Archive for July, 2016

6 Key Long Term Care Insurance Concepts

July 26, 2016

Confused by the “insurance-speak” jargon used by agents, brokers and insurance companies in describing the wonders of long term care insurance?  This will help.

1.  Maximum monthly (or daily) benefit: Almost all long term care insurance policies available for purchase today are built on the reimbursement model.  That is, you are reimbursed for what you actually paid for covered care up to the monthly, or other periodic limit specified in your policy.  For example: If you have a monthly maximum benefit of $6,000 & you spend $5,000 for covered care in a month, you will receive a check for $5,000….but the remaining $1,000 stays in your  Total Policy Benefit (See #2 below).  If you spend $8,000 in a month, you will get $6,000.

2. Total Policy Benefit (or “Total Policy Benefit”, or “Pool of Benefit dollars): Applicable to most quality long term care insurance policies.  The initial total benefits that can be paid out before a policy is “used up”.  If inflation protection is included in a policy, this amount will increase over time.  Total Policy Benefit = Monthly Benefit X 12 (or the Daily Benefit X 365) X number of years in the Benefit Period.

3. Benefit Period: A derived number.  Far less important than Total Policy Benefit.  How long, in years, a policy will continue to pay a benefit, assuming the insured person receives the maximum daily/monthly benefit for each and every time period starting with the first day of needing care.  Benefit Period = Total Policy Benefit, divided by Monthly Benefit, divided by 12 ( or = Total Policy Benefit, divided by Daily Benefit, divided by 365).  If an insured person spends less than the maximum daily/monthly benefit at any time while receiving dollars from the policy, the policy benefits will last longer than the Benefit Period.  Example: Let’s assume a policy with a $6,000 monthly benefit, a $360,000 Total Policy Benefit, a 5 year Benefit Period, a zero-day Elimination Period, and no Inflation Protection.  If the insured person spends at least $6,000 on qualifying expenses each and every month, the policy benefits will be “used up” in exactly 5 years.  As another example, if she only spent $3,000 each and every month, the policy benefits would continue for exactly 10 years.  If you do the math and can follow theses two examples, then you understand the confusing concept of Benefit
Period.  If you cannot follow, please call me at 303-699-4172 and I will do a better job of explaining Benefit Period.

4. Compound or Simple Inflation Protection: A rider that causes both the Maximum Monthly/Daily Benefit and the Total Policy Benefit to automatically increase annually without an increase in premium (Of course you pay a higher premium to have this rider included.).  In years past, the gold standard was 5% compound.  Although 5% compound must still be still offered, it has become so expensive that it is seldom included in new policies.  Much more common today is 3% compound.  Also available are 3% simple and 5% simple.  The easiest way to explain the difference between compound and simple inflation protection is that compound is “interest on interest” and simple inflation protection is a fixed percentage of the original amount.  Another often offered inflation protection option is some variation of a Guaranteed Increase Benefit.  With this, you are guaranteed the right to periodically increase, or not, your Maximum Monthly/Daily Benefit and the Total Policy Benefit regardless of future health.  Your premium increases, but only when you increase your benefits.

5. Activities of Daily Living (ADLs): The ball-park measure of whether or not a person can live independently.  As in “can you do all of the following without assistance from another person”: Feeding, dressing, bathing, continence, toileting transferring are the six standardized ADLs.  The need for assistance with at least two Activities of Daily Living, with the need for assistance expected to last for at least 90 days, is the primary benefit trigger for most policies.  For what it is worth, bathing is commonly the first Activity of Daily Living that someone will need assistance with.  Why do you think that is?

6. Elimination Period (or Waiting Period): The number of days that an Insured person must qualify to receive policy benefits before benefits actually start accruing.  Almost always only needs to be satisfied once per policy lifetime.  The Elimination Period is most often 90 days, but can be shorter or longer.  A shorter Elimination Period is nice, but cost more.  The Elimination Period can be thought of as the up front policy deductible.


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, 2016