Common Misconceptions About Long-Term Care Insurance, Part 2
by Phyllis Shelton

Last month we started looking at common misconceptions that both consumers and insurance agents share about long-term care insurance. We dealt with a major misconception that premiums can never increase when, in fact, they can. We then  talked about five precautions you can take to reduce the risk of purchasing a policy that may have quick rate increases.

This segment will deal with misconceptions about the major benefit decisions that are necessary when purchasing a long-term care insurance policy, all of  which dramatically impact the premium you will pay for the policy.

Daily or Monthly Benefit and the necessity of inflation coverage:

When you consider long-term care insurance, you will be asked to choose a daily benefit (monthly benefit with a few policies) that establishes a maximum amount the policy can pay in benefits each day or month.

A few policies are "indemnity" policies, which means they will pay whatever  benefit you choose, regardless of the cost. For example, if you purchase a policy with a $150 daily benefit and the charge is $120, the policy will pay  $150, even though the benefit payment exceeds the charge.

Most policies, however, are not like that. Most policies are "reimbursement" policies, which means the policy pays no more than the actual charge, and the  daily or monthly benefit you choose just acts as a maximum that can be paid. In the above example, a reimbursement policy would pay no more than $120, which is the actual charge. At first glance, you may opt for the indemnity policy because you receive more money - $150 instead of $120. So why do most policies operate under the reimbursement model instead of the indemnity model? The simple answer  is that reimbursement policies that don't pay more than the actual charge are  better for rate stability in the future, as claim payments will be lower. It's like asking a major medical policy to pay more than the doctor's actual charge.  It doesn't happen!

Choices you will be offered can range from $40 per day all the way up to $350  or more per day, usually in $10 increments ($100, $110, $120, etc.) or the monthly equivalent. The first step to making this choice is to find out the  average cost in your area for either a 10 hour shift of home health care  provided by home health aides or the daily charge for a semi-private nursing home room. Insurance agents who sell long-term care insurance should be able to  provide you with a local cost survey to help you with your decision, or you can  research it yourself by calling several long-term care providers from the Yellow  Pages.

After you determine the average cost in your area, ask yourself what you want  the policy to do - pay half the cost, two-thirds, 80% like a major medical  policy, or full coverage as much as possible. In the event you do need nursing home care as a last resort, "full coverage" can mean a higher benefit to cover the cost of a private room in a nursing home. For example, a $90 daily benefit ($2,800 monthly) would cover about 2/3 of the cost in most parts of the country. However, you may need $190 day to accomplish this same objective if you live in a "high-cost area" like New York, Massachusetts, Connecticut or even some parts  of California. This is why it is so important to know the average cost of care in your area.

Here's the misconception: Nursing home charges just mean the daily charge for room and board.

Wrong. Here's a detail that few people understand that dramatically impacts  this decision. When asked, a nursing home employee will tell you the room and board charge, but there is an average of about 20% more in additional charges, mainly made up of prescription drug charges, but also miscellaneous supplies like Depends, and the like.

Most long-term care insurance policies that pay no more than the actual  charge ("reimbursement" policies, remember?) only pay nursing home charges based on the room and board charge and you have to pay the miscellaneous charges. If you have other coverage for prescription drugs, this may not amount to much. If you don't, it can be a significant out-of-pocket amount for you. If you are willing to fund about 20% of the cost yourself and you have no prescription drug coverage, you might consider purchasing a daily or monthly benefit equal to the  average room and board cost in your area, because the whole charge will be about 20% higher, depending on how much medicine you take each month and how many  miscellaneous supplies you use. For example, if the average room and board cost  in your area is $120, you know the actual charge will probably be about $140 - $150 per day with drugs and supplies, so you might buy a daily benefit of at least $120 per day. Some agents will recommend you purchase only a $100 daily  benefit because they don't understand how these additional charges for drugs and supplies work.

Also, will the policy pay the same amount for other places of care, such as  assisted living, home health care or adult day care? First, understand that not all policies cover these alternatives to nursing home care. I recommend that you  not purchase a policy that pays benefits only if you are in a nursing home,  because most of us want a nursing home to be the last resort, not the first resort. So make sure the policy at least covers an assisted facility in addition to a nursing home. Then if you afford it, home health care and adult day care are great add-on benefits.

Many policies only pay half the daily or monthly benefit you choose if you are having care outside of a nursing home, because -

Another misconception is that home care in particular only costs half as much as nursing home care.

Wrong. The average cost per hour for a home health aide nationwide is about  $15, so a 10-hour daily home care shift will cost about the same as nursing home care. Some policies offer the same benefit maximum for all types of benefits - home care, assisted living, or adult day care - or pay at least 75% or 80% of the daily or monthly benefit for care outside the nursing home.

We've mentioned a monthly benefit several times now. Why would a policy offer  a monthly benefit or some even offer a weekly benefit? Such a policy offers  extra flexibility, especially as the benefit relates to home health care. A home  health agency may send two people to your house on the same day to do two different things to help you. One person may give you a bath and the other one  may stay with you to keep you from falling when you go to the bathroom, for  example. The charges of these two people may exceed the daily benefit. A policy  that has a monthly or weekly maximum can pay the total charge for the day as that policy will not stop paying until the monthly or weekly benefit is  exhausted instead of capping out at a daily benefit level.

The downside to this flexibility is that you want to be careful and not use  up all your benefits in a few days when you need them to last the entire month.  Most LTC policies offer to pay a third-party, commonly referred to as a "care coordinator" to help you plan your care to be sure your benefit dollars are  spent wisely to provide you with the best possible care.

Next month, we will look at how to plan for inflation to be sure your daily  or monthly benefit is as meaningful in the future as it is today.