BUSINESSWEEK ONLINE : JULY 19, 1999 ISSUE
COVER STORY

Someone to Watch Over You
These policies will pay the bill

Back in 1994, Flora and Joseph Zeman watched a neighbor in Tamarac, Fla., slowly decline from Parkinson's disease. As his illness worsened, the neighbor and his wife had to hire a live-in home health aide. ''They went broke,'' remembers Flora Zeman. ''They had to sell their house.''

Their friends' plight made such an impression on the Zemans that they bought long-term care insurance to shield them from the budget-busting costs of chronic illness. Just two years later, at age 67, Flora had a leg amputated. She has needed her own home health aides ever since. But Flora's policy, which cost her $1,500 a year, pays up to $122 a day--plus an inflation adjustment--for her care. ''I'm just relieved I got it,'' she says.

Long-term-care (LTC) policies insure against the risk you'll need costly custodial care as a result of old age, illness, or accident. The best policies pay whether you are at home or in a nursing facility. ''Not everybody is going to need frailty care,'' says E. Craig MacBean, a Richmond (Va.) financial planner and author. But it is so expensive that ''nobody can afford to ignore it.''

Indeed, the cost can be staggering. A year in a nursing home averages $40,000--twice that in cities such as New York. For home care, a nurse's aide gets $12 to $15 per hour, while registered nurses can top $25. Round-the-clock nursing care can run $600 a day.

NEW TARGET. Because younger people rarely think about the need for such care, LTC insurance has been an old person's product. Only after people watch a friend or relative run up huge costs do they buy insurance for themselves. Now, insurers are trying to change their demographics. The new target: fiftysomethings.

But should you buy? When? And what benefits should you pick from a complex menu of choices? For some, the answers are relatively easy. If diseases such as Alzheimer's run in your family, buy a policy sooner rather than later. On the other hand, if you are elderly and have annual income of less than $35,000 and assets of less than $75,000--excluding your house and car--you probably don't want a policy. High premiums will cut into your ability to live comfortably.

Remember, Medicaid, the government-run health-care program for the poor, will pay for long-term care--once you spend most of your assets. But Medicare, the federal health-care program for seniors, will only provide short-term home health- and nursing-facility care to help you recover from an illness or injury. You'll get no long-term benefits if you are suffering from a chronic illness or become frail.

Insurers want you to buy LTC insurance at 45 or 50. But many financial experts say you can wait until you are in your mid-50s or even a bit older. ''The products are extremely well suited for people in their 60s,'' says Robert Pearson, CEO of CareQuest, a Neenah (Wisc.) provider of health-care benefits for business and nonprofit institutions. ''For younger people, there's just too much distance between when they buy and their need.''

Younger buyers pay lower annual premiums, but face more years of payments--and a greater chance they'll get stuck with an obsolete plan. At 45, you can get a solid midrange policy for $650 a year (table). At 60, the same policy may cost $1,200. But at 70, premiums will run nearly $3,000. If you buy at, say, 60, insurers can still raise premiums for your class, and inflation riders will add to your costs, but you'll always pay at the prevailing 60-year-old rate. Another advantage to buying young: You'll have to take a physical and pass a cognitive test to get most individual policies. You could be disqualified if you suffer from chronic illnesses such as Parkinson's, or show early symptoms of Alzheimer's disease.

But since many buyers won't need care until they are well into their 80s, they could be paying premiums for 20 years or more. And the policies are changing rapidly: The gold-plated coverage you get today may be obsolete when you need it. Ten years ago, most policies were geared to nursing-home coverage. They offered only limited benefits for home care and paid nothing for assisted living. Today, those are usually covered. But continuing care centers (page 132)--facilities that offer independent apartments and skilled nursing care at a fixed monthly fee--are not. They may be 10 years from now.

SELF-INSURE? Insurers will let you convert to a more modern policy. But you may have to retake that physical. And your premiums will usually reset at the age you change coverage. There is another reason to delay: It helps to have some idea of where you'll be living after retirement. That may be easier to imagine at 60 than at 50.

Can you self-insure by building a nest egg to pay for future frailty-care costs? It's doable, but takes lots of discipline. For example, a 50-year-old woman can buy a top-of-the-line policy for a $1,000 initial annual premium. If the price rises each year by 5%, at age 80 she will have paid about $66,000 in premiums. And she would get a lifetime benefit worth about $500,000.

