(Article from Kiplinger's Retirement Report, December 2004)

Selecting a long-term-care insurance policy that's right for you takes effort. You must understand the industry's various packages, bone up on benefit descriptions, and weigh the costs--both current and future, since premiums could increase. Below, we explain the key elements of long-term-care insurance and why you might consider buying a policy sooner rather than later.

GETTING THE DETAILS
The first thing you must do is learn the lingo. The details of the features you choose--such as how soon coverage begins and how long your coverage will last--will determine your premiums.

Elimination period. This is the length of time you must be under care before the benefits kick in. Most people choose a waiting period of 100 days or less. The longer the period, the lower the premium, but the more you have to pay out of pocket during your initial care.

Keep in mind that policies can differ in how they define the elimination period. For example, some may start counting down the days as soon as you are impaired, even if you're in a hospital and not receiving long-term-care services. Others start the waiting period when your qualified long-term-care services begin. Some policies count only the days on which you receive covered services rather than a continuous time span. If the days are counted this way and you're receiving home care three times a week, it could take you more than seven months to satisfy a 90-day elimination period, at a greater out-of-pocket cost than the continuous-day approach.

Although longer elimination periods mean cheaper premiums, sometimes a shorter period makes more sense. For example, if your care costs $100 a day and your policy has a 90-day elimination period, you'd spend $9,000 out of pocket before your coverage started. With a 60-day elimination period, you would spend only $6,000--a $3,000 savings. Compare such potential savings against the higher premium in deciding which elimination period to choose.

Maximum daily/monthly benefit. This is the maximum per-day amount that the insurer will reimburse you for qualified expenses. The higher the benefit amount, the higher the premium. However, there is no compelling reason for you to insure yourself for 100% of the daily cost. When considering a policy, estimate what future care costs will run in the area where you think you'll be living. Then subtract from this cost the amount you'll be able to pay out of pocket. You can find a list of average nursing-home and assisted-living costs at the Mature Market Institute (MetLife). The average nursing-home private room costs $192 per day, but prices vary widely across the country, from a low of $99 a day in Shreveport, La., to a high of $331 in Stamford, Conn.

Maximum lifetime benefit. This is the total pool of insurance money available to pay for your care. If you buy a three-year policy paying a daily benefit of $150, your lifetime benefit would be $164,250 ($150 x 365 days x 3 years). If you spend only $75 a day, your coverage would last six years.

Inflation adjustment. Nursing home costs continue to rise, currently averaging $70,080 a year, up 6% from 2003. If prices continue to increase by 5% per year, the annual total cost will top $160,000 two decades from now. You can purchase a rider that increases your daily benefit annually to keep up with inflation. We recommend that you consider an automatic, compounding 5% annual inflation rider, especially if you're younger than 70. However, the rider is expensive and can double the cost of your premium. There are less-costly ways to adjust policy benefits for inflation, and these may be appropriate for older policyholders who are likely to trigger benefits within a few years.

BACKGROUND CHECKS
Buy a policy from a financially strong company rated A or better by independent rating services such as A.M. Best and Standard & Poor's. Stick with insurers that have strict underwriting policies, such as Genworth Financial, John Hancock and MetLife, which also issues policies for federal government employees and retirees. This means they'll require detailed information about your health. Be wary of companies offering premiums that seem too good to be true. They may be more likely to raise your rates in the future. Check with your state's insurance department to review a company's history of rate increases. A company that hasn't raised rates on existing policyholders may be less likely to do so than a company with a history of rate increases, but keep in mind that there's no guarantee.

Once you're ready to shop around, Long-Term Care Quote (800-587-3279; www.ltcq.net) can help you compare policies. After you fill out an online questionnaire, the company will send you information on an assortment of policies, comparing details such as daily benefit amounts, elimination periods, rate increases on existing policyholders and company ratings. You can buy a policy through the site or look for an agent on your own. If you do that, pick one who specializes in long-term-care insurance and works with a number of companies. You may also be able to get recommendations from your financial advisers.

MAKE IT AFFORDABLE
Once you've zeroed in on a policy, take the quoted premium and adjust it for reasonable increases. If you aren't sure that you can comfortably afford the adjusted amount, consider one or more of the following options:

• Cutting the policy's maximum lifetime benefit. It's better to have enough daily/monthly coverage and a shorter benefit period than less coverage and a longer benefit period.
• Extending the elimination period. But don't stretch it beyond 100 days because the amount you'll save usually isn't worth the risk.
• Selecting a policy that covers only institutional care, such as in a nursing home or assisted-living facility. Dropping home-care coverage will usually reduce the premium.
• Buying a policy for you and your spouse at the same time from one insurer. Companies are offering big spousal discounts, up to 40%, as they try to attract more couples. (Couples tend to care for one another, thereby delaying benefit claims.)
• Reducing the policy's inflation protection. Don't tinker with this provision except as a last resort and only if you're over age 70.

WHY NOT BUY LATER?
You never know when you may need long-term care: While it sounds like coverage for the very elderly, nearly 45% of nursing-home residents are between the ages 64 and 85. Plus, the older you are when you buy, the more the policy will cost--assuming you're healthy enough to qualify for coverage. And many policies have a cut-off age, usually around 80, after which they won't sell you a policy. It's also possible that a policy you found attractive but decided to delay buying may not be available later. To make the insurance more affordable, insurance companies are focusing more on basic benefits in their new policies than on bells and whistles.

Don't assume that by paying premiums for fewer years you'd save money. Nancy Morith, a long-term-care insurance agent in Princeton, N.J., gives the example of a single woman who bought a policy in 1996 when she was 58 years old. Her annual premium is about $1,500. With a compounding inflation rider, her daily maximum benefit has now grown to $177 a day. It will increase to about $518 a day when she turns 80, and $844 by the time she turns 90. If she tried to buy a similar policy today at age 66, she'd pay $4,300 a year in premiums. Although she would have saved $15,000 by not paying premiums over the past eight years, that $15,000 would be absorbed by higher premiums within the next six years.

Listed below are sample annual premiums for single and married individuals from five top-rated insurers. Policies pay a maximum daily benefit of $150 for three years, have a 90- to 100-day elimination period, and include a 5% annual compound inflation rider. These rates are for someone in good health and, where appropriate, they include marital discounts.