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Avoid the 8 pitfalls of long-term care insurance

While are many advantages to purchasing long-term care (LTC) insurance, there are numerous pitfalls that can wipe them out.

Here are common pitfalls you might encounter when shopping for long-term care insurance.

Pitfall No. 1: Failure to comparison shop

Price varies widely, depending on the benefits offered, the insurer's desire to increase market share in particular areas, or even on the company's own flawed pricing methodology. Prices may go up as more features are added — this may include features that you might not want or need.

Recommendation: Shop around and avoid purchasing benefits you don't need. In addition, make sure you have the right to cancel the policy for any reason within 30 days of purchase to receive a full refund. You might also want to check that there is a guarantee that the policy cannot be canceled or terminated based on your age or physical and mental health.

Pitfall No. 2: Low-balling

shopping for long-term care insurance

Be aware of excessively low-priced policies. Low-balled premiums could mean that, down the road, your rates will increase sharply as the company scramble to make up for the past price breaks.

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Recommendation: If it sounds too good to be true, it probably is.

According to "The Shopper's Guide to Long-Term Care Insurance," 2003, by the National Association of Insurance Commissioners (NAIC), you should ask companies about their rate-increase histories and whether they have increased rates on the long-term care policies they sell. Ask to see the company's personal worksheet that includes this rate information.

Pitfall No. 3: Definition of a "facility"

There are no national standards on what counts as a "long-term care facility." That means the definition of what precisely is an "assisted-living facility" or "adult day-care center" can vary widely from policy to policy and state to state. Consequently, if you buy a policy in one state and then retire to another state, there might not be facilities in your new state that match the definition in your policy — and you'd have nowhere to go.

Recommendation: Make sure you understand exactly what kind of facilities the policy will cover before you buy it, suggests the NAIC in "The Shopper's Guide to Long-Term Care Insurance," 2003, by the National Association of Insurance Commissioners. If you have local facilities in mind, you might want to call the facilities themselves to make sure they fit the criteria in your policy.

Pitfall No. 4: Buying too far ahead

An agent may recommend that you buy an LTC policy at age 40 in order to lock in lower premiums, but be careful. Future long-term care facilities might not fit the policy's current criteria of long-term care facilities because the industry is undergoing rapid change. So the types of facilities defined in your policy today might not match the types of facilities available decades from now.

Recommendation: Try to buy a policy within 10 years of expected use.

Pitfall No. 5: Spousal discounts

Most LTC insurers give a spousal discount only if you and your spouse purchase identical policies — but purchasing identical policies might not be a good idea, as women tend to live longer than men and are more likely to live alone in their later years, resulting in different long-term care needs.

Recommendation: Weigh the pros and cons of spousal discounts, and make sure it's valid if you buy different LTC policies.

Pitfall No. 6: Alternate care

Insurance agents may overstate the benefits of alternate care plans, which supposedly allow you to pick the care and setting appropriate to your needs at the time you need care — even if that particular type of care is not covered in your policy. Unfortunately, this benefit is only as good as the insurer's willingness to allow its use. The language of many policies leaves so much open to interpretation that the company is often free to force you into only the facilities it covers, defeating the purpose of the alternate-care feature.

Recommendation: Unless an LTC policy has language that specifically defines what it will offer, do not let this benefit influence your purchasing decision.

Pitfall No. 7: Rate hikes

Insurance company promises that there will be no rate hikes might be misleading. Company literature might say the insurer won't raise your rates unless it raises rates for the entire "class" you're in, but the problem is that there is no precise definition of what constitutes your class. That means insurers can manipulate the definition went it wants to raise rates.

Recommendation: Make sure the language says your rates won't be raised unless the premiums for all policyholders in your state go up.

Pitfall No. 8: Policy exclusions

Every LTC policy will contain specific exclusions, and it's important to understand what you won't be entitled to. Examples of exclusions can include LTC services outside the United States, care given by family members, "experimental" treatments, treatment for self-inflicted injuries and treatment for alcohol and drug addiction.

Recommendation:Make sure the exclusion list is reasonable.

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