Say the same 50-year-old invests $1,000 in year one and increases her annual investments by 5% for 30 years. If her portfolio appreciates 8% annually, she would have a pre-tax portfolio of nearly $200,000 at the end of the third decade. Unlike an insurance benefit, the money is hers to use as she pleases. But it is not $500,000. And if she suffers a catastrophic illness at, say, 70, she will be far worse off than if she had a policy.

Let's say you're ready to buy. You'll need to wade through a mire of options. Most policies today are just selling a pool of money. If you buy $100-a-day coverage for five years, you are really getting up to $182,500 in insurance. But no actual policy is that simple. You'll need to learn about daily benefits, inflation riders, elimination periods, and benefit periods. ''Even for a sophisticated person, it's a mess,'' says Martin Weiss, chairman of Weiss Ratings Inc., a Palm Beach Gardens (Fla.) firm that analyzes long-term-care insurance (800 289-9222).

Here are some of the key variables:
-- Benefit period. This is the number of years of coverage you are buying. Policies may offer three years or five years, or lifetime benefits. A lifetime plan will give you greater peace of mind, but you'll pay about 30% more than for a five-year policy.

How long should you be covered? In 1995, according to the Health & Human Services Dept., an average nursing home stay was about 2 1/2 years. But for more than 70% of patients, it was three years or less. And only 14.6% remained for more than five years. According to industry estimates collected by CareQuest, stays in assisted-living facilities averaged about 18 months.

-- Daily Benefit. Figured in maximum dollars per day. This number may be the toughest to work up. In part, it will depend on where you plan to retire, since long-term care costs vary so much around the country. You also should factor in your monthly Social Security or private pension benefits, since you can use those funds to help pay for care.

Nancy P. Morith, a Princeton (N.J.) independent insurance broker, figures it this way: In her state, a nursing home stay averages $200-a-day, while assisted living or an eight-hour-a-day home health aide costs about $140. In that environment, she says, a comfortable policy should probably start at $140. ''I don't think you need to insure the full cost of a nursing home, especially if you have a pension,'' she says.

-- Elimination period. This is insurancespeak for the deductible--how long you are willing to pay out-of-pocket before your coverage kicks in. Policies range from zero days--or first-dollar coverage--to 90 or 100 days. You can save on premiums by self-insuring for the first three months. But most planners suggest 30 days.

-- Inflation. If you're going to buy before you are 75, get an inflation rider. Most policies offer escalators based on either 5% simple or 5% compound inflation. With costs rising so quickly, look for the most generous rider you can afford, especially if you buy at 55 or 60.

-- Benefit triggers. Your policy will begin paying when you're unable to perform what's called activities of daily living--routine actions such as eating, bathing, and going to the bathroom. Usually, policies won't pay off until you need help with at least two or three. But who decides? Most policies provide care managers to help make these calls. Make sure you get to pick the advocate. And get a policy that provides flexibility in care choices. Your living arrangements should be driven by need, not by what insurance will cover. ''Look for products that provide maximum choice,'' says Rona Bartelstone, a Ft. Lauderdale (Fla.) care manager.

Be sure to get a knowledgeable agent. Bad advice can cost a bundle. And make sure the insurer has solid financial backing. You can buy ratings from companies such as Weiss, A.M. Best (www.ambest.com), or Standard & Poor's (www.standardandpoors.com). Stick with a company rated ''B'' or better. Some names to look at: Travelers, John Hancock, Transamerica, UNUM, and Fortis. If you buy at 60, you'll need a company that's going to be around in 20 years.

Finally, shop around. A study conducted by Weiss Ratings shows that premiums can vary by as much as 30% for similar policies.

So what's the bottom line? The consensus among a half-dozen experts seems to be this: Consider a policy at 55 or 60. If you can afford it, get a minimum of five years' coverage, with a generous inflation rider, and a deductible of 20 or 30 days. And make sure your policy will pay for the widest choice of care options.

Thinking about how you'll be cared for when you can no longer feed yourself is no fun. But making plans for that day is as important as deciding whether to buy that condo on the lake.

BY HOWARD GLECKMAN

To read a letter to the editor about this story, click here.

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