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.
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%.
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.
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.
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.