Whether you’re considering buying a long-term care insurance policy through the Federal Long-Term Care Insurance Program (FLTCIP) or another provider, there is a basic strategy you should follow to get the most for your hard-earned dollars. In this week’s column, I’ll discuss the general strategy I recommend for buying long-term care insurance, along with some tips for configuring the most important benefit variable you’ll choose — the daily benefit limit. In my next column, I’ll cover other benefit choices.

Basic Strategy

The goal of your exercise in configuring benefits should be to design a policy that will eliminate the bulk of the unacceptable financial risk you face. The wrong level of coverage either wastes your money or leaves too much risk uncovered. Insuring against every possible contingency is impossible, and anything even close is usually prohibitively expensive. Your strategy should be to set deductibles and co-payments as high as affordable and focus on covering what you consider to be the most likely and unaffordable costs.

When making benefit choices, you are deciding where best to spend the premium dollars you have to work with. Rather than asking yourself, “Should I upgrade to unlimited benefits?”, think of your decisions as relative choices: “Should I spend these dollars on unlimited benefits, or would they be better spent raising the daily benefit limit?”

Some of today’s long-term care insurance policies, including those through the federal program, offer a choice between comprehensive coverage and coverage that is limited to care in a nursing facility. If you’d prefer to stay at home rather than in a nursing home, and if you can afford the coverage, you should opt for a comprehensive policy. The premiums are typically 30 percent to 40 percent higher than for the facility-only alternative, but the flexibility you’ll have using your benefits may well be worth the added cost.

For example, according to information available on the FLTCIP Web site (www.ltcfeds.com), the average cost of a day’s stay in a nursing home in Washington is $193.20. But, the average cost of care at home is $16.30 per hour. The same $193.20 for nursing home care would buy a little less than 12 hours of care at home. Other stay-at-home costs must be factored in — the cost of meals, supplies, utilities, the cost of overnight shift workers and other incidental expenses.

So, if available, purchase home care benefit limits that are at least as high as those for facility-based care. The federal program, however, limits these benefits to 75 percent of the nursing facility daily benefit limit.

Daily Benefit Limit

The rate at which the policy will pay benefits, or the daily benefit limit, is one of the most important elements of any long-term care insurance policy. It determines how fast you will be able to extract benefits from the policy, and what you don’t spend remains available to be spent later. The level should be set in accordance with the cost of care in your area and adjusted to reflect your specific circumstances. Choose a daily, rather than a monthly limit, if possible, and then judge all other benefits against it when deciding where to spend your money.

A good source of information about long-term care costs is the FLTCIP Web site. But the best way to find accurate information is to ask for rates at nursing facilities and home care agencies in your area or the area where you plan to retire. Calculate the cost of eight hours of home care service, compare it to the cost of one day in a nursing home and use the higher number as your starting point for estimating the daily benefit limit you want. Adjust this number downward if you will be able to afford to contribute to the cost of care from your own resources.

The reduction amount can be estimated by making a few scratch-pad calculations for the most expensive long-term care scenario you’re likely to face.

For a couple, this usually occurs when one partner maintains their current lifestyle while the other receives full-time care.

For singles, this usually occurs when home care is needed. Compare your estimated income and costs in these scenarios to determine how much you may be able to contribute from your own resources.

For instance, spouses who spend $50,000 per year, after taxes, in retirement might face maximum expected costs of $100,000 per year in a worst-case scenario — $50,000 per year to fund the current standard of living, plus $50,000 per year for nursing care for one partner in a nursing home. If they estimate their maximum sustainable after-tax income to be $65,000 per year including pension, Social Security and investment sources, then they could plan to supplement their long-term care benefits with $15,000 per year or $41 per day of their own money. So, they might consider reducing the daily benefit limit for the policy they buy by $40.

Written by Mike Miles
For the Federal Times
Publication August 2, 2004