LTC Insurance Basics

While many standard features are automatically included in a long-term care insurance policy, you can control the premiums you pay and the benefits you receive when you select the key benefit choices in a policy. Below are descriptions of the most common benefit choices in policies, and tips on selecting what is right for you.

Benefit Amount - Monthly or Daily

The daily or monthly benefit you select is the maximum dollar amount that the insurance company must pay for your care on a given day or for a month.  A monthly benefit allows you to receive benefits for expenses on specific days that are greater than an equivalent daily benefit but only up to the monthly benefit limit.

The benefit choices may range from $50 to $500 per day ($1500 to $15,000 per month) depending on the carrier. 

If you are purchasing a reimbursement policy, most companies will allow the amount of the daily or monthly benefit that you did not use to be carried over, which extends your benefit period.  For example, if your daily benefit amount were $150 and your expenses were only $100, then the remaining $50 is not lost, but remains in the total pool of money effectively "stretching" the benefit period longer.  This could therefore allow a three-year plan to last longer than three years! 

If you purchase a cash benefit or indemnity policy, the carrier would pay you the entire daily or monthly benefit regardless of the cost of your care.  Also, some reimbursement policies have an option to receive a portion of the monthly benefit (e.g., 30%) in cash to use however you need without requiring any receipts.  This is in lieu of submitting bills to qualify for the full benefit and can be selected on a month-to-month basis.

Tips:
  1. Research the average daily cost of care in the area you are planning on retiring to ensure you select the appropriate daily benefit amount.
  2. You do not have to buy insurance for the full cost of care.  Focus on covering the cost of home care first - the "extra" costs.
  3. The more discretionary income you have, the lower the monthly benefit you may want to purchase.
  4. Consider the extra costs if you want to plan for extended home care (> 8-hours) or a private room in a facility when selecting your benefit amount.

Home Care Benefits

This benefit provides for care in your own home. This can include skilled professionals like registered nurses and licensed therapists , home health aides and personal care attendants, as well as homemaker services. Adult day care benefits are usually included also.

The home health care benefit the carrier will pay is usually based on a percentage of the daily benefit. For example, if you choose a 100% home health care benefit, you would receive 100% of the daily benefit you selected for services in your home. The choices vary by carrier, but some other examples are 75% or 50%.

Tip:

If it is important for you to stay in your home, you will want to choose 100% home health care options. If you do not have a primary caregiver or live alone, home care may not be in your best interest, since you may require around the clock care and 24/7 home care can be prohibitively expensive for most people.


Benefit Period / Policy Limit

The Benefit Period is usually expressed in years.  This can range anywhere from two years to unlimited years (lifetime coverage).   

This is total amount that the policy will pay after a disability and claim begins.  Common options are 2, 3, 4, 5, 6 years or a lifetime/unlimited policy.  The longer the Benefit Period, the more expensive the premium.

IMPORTANT:  While it is usually expressed as a number of years, the Benefit Period is not a time limit but rather a multiplier that determines a Policy Limit in total dollars that can be paid.  For example:  A $100/day, 4-year policy will not end after 4 years of disability, but after the total Policy Limit of $146,000 ($100 x 365 days x 4 years) is paid out.  This Policy Limit or "pool of money" approach can allow the policy to last longer than the stated benefit period:  If you only need $50/day from the policy in our example above - that's 1/2 the daily benefit - the policy will last twice as long or 8-years.

This is why it's generally better to have a larger Benefit Amount and a shorter Benefit Period ("short & rich") vs. a smaller Benefit Amount and a longer Benefit Period ("tall but poor").

NOTE:  The Policy Limit total dollars will also increase with any Automatic or Pay-As-You-Go Inflation increases.

An unlimited plan is obviously best, but it's also the most expensive and most people can't afford it and don't need it.  Ideally, each person should have 4 to 6 years.  In most of the country a "3x3 Plan" ($3000/month, 3% Inflation, 3-years) is a great base of meaningful, affordable coverage.  (In very high cost areas like the urban Northeast, Florida or California increase the Benefit Amount.)

If you have a family history of extreme longevity or Alzheimer's, consider longer benefits: 5, 6 years or even unlimited benefits.

COMMON TRAP:  Thinking you "need" lifetime/unlimited benefits but then buying nothing because it is unaffordable.  Consider this common objection: "What if I only buy 4 years and then I get Alzheimer's?"  That's the wrong question.  The proper question is: "What if you get Alzheimer's and have NO coverage?!"

