Key Financial Variables in a Long-Term Care Insurance Policy

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Key Financial Variables in a Long-Term Care Insurance Policy

These are the key terms and concepts involved in putting together a long-term care (LTC) insurance policy. Let’s revisit them with some observations that might be helpful in particular situations.

Maximum Daily Benefit

This is the most important policy design choice. It should be based on today’s cost of a nursing home of your choice—do not use ballpark or average figures. Taking account of your expected out-of-pocket contribution, if any, you and your insurance advisor can determine the daily benefit you need.

With virtually all policies now sold, any portion of the daily benefit that is not used remains available. For this reason, it is usually far better to have a higher daily benefit than a longer benefit period.

In fact, a premium dollar is most often better spent on buying the highest possible daily benefit than on any rider or option—except for inflation protection. Statistics indicate that the average nursing home stay is about three years. It is better to cover the full costs for three years than partial costs for a longer term, as the longer term most likely will not be needed. If it is, then other assets can be used or Medicaid will apply.

Benefit Period

The benefit period usually serves only as a "multiplier" of the daily benefit amount in determining the total benefits available from a policy. A three-year benefit period, for example, usually does not mean that all benefits must be paid within three years. (This is especially so with newer policies.)

Instead, it means that the policy will pay, at most, the daily benefit (e.g., $100) multiplied by the number of days in three years (1,095), or $109,500.

If any of that sum has not been used after three years, it remains available. That is why the benefit period is of much less importance than the choice of daily benefit amount.

Elimination or Waiting Period

The elimination period or waiting period is the number of days you must wait after qualifying for LTC policy benefits until actually becoming entitled to payment from that point forward. Remember, however, that expenses during the waiting period must be paid by the insured. They are like a deductible. For example, with a thirty-day waiting period, the insured must receive long-term care thirty days at his or her own expense before the insurance company starts to pay benefits going forward.

The length of the elimination or waiting period is an important choice. It has a predictable effect on the policy price—longer period, lower premium, and vice versa. For this reason it might be tempting to choose a long elimination period for the sake of affordability.

Since the waiting period also contributes to the financial burden, you should be prepared to assume expenses until benefits begin if you make a claim. Would you be able to afford the cost of care—at prices twenty years from now—for ninety or more days until benefits begin?

While it might seem counterintuitive, the budget-conscious should consider choosing a shorter elimination period and compromising in other ways to hold the premium down.

An insurer may use one or more of the following methods to determine what a day is in the elimination period:

• Certification by a licensed healthcare practitioner
• Payment for qualified services by the insured
• Under certain circumstances, care provided by a family member may qualify.

Inflation Protection

Inflation protection is so important that it should be considered carefully in the policy design process. The economic value of a policy without inflation protection will erode, so that even a more-than-adequate daily benefit today will leave substantial costs uncovered after only ten to fifteen years. The practical value of such a policy could be nil.

Inflation protection adds so much to a policy’s cost that the consumer should look at this option early in the decision-making process. For some of us, once the inflation benefit is included, other options and choices might become unaffordable. Because of its expense, older policy buyers sometimes do without the optional benefit and use an alternative approach in dealing with inflation.

Those around the ages of seventy to seventy-five might find it more effective to select an extra-large daily benefit initially (if they can qualify at all), forgo the optional protection, and just let inflation run its course.

Indemnity LTC Insurance Has Some Advantages

In certain circumstances an indemnity policy might be more valuable than a reimbursement policy. These situations commonly involve home care arrangements or a need to cover expenses that a reimbursement policy will not necessarily pay for.

The indemnity form of coverage pays the full daily benefit directly to an insured who qualifies, with no questions about expenses. It’s his money. The setting in which LTC is provided does not matter. So there are no decisions to be made regarding coverage of home or community care in the purchase of an indemnity policy.

How the Home and Community Care Benefits Are Calculated

This is an important issue, but very easy to overlook. Policies typically state benefits as "daily" amounts, and that reimbursement policies using the popular "pool of benefits" approach will hold unused daily benefits for future use.

But even these policies do not necessarily pay more than the specified maximum for any single day. That could leave you with uncovered expenses on high-cost days.

Some policies, however, state a weekly benefit maximum (seven times the daily maximum). In that case, covered expenses can be lumped together on a weekly basis as well. Benefits not used on one day of the week are available to cover the high-cost days that week.

This is a desirable policy feature. Of course, it is not free. Sometimes it is offered as an extra-cost option; other insurers that allow weekly "expense lumping" build the feature and its cost into the basic policy.