What are options and riders?

Many factors are involved in selecting a suitable long-term care insurance (LTCI) policy. Among these factors are your financial situation, your family arrangement, your preferences regarding long-term care choices, and the level of risk you are willing to accept. A basic LTCI policy will do a reasonable job of providing coverage. There are additional benefits, however, that you can purchase as options or riders to enhance a basic policy and tailor it to your specific needs. You will need to balance the cost of these options against their importance to you.

What features does a basic long-term care insurance (LTCI) policy provide?

In return for your payment of premiums, an LTCI policy will pay a selected dollar amount per day (for a set period of time) for your skilled, intermediate, or custodial care in a nursing home. The basic features of an LTCI policy are the daily benefit amount, the benefit period, and the deductible amount (or elimination period). Most policies provide that LTCI benefits will be triggered (or become available to you) by certain physical or mental ailments, such as your inability to perform certain activities of daily living (ADLs). Your policy will outline these “triggers.”

What optional features are available?

Many plans are comprehensive, loading the most important features into the base plan. However, some LTCI plans strip down the base plan to provide minimum coverage at a correspondingly lower premium. Then, through the use of optional benefits, the policy can be built with as few or as many of the features as you want. Some of the more important options and riders include the following:

Home health care and alternate care settings

A very comprehensive LTCI policy will cover not only skilled care, intermediate care, and custodial care in nursing home facilities but also home health care, adult day care, and alternative care (such as assisted living environments). Many policies offer benefits like home health care and alternative care as optional, add-on riders.

Home care makes sense when you’re recovering from a stroke, broken bone, or illness, and don’t need lifetime care. This type of care is also useful if you’re living with your children and require the services of a nurse or home health aide a few times a week. It can also help an individual make the transition from a hospital or nursing home to self-sufficiency. However, adding home health care onto your policy works best if you have a reliable network of family and friends nearby. You’ll need people around to keep an eye on the workers and to offer help when the professional has left for the day. Home-care coverage with a benefit paying half the amount that would be paid for nursing home care can increase the premium by 30 percent. Some insurance carriers offer home-care coverage that equals the nursing home benefit. That could raise the premium by another 20 percent.

Inflation protection

Although the average daily cost of nursing homes in your locale might be $100 today, it could be $200 or more five years from now. Therefore, an inflation rider is very important. The younger you are when you buy an LTCI policy, the more important inflation protection will be. An inflation rider can be very expensive, often increasing the cost of a policy by 30 percent.

One alternative is to buy a much larger daily benefit amount than the average local cost of a nursing home at present. For instance, if the average per diem cost of a nursing home in your area is $100 right now, you could purchase a $175-per-day benefit amount to provide some protection against rising long-term care costs for a few years. Naturally, this would increase the cost of your premium. However, because the daily cost of nursing home coverage may increase dramatically with inflation, it might be wiser to purchase an inflation rider. The rider will automatically increase your daily benefit amount by a specific percentage each year, such as 5 percent. Inflation protection is offered two ways:

• Increases made on a simple basis
• Increases made on a compound basis

A simple inflation rider can increase your LTCI premium by 20 to 30 percent or more, while a compound inflation rider option could double the simple inflation rider premium.

Return of premium feature

Some companies offer a return of premium option or nonforfeiture benefits for individuals who cancel their policies after paying premiums for a number of years. The amount of premium returned may vary depending on the language of the rider. Some insurers return all of the premiums paid beyond a certain date less any policy benefits utilized. Others may pay a stipulated percentage. For instance, a policy might return nothing if canceled within the first five years, 15 percent of the premium after five years, and perhaps all of the premium after 35 years. However, this option might cost you an extra 50 percent of your normal premium.

Waiver of premium

This provision allows you to stop paying premiums once you are in a nursing home and the insurance company has started to pay benefits. Some companies waive the premium as soon as they make the first benefit payment. Others wait 60-90 days. Note that waiver of premium might not apply if you are receiving care in your home.

Spousal benefits

Some insurers offer spousal options. For example, an insurer with a spousal benefit transfer rider allows one of the insured spouses to access the benefits of the other spouse after his or her benefits are exhausted. Or perhaps a joint waiver of premium may be provided. If one spouse enters a nursing home, payment of insurance premiums may be waived for both spouses.

Third-party notification

This benefit allows you to name a third party who would be notified by the insurance company if your policy is about to lapse because of your nonpayment of the premium. The third party can be a relative, a friend, or a professional (such as an attorney). This third party would then have a period of time to pay the overdue premium. Individuals with cognitive impairments who have forgotten to pay the premium have had their policies lapse when they have needed them the most. This provision can prevent such a lapse. Many states require that this option be offered at no additional cost to you.

How should you evaluate an LTCI policy?

You’ll want to determine that certain necessary provisions are included in the policy while keeping in mind that the more optional features or benefits the policy has, the more it will cost. Questions that should be addressed when evaluating an LTCI policy include the following:

• Which long-term care services are covered? Does the policy cover skilled nursing, intermediate care, custodial care, home health care, and alternative care? If not, what is the cost of a home health care or alternative care rider?
• Is the policy renewable regardless of age or physical or mental condition?
• How do you qualify for benefits?
• When do benefits begin? Is there a waiting or elimination period?
• How long will the policy pay benefits?
• How much does the policy pay? What is the minimum and maximum daily benefit amount that you can purchase?
• Will benefits increase with inflation? If not, what is the cost of an inflation rider?
• Is the policy tax qualified?
• Can the policy be upgraded if the insurance company offers an improved policy?
• What conditions are specifically excluded from coverage?
• Does the policy limit benefits because of pre-existing conditions?