Another method of paying for long- term care is long-term care insurance. This type of insurance can cover a wide range of services for individuals when they need long-term care, from home and community-based care to institutional care. As with most other forms of insurance, you cannot purchase coverage once you need the company to pay benefits.

Long-term care insurance is most often sold to individuals who pay all of the premiums. Some employers offer this type of insurance, although they rarely pay any of the premiums. Some allow the parents, and sometimes the parents-in-law of their employees, to apply for the group coverage. For instance, the California Public Employees Retirement System companies offer long-term care coverage to their employees, retirees, and the parents and parents-in-law of their members. Companies selling this insurance will screen most people for existing medical conditions when they apply for either group coverage or for an individual policy.

The decision to purchase a long-term care policy and the type of policy you select depends on many factors. For example, significant differences exist among policy types, features, benefit options and eligibility criteria. Choosing among these options can be a challenge. It requires careful consideration of a number of factors related to your risk of needing long-term care and your individual financial planning.

Long-term care insurance is designed to reimburse you for some of your expenses when you need assistance with basic activities such as bathing, eating, or getting in and out of bed. You may need this kind of help following a disabling stroke, because of a disorder like Alzheimer's disease, or because of advanced age and frailty.

Long-term care insurance is a policy that pays for care in institutions like Skilled Nursing Facilities and Assisted Living Facilities; at home for home health care, personal care, homemakers services, hospice care and respite care; and in the community for Adult Day Care (or Adult Day Health Care) or Alzheimer's Day Care.

The care that people generally need in any of these locations is assistance or supervision with the normal activities of daily living (ADLs), or because of a cognitive impairment like Alzheimer's disease. This type of care is often called custodial care or personal care. Medicare does not pay for this type of care, but Long-term care insurance policies do.

Congress passed legislation effective in 1997 giving a tax break to people who purchase long-term care insurance that meets certain federal standards.

This legislation is called the Health Insurance Portability and Accountability Act or HIPAA. Policies that qualify for the new tax break use a standard of eligibility for benefits that is stricter than the standards established in California. Policies that are labeled as "Federally Tax Qualified" use the federal standards for paying benefits. Some or all of the premiums for these policies may be deductible as a medical expense (depending on your age and adjusted gross income), and benefit payments are excluded from income.

Note: Premiums paid for a tax-qualified policy qualify as a medical expense. People who itemize medical expenses on their federal tax return and have total medical expenses greater than 7.5 percent of their adjusted gross income may be able to deduct some portion of a premium for one of these policies. Contact your tax advisor for more information.

Policies that use the standards established by California are more generous than the federal standard, so the premiums cannot be deducted. It is not clear under federal law whether the benefit payments are taxable as income. However, no long term care benefits have been previously taxed as income.

The federal government has not made any decision on the tax treatment of policies that use the California standards. Until a decision is made, companies selling the tax qualified policies are required to also offer people the chance to buy a policy that meets the California standards. Some companies sell both types of policies, while other companies only sell the California policies. Some employers only offer tax qualified policies because they are not required by state law to offer both.

Differences between these two kinds of policies will be discussed in each of the following sections.

Note: All long-term care policies that were sold before January 1, 1997 automatically qualify for the new tax breaks. These policies do not have to be replaced with a new tax qualified policy to benefit from these new tax breaks. Consult your tax advisor for more information.

No, there are three types of long-term care insurance policies. In addition, each type of policy can be designed to qualify for the new tax benefit depending on which set of standards the company uses - the federal standards or the state standards.

These policies only pay for care in a nursing home or similar facility.

Companies selling these policies must also offer a buyer coverage for assisted living in a Residential Care Facility for the Elderly (RCFE) or a Residential Care Facility (RCF).

These policies only pay for care in your own home. They are required to include benefits for home health care, adult day care, personal care, homemaker services, hospice and respite care. Some also include care management services and equipment prescribed for medical purposes. A few companies also pay for modifications to your home if necessary to allow you to continue living in your own home.

These policies pay for long-term care at home or in the community, as well as in a nursing home. All of the home and community services required in a Home Care Only policy must also be included in a comprehensive policy. Companies selling this kind of policy must also offer buyers a benefit for assisted living in a Residential Care Facility for the Elderly (RCFE) or a Residential Care Facility (RCF).

Any of these policies can be tax qualified or not, depending on which set of benefit eligibility standards are used by the company. A tax qualified policy must be labeled as "intended to meet federal tax requirements." Agents selling tax qualified policies are required to show potential buyers a side-by-side comparison of both types of policies to illustrate the major differences between the two. You should ask to see this comparison before deciding which type of policy to buy.

