Archive for March, 2012

The Benefit Period Simplified

March 16, 2012

True or False? “A long term care insurance policy’s Benefit Period determines the maximum length of time that benefits can be received.”  What do you think?  This statement is mostly false.  

Almost all modern long term care insurance policies have two benefit limits.  1) The Total Benefit Amount, or “Pool of Money” determines the largest total benefit payout over the life of the policy.*  2) The Maximum Monthly (or sometimes Daily) Benefit limits the rate at which benefit dollars may be paid out.  Here is the basic formula:

Maximum Monthly Benefit multiplied by Benefit Period (in months) = Total Benefit Amount (or “Pool of Money”).  When designing a policy, if we increase either the Maximum Monthly Benefit or the Benefit Period, we also increase the Total Benefit Amount.  Looking at the basic benefit formula in a slightly different way, we can see that:

   Total Benefit Amount divided by Maximum Monthly Benefit = Benefit Period (in months).

   Example: $360,000 Total Benefit Amount divided by $6,000 Maximum Monthly Benefit = Benefit Period of 60 months, or 5 years.

In the above example, is it not true that 5 years is the longest time that policy benefits can be paid out?  No, it is not true.  Actually 5 years is the minimum payout time.  Bear with me.  Let’s assume we are talking about a reimbursement (by far the most common) policy instead of one with a pure cash benefit.  What if you only needed about 4 hours per day of home care at $25 per hour?  That would equate to $3,000 per month for which you would be reimbursed.

Continuing the example: $360,000 Total Benefit Amount divided by $3,000 per month actually spent on care = policy would pay $3,000 monthly benefits for 120 months (or 10 years).    If you are spending less than the Maximum Monthly Benefit, your benefits will continue flowing longer.  On the other hand, if you are spending at least the full Maximum Monthly Benefit on care every month, your Total Benefit Amount will last exactly the number of months in your Benefit Period.

This would be a good time to mention cash benefit policies.  The leading (and perhaps only) pure cash long term care insurance policy available today is offered by the MedAmerica Insurance Company.  Unlike the more traditional reimbursement model, you do not need to submit paid invoices for qualified care.  Instead, you receive the full monthly benefit for each month in which you are eligible.  This type of policy is more flexible, but the cost of this flexibility is a higher premium.  RE “This statement is mostly false.” near the beginning of this article: With a pure cash policy the Benefit Period is both the maximum and the minimum number of months for which you can receive benefits.  This is because the Maximum Monthly Benefit is paid until the Total Benefit Amount has been exhausted.

BOTTOM LINE: Please call me (after 4/1/2012) if I have caused you further confusion.  I can better explain the Benefit Period concept during a direct conversation.

Note*.  I have not considered the impact of inflation protection in this discussion in order to keep things simple.  Inflation protection generally increases both the Maximum Monthly (or Daily) Benefit and the Total Benefit Amount.

Disclaimer: Actual policy language, rather than the contents of this eNewsletter always takes precedence.  Long term insurance policies vary from company to company & within the same company.  Raymond Smith, The Long Term Care Specialist, does not give legal or tax advice.  Consult your tax advisor or attorney for these matters.

 © Raymond Smith, The Long Term Care Specialist, 2012