How to save money on long-term care insurance

Often, the best way to handle the problem of long-term health care costs is to buy long-term care insurance. If you can afford the premiums and you’re insurable, this can save you a lot of money in the long run.

However, long-term care insurance can be expensive. If you’re thinking about purchasing a policy, here are some things to consider:

How much coverage do you really need? A good way to get started, and to avoid overpaying, is to calculate how much of a benefit you actually require.

For instance, the national average cost of a private room in a nursing home is about $250 a day, and the average monthly base rate in an assisted living facility is $3,550, according to MetLife’s 2012 survey of long-term care costs. These numbers can vary widely from location to location.

One easy way to calculate a daily benefit is to take the average cost of care where you live (or are likely to live when you’ll need care), and subtract from that your daily income. For instance, if nursing homes cost $300 a day in your area, and your income is $3,000 a month, or $100 a day, then your daily benefit should be about $200.

Check what period the policy covers. In general, the shortest period of coverage available is two years, but policies can be purchased for much longer periods or even for your lifetime. Of course, the longer the policy’s coverage period, the higher the premiums will be.

Most people don’t actually need lifetime coverage. Often, a good length of time is five years, because statistically it’s unusual for someone to need care for more than five years. In addition, Medicaid looks back five years for any asset transfers. If you purchase five years of long-term care coverage, you could transfer most or all of your assets to your children or to a trust, pay for your care with insurance over five years, and then qualify for Medicaid coverage.

Consider a smaller benefit. A policy that pays $200 a day for five years might still be expensive, especially if it includes an inflation rider. If you can’t afford such coverage, you could think of long-term care insurance as “avoid nursing home” insurance. Under this approach, you could purchase just enough insurance to pay for home care or assisted living care, which are usually not fully covered by Medicaid.

For example, if you purchased insurance with a daily benefit of $100, you would have about $6,000 a month to cover your living expenses plus home care or assisted living costs. The premium for such a policy would likely be much more affordable than one for a policy with a daily benefit of $200.

Buy when you’re younger. Long-term care insurance premiums rise as you age, so the younger you buy, the cheaper your premiums. Be careful, however, because insurance premiums can, and often do, increase considerably from your initial purchase price. Even if you have a policy that is “guaranteed renewable,” your premiums could still increase.

Limit coverage to one spouse. Often, a married couple will be able to afford coverage for only one spouse. This can be a reasonable option, particularly because the Medicaid rules provide some protection for the spouse of a nursing home resident.

If you have no specific reason to think that one spouse is more likely to require long-term care than the other, then looking at statistics alone, the wife should probably purchase the policy. In our society, women tend to live longer than men, and are much more likely to end up in a nursing home for a long period of time.

Of course, this amounts to playing the odds and is not a sure thing. On the other hand, some companies offer incentives for both spouses to purchase coverage, such as a premium discount for the second spouse.

Consider a ‘shared care’ policy. If both you and your spouse are purchasing long-term care insurance, a “shared care” policy might give you more coverage for less money.

With this kind of policy, you buy a pool of benefits that you can split between you and your spouse. For example, if you buy a five-year policy, you will have a total of 10 years between you and your spouse. If your spouse uses two years of the policy, you will still have eight years.

A shared care policy may cost more than separate policies with the same benefit period, but it will allow you to buy a shorter policy knowing that you will have a shared pool of benefits to work with.

Choose a longer waiting period. Most policies have a waiting period before coverage begins, typically 30 to 90 days. The longer you make this waiting period (which policies typically refer to as an “elimination period”), the cheaper your premiums. Keep in mind, however, that you will have to pay for your care out-of-pocket until the waiting period is over and the insurance begins its coverage.

Be careful with inflation protection. Inflation protection increases the value of your benefit to keep up with inflation, and is generally recommended. But you should give some thought to whether you want compound-interest increases or simple-interest increases. If you’re purchasing a long-term policy and you’re age 62 or younger, then you’ll most likely want compound inflation protection. But if you’re 63 or older, some experts believe that simple inflation increases may be enough, and you’ll save considerably on premium costs.

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