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Long Term Care Planning

Long-term care is often associated with the elderly but it applies to the ongoing care of individuals of all ages who can no longer independently perform basic activities of daily living (ADLs) such as bathing, dressing, or eating. This could be due to an illness, injury, or cognitive disorder. This care can be provided in a number of settings, including private homes, assisted-living facilities, adult day-care centers, hospices, and nursing homes.

How does Long Term Care Insurance (LTCI) work?

Typically you pay premiums and when benefits are triggered, the policy pays a selected dollar amount per day for a set period of time. The type of long-term care received would be outlined in the policy details. Typically, benefits are payable when you're unable to perform a certain number of ADLs (e.g., two or three). Some policies, however, will begin paying benefits only if your doctor certifies that the care is medically necessary. Other policies may also offer benefits for cognitive or mental incapacity, demonstrated by your inability to pass certain tests.

LTCI as part of an annuity or life insurance policy

Sometimes, long-term care (LTC) coverage can also be combined with an annuity or a life insurance policy. These hybrid products allow the policy owner to use the annuity cash value or the life insurance death benefit for long-term care expenses. It's possible that cash values can be withdrawn from annuities or life insurance tax free to pay for qualified long-term care insurance.

Why to consider LTCI

Although Medicaid does cover some of the costs of long-term care, it has strict financial eligibility requirements. In essence, you would have to exhaust almost all of your life savings to become eligible for it. And since HMOs, Medicare, and Medigap don't pay for most long-term care expenses, you're going to need to consider alternative ways to pay for long-term care.

Whether or not you should buy it depends on a number of factors, such as your age and financial circumstances. Consider purchasing an LTCI policy if some or all of the following apply:

  • You are between the ages of 40 and 84
  • You have significant assets that you would like to protect
  • You can afford to pay the premiums now and in the future
  • You are in good health and are insurable

Understanding LTCI policies

Read the Outline of Coverage portion of each policy carefully, and make sure you understand all of the benefits, exclusions, and provisions.

When comparing policies, you'll want to pay close attention to these common features and provisions:

  • Elimination period: The period of time before the insurance policy will begin paying benefits (typical options range from 20 to 100 days). Also known as the waiting period.
  • Duration of benefits: The limitations placed on the benefits you can receive (e.g., a dollar amount such as $150,000 or a time limit).
  • Daily benefit: The amount of coverage you select as your daily benefit (typical options range from $50 to $350).
  • Optional inflation rider: Protection against inflation.
  • Range of care: Coverage for different levels of care (skilled, intermediate, and/or custodial) in care settings specified in policy (e.g., nursing home, assisted living facility, at home).
  • Pre-existing conditions: The waiting period (e.g., six months) imposed before coverage will go into effect regarding treatment for pre-existing conditions.
  • Other exclusions: Whether or not certain conditions are covered (e.g., Alzheimer's or Parkinson's disease).
  • Premium increases: Whether or not your premiums will increase during the policy period.
  • Guaranteed renewability: The opportunity for you to renew the policy and maintain your coverage despite any change in your health, so long as premiums are paid on time.
  • Grace period for late payment: The period during which the policy will remain in effect if you are late paying the premium.
  • Return of premium: Return of premium or nonforfeiture benefits if you cancel your policy after paying premiums for a number of years.
  • Prior hospitalization: Whether or not a hospital stay is required before you can qualify for LTCI benefits.

Note: Withdrawals from an insurance policy may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse. All optional benefits such as riders and bonuses are available for an additional cost. The guarantees associated with optional benefits are backed/subject to the claims-paying ability of the issuing insurance company. It is important to weigh the costs against the benefits when adding such options to an annuity/life insurance contract.

What's it going to cost?

There's no doubt about it, LTCI is often expensive. The cost of LTCI depends on many factors, including the type of policy that you purchase. Premium cost is also based in large part on your age at the time you purchase the policy. The younger you are when you purchase a policy, the lower your initial premiums can be.

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