A long-term care insurance policy is one way to pay for future long-term care costs. There are 5 types of long-term care. Without the proper planning you may not be able to decide which type of care you want. Instead you could be forced to spend down your assets and where you go could be dictated by the state. The fast growing alternative to this is to put a long-term care insurance policy in place so that you can decide when, where and what type of long-term care you receive.
The hardest part of any insurance policy is understanding the ins and outs of the policy itself.
Facility Only vs Comprehensive Coverage
The first decision you need to make is in regards to why type of long-term care services you would like covered. Most people want to stay in their home as long as possible so this isn’t much of a decision. Depending on your family and personal lives your situation may be different. A facility only policy will cover services in a nursing facility, assisted living facility and hospice. Any other type of care is not covered by a facility only policy. A comprehensive policy will cover facility coverage as well as home health care and adult day care.
Things to look for:
- With a facility only policy look for a bed reservation benefit that will help cover the costs of reserving a bed in one of these facilities. This is important due to sometimes long waiting lists at the better facilities. Also, look for a waiver of premium so that premiums will no longer be due while you are receiving benefits.
- With a comprehensive policy look for emergency response/ambulance benefits to help cover the costs of medical personal needing to come to your home and/or transport you to a medical facility. Also, look for an alternate care benefit which would help cover costs associated with medical equipment and home modifications as a result of receiving care in your home. Finally, don’t forget the waiver of premium which means no more premiums are due while you are receiving benefits.
Elimination Period
This works similar to disability insurance, where you need to be under a doctor’s care for a certain period of time before you are eligible to receive benefits from your long-term care insurance policy. Common elimination periods are 30, 60, 90 or 180 days. The difference with long-term care insurance is that it is common to not need care every day, at least initially. This means that only the days you need care would count towards your elimination period. However, there are variations between policies where some will only count the specific day that you receive care while others will count 7 days towards an elimination period if you use a minimum of one day of care within those 7 days.
Things to look for:
- With home based care, you will usually have the option of adding a waiver of elimination to the policy so that you can begin receiving home based care as soon as you qualify. The elimination period would then only apply to facility coverage.
Pool of Money
Unlike disability insurance, long-term care insurance has a pool of money available. What this means is that you’re policy will cover a certain dollar amount determined by two factor: your daily benefit amount and your benefit period. This will determine your total pool of money that is available. If you use less than your daily benefit amount on any given day then it could extent your benefit period.
For example, if you have a $300 per day daily benefit and a 5 year benefit period you would pool of money would be $547,500 (300 x 365 x 5). If you only used $200, the other $100 of your daily benefit would stay in your pool of money so you could technically collect benefits beyond your 5 year benefit period because you’d still have money left over at the end of 5 years.
Things to look for:
- Daily benefit amount is the maximum dollar amount you can collect/receive on a given day. It is usually in increments of $10 from $50 to $500 per day
- Benefit period is the amount of time benefits are estimated to last. It is usually available for 2, 3, 4, 5, 6, 8, 10 and lifetime periods.
- Keep in mind that costs of long-term care vary greatly from location to location. It is important to understand what the costs in your geographic location are for the services you are looking to receive.
Inflation Protection
Due to the quickly rising costs of long-term care, inflation protection is vital to having your policy provide the benefits that you are looking for and expect. Most long-term care insurance policies will offer the choice between no inflation protection, simple inflation protection and compound inflation protection. For most people the compound inflation protection is a must. As you get older (70+), it is not uncommon to go with a simple inflation and maybe a higher daily benefit. 5% is usually used as the inflation amount but it can vary from policy to policy and company to company.
For an example, let’s say you have a $300 per month daily benefit. With 5% simple inflation your daily benefit would be $300 in year 1, $315 in year 2, $330 in year 3, $345 in year 4 … $435 in year 10. Whereas with 5% compound inflation your daily benefit would be $300 in year 1, $315 in year 2, $330.75 in year 3, $347.29 in year 4 … $465.40 in year 10. If it’s a benefit you might not use for 15, 20 or 25 years down the road the compound inflation protection will really pay off. The extra $30 per day in benefit after 10 years would mean an extra $10,950 for each year of your benefit period.
Partner Discounts
The best way to save on long-term care insurance is partner discounts. Most insurance companies will offer discounts of up to 40% on each policy if both you and your partner have a policy with that company. A lot of companies will do a shared pool of money in these types of policies. What this means is that if you each had a 5 year benefit period, the pool of money available to you would be equivalent to a 10 year benefit. Then one of you could use more than 5 years of benefits but it would reduce the money available to the other partner.
The downside to this is that one partner could essentially use up the whole pool of money. In the last year or two a few companies have started to offer a different version so that if you purchase a 5 year benefit period, not only would each partner have their own 5 years worth of benefits but there would also be a separate 5 year benefit pool put aside that either of the partners could use.
It is important to look at the financial strength of the insurance company with which you choose to place your coverage to make sure the coverage will be there when you need it.
Long-term care insurance is not cheap but neither are long-term care services. Would you rather have your hard earned money go to a medical facility and then let the state decide your fate or would you rather have the choice in the type of care your receive and leave a legacy to your kids and grandkids?
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Hi Evolution, What a timely article. I am investigating a ltc policy for myself and my husband right now. Your article really breaks down the issues. Got what I think is a pretty fair quote from my alumni assoc. Great job, Barb
how do long term coverage companies determine which pool a certain individual will be a part of?
it always scares me to think i would be in a pool that might not have enough money in it.
Ah. Good ol Inflation. You would certainly need a hedge against that.
Being young and Canadian, most of my benefits are covered by what the nation freely provides, so I never really had to look into a lot of complex things beyond basic injuries. And even then those are incredibly rare, given my sedentary lifestyle. I may look into it once I reach my middle ages, however.
From an investment perspective, I always considered insurance like buying stock options. In buying them, you’re saying to yourself that you’re going to have a horrible health encounter soon, whereas the seller is saying you’re going to remain nice and healthy. So having an options-investor mindset does kind of help when deciding on insurance policies like this.
Or maybe I think too strangely on this sort of thing.
Pool of money always scares me. my guess is 80% of the time you will be fine but i would almost rather be 100% certain that everything will be OK..
the flip side is with a pool in theory, the cost should be less.
I don’t have LTC coverage but since I’m 47, I will be thinking about it. My parents have a great policy and fortunately have not used it.
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