Health care costs in retirement will be significant. A sickness or injury that creates a need for long-term care can be financially devastating. This is why purchasing long-term care (LTC) insurance can be such an important part of retirement planning. When considering LTC coverage, pay particular attention to these important policy provisions.
1. Elimination period. Also called the waiting period, this is the period of time during which you may require long-term care but before the policy kicks in. In other words, you will have to self-fund 100 percent of your care during the elimination period
2. Benefit period. Not all LTC policies provide lifetime benefits because that would be very expensive. Setting a reasonable benefit period can make the coverage more affordable. Statistically, five years of benefits will cover most long-term events. If you need long-term care for more than five years, you will have to self-fund or use any available Medicare and Medicaid benefits.
3. Benefit amount. Most LTC policies limit benefit payouts for covered services in two ways: daily and over your lifetime. The daily benefit should have some reasonable relationship to the cost of receiving long-term care in your area. The lifetime benefit will be based on the daily benefit as well as the benefit period.
4. Covered services. Pay close attention to what types of care are covered. Preferably, you want a policy that includes care in a nursing home or hospice facility (skilled, intermediate, and custodial), an assisted living facility, home care, community care, and respite care. The key service can be home care, so that you can live at home and still receive long-term care benefits. Respite care is when you may need a temporary period of help in or outside the home in case of illness or short-term disability.
5. Inflation protection. This is very important because of the expected rise in LTC costs over time. A compound inflation protection rider will automatically increase your the benefit amount each year by a stated percentage, such as 5 percent, without increasing your premium. Adding compound inflation protection is expensive, but it may be necessary to take advantage of long-term care partnership rules if they have been adopted by your state. If your LTC policy qualifies for the long-term care partnership program, you are allowed to keep more of your financial assets when becoming eligible for government long-term care benefits.
6. Indemnity rider. An indemnity-type LTC policy will pay the full daily care benefit regardless of the actual charges incurred. For example, with many indemnity riders, if you are chronically ill and receiving long-term care at home, you may still receive your full benefit, as long as part of the care involves a non-family member, such as a paid homemaker or private aide service.
7. Benefit eligibility. This is the policy language that defines when you are receiving long-term care that is eligible for benefits. Some policies state that you must be chronically ill, which typically means you are unable for a defined period of time to perform two or more activities of daily living without substantial assistance. Activities of daily living may also be defined in the policy, such as bathing, dressing, transferring in or out of a bed or chair, using the bathroom, continence, and eating.
There are other LTC policy terms that are important (including the premium amount) but the seven listed above are among the most significant. Be sure to discuss and compare them in detail with the salespeople trying to sell you LTC insurance.
Mark Patterson is an engineer, patent attorney, baby boomer, and author of The Failsafe Retirement System. He blogs on matters of personal finance and retirement planning at Tough Money Love and Go To Retirement.