Archive for November, 2010

Policy Design Decisions: “Pool of Money”

November 23, 2010

This is the first in a series of articles about designing a long term care insurance policy.  Most of what will be presented in this series relates to traditional (as opposed to combination life insurance/long term care insurance, or annuity/long term care insurance) policies.

Policies are most often presented as having a “Benefit Period” of 2, 3, 4, 5, 6, 7, or 10 years or unlimited.  While pretty much standard practice, this is confusing to consumers and to many insurance brokers/agents.

The  number of years in a Benefit Period is irrelevant for almost all modern policies.  What you really have is a pool of benefit dollars that is equal to the maximum Daily Benefit Amount multiplied by 365 (days in a year), then multiplied again by the number of Benefit Period years.  If instead of a maximum Daily Benefit Amount, the policy has a maximum Monthly Benefit Amount, then the pool of benefit dollars is equal to the maximum Monthly Benefit Amount multiplied by 12, then again multiplied by the number of Benefit Period years.

For example, a policy with a $200 maximum Daily Benefit Amount and a five year Benefit Period will have a $365,000 “Pool of Money” (sometimes called the “Maximum Benefit Amount” or “Pool of Benefit Dollars”).  Phew!  I will just refer to it as the Pool of Money from now on.  So why does the “Pool of Money” amount do a better job of communicating how much benefit the policy provides than does the number of years in the Benefit Period? 

1.  People often think that a policy with for example, a five year Benefit Period, expires at the end of five years or alternatively, after five years of receiving benefits.  The former is not correct (policies remain in-force for as long as the premiums are paid).  The latter may be true, but usually is not.  More on this next.

2.  The Daily or Monthly Benefit amounts are maximums.  You are reimbursed for what you spend on qualified care up to these limits.  Let’s continue with our example of a $200 maximum Daily Benefit Amount, a five year Benefit Period, and a consequent $365,000 Pool of Money.  Let us further assume that seven years after your policy is issued, something happens and you go on claim for an indefinite period.  If you continue to need care, but only spend $100 per day (perhaps 4.5 hours per day of Home Care), your benefits would continue for ten years.  In other words, your policy benefits continue to be paid until your Pool of Money has been used up…assuming, of course, that you continue to qualify.

3.  For purposes of simplicity, Number 2 above assumes that your policy has no built in inflation protection.  The stated Pool of Money dollar amount is always applicable to when the policy is first issued.  The maximum Daily/Monthly Amount AND the Pool of Money dollar amount will both grow per the specifics of any selected inflation protection option.  As an example, at 5% annually compounded, an amount will double every 14.5 years.  So with our  above policy example, in 14-15 years the $200 maximum Daily Benefit and $365,000 Pool of Money will double to $400 and $730,000 respectively.  This is just a teaser about policy inflation protection.  I will go into more detail about inflation protection options in a future issue.

The Pool of Money concept applies to most, but not all long term care insurance policies.  A small number of older policies and just a few on the market today, stick to the number of years (or sometimes days) specified in the Benefit Period.  Unless I state otherwise, any policy that I write about (or we talk about individually) will be structured with a Pool of Money.

Note: A few long term care insurance policies are starting to appear with only a specified Pool of Money, and not a Benefit period.  This is a step in the right direction…less for me to explain and less for you to understand.

© Raymond Smith, The Long Term Care Specialist, 2010

A Better Way to Self-Insure

November 23, 2010

People sometimes tell me they will self-insure (use existing assets) against the risk of needing long term care services.   Individuals with a net worth of at least $1,500,00 (or couples with at least $3,000,000) could probably pay the costs of long term care provided: 1) most of the assets can easily be converted to cash and, 2) there is no desire to leave anything for loved ones. The Pension Protection Act of 2006 (with long term care insurance provisions effective January 1, 2010) has made combination annuity/long term care and life insurance/long term care policies more attractive.  To be sure, these combination policies only work for people who have the wherewithal to reallocate between about $50,000 and $150,000 of assets per person ($100,000-$300,000 per couple).  Note that I said “reallocate” rather than “spend”.

Let’s start with the combination annuity/long term care insurance policy.  These policies are similar to normal deferred fixed annuities except for the attached long term care rider.  Policy issue ages are typically about age 40 to age 80.  The dollars that are moved to the annuity are usually leveraged by a factor of two or three times for long term care.  As an example, $100,000 placed in the annuity will provide a $200,000 to $300,000 pool of long term care benefits.  The amount paid into the annuity is guaranteed.  Thus, you are guaranteed the right to withdraw either the original amount paid into the annuity (after a surrender period), or use the multiplied long term care pool of benefits for long term care services.  The annuity usually includes a growth rate that is consistent with current interest rates.  Medical underwriting is still used to qualify applicants, but is generally less stringent than for traditional long term care insurance.

Combination life insurance/long term care insurance:  This is the exciting newly popular product.  Imagine an insurance policy that guarantees:

1. If you die, your beneficiary(or beneficiaries) get a death benefit equal to about 1.5 – 2.5 times the single premium or,

2. If you need long term care, you have a pool of benefit dollars equal to about 3.0 – 6.0  times the initial single premium (the actual long term care leverage factor depends upon age, gender, and medical history) or,

3. You are guaranteed the full return of your original premium if you later decide you want your money back more than you want the insurance.

As with any insurance policy, there are many details that must be checked before buying a combination policy.  This article is merely an overview of the subject.  It is worthy of note that before selling a combination product, an insurance broker or agent must have completed state-required long term care insurance training in addition to normal insurance licensing.

© Raymond Smith, The Long Term Care Specialist, 2010