BUSINESSWEEK ONLINE : NOVEMBER 20, 2000 ISSUE
BUSINESSWEEK INVESTOR

Long-Term Care Policies That Will Last
Built-in inflation protection is an invaluable feature

About 11 years ago, Belle and Abe Lieberman of Scottsbluff, Neb., bought long-term-care insurance that would pay $50 per day if either had to enter a nursing home. The annual premium for the two, who were 73 and 79 respectively, was $2,264. Two years ago, they sought to increase the benefit to $100 per day, and after a long search they bought a policy costing $7,750 a year from Penn Treaty Network America Insurance Co. Including their Medicare supplemental insurance, the Liebermans now spend $11,027 a year on health insurance. ''I go broke every month,'' mourns Belle.

The Liebermans fell into a common trap: They bought a long-term-care policy with a daily benefit that did not adjust for inflation. The catch is such a policy costs considerably more than one that doesn't adjust for rising care prices. For example, Penn Treaty offers a plan that pays $150 per day for two years in a nursing home. Without an inflation feature, it costs $600 a year for a healthy 55-year-old man. Otherwise, the policy is $900 a year.

Inflation protection is only one of several important issues to keep in mind when shopping for long-term-care insurance. Here are others:

-- Your age. The younger you are when you buy, the lower your premium. What's more, you'll have nursing-home coverage at a relatively young age, should you need it. For a 65-year-old, the Penn Treaty policy would cost nearly twice as much as it would for a 55-year-old. Also, like life insurance, it's best to secure when you're healthy, since insurers look at your medical records.

Buying when you're younger, however, does not protect you permanently against price increases. Although an insurer cannot raise your premium alone, state regulators may allow the company to increase premiums for everyone who holds a particular policy. And in Congressional testimony, cases have been mentioned in which premiums on the same policy jumped from $1,861 to $6,600 in just two years.

-- Amount of coverage: To estimate your needs, call nursing homes in your area to determine the average cost of coverage. Let's say you live in San Diego, where a recent survey pegged the average daily cost at $149. If you can afford to pay $50 a day out of pocket--about $18,000 a year--then you should buy a policy that will provide a $100 per day benefit. For a 55-year-old male with no health problems, two years of coverage at that level through Penn Treaty runs $340 without inflation protection or $600 with it. Experts also recommend you search for a policy with coverage for home health care, which averages $16 an hour nationally, says MetLife ( MET).

-- Start of benefits: Long-term-care policies generally come with an ''elimination period,'' which refers to the number of days you need to be in a nursing home before the payments commence. The options range from 20 to 90 days, and the longer the elimination period, the lower the cost. Figure out how much you could afford to spend out-of-pocket before the policy kicks in.

-- ''Tax-qualified'' policies: You can declare a federal income-tax deduction, based on your age, for part of your long-term care premium. In 2000, the amount ranges from $220 for taxpayers 40 or younger to $2,750 for those over 70. You can qualify for the deduction only if your total medical expenses exceed 7.5% of your gross income, and if you buy a ''tax-qualified'' policy, meaning it meets standards Uncle Sam established for policies bought after 1997. Advantages of a tax-qualified policy: A recipient's benefits are not counted as income for tax purposes and the policy is ''guaranteed renewable,'' meaning it can't be cancelled.

Long-term-care insurance is a relatively new product, so companies do not have decades of experience on which to base their premiums. And regulators continually question how best to protect consumers against some insurers' aggressive marketing. That's why it's critical to define your long-term-care needs and shop around until you find a policy that really meets them.

By ELLEN HOFFMAN

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