months to a lifetime. Needless to say, opting for a lifetime payout costs the most. This entails a certain "crystal ball" bit of analysis, says FitzPatrick, who notes that the choice often depends on family medical history. On average, nursing-home patients live 2 to 3 years after entering a facility. On the other hand, someone with a family history or other risk factors pointing to Alzheimer's or Parkinson's disease may want to consider that a person with such a condition can live many more years. Also, consider that LTC often begins at home and that the average caregiving time is 5 years.

FitzPatrick also cautions against two common LTC insurance traps, one related to the number of days a policyholder must wait before the payout begins and the other having to do with what the payout will cover. The first, known as the elimination period, is essentially a deductible. Policyholders must handle their own LTC expenses between the time they qualify for LTC and the time their policy begins paying for it. You can opt for payouts to begin immediately, but you'll pay more; opt for the six-month option (which may be viable if you anticipate having access to family help, or enough funds to pay your way) and you can drive your premium cost down. In some cases, you can decide whether the elimination period is calculated on a calendar-day or date-of-service basis. With the calendar-day option, the countdown to benefits begins as soon as the policyholder is deemed to need LTC; the date-of-service basis starts the clock when the client begins to incur expenses.

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