Before purchasing a policy, think about your future ability to pay the premium if the company has to raise premiums for all policyholders. A good benchmark is that a premium should not exceed 7 percent of your annual income. Your income may fail to keep up with inflation as you get older, and if your spouse dies, your income might drop. You could then be faced with some tough decisions about what you can afford to continue paying.

If you have abundant assets, you may plan to pay some or all of your long-term care costs yourself (in other words, self-insure). If your non-housing assets are low (less than the cost of a year in a nursing home) long-term care insurance is probably not a good idea. If you already qualify for Medi-Cal or would spend all your assets within a few months, you do not need long-term care insurance.

If you are somewhere between these extremes, long-term care insurance may be worth considering. The amount of insurance coverage you buy should be roughly comparable to the assets you would otherwise have to spend.

Premiums are based on age. The older you are when you purchase coverage, the more expensive the premium will be. Many companies will not sell long-term care insurance policies to a person over 85 years of age. Most people begin to think about long-term care insurance when they are planning for retirement. Most people buy a policy between the ages of 65 and 80.

People with serious health problems are rarely accepted for long-term care coverage. A few companies will accept you with certain chronic conditions, but your premiums are likely to be higher.

An insurance company can refuse to pay if you need care during the first six months after you buy the policy because of a condition you had during the six months before you bought the policy. Some insurance companies will pay for care caused by a pre-existing condition if you listed it on your application and they issued you a policy. You should always be certain that the health questions on an insurance application are answered accurately.

If you are considering purchasing a long-term care insurance policy, there are "Rating" companies that rate insurance companies on their financial condition and "claims-paying ability." These companies include AM Best, Duff & Phelps, Moody’s and Standard & Poor. AM Best Reports are often available at public libraries. The other three companies will give ratings over the telephone. Some charge a fee; others do not.

An insurance agent should be able to tell you about any premium increases of the company you are considering. You should ask about rate increases for any long-term care policies the company sells now, or has sold in the past. You can also call the company and ask for information about their rate increases.

The cost of long-term care policies varies according to the type of policy and the coverage provided. Policies that only pay for nursing home care are less expensive than those that cover both nursing home and home and community care.

Some of the factors that can influence the cost of long-term care insurance include:

• Your age and your health at the time you apply for coverage;

• The combination of benefits you want included in the policy;

• The daily or monthly benefit amount you want the company to pay when you need care; and

• The number of years you want the company to pay benefits.

Note: Premiums for tax qualified policies may be a little less expensive because of the stricter benefit eligibility standards (page 29).

That depends on the benefits you choose. Most policies pay daily amounts (sometimes called "daily benefits" or "daily maximums") from $50 a day to more than $200 a day for the services described in the policy. This means that the company will pay your covered expenses "up to" the daily maximum you choose. You will be responsible for any amounts greater than the daily benefit, and the company will not pay more than the cost of the covered service.

For example: If you choose a daily maximum of $100 per day and your nursing home expenses are $150 per day, you will be responsible for the difference, $50 per day, or $1,500 a month. (This is your co-payment.)

While you may have the income to pay this co-payment today, you need to be sure that you can pay it in the future too. Nursing home costs have doubled about every ten years, which means that the co-payment you choose will also increase. State law requires insurance companies to offer you the chance to buy inflation protection. While this benefit increases the cost of your premium, without it you risk not being able to pay your share of the cost later.

Most policies have a maximum number of days that benefits will be paid once you start using them. This time period is called a "benefit period," "maximum benefit period" or "lifetime maximum." Others refer to it as the duration of your coverage, or the total number of dollars that the company will pay for your care.

Companies generally sell coverage in one year increments. You can buy as little as one year of coverage, or lifetime coverage that will pay as long as you live once benefits begin. The premium is higher the longer you want the company to pay benefits, and not many people can afford the premium for lifetime coverage. Most people buy between two and five years of coverage.

This is the number of days you must wait after you are eligible for benefits before the policy begins paying for your care. While a few policies have no elimination periods and pay benefits from the first day, the most common waiting periods are 30 days, 60 days, 90 days, or 100 days. You will be responsible for the cost of your long-term care expenses during the elimination period you choose when you buy the policy. The policy premium will be lower if you select a longer elimination period, but you will pay the full cost when you first need care.

For example: If your nursing home cost is $100 per day and you have a 60-day waiting period, you will pay the first $6,000 for your care before the policy pays anything. This example assumes that you continue to stay in the nursing home after 60 days. If your stay was shorter than your elimination period, the policy would pay nothing for your nursing home stay.

