How to avoid the pitfalls associated with buying long-term care insurance Featured

8:00pm EDT May 31, 2012
How to avoid the pitfalls associated with buying long-term care insurance

Once you have researched long-term care insurance and are seriously considering buying a policy, there are still many things to consider before your purchase, says Robert D. Coode, a Principal and Registered Representative at Skoda Minotti.

“Make sure you’re doing it for the right reasons and are not being swayed by unsubstantiated sales pitches,” Coode says.

He says potential buyers should consider possible increases to the premium over time; the definition of terms, such as what constitutes an assisted living facility in different states; the financial strength of the institution from which the policy is being purchased; and the chance that an unscrupulous agent is out to inflate his or her commissions to the detriment of the client.

Smart Business spoke with Coode about buying long-term care insurance and what to be wary of before jumping into a policy.

What is long-term care insurance?

Long-term care insurance helps those with chronic illness, disability or those who are unable to perform the basic activities of daily living to offset the cost of care. These policies generally cover services not addressed by health insurance, Medicare or Medicaid.

Are all types of care facilities covered through these policies?

Currently there are no national standards for what constitutes a long-term care facility. This means that an assisted living facility or adult daycare could have one meaning in a particular policy or state and another elsewhere.

This can pose a problem if you buy a policy in one state and retire to another. There could be no facilities in your new state that match the definitions in your policy. To protect yourself, make sure you understand exactly what the policy covers before you buy it.

If I purchase a policy now, will premiums remain the same over the life of the policy?

With most policies, your age at the time you purchase the policy is a factor in determining premiums. However, that doesn’t mean your premiums will stay the same as long as you own it. In fact, your premiums can increase if your insurance company establishes a rate increase for everyone in your class and the state insurance commissioner approves increase.

As a relatively new type of insurance, long-term policies could be more susceptible to rate increases because insurance companies lack a sufficient amount of underwriting data to predict the number and size of claims they can expect in the future. Unfortunately, if your insurance company raises premiums, taking your business elsewhere might not be that simple. Any premium on a new policy will still be based on your age, which will be older, and your health, which might be worse than when you initially bought the coverage. So no matter when you buy your policy, make sure you can afford the premiums both now and in the future.

Is the financial stability of the insurance carrier relevant to the purchasing decision?

A large number of unexpected long-term care claims could potentially devastate an insurance company that isn’t financially strong. So before you buy a policy, it’s always a good idea to check the company’s financial rating by using a rating service such as Standard & Poor’s, Moody’s, A.M. Best or Fitch Ratings. You can also check with your state’s insurance department for more specific financial information on particular companies.

Is a long-term care policy a good tax write-off?

Although it’s true that premiums paid on a tax-qualified long-term care policy can reduce your tax burden, it’s important to note that you must itemize deductions to be eligible. This type of insurance premium falls under the write-off for medical and dental expenses, which is limited to expenses exceeding 7.5 percent of your adjusted gross income. For example, if your adjusted gross income is $60,000, you are able to deduct only that portion of your unreimbursed medical and dental expenses, including long-term care premiums, exceeding $4,500.

However, there’s another caveat. Even if your premiums exceed 7.5 percent of your adjusted gross income, you can’t include all of the premiums in your deduction for medical and dental expenses. Instead, your premiums are deductible according to a sliding scale that’s contingent on your age. So what might look like a great tax write-off at first might not be so great after all.

Also, it’s important to note that beginning in 2013, the threshold to deduct medical expenses will be raised from 7.5 percent of adjusted gross income to 10 percent. The threshold increase will be delayed until 2017 for those ages 65 and older.

What should someone keep in mind when switching policies?

Although in some cases a new policy might have an attractive added benefit that your old policy doesn’t, red flags should go up if an insurance agent encourages you to ditch your old policy for a new one without providing a clear explanation of the added benefits.

For one thing, your premiums are based on your age and health at the time you purchase the policy. So all other things being equal, your new policy will be more expensive. For another, you run the risk that a pre-existing condition won’t be covered under the new policy.

If you’re unhappy with your current policy, an alternative might be to upgrade it rather than replace it. Unfortunately, there are unethical agents who make misleading comparisons of long-term care policies in an attempt to get you to switch products for no more reason than to boost their commission.

If you’re considering switching policies, make sure you understand exactly what the new one offers, whether the additional coverage is important to you and what you’re giving up in the exchange.

Robert D. Coode is a Principal and Registered Representative with Skoda Minotti. Reach him at (440) 449-6800 or rdcoode@smcofinancial.com.

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