The high cost of long-term care makes paying for it a challenge. What makes it even more challenging is that the alternatives most people are drawn to have serious limitations.

Personal savings

For most people, it will be difficult to accumulate sufficient personal assets to meet both retirement income and long-term care needs. Furthermore, there are both financial and emotional costs associated with liquidation of personal assets to meet long-term care needs. These include taxation of gains realized on the sale of assets, loss of the use and enjoyment of liquidated assets, and depletion of assets available for surviving heirs.

Reliance on family members

A number of socio-economic factors have combined to make it increasingly difficult for family members to provide long-term care to aging parents. These include:

-- geographic dispersion of the family;

-- increased participation of women, traditional providers of long-term care, in the paid workforce;

-- a trend toward smaller nuclear families;

-- higher-divorce rates; and

-- the inability of family members to meet their own financial and personal objectives while also providing care and support to aging parents.

Medicare and Medicaid

Neither of these government-sponsored programs is ideally suited for paying for long-term care. Medicare generally covers short-term skilled nursing home care following hospitalization and limits at-home help to those who need skilled nursing care and rehabilitative therapy. Medicaid pays for long-term care both at home and in a nursing facility, but this program is targeted to individuals who are below poverty level or those who are medically disabled and have had to spend down their assets to qualify for Medicaid.

Given the limitations of these alternatives, the purchase of long-term care insurance makes sense for many people. Only long-term care insurance is specifically designed to address the cost of long-term care resulting from chronic illness or injury. But selecting the right policy can be tricky.

Legislative developments

Two major pieces of legislation - one at the state level and the other at the federal level - have affected the design and development of long-term care insurance policies.

At the state level, the National Association of Insurance Commissioners (NAIC) model act has been adopted by most states. The Model Act focuses on two major areas, policy provisions and marketing. The legislation responded to concerns from consumer advocates that without certain minimal protections, consumers could fall prey to deceptive and unfair marketing practices.

At the federal level, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) created a limited tax deduction for premiums paid on qualified long-term care policies. Although there are some differences, as a general rule, policies must meet the NAIC guidelines to be tax qualified.

Policy provisions

The NAIC and HIPAA guidelines leave room for considerable flexibility in policy design. One consideration is the type of benefit covered. Most policies offer both nursing facility and home care/home health care options.

Another consideration is the amount of benefits provided. The benefit for nursing home care typically ranges from $40 to $500 per day. It is common for policies to pay a benefit for home care/home health care that is expressed as a percentage, say 50 percent, of the benefit provided for institutional care.

Inflation protection is typically offered in the form of a specified increase, generally 5 percent, on either a simple or compound basis. Availability of inflation options varies by state.

Other important considerations in policy design are the elimination period and the benefit period. The elimination period refers to the time that must expire before the benefits become payable. Most insurers allow the applicant to select elimination periods of 30, 60, 90, or 180 days. The benefit period is the time period over which a benefit is paid. Typical selections are benefit periods that offer coverage for two, three, four, or five years or for the lifetime of the insured.

Yet another important policy feature is the nonforfeiture option. One form of nonforfeiture option enables the policy owner to continue coverage in some form even if no further premiums are paid.

Long-term care insurance contains benefits, exclusions, limitations, eligibility requirements and specific terms and provisions under which the insurance coverage may be continued in force or discontinued. A qualified financial services professional can help educate and guide you through the decision making process.

Sharon Stanley is a representative of The Prudential Insurance Co. of America in Cape Girardeau. (334-2603 )