FOR COUPLES:  It is strongly recommended that couples consider a "Shared Benefit" plan.  Each spouse's or partner's benefit is added together to make one large, flexible benefit that can be used/shared between the two.  For example two 4-year plans become 8 shared years.


Elimination Period - The "Deductible"

The "deductible" on LTC insurance is called an elimination period. The elimination period is the length of time you must pay for long-term care services before the insurance policy begins to pay benefits. Examples of deductibles available are: 0, 30, 60, 90, 100, 180, 365, or even 730 days. When you choose your deductible you are agreeing to pay for any charges during those days. Generally, the longer the elimination period, the lower the premiums. But remember, the lowest premium is not always the best value.

Tips:

  1. The more savings/assets you have, the longer the elimination period you can get by with.
  2. The younger you are, the more important it is to consider the FUTURE cost of the deductible, since the cost of long-term care is expected to increase with inflation. It may be more cost effective over the long run, to select a shorter deducible.
  3. Choose a policy that only requires you to meet the elimination period once in a lifetime.
  4. Also consider the alternative use of your premium dollars relative to any savings from selecting a longer elimination period. Could your premium savings be reinvested to make up the difference in increased exposure if you have to self-insure for a longer period of time?
  5. Usually, the younger you are the smaller the premium savings because of a longer elimination period, but your future exposure could be dramatic 20 or 30 years from the time of purchase if you assume an extra 60 days of risk (the difference between a 30 and 90 day elimination period; for example).


Inflation Protection

When you purchase long-term care insurance, you will want your policy to stand the test of time. The costs of long-term care are expected to increase just like they have done in the past. In fact, over time, the costs of long-term care can double or triple what they are today. Depending on the state that you live in, you will have several choices of inflation protection options. 

The most common inflation protection options in long-term care policies are: 5% compound, 3% compound, CPI-linked compound (increases match the rate of the Consumer Price Index) and 5% simple (equal) increases. These options automatically increase your benefits over time, but your premiums are designed to stay level for the life of your policy. If inflation for long-term care runs five percent annually, a nursing home that now costs $110 per day would charge more than twice as much a day in 15 years. Without this protection, your policy could cover less than half of your care costs at that time.

- 5% compound doubles the benefit every 15 years - 4x in 30 years
- 3% compound doubles the benefit every 24 years - 4x in 48 years
- (CPI-linked compound is projected to increase on average 2.5% - 3.5%/year and is considered an equal benefit to a fixed 3% option)
- 5% simple will double the benefit in 20 years, but because it's an "equal" increase every year, it takes another 40 years (60 total) to increase 4 times.

  1. Automatic:  This is best but is more expensive to start.  The Benefit Amount increases every year even as premiums are designed to remain level^.  The rate of increase is optional.  Most common: 3% or 5% compound, 5% simple (equal) increases, or compound increases linked to the variable Consumer Price Index (CPI).  Most people today choose a 3% or CPI-linked compound option.  Some plans stop the increases after the benefits double or at age 75, this is less expensive, but also more limited.
  2. Pay-As-You-Go:  Also called "purchase option".  Starts much cheaper, but in order keep your Benefit Amount growing with inflation you must continually pay more and more premium to purchase additional coverage every year or every few years.  Over the long run this will cost more than an Automatic Inflation option, but it is a good option for a very affordable "starter plan".
IMPORTANT NOTE:  If you want your policy to qualify for Partnership asset protection - and you are in a Partnership-participating state - you MUST have an Automatic Inflation benefit based on your age.

Tips:

  1. If you are 61 years or older, 5% simple increases may be sufficient
  2. If you are younger than age 60, compound increases make more sense because it will increase the benefit amount faster and to a greater degree in the long run.

NOTE that most states now offer "Partnership"/Medicaid asset protection when purchasing LTC insurance with a qualifying inflation rider.  The selection of the proper inflation rider based on your age at time of purchase is critical to qualify for this value-added benefit if your LTC care needs outlast your policy's benefits.

The 4 Core Provisions:

1. Benefit Amount - per day or per month.

2. Benefit Period/Total Benefit - number of years or the total dollar amount available.

3. Inflation - how much will the benefits automatically increase every year.

4. Elimination Period - the "deductible" - the number of days of LTC disability that you must pay for yourself before benefits begin.