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Someone to Watch Over Me
What you need to know before you sign on the dotted line for long-term care insurance

An Oregon widow's long-term care (LTC) insurance refused to pay for her nursing home-because the facility didn't precisely meet the definition of "skilled" care. An Illinois man's $1000-a-year LTC policy quickly skyrocketed to $5000, and soon after that, to $8000. When he could no longer afford to pay, he let the policy lapse. When the day came that he needed long-term care, he was on his own.

Both buyers might have avoided disaster if they had taken the time to understand the fine print of their policies. This is even more important now that more Americans are buying (the number of LTC policyholders tripled from 1.9 million in 1990 to 6.8 million in 1999). Yes, long-term care insurance can bring peace of mind, and possibly pay for higher quality care in an assisted living facility or for home care that might not be covered by Medicaid. But a world of trouble may await anyone who neglects to face the facts before buying this insurance.

Making the Decision

Some salesmen will tell you that everyone needs LTC insurance. That's not true. Not by a long shot. Before you start shopping, it's critical to ask some basic questions. (They're not nearly as simple as they sound.)

What are your real odds? One large insurance company's literature offers the blood-pressure-raising statistic that "An estimated 43 percent of Americans over 65 are expected to spend some time in a nursing home during their lifetimes." Scary, but misleading, since this statement counts even very short stays, for which insurance really isn't necessary. If you rule out nursing home visits lasting less than three months, only one-third of the population will spend time in a care facility, according to the National Association of Insurance Commissioners.

What’s your bottom line? Both the very rich and the very poor don't need LTC insurance. Rich folks can afford nursing home care on their own nickel. And poor people may be able to qualify for Medicaid. LTC insurance is more for the folks in the middle, average Americans. "In the Northeast, I'd say those with assets of over $150,000 but less than $2 million would be the best candidates," says Katy Cushman, a former regulator with the Massachusetts Division of Insurance and current LTC insurance broker. In other parts of the country, such as the Midwest, where LTC and the general cost of living are lower, she says, the appropriate dollar figures might be about half as high, she says.

How healthy are you? It's not only wealth that should be taken into consideration. "You need to think about your personal health and family history, as well," says David A. Rubin, an attorney in St. Louis, Missouri, whose primary focus is the practice of estate planning and insurance law. The majority of nursing home residents are there because of a chronic disease involving dementia (often Alzheimer's-related), followed by complications resulting from diabetes or stroke, according to the Health Insurance Association. These types of disease, although unpredictable in many cases, tend to strike people with certain risk factors such as being overweight, having high blood pressure, or having a family history of certain health problems. You might want to talk to your doctor about your personal odds. "Two people with identical finances but different health profiles may want to go different routes," says Rubin. For example, if one has a family history of good health, and keeps himself in good shape, he may rationally opt to forego LTC insurance. For another person with a family history of debilitating diseases and poor health habits, buying insurance would be much more prudent.

Do you have another choice? Do you have anyone nearby who would be available to help you if you became disabled and wanted to remain in your home? Such a helper would make home care much more doable, and might make assisted-living and nursing home care unnecessary. Also consider the area you live in. Are there services for the disabled, access to public transportation and supportive community services? All of these things make a difference when it comes to needing-or not needing-long-term care services. An older person living in a rural area far from any services and relatives may have no other alternative than to go into a facility. The opposite may be true for a city dweller who has easy access to these.

Figuring the Cost

This is the tough part. LTC insurance policies can vary wildly in what and in how much they cover, in the prices you'll pay for that coverage, and in the solidness of the company backing the plan. Here are some important questions to consider when choosing from the menu of services offered by most LTC policies:

How long is long enough? One potential way to keep your premiums from soaring is to cap the length of your policy. Some policies will cover your long-term care for three years, others for six, some for a lifetime. Of course, the lifetime policies are the most costly, and they make the most commission for the agents. "But the lifetime policy is often overkill," says Cushman. She points out that very few people will ever use it, given that historically the average length of claim time on LTC insurance policies is about two years.

How old are you? The younger you are when you obtain a policy, the lower the monthly premiums. Furthermore, the waiting game is risky because the longer you delay, the higher your risk of developing a chronic disease that could either cause you to be rejected or raise your premiums through the roof. An average policy (paying $150 per day for three years of coverage, with a 30-day waiting period and 5 percent compounded inflation protection) could cost a 50-year-old roughly $1500 a year. That same policy could cost a 60-year-old a little over $2000, and a 70-year-old about $4500. Many experts feel that the mid-50's is a reasonable age to start shopping. "Most consumers buy in their 60s and don't need it, if they need it at all, until they are in their 80s," says Enid Kassner, senior policy adviser with AARP's Public Policy Institute.

