Watch out for these traps

Long-term-care insurance is supposed to help protect us from the ever-increasing costs of nursing home and in-home care. But the policies are complex and typically are purchased decades before their benefits are needed. That makes it difficult for consumers to know what they will need and what will and won’t be covered.

Adding to the confusion is a new federal program to be funded by individuals’ automatic payroll deductions at businesses that choose to participate — part of the government’s health-care system overhaul. The program — whose premiums and many other details have yet to be decided — is meant to help consumers pay for some features of long-term care.

Here, potential pitfalls surrounding long-term-care coverage…

TRAP: THE NEW UNCERTAINTIES

Until the Department of Health and Human Services sets the premiums and rules for the new federal program, possibly as late as October 2012, there’s no way to know whether it’s a good deal.

The program, officially called the Community Living Assistance Services and Supports Act (CLASS), will be required to accept participants regardless of their age or health. Add up the potential costs, and it’s possible, though not certain, that healthy people might be able to obtain better deals on long-term-care coverage from private insurers. On the other hand, people living below the poverty line will have to pay a premium of only $5 per month.

Even if the program does offer attractive terms…

It won’t be available for enrollment to those who are already retired or about to retire — the program will be tied to employment, much like Social Security. If your employer offers the program, you will be enrolled automatically unless you opt out. Also, you must pay premiums for five years before you can collect benefits.

It won’t pay any benefits before 2018, and its benefits might be insufficient to fully cover nursing home costs. The Congressional Budget Office estimates that benefits might average around $75 per day — enough to help pay for a home health aide but well below nursing home costs, which currently average $200 per day and are climbing fast.

The program might turn out to be best used in conjunction with a private long-term-care policy… or with some future insurance product designed specifically to supplement the federal program.

What to do: If it makes sense for you to obtain private insurance now to protect your assets, do so. Otherwise you might find yourself in need of long-term care before the government program is up and running.

TRAP: SOARING PRIVATE INSURER PREMIUMS

Don’t purchase a private long-term-care insurance policy unless your retirement budget has enough flexibility to cover a 50% premium increase.

That’s because premiums — which are not locked in when you obtain a policy — have been soaring. Policyholders who can’t or don’t want to pay the higher rates often abandon their policies.

What to do: If you want to buy a policy, do so through an independent insurance agent who sells policies issued by more than one company. Such an agent is more likely to provide frank opinions about which insurers strive to limit rate increases. Many of these agents can be found through the Web site of the Independent Insurance Agents & Brokers of America, a trade organization (www.iiaba.net), or the National Association of Professional Insurance Agents (www.pianet.com). Your agent should have at least 10 years of experience selling long-term-care insurance in the community. As a rule of thumb, choose a policy from one of the top six to eight companies selling long-term-care insurance. They are less likely to increase rates dramatically than those that do little long-term-care business. Contact your state insurance department to find one of these companies.

TRAP: ENDLESS PREMIUMS

Some policies now continue to charge premiums even as they are paying benefits. Traditionally, long-term-care policies stop charging premiums when they begin paying benefits. That’s an important feature — long-term-care policies rarely pay 100% of long-term-care costs, and many retirees cannot afford to pay both out-of-pocket care expenses and insurance premiums.

What to do: Make sure that the policy includes a “waiver of premium” clause, either as a basic feature or as a rider, before signing a contract.

TRAP: NO INFLATION PROTECTION

Insurance agents sometimes encourage customers to skip inflation riders, which increase benefits to keep pace with the cost of care, in favor of less expensive policies that include “future purchase options.” These options give policyholders the right to buy additional coverage later, regardless of their age or health — but they don’t guarantee that the added coverage you can buy in the future will be affordable.

What to do: Insist that your policy include a rider that covers annual inflation of at least 5%, compounded, especially if you are younger than 60. It could be decades before younger people require long-term care, which means it is likely to be more expensive than it is today.

TRAP: NO NURSING HOME COVERAGE

A policy covering only in-home care is not a good one — even if in-home care is what you want. As much as seniors want to remain in their homes, failing health sometimes means they cannot.

What to do: Do not buy a policy unless it provides coverage for in-home care, nursing home care and assisted-living facilities — all at levels sufficient to pay most or all of the bills charged for these care options in your area.

TRAP: LANGUAGE TRICKS

Key words and phrases often are not noticed or are misinterpreted.

Examples: One policy defined an “assisted-living facility” as having at least 10 beds. A policyholder received no benefits when he entered a facility with only six beds.

If you hire a family member rather than a professional caregiver to care for you, it is unlikely to count toward your “exclusion period” — the period before you can start getting benefits for a preexisting condition.

What to do: Read the “definition of terms” section of your policy carefully. If you are uncertain how to interpret something in your policy, contact your agent or your state’s agency on aging or insurance department to ask for help. Seek an exclusion period of no more than three months.