Long-Term Care Insurance: Understanding the Fine Print

Many people think about buying long-term care insurance. Far fewer actually do it. Most are scared off by the complexities of long-term care policies. Over the years, policies have improved, but you need to shop carefully. Asking the following questions, supplied by the California Society of CPAs, will help you evaluate the terms of a policy and select the one that¹s best for you.

These days, nearly all long-term care policies base benefits on a person's ability to perform so-called activities of daily living. These activities include eating, using the toilet, bathing, dressing, and moving about. Most policies provide coverage upon certification by a doctor that you are unable to perform two or three activities associated with daily living.

Generally, the more comprehensive and flexible the coverage, the better it is. The best policies cover a continuum of care including home health care, personal care, community-based adult day care, assisted living facilities, and skilled care in a nursing home.

You should base your daily benefit amount on the going rate in your area for nursing home care. If you prefer, you can lower your premium by purchasing a benefit amount slightly lower than the daily cost of nursing home care and paying the difference out of pocket. For example, if the going rate in your area is $150 a day, you might consider insuring yourself for up to $125 a day and paying the rest on your own.

The elimination period refers to the length of time between when your long-term care needs begin and when your long-term care benefits become payable. The elimination period can be anywhere from 0 days to a year. The longer you wait and pay for care out-of-pocket, the lower the premium. Some policies apply the elimination period to each admission; with others you need to satisfy it once.

In some cases, yes. However, it's best to avoid policies that require prior hospitalization in order to receive benefits.

Here's the catch. It's important that you calculate your health care and dependent care needs very carefully because IRS regulations require that you forfeit any amounts you place in the plan that aren't spent by the end of the year.

Given the rising cost of health care, a benefit amount that seems reasonable today could quickly become inadequate. An inflation protection provision is the only way to ensure that the benefits payable under the policy will rise each year to keep pace with inflation.

This provision means that you do not have to continue to pay the premiums once you begin collecting benefits. Some policies waive premiums starting on the first day benefits become payable; others require that benefits be paid for a certain number of days before premiums are waived.

Look for a policy that is guaranteed renewable. This means the company cannot cancel your policy as you get older and/or your health deteriorates. However, your premiums can go up. While you cannot be singled out for a rate increase, subject to approval from the State Insurance Department, insurance companies can, and do, raise premiums for a class of policyholders.

Be sure to examine the financial strength and stability of the insurer. After all, you want the company to be around if you need coverage 15-20 years from now. A quick trip to the library or a search on the Internet can provide you with the company's rating by agencies such as Standard & Poor¹s or A.M. Best.

Before you sign up for long-term care insurance, get copies of contracts from several insurance companies and read the fine print in advance of selecting the policy that best fits your needs.

Under current law, a portion of the premium on your long-term care policy may be deductible as a medical expense on your tax return. A CPA can help you select a policy that qualifies for the deduction.

NOTE: Be very careful. Nationwide very few people actually collect on these policies. A large number of policies are cancelled or allowed to lapse before any benefits are received due, in part, to the increase in premiums. Check with your insurance carrier for their benefit payout rate.

In accordance with IRS Circular 230, the information on this website is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.