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LTCI: Finding A Good Fit

First things first: in order to feel comfortable enough with long-term care insurance to take the plunge and buy a policy, you need to know how it works.

The basics of long-term care insurance policy design are fairly straight forward.  You might ask yourself these questions:

  • How much money do I want available per day, or each month?  This is called the daily benefit amount (DBA), or, multiplied by 30 days, the monthly benefit.  You select a range from $50 to $500 per day.  What you are looking at here is the highest amount you will receive per day (or month) while you are receiving care.
  • How long do I want my benefits to last once they start? This is called the benefit period and ranges from ‘lifetime’ or ‘unlimited’ down to two years.  This benefit period is not limited by time but is instead a multiplier used for generating a total lifetime benefit or maximum pool of money – see below for more details.
  • How much of my maximum daily benefit amount will I want used for home and ‘community based’ care?  Your options are 100%, 75% or 50% and this will be what your policy will pay towards these covered services.  The most common choice is 100%.
  • Do I want my benefit to grow over time?  This is an inflation option – very strongly recommended.
  • How long am I willing to wait to receive benefits? This is the elimination period, rather like a deductible.  To help keep the premium payments affordable, you can choose to have the benefits begin after 30, 60, or 90 days of care – or longer.  The longer the wait, the lower the premium.  You are using other assets to cover the gap.

To recap: think of LTCI as buying a big bag of money that can be tucked away and dipped into at a later date.  Some carriers talk in terms of ‘buckets’ or ‘pools’ of money.  It all comes down to the same idea.  Your bag, or bucket, or pool, represents a daily dollar amount – say, $150 – multiplied by your benefit period.  Suppose your benefit period is five years.  Five years means 365 days per year, multiplied by 5, or 1,825 days.  This comes to $54,750 per year towards your care, for five years – a total of $273,750.  The important number is really the total benefit dollar amount, not the five years.  You have created a $273,750 fund or pool of money to use for your medical and custodial care in the future.

The policy will last as long as you have money in the account.  You may have chosen a five-year option, but your policy can last much longer than that.  It works like a checking account; the care you receive is paid for by your insurance company from your ‘bag’ or ‘pool’ of funds.  If you should need home care, for example, and the rate for that service is $120 per day rather than the $150 per day that you purchased, you are not going to lose that $30 per day difference.  The insurance company will pay the $120 per day, with the remaining $30 per day staying in your account.  And suppose you only need the full $150 per day benefit  four days per week instead of seven?  The $450 not spent per week stays in your account and can be used later. 

Another thing to keep in mind is that you will want to purchase the inflation protection option mentioned above when you buy your coverage.  Given that you will likely not need the care for ten or more years and since you are working with a specific dollar amount per day – that $150, for example – inflation will take its toll.  What $150 per day buys today may not be enough ten years from now.  A 5% simple inflation option (suggested for those of us over 65) means that the $150 you started with grows to $225 per day in ten years, and doubles to $300 per day in twenty years.  A 5% compound inflation option (suggested for those of us under age 65) means you will double your $150 to $300 in 14.3 years rather than 20 years.

Time for a break.  We will take this up again tomorrow…

(Special thanks to Tori W. Reid, PhD, on the basics of LTCI policy design)

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