It’s a rainy Saturday morning here in San Diego. The local weather services have been whipped into an absolute frenzy predicting the mother of all storms and 100 year record setting cold temperatures for the local area. There’s no question that this is a big Arctic system and that it’s raining outside, but I see some blue in the sky and I’m just not getting the whole natural disaster vibe. I believe they’re taking the brunt of this system due east of us. With this backdrop, it seems like a perfect time to crank out Part 2 of our blog series on Long Term Care Insurance (LTCI). We’ll take a look at the types of policies, what is covered and what we need to think about when evaluating various policy options.
Types of Policies
LTCI is usually available as a standalone product or on an employer sponsored, group insurance plan. The majority of policies are sold by insurance agents to individuals/couples. There are many varieties and packages available. Where is the care to be received? Policies can be designed to pay benefits only when the insured is in a facility (skilled nursing and/or assisted living) or only when care is received at home, or a comprehensive policy that pays regardless of where the care is provided.
Policy Features
Benefit amount – Amount the policy will pay; sometimes referred to as the daily benefit (DB) or maximum daily benefit (MDB). Most LTCI policies are reimbursement policies. This means the insurance pays the actual cost of care up to the maximum daily benefit.
Daily, weekly or monthly? – The manner or formula that a policy uses is important and can provide either serious constraints or valuable flexibility for clients. Daily benefit policies typically have the lowest premium but provide the least flexibility for care at home. These policies will not reimburse more than the daily limit for care on any given day even if the expenses are actually higher. Many clients enjoy enhanced flexibility with a weekly or monthly home care policy. This is a good solution when little or no care is needed on some days and a lot of assistance is needed on others. For example, a daily limit policy with a benefit of $150.00 per day will never pay more than $150.00 for any given day. A weekly policy provides seven times this amount or $1050.00 per week. A monthly policy provides 30 times the daily benefit or $4500.00. If the care requirements are widely different during the week (for instance, if a client only needs 2 hours help with a shower and breakfast on 3 days, but needs 10 hours per day for the other 4 days so the family caregiver can go to work, then a weekly or monthly limit is the way to go). This option allows a client to borrow from days when little or no care is needed to help pay for days when a lot of care is required. The only difference between a weekly or monthly policy is simply how often the pooling resets.
Elimination Period – Also called a waiting period. Similar to the deductible found in an auto or homeowners policy. Please bear in mind that while a longer elimination period (deductible) may reduce premium costs, it also increases the amount of money the policyholder must pay before the policy begins paying benefits.
Benefit Period- Policies are available with an unlimited or lifetime benefit that can never run out, once a claim begins. They are also available with limited benefit periods for lower premiums. Options generally range from 2- 10 years. While these limited benefit periods are expressed as a unit of time, most contracts use the benefit period as a multiplier. For example, the total benefits are determined this way: daily benefit amount X 365 days X # of years in the benefit period = total lifetime benefit. In this example, $150.00 per day x 365 days = $54,750 X 10 year benefit period = $547,500 total lifetime benefit. If the claimant received $150.00 in long- term care services each and every day, their policy limit would be exhausted in 10 years. How long would it last if the insured only used $75.00 in LTC services each day? 20 years. And if the services weren’t provided every day, it could last longer. Before deciding on the length of the benefit period, please remember that while most nursing home stays are relatively short in length, there may be much longer periods prior to admission, for example at home or in an assisted living facility.
Inflation Protection – Very important. I’ve never seen or heard a client complain who purchased this added layer of protection. Adding the inflation rider allows the insured’s benefit amount to keep pace with the ever increasing cost of healthcare and long term care. Usually a buyer can select from the following menu of inflation protection:
- Simple Inflation – A typical annual increase of 5% is based on the daily benefit amount originally purchased. Using 5%, simple inflation doubles the daily benefit and the maximum total benefit every 20 years.
- Compound Inflation – Annual increase is based on the daily benefit compounded annually. Using 5%, compound inflation doubles the daily benefit and the maximum total benefit every 15 years.
- Guaranteed Purchase Option – The premium starts much lower than with an automatic inflation option. The insurance carrier then offers a guaranteed option to periodically buy more coverage in the future, typically every 1 – 3 years. Premiums increase with each purchased benefits increase, and the added coverage is priced at the insured’s current age, thus adding to the increased cost.
Inflation protection is so important that it must be offered to policy applicants. It’s hard to say which type is best for each individual applicant. A general consensus is that compound inflation is the most appropriate protection for applicants under age 70, because the benefits grow the fastest over time.
Guaranteed Renewable - It is mandatory that LTCI policies be guaranteed renewable. This means the insurance carrier cannot cancel the policy or change the benefits as long as premiums are being paid. This does not mean the premiums are guaranteed to remain the same (fixed). LTC insurance companies can raise rates if they are needed to pay claims and are approved by the regulators. The rate increase is filed based on the experience of a series or entire class of policies, unlike an auto policy which sets rates based on an individual’s personal claims experience.
Also, please remember LTC insurance policies do not annuitize. In other words, with an annuity, the holder pays in for several years and then turns on the spigot and the policy pays out. An LTC insurance policy is more like your homeowner’s policy in this regard. It pays out as long as you continue to pay the premiums.
Questions To Help Evaluate Various Policies
- What level of care (skilled vs. unskilled) is covered? Some older policies that cover only skilled care would not cover custodial/companion services unless skilled care was received first. New policies must cover all levels without the prerequisites.
- Can I receive care at any licensed facility?
- Does it cover in-home care?
- Does in-home care need to be through an agency or can I hire private as well?
- Is an adult day care facility covered?
- Is care covered in an assisted living facility?
- What are the benefits per day for home care? Assisted living facility? Alzheimer’s facility? Adult day care?
- When do benefits start and how are they triggered?
- Is there a waiver of premium benefit?
- What type of inflation protection are you comfortable with and willing to buy?
- Tax qualified?
- Is there a couples discount if they both purchase a policy from the same carrier?
- How much premium can you afford to pay on a monthly and/or annual basis?
- What waiting periods are available and exactly how do they work?
Long-term care insurance is an affordable strategy for managing the potential financial burden of long term care needs. Unfortunately, talking about long-term care is something most people avoid. Most of us don’t want to think about it, and we most definitely do not think it could possibly happen to us. Thus, the elephant in the room syndrome is ever present, yet again. As I mentioned in Part 1 of this series, please make a decision to explore and examine this critical component of long-term care protection. The consequences of not doing so can be devastating, and after all, it’s you and I and our loved ones that we’re talking about here. I think we all deserve it. At least avail yourself of the opportunity to make an informed decision that you can be comfortable with going forward.
Thanks for staying with me on this. I know it can be a bit tedious, but I believe it is vitally important to get this information out to the community, in whatever way possible. In the final Part 3 of this series, we’ll look at new and innovative developments, pricing, and the current state of the LTCI market.
Tags: assisted living, custodial care, elimination period, Home Care, inflation protection, long term care, long term care cost, long term care insurance, ltc, skilled nursing
