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Investing in long-term care

Partial long-term care coverage now is a good idea for several reasons.

First, each year another birthday brings a somewhat higher premium as insurance companies determine they have one less year to invest your premiums before they will likely have to pay your medical costs for home health care, assisted living and/or nursing home. Second, providers raise the cost of new policies and increases are significant with each change. Third, you can utilize the coverage if needed early. Fourth, a health issue or an accident may occur that would make you uninsurable in the future.

Most likely the most significant reason is that past increases in premium rates for new policies make buying earlier more efficient. In the last decade, it is easy to document insurance company premium rate increases. Therefore, to protect your estate for your heirs, buy a smaller affordable policy now, but get started.

A couple in 2000 who understood investment compounding, purchased a policy for $60 a day. While this was less than the daily cost of care in 2000, it was what they could afford with one child in college and another child ready to start college in two years. They planned to bring the coverage more in line with the present daily costs of care after one of their children were through college. The chosen coverage included 5 percent compounding of the daily rate, which meant that coverage would grow annually like dollars grow in a 5 percent compounding investment. The compounding daily benefit was planned to match medical cost increases for care. The couple’s cost was $826 annually.

Five years later, the couple re-examined the cost of a second policy. They wanted to bring their daily coverage to be more in line with the present cost of assisted living in Florida. In 2005, care was running $120 to $150 a day. By this time, the compounding feature on the first policy had grown the daily coverage to a benefit of $76. They determined a second policy for $50 a day keeping the unlimited length of time benefit would be able to protect their estate in the future while keeping the cost for coverage affordable. The second policy for $50 per day cost more annually, $1,460, due mostly to the impact of rate increases for new policies during the five year period from 2000 to 2005.

The second policy although less efficient than the first, proves to be a bargain in 2010. Now, the couple has an unlimited length of time coverage for $162 a day and due to compounding this daily coverage will continue to increase each year. If one of them needs care any time, insurance is there for them.

Government has stepped in to protect existing policy holders and now state laws support rejection of insurance company rate increase requests for existing policy holders. This will encourage insurers to accurately assess premiums to cover their future payments. Likely, companies will continue to charge more in the future for new policy holder premiums while giving more assurance to prudent purchasers that their premiums will remain constant.

The importance of starting coverage as soon as possible is further illustrated by two occurrences this month. One, a major long-time supplier of long-term care raised rates across the country. Second, another major insurer announced it no longer would provide long-term care insurance due to the lack of profitability for these policies previously issued. The owners of the policies are receiving large payments for their home health, assisted living and nursing home care. With national health coverage not affecting long-term care, it is evident the need for this insurance continues and buying partial coverage now as soon as possible is better for you.

Lea Smith Johnson, a financial planner with FCC Investment in Bradenton, can be reached at (941) 755-0975.

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