Where do you live? Where will you likely be living after you retire? There is a huge difference in the cost of care between, say, Mississippi and Manhattan. According to a recent survey done by the MetLife Mature Market Institute, the average monthly price for assisted living facilities in The Magnolia State is $600, but similar digs in The Big Apple will run you $3700 a month. Most other spots in the U.S. are somewhere in between. Nursing homes, are, of course, more expensive. The national average monthly cost is nearly $4700, but that, too, varies by region.

How much protection should you get? Some agents may try to convince you that you need enough insurance to cover the full cost of nursing home care, but you probably don't. "The richer the coverage, the more expensive the policy, and there's no point in buying a whole lot of coverage that you're not likely to need," says Ralph Allora, an attorney in Lyndhurst, New Jersey, who advises clients on matters of LTC insurance. Say you determine that nursing homes in your area cost $4000 a month. You have $3000 a month coming in from Social Security, pension, and investments. An insurance policy that covers the $1000 difference may be sufficient.

Who’s got the best deal? Many people typically go directly to whichever insurance company covers them for life, home, or auto. It's not that easy. LTC coverage is highly specialized, and you should check a variety of companies before signing on the dotted line, says John E. Ryan, CFP, a long-term care insurance specialist in Denver. "A person may have diabetes, and that may rule out certain companies that would add a fortune onto the premium, or reject the person outright. For another company, that wouldn't be a major problem. A good broker will have a scent for which underwriters will have the best policy for a particular client. His job is to be a good matchmaker." If you sense that a broker seems particularly eager to get you in a smoldering relationship with a certain underwriter, you have a right to know a little something about their relationship. Commissions for brokers vary radically. One insurance company may pay a commission of 40 percent of the first year's premium, and another company may pay 70 percent. It's perfectly okay for you to ask. There are several organizations that can help you make a choice. Your local office of the Area Agencies on Aging (1-800-677-1116) is the good place to start. The AARP Health Care Options call center (1-800-523-5800) will answer questions about LTC insurance in general and about the AARP plan, which is underwritten by MetLIfe, in particular.

Can you afford it? Before you pick any plan, make sure the premium is something you can truly afford. "And make sure that you can pay it not just this year, but over the long haul, even well after you retire" cautions Enid Kassner, senior policy adviser with AARP's Public Policy Institute. An industry rule of thumb: no more than seven percent of your annual income should go toward LTC coverage. And don't forget to ask about spousal and family discounts. Some companies also give price breaks to very healthy individuals.

How solid is the provider? When you buy an insurance policy from a company, you're entering into a long-term business partnership with that company, and you want to make sure that your business partner will still be solvent when and if you need to collect your benefits. There are a number of insurer rating services that will help you to determine the financial buoyancy of various companies, and will help you separate the floaters from the sinkers. These include Moody's (212-553-0377, www.moodys.com), Standard & Poor's (212-438-2400, www.standardandpoors.com), Weiss Ratings (800-289-9222, www.weissratings.com), A.M. Best (www.ambest.com), and Fitch Ratings (800-893-4824, www.fitchratings.com). An insurance broker or agent should supply you with their ratings, or you can visit your local library and look them up. "Also consider the size of the company you're dealing with," adds Elizabeth Clemmer, associate director of the AARP Public Policy Institute. "The LTC insurance industry is still in its infancy, and going with a larger company that already had a track record with LTC and other insurance might be the wisest choice."

Do you work for government? Last summer [2002], the federal government entered the LTC insurance business, and many experts consider the offering a good one-it's fairly priced, the provider is certainly likely to stay solvent, and for those eligible it may be easier to qualify if they have pre-existing medical conditions or disabilities. It's estimated that the plan is open to some 20 million people, including 8 million federal and postal workers and all government retirees, as well as retired military personnel. Also eligible: their immediate families, including their adult children, current spouses, parents, parents-in-law, and stepparents. A sample policy for a 70-year-old woman in good health costs $234.15 a month for a plan that pays $175 a day for nursing home coverage (75 percent as much if she needs in-home care) for an unlimited period of time, with a 90-day waiting period. And that includes periodic inflation protection. For information on the Federal Long Term Care Insurance Program, call 1-800-582-3337, or 1-800-843-3557 (TDD for the hearing impaired). Or go to the website www.ltcfeds.com.

One last thing. Because of the enormous complexity of LTC insurance contracts (see sidebar) it is best to have yours looked over by someone knowledgeable and independent before you sign on the dotted line. Your best bet is an attorney who specializes in eldercare, insurance law, or estate planning. You can check with family and friends, or ask for a referral from your local bar association. AARP members can get a free 30-minute consultation with such an attorney through the Legal Services Network. Call 1-800-424-3410, or jump online to www.aarp.org/lsn. If a half-hour consult isn't enough, you may wind up spending another $100 or so for the attorney to finish combing through your policy. That's a rather small investment considering that it could well save you from spending big bucks for a policy that does you little good.

We know of a poor widow from Oregon and a penniless fellow from Illinois who would have been a lot better off if they had made that investment.