Financial Planning Blog

Whether or not to purchase a long term care insurance (LTCI) policy is one of the most important and difficult retirement planning decisions. In Part 1, the costs and risks of potentially requiring long term cares services were laid out. These risks should serve as motivation to at least consider long term care insurance. However, as you will see from the following brief summary, LTCI policies are relatively complex with many choices. It is difficult enough to decide on the options for your medical insurance policy that will be in force for only the next year or so. Making the many trade-offs necessary in selecting a LTCI policy that will likely be used far in the future, if at all, is somewhat overwhelming.

Here is a quick summary of key LTCI provisions and features. This isn't all there is to know, or even all you need to know. It's a start however. Links for additional information are at the end of the article.

Benefits

• The daily benefit is generally the maximum amount the insurance company will pay for nursing home care per day. (The maximum benefits for home or other care may be lower.) Daily benefits of $100-250 per day are common. This may also be specified by the week or month. It is stated in today's dollars, but will grow with inflation if you purchase inflation protection.
• The benefit period is how long the benefits will be paid. It is usually from 1 to 5 years, but can be unlimited.
• The lifetime benefit is the total amount of insurance, and is calculated by multiplying the benefit period times the daily benefit. For example, a $100 daily benefit for 5 years will give you a total lifetime pool of benefits of $182,500 (100x365x5). A $250 daily benefit for 2 years will give you the same lifetime benefit total of $182,500 (250x365x2).
• Which is better, the "long-skinny" policy ($100x5 years) or the "short-fat" policy ($250x2 years)? If the cost is close, the short-fat policy is preferable. This is because if you don't use the entire daily benefit, the short-fat policy will stretch out and become a longer policy. For example, if you only use $100 of the $250 per day maximum, the policy will last five years, just like the long-skinny policy. However, if you have a long-skinny policy with a $100 daily limit, but actual daily expenses of $250, you still will only be reimbursed $100. You may have significant out-of-pocket expenses for a considerable time, and still die without exhausting your full insurance benefit.
• The most common method for benefits to be paid is under the expense incurred method. Like most medical insurance plans, it pays the lesser of the amount billed or the policy limit. Some policies use the indemnity method that pays a set dollar amount per day once you start receiving services. This is simpler, and generally maximized benefits paid earlier.

Benefit Triggers

• This term refers to what must happen for the insurance company to start paying. Benefit triggers usually refer to the inability to do two or more activities of daily living (ADLs) without assistance, or cognitive impairment. (ADls include bathing, eating, dressing, toileting, continence, and transferring.)
• The concept of benefit triggers may sound simple enough, but check the policy description carefully. For example, some policies state "hands-on" assistance be necessary before eligibility for benefits, while others are more liberal and require only "standby" supervision.

Elimination Period

• Think of the elimination (or waiting) period as a type of deductible. It is the period of time you must wait after hitting the trigger before benefits start. Insurance companies will measure this period differently-some will demand continuous days of care, others will allow days of intermittent care to be accumulated. A longer elimination period may lower your premiums significantly.

Inflation Protection

• Most advisors consider inflation protection a must for LTC policies. What sounds like a healthy benefit today will likely be totally unsatisfactory in 15+ years. Consider that the $200/day average nursing care room today will be about $400/day in 20 years, assuming only 3.5% inflation.
• Inflation riders may be either simple or compound, and generally assume a 5% inflation rate, instead of following some index such as the CPI. Although a simple inflation adjustment may be adequate, don't under estimate how big a difference it can make. A $200 daily benefit increased by 5%/year using a simple adjustment would pay $400 after 20 years. The same $200 daily benefit adjusted under a compound inflation rider would pay $530 after 20 years-almost a third more.

Services Covered

• You want to make sure the policy covers a wide range of services you may require in the future. Is home care covered, or only services provided in a nursing home or other facility? Is assisted living and other services like adult day care, respite care, hospice and homemaker services covered? Are there licensing requirements for the service providers?

Guaranteed Renewable

• Most policies are "guaranteed renewable", meaning that the insurance company cannot refuse to renew coverage for any reason other than non-payment. Your rates can still go up, individuals cannot be singled out-the rate increase must be for an entire class of insured (e.g. all policies in Idaho).

Payment Options and Non-Forfeiture Provisions

• Most policies are paid for by "continuous premium", meaning you pay premiums until benefits are triggered. Another method is the "limited payment option" where you pay premiums for a set number of years-e.g. 10 or 20 years, or even a single payment. After the last payment the policy cannot be cancelled. These policies are obviously more expensive to start, but the fixed payment is preferable to some.
• Many people are concerned about the potential of paying significant premiums, only to lose the policy in the future if they cannot continue to make the payments. To mitigate this risk, most policies include some sort of non-forfeiture provision which will allow you to keep some level of benefits even if you stop making payments. These non-forfeiture provisions are structured in different ways, so you'll want to understand them and how they impact the cost of the policy.

If you are interested in more information on long term care and long term care insurance, go to the National Clearinghouse for Long-Term Care Information sponsored by the U.S. Department of Health and Human Services. You can also download a useful planning guide. There are also a good summary of tax incentives for purchasing long term care insurance and paying for long term care at the American Association for Long-Term Care Insurance.

In Part 3 we'll explore why planning for the financing of long term care is such a difficult decision.