Long-term care insurance (LTCI) is an expensive and complicated product. It’s sold by a shrinking number of financially challenged insurers and subject to differing state rules that aren’t always effectively enforced. Consumers have faced large rate increases, and complaints about industry sales practices and claims denials are on the rise. No wonder that private LTCI paid for only 7 percent of the nation’s long-term care bill in 2007. Why would anyone want to buy this product?

Because fear of outliving our assets is one of the strongest motivators driving the financial decisions of aging Americans. Because dramatic gains in life expectancies haven’t been matched by comparable improvements in retirement finances. Because many of us are scared about Alzheimer’s Disease (see Unforgettable TV: HBO’s Alzheimer’s Project). And because we don’t want to become financial and emotional burdens on our children (without inviting generational warfare, we haven’t exactly set the table so well for their financial futures).
Further, many consumers mistakenly think Medicare will cover their long-term care expenses. Beyond short-term hospital and nursing-home stints to recover from treatable medical conditions, it will not. Long-term care insurance, by contrast, is not health insurance but protection against progressive deterioration that renders people incapable of caring for themselves physically or mentally. The physical coverage triggers include six long-established activities of daily living –bathing, dressing, toileting, continence, eating and getting around (walking, moving from place to place and the like). Mental triggers include Alzheimer’s and dementia. The cost of dealing with these conditions can be staggering, depleting life savings and forcing people into poverty, where they qualify for Medicaid and a slot at a nearby nursing home.

So, for all of these reasons, you should at least consider long-term care insurance. The good news is that Congress is right there with you. Legislative interest in all forms of health care is high these days, and includes studies and proposals on LTCI that just might make it a more attractive product. And while LTCI is perhaps only a footnote in the national debate about health-care reform, rising concerns about the quality and affordability of elder care aren’t going away, even with major health reforms.

In the meantime, Washington’s attention to long-term care issues is generating invaluable information about LTCI that will help consumers make smart decisions. Last week, Wisconsin Democratic Senator Herb Kohl introduced a bill to strengthen consumer safeguards for LTCI and standardize state rules. Other proposals include tax breaks to make LTCI policies more affordable and a measure introduced by Massachusetts Senator Ted Kennedy to create a publicly administered LTCI program that offered private policies to employees in a fashion similar to a 401(k) plan. While these proposals work their way through Congress, here are factors you should address in evaluating if long-term care insurance is right for you.

Who Needs It? Group policies now account for a third of outstanding LTCI. For individual buyers, long-term care insurance generally is purchased by people in their 50s and 60s. It is too expensive for lower-income consumers and generally not recommended for wealthy consumers, who can afford to pay long-term care costs without insurance. According to a recent study by the Kaiser Family Foundation and Avalere Health:

About 50 percent of people buying long-term care insurance earn above $75,000 annually compared to 31 percent of the general population age 50 and older. Three-quarters of purchasers have liquid assets (i.e., assets not including the home) over $100,000 compared to 30 percent of the general population. About 16 percent of long-term care insurance buyers earn less than $35,000 annually.

Some consumers avoid the need for LTCI by buying into continuing care retirement communities (CCRCs), whose fees usually reflect the cost of lifetime care, including those services covered by long-term care insurance. However, CCRCs can be costly. Also, CCRC packages often are funded by the sale of a primary residence, and those sales have been hurt by the recession and steep declines in home values.

What Does It Cover? When a triggering event produces an LTCI claim, most policies pay for covered services at a full range of at-home and institutional facilities. There are four decisions that consumers must make that will determine the cost and completeness of their coverage.

1) Elimination Period. Policy costs are held down by consumers agreeing to pay their own care costs for a specified time when they have a valid claim. This time is known as the elimination period and 90 days is a common selection. As with the deductions for an auto insurance policy, the more you pay up-front, the lower your premium will be.

2) Maximum Daily Benefit Amount. With the annual cost of a nursing home at $75,000 and rising, long-term care expenses can be enormous. Most policies have a range of $100 to $200 in maximum daily benefits, with higher premiums for higher daily maximums. In policies reviewed by researchers, on average, the daily maximum was $145 for individual policies and $128 in the group market.

3) Lifetime Maximum Amount and Benefit Period. Most policies carry a lifetime benefit cap that is expressed as a time period for how long the policy will continue providing maximum daily benefits. The most common periods are three and five years, with higher premiums for the larger payment caps. If daily expenses under the policy are beneath the daily maximum, the Kaiser-Avalere study notes, then the lifetime benefit period will be extended until the policy’s maximum benefits have been paid. Most consumers pick a three-year lifetime period.

4) Inflation Protection. Most LTCI policies are bought 10 or 20 or even 30 years before a claim is ever made on the policy. Policies offer varying levels of inflation adjustments. In most policies, this protection is built into the initial premium, which is designed not to change during the life of the policy. Some policies offer a flat-rate annual increase in benefits, with three and five percent being the most common choices. Others will offer compounded rates of inflation protection, which is more costly. And some policies will offer lower current premiums and give policyholders the future option to raise their benefit maximums from time to time by paying a higher premium. Consumers most often choose five percent compound inflation protection on individual policies; for group policies, the option to make future changes was the dominant choice. The amount of inflation protection, researchers found, was directly linked to income levels. Only 44 percent of buyers making less than $25,000 elected an inflation-protection feature, while 86 percent of buyers with annual incomes exceeding $75,000 did so.

What Does It Cost? The Kaiser-Avalere study looked at rates from three large LTCI insurers in 2008 and said a policy for a 60 year-old person would cost between $2,140 and $2,460 a year if it offered the most commonly sought provisions — $150 per-day maximum, three-year benefit period, five percent compound inflation protection, comprehensive benefits, and a 90-day elimination period. Boosting the lifetime maximum to five years raised the annual premium to a range of $2,997 to $3,183. Much of the premium cost is generated by the compound inflation protection. But remember, even five percent compounded every year might not keep pace with health-care inflation trends. Couples also can buy coverage together, with substantially lower per-person costs.

What Is The State Medicaid Partnership Program? Four states began testing an LTCI product about 15 years ago that has an attractive estate-preservation feature. In these states (California, Connecticut, Indiana, and New York) people who bought what were called LTCI partnership policies could exempt LTCI paid-out benefits from their estates in determining if they qualified for Medicaid. Normally, people must spend down most of their non-mortgage assets to qualify for Medicaid. But under the partnership program, someone with a policy that had a $300,000 lifetime maximum, for example, could shelter up to that amount in their estate and still be eligible for Medicaid should their LTCI policy benefits be exhausted and they needed to use Medicaid to pay for their care expenses. The states liked the program because it reduced Medicaid spending (very few partnership policy owners have reached their policy limits and been forced onto Medicaid). Policyholders liked it because it protected their estates from being depleted in order to qualify for Medicaid. And the insurers liked it because it helped them sell more policies. A few years ago, the partnership program was opened to other states, and today 43 states either offer partnership LTCI or are in the process of doing so.