Tips for buying long-term care insurance amid rising rates

Long-term care insurance rates have jumped 6 percent to 17 percent on average, compared to last year, according to the 2012 National Long-Term Care Insurance Price Index.

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Long-term care insurance pays for services that aren't covered by Medicare or traditional health insurance but are needed when you can't care for yourself.  Such services include assistance with everyday tasks, such as dressing, bathing and eating.

Most long-term policies cover a wide range of services in a variety of settings, including nursing homes, assisted living communities, adult day care programs, care centers for those with Alzheimer's disease and your own home.

The American Association for Long-Term Care Insurance (AALTCI), which publishes the price index, analyzes what you pay for the most popular policies offered by 10 insurance companies.  The average cost this year for a 55-year-old single individual who qualifies for preferred health discounts is $1,720 for benefits of $165,000 to $200,000. The same coverage last year would cost, on average, $1,480.

Low interest rates and low yields on fixed-income investments are fueling the higher rates, Jesse Slome, AALTCI executive director, said in a press statement.  Forty percent to 60 percent of the dollars an insurer accumulates to pay future claims comes from investment returns, according to the AALTCI.

In addition to rising rates, the survey this year reports a wider gap between the lowest-cost and highest-cost policy. For a 55-year-old single policy applicant, the highest-priced policy costs almost 80 percent more than the lowest-priced policy, according to the press statement. 

The association recommends comparison shopping for insurance quotes, as policy prices for some categories vary by as much as 132 percent and no single company always has the lowest or the highest rate.

Long-term care insurance policies include limits on coverage. There might be a cap on how much the policy will pay out over your lifetime and how much it will pay per day or per month for care. Some policies also limit the number of years they pay for long-term care. Typical time periods are two, three, four and five years.

3 key considerations when buying long-term care insurance

1. Buy early, save later. Policies vary widely in cost and coverage levels. The premium is based on the type and amount of services you want covered, your age and health condition when you buy the policy, and optional benefits, such as inflation protection.  For that reason, it's prudent to purchase coverage when you are younger, and, typically, more healthy.

2. Tax deductions. The federal government offers tax incentives for purchasing long-term care to encourage people to plan for their needs as they age. Each year, the IRS increases the federal deductibility limits to keep up with inflation, while some states also offer long-term care insurance tax incentives.

You can count long-term care insurance premiums as medical expenses and can deduct them if all your medical expenses exceed 7.5 percent of adjusted gross income.

The amount you can deduct for long-term care insurance rises with age. For instance, 2011 and 2012 federal tax deduction limits for individuals are as follows, according to IRS Revenue Procedure 2011-52 :  

• Age 40 and younger: $340 for 2011;  $350 for 2012

• Age 70 and older:  $4,240 for 2011; $4,370 for 2012

3. Combo-pack policies. You can also buy a policy that folds life insurance into your long-term care insurance. The policies provide long-term care benefits and pay out a death benefit to life insurance beneficiaries if not all of the long-term care coverage is used.