While some companies require you to meet the elimination period once during your lifetime, others require you to meet it for each period of care. For example, if you need care for a total of 60 days and have a 30-day elimination period, you pay for the first 30 days and your policy pays the remaining 30 days. Then if you do not need assistance for a period of time and later you need to use your benefits again, you would have to pay for your care during a new elimination period.

Note: Remember that you cannot depend on Medicare to pay for the first 100 days you are in a nursing home. Medicare will only pay for the first 20 days and part of the cost from days 21 to 100 while you are receiving daily skilled care and rehabilitative services. If you only need custodial care or personal care services, you or your long-term care insurance will pay for your care, depending on how your policy is designed. Federally tax qualified policies are not allowed to pay the Medicare coinsurance after the 21st day. Policies using the California standards do not have this restriction.

This is a plan for the care you need that is written by your doctor or a medical team, such as those at home health agencies. The Plan determines that you need care, describes the kind of care you need, and how frequently, and for how long you need care.

Some insurance policies require a Plan of Care for personal care and homemaker services; others require one for every benefit. Many insurance companies require that the Plan of Care be updated periodically.

In the past, some policies required you to contact the insurance company's care manager to assess your need for care. Policies sold after 10/6/97 must allow you to use an independent care manager to decide if you need care. Care management is a process to assess, plan, coordinate and monitor long-term care. Some companies provide this type of ongoing care management as part of your benefit package. The cost may be included in your benefits or deducted from your lifetime benefit limit.

Policy definitions determine where you can get care and who can provide care.

In California companies must pay nursing home benefits in any state licensed nursing home. Policies that pay benefits for Assisted Living must pay for care in licensed places like Residential Care Facilities for the Elderly (RCFEs), or in Residential Care Facilities (RCFs), sometimes called Board and Care homes. Some policies also pay for hospice care at home or for inpatient care.

Home health agencies can provide any of the required home care services. Licensed professionals such as nurses, physical therapists and social workers may also be eligible providers of certain skilled care services.

All policies sold after I/l/93 that pay for home care must allow unskilled people to provide personal care, homemaker services and some hospice services if the care is recommended in the Plan of Care. While a few policies will pay benefits when family members provide the unskilled personal care, most will not. All policies are required to pay for care in both medical and non-medical adult day care centers, or Alzheimer's day care centers.

In California home care benefits in long-term care policies must include the following services:

• Home Health Care - skilled nursing, part-time and intermittent, or other professional services and therapies in your residence, including audiology and medical social services;

• Adult Day Care - a licensed day care program that usually provides personal care, supervision, protection or assistance in eating, bathing, dressing, toileting, moving about, and taking medications;

• Adult Day Health Care - a level of day care including medical, skilled nursing and therapy services;

• Personal Care - assistance in your residence with any activity of daily living (bathing, dressing, continence, toileting, transferring, eating, and ambulating) as well as using the telephone, managing medication, shopping for essentials, preparing meals, laundry and light housekeeping;

• Homemaker Services - assistance with chores or activities that are necessary for you to be able to remain in your residence;

• Hospice Services - services in your residence that provide physical, emotional, social and spiritual support for you, your caregiver and your family when a terminal illness has been diagnosed; and

• Respite Care - short-term care in a nursing facility, in your home or in a community program to relieve the primary caregiver in your home.

Note: Personal care, homemaker and hospice services may be provided by a skilled or unskilled person when they are required in a Plan of Care developed by your doctor or a care team under medical direction.

Eligibility for home care benefits is usually based on the inability to perform certain "activities of daily living" (ADLs), or on impairment of cognitive ability. These are referred to as "benefit eligibility triggers."

Policies that pay for home care and use the California eligibility standards must pay benefits when you are impaired in 2 out of the 7 ADLs listed below:

• Bathing • Dressing • Continence • Toileting • Transferring • Eating • Ambulating

OR, when you need help because of cognitive impairment. (An example would be someone with Alzheimer's disease who needs supervision.)

Policies that pay for home care and use the eligibility standards for federally tax qualified policies cannot pay benefits until a health care practitioner certifies that you will need care for at least 90 days because you cannot perform 2 out of the 6 ADLs listed below without substantial assistance from another person:

• Bathing • Dressing • Continence • Toileting • Transferring • Eating

OR, when you need help because of severe cognitive impairment.

In policies that use the California eligibility standard, impairment means that you need supervision or assistance to protect yourself or others because of mental deterioration caused by Alzheimer's disease or other organic mental diseases. In policies that use the federally tax qualified eligibility standard, you must require substantial supervision because of severe cognitive impairment.

