Purchasing long-term care insurance can be one part of estate plan

Long-term care insurance is a popular way to offset increasing care needs, but policy terms can be confusing. Understanding exactly what long-term care insurance actually is can help those who are insured to know how best to include their coverage in estate plans.

Long-term care policy terms vary significantly. Four common variations are the elimination period, the type of care that is covered, the needs requirements and the actual daily rate paid.

Similar to a deductible, an elimination period is the time the insured must pay out of pocket before the insurance begins to pay. A typical elimination period is 90 days, while some are much shorter and some are much longer. For a standard 90-day elimination period, the insured would have to pay the first three months out of pocket before the insurance begins to pay.

The type of care covered often depends on when the policy was created — before or after assisted living facilities became commonplace. A fairly standard policy includes both home care and nursing home care, but not all policies include assisted living. Similarly, needs requirements vary, with most requiring the insured to need assistance with multiple activities of daily living and some even requiring a full evaluation before payment commences.

Finally, the actual payout varies significantly, and is determined by the daily rate, whether there is an adjustment for inflation and the maximum amount that can be paid.

The daily rate should be enough to supplement the insured's income to cover the actual cost of care, but in many cases, it is simply not enough.

For example, if Jane has income of $1,400 per month, and a long-term care policy that pays $120 per day, she still only will have $5,050 per month, which is much less than long-term care would cost. Jane still would need to use her personal assets or apply for Medicaid to pay the difference each month.

Some policies pay for a year, while others may last for five or more years.

Long-term care insurance can be a good option in some cases, and particularly for those who purchased policies long ago or who just need to supplement a good income. When long-term care insurance was being sold in the 1990s, many were very good policies, sometimes with no maximum duration of payments and daily rates adjusted for inflation. However, a large number of long-term care policies since that time have become so expensive that the insured has had to choose between keeping up the excellent benefits or reducing benefits to keep them affordable.

The alternative to long-term care insurance is setting up an irrevocable trust. Unlike long-term care insurance, trust planning has one up-front cost rather than an annual fee. It also has the benefit of asset protection at the time of the grantor's death, which allows for private, fast distribution of assets to beneficiaries.

Trust planning is not without its limitations, however. Using an irrevocable trust requires the grantor to give up easy access and control over the assets that he wants to protect. Furthermore, transfers to trust always are reportable under the five-year lookback period, so trust planning ideally should be completed at least five years prior to the anticipated need for long-term care.

Long-term care insurance and trust planning are both valuable tools for asset protection. However, each should be carefully analyzed to determine which is best for the individual.

By making a plan, rather than simply a purchase, individuals will be well prepared for long-term care costs.