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LTC Insurance Plan Design
Plan design is one of the most difficult aspects when providing clients with long term care insurance.
In this section we explain the parts of a policy so you can make an informed decision today that will make sense in the future when you use your insurance.
There are five main factors that will determine your premium:
- Age when you start
- Daily or Monthly Benefit (how much you can receive per day or month from the insurance company)
- Benefit Period (how long the Daily Benefits pay, 2,3,4,5,6 years, etc)
- Inflation Protection (increases the Daily Benefit every year, choice depends on age and financial plan)
- Elimination Period (the deductible or how long you pay, usually 30, 60 or 90 days)
Riders and discounts can effect the premium also, more about them later.
1. Age
The age when you start is what the rate will be based on. If you have a birthday coming up soon you might consider insuring at least by your birthday to get the younger age lower rate. This difference becomes more significant the older one is when they start.
Most of the larger companies will give you a grace period of 30 days start counting on the birth day to enable you to claim your previous age. If your 55th birthday is on May 14th you count 30 days including the 14th, before you'll have to pay the next age rate (55), that is you'll be able to get the age 54 rate as long as the application is dated no later than June 13.
MY AGE _____
2. Daily/Monthly Benefit
First find out how much it cost for: 1. home care, 2. assisted living, and 3. nursing home care in your area. In many areas of the U.S. average care can cost $100 for 4 hours of home care, $4500 per month for assisted living, and $200 per day ($6,000/month) for nursing home care. Most companies base their premiums on a Daily not Monthly benefit because most nursing homes charge a daily rate.
Most people considering LTC insurance will have some income and often will design a plan with a co-payment to get a lower premium. For example, one client in New Jersey knows it can cost $300 per day for nursing home care but they also know that they can afford $100 a day out of pocket, so they got a plan with a $200 a day benefit.
MY DAILY BENEFIT _____
3. Benefit Period or Term
The $64,000 question! How long will you need benefits for? The best we can do is guess.
You'll want to consider your current health, your health history, your genetics (longevity or not and who), statistics and averages. If your family tree shows Alzheimer's or dementia or crippling arthritis occurs you might consider a longer benefit period than if your genetics lean towards heart disease and cancer (not longevity).
Nursing home statistics not including home care or assisted living show an average of 2.2 years of care for men and 3.5 years for women. The average long term care insurance policy claim is 3 years.
Insurance companies differ on the benefit periods offered. The most common are 2, 3, 4, 5 years (variations by state and company may offer 1, 7, 10 years and lifetime/unlimited). An average man may want 2-4 years of coverage and an averge woman 2-5 years.
If we are just considering averages and you happen to live an average lifespan and need an average amount of long term care it would look like this: average cost of $200 per day for 3 years (1095 days). You would need $200x1095=$219,000 in insurance.
MY BENEFIT PERIOD _____
4. Inflation Protection
The three most common options for Inflation Protection are:
- None
- 5% Simple/Equal
- 5% Compound.
What inflation protection does is increases the Daily Benefit on the anniversary of the policy. If you buy a $150/day policy with no inflation protection it stay at $150. If you buy Simple then the $150 will double to $300 in 20 years. If you buy Compound then the $150 will double in 14.5 years.
Since the insurance company is paying you higher Daily Benefit in the future with Compound it will mean a higher premium policy than Simple.
The rule of thumb is if you are 65 or older then consider Simple and if under 65 Compound. But also consider the longevity factor and your current health. Someone 50 years old will have a lower premium than someone 60 so they can more easily afford the higher cost of the Compound and they are more likely to enjoy the benefit of paying more to double the benefit faster (14.5yr) than a person over 65.
MY INFLATION PROTECTION _____
5. Elimination Period
The Elimination Period is the deductible in long term care insurance. It is a time deductible or how long you pay for care before your monetary benefits start (other policy benefits may start on the first day of your claim). This is considered the "hidden" cost of long term care insurance.
Most companies offer Elimination Periods (EP) of 30, 60 or 90 days. The longer the EP the lower the premium. If you have a 90 day Elimination Period and care cost you $150 per day, you are going to end up spending 90x$150=$13,500 out of pocket before your insurance starts. The EP must be factored in as part of the cost, part of your premium. If you have a future out of pocket of $13,500 and you go on claim in 15 years, that's adding $900 a year to your cost.
Most companies have a rider called a Home Health Care EP Waiver (HHC). What this means is that with the waiver your monetary benefits start on the first day of home care rather than on day 30, 60, or 90. The waiver increases the cost of the premium 10%-15% depending on the company. It would have to make sense with your financial plan to add the waiver. If the waiver cost you $400 per year, it would take over 33 years to have paid $13,500. Also with the HHC, for every day of qualified home care you are reducing the facility EP by one day, so that after (30, 60, 90) days of home care you would no longer have a facility EP. The EP is a one-time requirement.
Our average age/benefit clients often choose a 90 day EP with the HHC. We have high net worth clients who want a high deductible, for example 180 days. They're saying "I can handle a $50,000 LTC bill, I'm worried about the $500,000 LTC bill."
MY ELIMINATION PERIOD _____
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