California law requires one set of ADL definitions for policies using the California eligibility standards and another set for policies using the federally tax qualified eligibility standards. These definitions describe each ADL. When a person cannot do one of these, they have met one of the ADLs necessary to qualify for benefits.

For instance, "bathing" in a tax qualified policy means "washing oneself by sponge bath, or in either a tub or shower, including the act of getting into or out of a tub or shower."

"Bathing" in a policy with California eligibility standards means "cleaning the body using a tub, shower, or sponge bath, including getting a basin of water, managing faucets, getting in or out of the tub or shower, and reaching head and body parts for soaping, rinsing and drying."

Note: The additional ADL (ambulating) in the California eligibility standards may make it easier for some people to qualify for home care benefits. In addition, people with these policies don't need to get certification that they need care for at least 90 days.

When you buy individual long- term care insurance, the insurance company must offer you the option to purchase inflation protection. In some cases, you must choose this option at the time you purchase the policy and the cost is included in the premium. In others, you can purchase inflation protection at stated intervals during the life of the policy. Your premium increases each time you choose this option.

If you buy long-term care insurance through a group like an employer or an association, the offer of inflation protection has been made to the group master policyholder. You may not be able to purchase this option if the group didn't choose to offer it to their members.

If you choose 5 percent simple inflation protection, your original daily benefit will increase by 5 percent each year. If you choose 5 percent compounded inflation protection, your previous year's daily benefit will increase by 5 percent. Compounded inflation protection increases your maximum daily benefit at a much faster rate than simple inflation protection. Long- term care expenses increase at a compounded rate, and your benefits should too. (See chart below)

This is a growing and popular option for people when they cannot stay in their own homes. Many of these newer facilities offer independent living with on-site services like meals, supervision, and assistance with ADLS.

Insurance companies are required to offer you the option of purchasing coverage for assisted living either as a rider, or as a benefit in the policy.

This benefit must pay no less than 50 percent of the nursing home benefit you choose. Your benefit must be paid in any facility that is licensed as a Residential Care Facility for the Elderly (RCFE) or a Residential Care Facility (RCF). Both of these are defined in California law, and assisted living facilities have one of these licenses.

Long-term care policies must allow the lifetime maximum amount to be used interchangeably for any of the benefits covered by the policy. If a policy covers both home and institutional care, the company is allowed to pay less each day for home care than for nursing home care.

However, the company must continue to pay until the maximum amount of the policy is exhausted, unless the person dies, or does not meet other requirements of the policy.

For example: If a policy pays $100 a day in a nursing home for 2 years and the daily home care benefit is $50, it could take four years to use up the maximum benefit for home care, but only two years for nursing home care.

Companies must allow you to reduce your coverage in exchange for a lower premium. There are three ways this can be done. You can reduce the daily benefit payment or the total number of years the policy will pay. You can also change your coverage from a Comprehensive policy to a Nursing Home Only policy if the company sells one. This right to reduce coverage can be exercised anytime after the first year or whenever the premium increases. Companies must also offer this option to you if you stop paying premiums.

Many policies will allow you to stop paying premiums while the policy is paying benefits (usually after a waiting period). Most waivers of premium apply only when you are using the nursing facility benefit or other institutional benefit, but some policies will also waive premiums while you are using the home care benefits.

Nonforfeiture benefits allow you to retain some benefit of a long-term care insurance policy if you have to drop your policy. For example:

• Reduced paid-up pays some percentage of the daily benefit, such as 30 percent, after you have paid premiums for 10 years.

• Shortened benefit period pays the full benefit, but for a shorter period of time. (For instance, a policy that might have paid $100 each day for five years might pay $100 per day for a much shorter period of time.) Generally, you must have paid premiums for a certain number of years before dropping the policy to get this benefit.

• Return of premium refunds a percentage of the total premiums paid, minus any claims paid, based on the number of years you paid premiums. (For instance, if premiums had been paid for 20 years, the company might refund 100 percent of the premiums.)

If you are eligible for benefits and you want the policy to pay for a benefit or service that is not listed in your policy, you can request that benefit from the insurance company. Although the company has absolute discretion to grant or deny your request, it may agree to your request. Some policies offer an alternative benefit in their contracts, others do not. You can always submit a request for payment of alternative services, whether or not your policy has this feature.

All long-term care policies sold in the State of California include the following protections:

Every long-term care policy sold to an individual must be either guaranteed renewable or non-cancelable. Guaranteed renewable means that the company cannot cancel your policy or change any of the benefits, unless you fail to pay the premiums. Insurance companies are allowed to increase premiums for a "class" of policies, but not for you individually. Non-cancelable means that your coverage cannot be canceled or the benefits changed, and the premium cannot increase as long as you continue to pay on time.

