How to buy long-term-care insurance

generic old senior citizen elderly age hands cane

(MoneyWatch) I recently wrote about candidates for insurance that covers the cost of a long-term stay in a nursing facility. Individuals with more than $200,000 but less than $2 million in assets or with incomes they must preserve for their survivor's financial security should consider purchasing a policy.

The thinking is that individuals with assets below this level will deplete their savings quickly and qualify for Medicaid when facing long-term-care expenses. Individuals with assets above this level can afford to pay these costs directly because they are basically self-insured.

According to industry surveys, the average age of individuals who buy these policies is now 60, down from 65 a few years ago. Although the cost of this coverage is lower for younger individuals, they tend not to address the possibility of this risk and buy insurance to cover it until they are older.

Since the risks of long-term care are greater for women, couples should factor this into their planning, allocating more available resources toward the cost of the woman's policy. Of course, taking into account family medical history and gauging who is more likely to need long-term care is the most important consideration.

Features to consider

Long-term-care-insurance policies offer a myriad of features and options from which to choose. To keep the cost as low as possible, choose only the most important options and accept some risk up front. Even if you have already purchased this insurance, it's a good idea to review it again as its features evolve. Here are a few guidelines:

Daily benefit amount: If the cost of long-term care in your area is about $75,000 annually, you may want to consider a policy that provides a daily benefit amount of about $200. But remember to reduce this amount by retirement income sources like pension, Social Security and annuity income that you are willing to use toward this cost. If your total retirement income is $30,000, you should buy only enough benefits to cover the gap, which would be about $125 per day.

Waiting period: Long-term-care policies may pay benefits immediately or after the first year of care. If you choose a policy that does not pay for the first six to nine months of long-term-care expenses, you can reduce the cost of this insurance by 25 percent or more. With a little planning and some modest savings, taking on this risk should not be a problem.

Benefit period: Since a third of all nursing-home stays are for two or more years, it's important to choose a benefit period of at least two years. You may want to consider a longer waiting period with a benefit period of at least five years. If you do select a five-year benefit period, opt for the "per period" option versus the lifetime option. Under the per period definition, the policy will cover more than one stay in a nursing home lasting up to five years each if each stay is separated by six months or more.

Consider gender: When purchasing this coverage for a couple, I recommend the full coverage and longer benefit period for the female, who is typically the individual most likely to live the longest. Women age 65 or older have a 50 percent chance of requiring long-term care, in contrast to 33 percent for men age 65 or older. The strategy is to cover the most likely risk and spend the least where there is lesser risk. Couples often don't think about this and waste money by buying the same amount of coverage for each.

Married discount: Actuarial surveys show that the first spouse requiring long-term care is typically cared for in a home by the second spouse, and so claims are filed later if at all. For this reason, insurance companies offer a discount on premiums for married couples.

Increasing benefits: It's important to make sure that policy benefits will rise over time because the costs of long-term care most certainly will. The majority of policies offer the option to purchase an annual benefit increase rider that is factored into the policy premiums.

Services covered:  Be sure that the definition of services covered includes skilled and custodial care delivered in a skilled-care facility or at home. Also, it's important to include home-care services; home health aides; respite care, which relieves family caregivers for periods of time; and the costs of an assisted-living facility.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.