Archive for January, 2014

Long Term Care Insurance Simplified…Really

January 30, 2014

Long Term Care Insurance can seem complicated, but it doesn’t have to be.  There are only two basic types:

“Traditional” Long Term Care Insurance: Currently offered by about nine good insurance companies.  Policies pay for long term care services received at home, adult day care, assisted living,  nursing home, and hospice.  The policy owner pays a monthly or annual premium until about 90 days after “going on claim”.  Then premiums are waived.

All policies reimburse (a few are “cash benefit” instead of reimbursement)  for what is spent on covered care up to two limits: 1) A maximum monthly benefit ranging from about $3,000-$12,000 is selected.  2) Then a total benefit amount or pool from about $100,000-$1,000,000.  The combination of maximum monthly benefit and total benefit amount will result in benefits being paid for a minimum of about 2-8 years depending upon the plan chosen.

Example: If a $6,000 monthly maximum and a total benefit amount of $360,000 are selected, AND at least $6,000 is spent on care each and every month, the policy will pay benefits for exactly 60 months before the pool runs out.  If only $3,000 is spent for care each and every month, the benefit pool will last exactly 10 years.  Do the math and you will see how this works…or call me and I will explain it better.

Because the cost of care keeps increasing, inflation protection is needed.  Inflation protection (commonly a choice of 3% or 5% simple, and 3% or 5% compound with many variations) “grows” both the maximum monthly benefit and the total benefit amount.  5% compound is the best, but adds the most to policy cost.

Next comes the elimination period.  This can be thought of as the policy deductible.  The elimination period needs to be satisfied only once.  The most common elimination period is 90 days.  Insurance companies may also offer 30, 60, 100, 180, or 365-day elimination periods.  An elimination period longer than 90 days will save a few dollars of premium, but then cost much in the form of future (more expensive) days of unreimbursed care.

Policy Riders: The sheer number of available riders can make your head spin.  Fortunately, a good long term care specialist can bring only those few riders that really matter.  Everyone is different and thus what matters to one person may not matter to another.  Having said that, here a few riders that most people should at least consider:

  1. Zero day elimination period for home care, coupled with a 90-day elimination period for assisted living and nursing home care.  There are many variations, but most will credit days spent in care at home (where most long term care happens) against the longer assisted living/nursing home elimination period.  Example: With this rider and a 90-day “facility care” elimination period, if at least 90 days is spent in care at home and the insured person then goes to a nursing home, the lifetime elimination period would be satisfied without any unreimbursed care days.

  2. Shared Care.  With variations all work about the same way.  Let’s say you and your spouse each have a $200,000 total benefit amount, or pool.  Continuing this example, you still need care after having exhausted your $200,000.  With a shared care rider, you could then start using your spouse’s total benefit amount.

Hybrid Life/Long Term Care Single Premium Insurance:  This type of policy guarantees that at the very least, all premium dollars are returned to the policy owner or his/her beneficiaries.

Here is an example assuming an age 60, married, male, non-smoker in good health.  A single premium of $141,768 buys the following: an initial maximum monthly benefit of $6,000 and a $309,600 initial total benefit amount.  5% simple inflation protection.  Benefits will last exactly four years if spending on care always at least equals the then maximum monthly benefit (Benefits will last longer if actual monthly care costs are less.).  A zero day home care elimination period , a 90 day elimination period for assisted living or nursing home.  Here is how this example policy would play out:

  1. $141,768 single premium is moved into the policy.
  2. At any time (unless benefits have been paid out), the policy owner could get all of his/her money back by surrendering the policy.  So although $141,768 was transferred, the policy owner’s net worth did not change at all.  $141,768 in a checking account or $141,768 cash in an accessible insurance policy both equal $141,768 on a balance sheet.

  3. If the policy owner dies without needing long term care services, his/her beneficiaries would receive a $144,000 death benefit…slightly more than the single premium paid.

  4. $309,600 is available for long term care services, with a $6,000 monthly limit, the day the policy becomes effective.   By age 80, this amount has grown to $597,600 and the monthly cap to $12,000.

Sounds great!  What is the downside to a hybrid policy?  First of all, you need to have about $100,000-$200,000 in liquid assets or this type of policy cannot be considered.  Second, there are fewer design alternatives compared to traditional long term care insurance policies.  Third, while you can get all of your money back by surrendering the policy, you give up any gain that single premium may have earned elsewhere.  There are also hybrid annuity/long term care policies available, but they do not provide as much leverage in our current low interest rate environment.

Which is best: traditional long term care insurance or a hybrid?  And what is the best policy design regardless of the general type?  The answer to both questions is “it depends upon the individual and that person’s situation”.  All this argues for working with an experienced broker who truly specializes in long term care and who utilizes multiple insurance companies.  While insurance may not be appropriate for everyone, planning for long term care is.

Disclaimer: The above examples are highly simplified.  Actual policy language, rather than the contents of this eNewsletter always takes precedence.  Long term care insurance policies vary widely 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, 2014