Archive for July, 2015

How Does My Policy Work?

July 27, 2015

Earlier this month, I received an email from a client wanting to know more about her policy benefits.  What follows is the email exchange, edited to protect the policy owner’s privacy.  “Susan Jones” is not her real name.

From: Susan Jones      Sent: July 6, 2015      To: Ray      Subject: My Policy Benefits (I’m sorry readers.  WordPress formatting does not let me arrange this as it would be for an email.). 

Hello Ray.  I am confused about my long term care insurance policy benefits.  My latest annual policy statement says my maximum monthly benefit is $3,582.16 and my Total Policy Benefit Amount is $171,943.53.  I thought my monthly benefit was $3,000 and my benefit “pool” (as you called it) was $144,000.  Thank you, Susan


From: Ray Smith      Sent: July 7, 2015      To: Susan Jones      Subject: RE: My Policy Benefits

Hi Susan.  You are correct in that you selected an initial Maximum Monthly Benefit of $3,000 and a “Benefit Pool”* of $144,000.  However, you also selected 3% annually compounded inflation protection so both benefit amounts have grown since your policy was issued.

With 3% compound inflation protection, on every policy anniversary your Maximum Monthly Benefit is increased by 3% of the previous year’s amount.  Your policy effective date was June 10, 2009, so on 6/10/2010, your Maximum Monthly Benefit had grown to $3,090.00 ($3,000.00 X 1.03), on 6/10/2011 it became $3,182.70 and so on until 6/10/2015 when your Maximum Monthly Benefit became $3,582.16.  Your Maximum Monthly Benefit will continue to grow for as long as your policy remains in-force.  On 6/10/2028, which is 20 years from your policy effective date, your Maximum Monthly Benefit will have grown to $5,260.52.  If you had chosen 3% annual simple inflation protection (instead of your selected 3% annually compounded), then your benefits would have grown by only 3% of the original amount (or $90.00) per year.  Why may someone have selected 3% simple inflation instead of 3% compound?  Because the policy would have cost less.

A few words about why it is called the Maximum Monthly Benefit: You policy reimburses you for what you have spent on qualifying long term care services up to your selected monthly maximum.  For example, if your Maximum Monthly Benefit was $3,000 and you spent $4,000 on qualified care in a month, you would receive a benefit check of $3,000.  If you had only spent $2,000, you would receive $2,000.  In this last example, what would happen to the $1,000 ($3,000-$2,000=$$1,000) that you did not receive?  Nothing!  The $1,000 would remain in your Benefit Pool for your use later.

Now is a good time to address the Benefit Pool amount and the Benefit Period (Stay with me…this is important.).  The Benefit Period is actually only a factor used to determine the size of the Benefit Pool.  If you had said “I want a 4 year Benefit Period coupled with an initial Maximum Monthly Benefit of $3,000”, your Benefit Pool would have been calculated thusly: $3,000 Maximum Monthly Benefit X 12 months in a year X 4 years = $144,000.  If you had asked for a 3 year Benefit Period, your Benefit Pool would have been $3,000 X 12 X 3 = $108, 000.  A five -year Benefit Period would have resulted in an initial Benefit Pool of $180,000.

Note that some earlier policies have a Maximum Daily Benefit.  In that case, you simply multiply the Maximum Daily Benefit X 365 days in a year X the Benefit Period years to determine the Benefit Pool.

What does a four-year Benefit Period actually tell us?  Does it mean that the policy expires four years after it is issued?  No!  Does it mean that you can only receive policy benefits for four years?  No!  Let’s take your example of a $3,000 Maximum Monthly Benefit and a four-year Benefit Period.  For purposes of simplicity, let us assume no inflation protection.  We would calculate the Benefit Pool* thusly: Benefit Pool = $3,000 per month X 12 months in a year X Benefit Period of 4 years = $144,000.

Remember that you are reimbursed for qualifying long term care expenses up to your Maximum Monthly Benefit of $3,000.  If you spend at least $3,000 each and every month, you will exhaust your $144,000 Benefit Pool in exactly 48 months, or 4 years or receiving policy benefits.  However if you spend less than $3,00 per month, each and every month, your policy benefits will last longer.  Example: Let’s say you only need a few hours of home care every day and that cost is $1,500 per month, each and every month.  Your $144,000 Benefit Pool would last 96 months, or 8 years.

*Benefit Pool:  I typically describe the total number of benefit dollars a policy will pay before becoming “used up” as the “Benefit Pool”.  This is more easily understood than terminology used by insurance companies such as “Policy Maximum Amount”, “Policy Limit”,  or “Maximum Lifetime Benefit”.

Susan, I hope I have answered your questions.  Please call me if anything is still unclear.  Thanks, Ray


From: Susan Jones    Sent: July 10, 3015    To:    Subject: RE: My Policy Benefits

Hello again Ray.  Your explanation, while wordy, clarified my policy benefits for me.  Thank you.  Susan.


Disclaimer: Actual policy language, rather than the contents of this eNewsletter always takes precedence. Long term care insurance policies vary widely from company to company & often 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, 2015