If you purchase a long-term care certificate through a group, you can continue or convert your coverage if the group cancels the master policy or terminates coverage. Continuation means you keep the same coverage if you pay the premium on time. Conversion means you get an individual policy of insurance with identical or equivalent coverage without health screening. In each case, your premium can change when you are no longer in the group.

Every applicant (except purchasers in employer or trade groups) has the right to return any policy or certificate within 30 days of receipt, for any reason, and have all premiums or fees refunded. The 30 days begin on the day that you get the policy or certificate.

Policies sold after 1990 cannot require you to be in a hospital before benefits will be paid in a nursing home, or to get skilled nursing care before personal care services are covered. Companies may not refuse to pay you benefits because you weren't in a hospital or nursing home before you needed covered home or

community services. Companies also may not refuse to pay covered benefits to people who are diagnosed with a cognitive impairment, including Alzheimer's disease.

An Outline of Coverage is a summary of the terms of a policy or certificate. Agents are required to give you an Outline of Coverage. If you are purchasing insurance through the mail, companies must give you the Outline with the application or enrollment form.

California law requires agents to comply with certain standards when selling insurance and to give consumers certain information at the time they make a sales presentation.

Agents are required to give you a fair and accurate comparison of any policies you may already have, with one you are considering for purchase. You must also be given a "Long-term Care Insurance Personal Worksheet." This form gives you important information about any rate increases the company has had, and asks you to consider certain other issues related to buying long-term care insurance. If you do not complete this form, the company is required to contact you before issuing coverage to make sure the agent showed it to you, and that you met their standards for income and assets to purchase this product.

Agents selling tax-qualified policies must show you a standardized side-by-side comparison of both the tax-qualified policy and policies using California eligibility standards. Both the side-by-side comparison and the Personal Worksheet are intended to help you purchase the right type of policy and an appropriate amount of coverage for your particular circumstances.

Insurance agents have a duty of honesty, good faith and fair dealing

to all consumers. They are prohibited from using high pressure tactics to sell you insurance and are not allowed to sell inappropriate coverage or excessive amounts of insurance. Advertisements and other marketing materials used by agents and by companies cannot be misleading.

Violations of these standards should be reported to the California Department of Insurance at 1-800-927-HELP (4357).

All agents and other financial consultants selling long-term care insurance must be licensed by the California Department of Insurance. Agents must receive special training before they can sell long-term care insurance and complete a certain number of continuing education hours before they can renew their license. Insurance companies have to keep a list of the agents authorized to sell their long-term care insurance policies and must send that list to the Department of Insurance.

Note: You can call the California Department of Insurance to verify whether an agent is authorized to sell long-term care insurance by calling 1-800-927-HELP (4357).

You can get more information or individual counseling on long-term care insurance from your local HICAP office. Call 1-800-510-2020 to find the HICAP office nearest you.

HICAP is the Health Insurance Counseling and Advocacy Program, a free statewide program through the California Department of Aging. HICAP uses trained, impartial volunteers who will meet with you, discuss your long-term care needs and help you with the questions you may have about long-term care insurance.

The answers to the questions above will help you determine what benefits you need.

The premium range I can afford is $_______. (Your answer to #1.)

The total lifetime benefit I can afford is $_______. (Your answer to #2.)

The number of years a policy should pay is ____ years. (Your answer to #3)

The daily benefit amount I need is $_______. (The 2nd amount in #4.)

The elimination period I can afford is ___ days. (The answer to #5.)

1. Does the policy cover assisted living?

2. Does the policy have 5% compounded inflation protection?

3. Has the company ever raised premiums on any long-term care policies they sold?

4. Does the policy have a premium waiver? When does it begin? Does it apply to all of the benefits in the policy? Does the company refund any of the annual premium I paid in advance?

5. Do I have to satisfy the elimination period more than once?

6. If Home Care is a covered benefit, is care management a benefit of the policy? Is the cost of care management deducted from my maximum benefits?

7. Does the company use their own care manager, or can I choose my own?

8. Does the policy include a nonforfeiture benefit? If so, how does it work?

9. Did my agent explain the side-by-side comparison and the Personal Worksheet?

10. Is my agent authorized to sell me either an individual policy or a "Partnership" policy?

These are just a handful of questions, there is much more for you to know before you purchase. Feel free to call us at 1-800-201-8559.

Note: For information on a joint venture between the State of California and certain selected insurance companies, read the next section on the California Partnership for Long-Term Care

Read Chapter Six "California Partnership for Long Term Care"