Shopping for Long Term Care Insurance - Who Should and Shouldn't Buy, and Policy Characteristics

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I've run two prior articles this week on the theme of Long Term Care, one on Long Term Care Issues, and one on Non-Tax-Qualified versus Tax-Qualified, and Partnership Insurance Policies. Now, I'm getting down to nuts and bolts of what you need to know while shopping for a policy.



The two most important characteristics are the total benefits and the daily benefits. It may be helpful for many people to think of total benefits as a lake, where instead of water, it contains the total amount that is available to you, and the daily benefits as the size of the pipe that brings those benefits to you when you need them. It doesn't do you much good to have a huge lake and a too-small pipe that can't put out the fire, which is the daily bills you have to pay for care.



The way policies are generally sold is that they are for X number of years, with a daily benefit limit of $Y. The product of these numbers (and 360 days per year) is the initial total benefits limit. A one year policy with a $150 per day limit is good for $54,000 of total coverage. A three year policy with a limit of $300 per day is worth $324,000 of total benefits. A five year policy with a limit of $180 per day has that exact same aggregate coverage limit of $324,000. There are lifetime policies available; these have no aggregate limit but are limited to whatever the daily benefit is.



Note that a three year $300 per day policy is superior to a five year $180 per day policy in that although they both have the same "lake" of benefits, the former has a larger "pipe" (or "stream", if you'd prefer) to get them to you. Therefore, the policy with the large pipe will be more expensive. It is an often misunderstood part of policies that there is no time limit for benefits. You can use less if you like, but you can't use it faster than the pipe brings it to you. If it takes you three, five, seven, or seventeen years to exhaust the "lake" that's how long it takes. I've known agents who did not understand this clearly. If you only use $60 per day, either of these policies will last fifteen years. But if you use $250 per day, the former will pay off the full amount of your daily benefit until exhausted (about 3.6 years), whereas if you have the latter, you're going to be out of pocket $70 per day from day one. This can cause you to exhaust the resources you were trying to protect well before the policy is done paying benefits. The "time duration stated" - the Y years part - is the shortest amount of time in which it is possible to exhaust your lake of benefits. It has nothing to do with how long the benefits can last, which is always "until exhaustion." Given the facts of the situation, it is better to have a big "pipe" than a long duration, and in the example given, the 3 year $300 per day policy will be the more expensive. It's also likely to be worth the difference. For Partnership policies, the state of California currently has a minimum daily benefit limit of $130.



It is to be noted that for the Partnership policies, at least in California, the limit is actually a monthly limit of thirty times the daily limit. Many other policies follow this as well. This means if you get something that costs extra once or twice a week, like physical therapy, as long as your entire monthly care does not exceed thirty times the daily benefit, you won't be out of pocket for those not-so-little extras.



Policies are sold as home care only, facility care only, or comprehensive, so called because it covers care where ever you may need it. Actually, here is a Glossary of terms you may want to refer to. Partnership is only sold in facility care only and comprehensive policies. My advice to to buy a comprehensive policy, because you never know what your situation will be when you actually need to use benefits. The difference in cost is typically small.



One of the really sneaky ways some insurance companies can stick you with a gotcha! is to require you to continue paying premiums while you are receiving care. Since you're likely in a situation of incompetence, or just plain unable, this is a good way to get out of paying benefits. ("But your honor, Ms. Jones did not continue to pay her premiums as is clearly required by the policy! We are clearly within our rights to cancel"). Insist upon a policy with waiver of premium upon commencement of benefits. This means you don't have to continue paying your premiums when you may not be mentally capable, or able to get new checks, or any of dozens of other possible hitches. In California, waiver of premium is required for all Partnership policies.



Policy Lapse Protection is similar, having to do with reinstating your policy if you neglect to pay the premium before you are diagnosed as needing care and it lapses for that reason, but good policy lapse protection is actually fairly widespread. You're going to have to pay the back premiums, "bring your payments current," and there may be an administrative or interest charge, but better that than needing an entirely new policy. This is not "don't make your payments for ten years and drop a lump sum on them when your doctor diagnoses you with Alzheimer's." About six months to maybe a year in some cases, is about the limit of lapse protection.



Elimination period is the time after you start receiving care, before your policy starts paying benefits. It's analogous to the "deductible" on your automobile insurance. Short elimination periods are more expensive, longer ones less so. I would not consider an elimination period of less than ninety days, or more than six months. Even at $200 per day, the person who is an appropriate buyer of long term care insurance should be able to fund three to six months or so. Lengthening the Elimination period makes the policy cheaper. Indeed, a three year policy with a six month elimination period may be cheaper that an equaivalent two year policy with a three month elimination period. The average stay in long term care is something approximating two years, but in a large number of cases it is five years or more. If you've got assets to protect, you can likely afford three to six months, but fewer people can afford years of coverage. If you're lucky enough to live in one of the states with an active Partnership for Long Term Care, the asset protection function means you continue to receive benefits even after the policy is exhausted. Even if you don't live in one of those states, the policy can get you through the "lookback period" where Medicaid will go back and attach any assets you transferred elsewhere. I know I've said Medicaid coverage is awful, but if you still have money, or people willing to spend money on your behalf, you can make it a lot more tolerable than it is for someone who is truly destitute.



Pre-existing conditions are not something to unduly worry about here, in my experience. If you have a pre-existing condition, the insurer is only allowed to exclude paying to treat it for six months in California, and I believe (but I am not certain) that this is an NAIC rule, which would mean it likely applies nationwide. This can mean that you will be flat out rejected until/unless you recover, but this is in accordance with the principles of insurance. You buy insurance when it's a risk, not a certainty. You don't wait to buy health insurance until the heart attack starts, you don't wait until you've got terminal cancer to buy a life insurance policy, and you don't wait until the doctor diagnoses you with Alzheimer's to buy a policy of Long Term Care Insurance. You would be quite properly rejected for coverage in all three cases.



Other bells and whistles you should be interested in include "step down" options for if the premium increases beyond your ability to pay. This gives you the ability to change to a less expensive policy without new underwriting, rather than simply losing coverage, if your circumstances change..



One protection I strongly advise everyone to get is inflation protection. If you buy a $200 per day policy, that may be adequate now. It may not be adequate when you need to use benefits. All California Partnership policies require compound interest inflation coverage if you are less than seventy at time of purchase. This is a good thing. If you are over seventy when you first buy, simple interest inflation protection is permitted, but I wouldn't advise it unless you are going to use benefits within the next couple of years or not at all.



Inflation protection applies to both daily benefit and total available benefits. So if you start with a 3 year, $300 per day policy, after one year of 5 percent inflation protection, it goes to a $315 per day policy with a total benefit pool of $340,200. Let's say it's twenty years down the line, and your "total pool" of dollars has gone to $871,000, but now you start using them. Let's say you use $21,000 of benefits that year, leaving $850,000. That $850,000 pool becomes $892,500 the next year, demonstrating that even after you start using benefits, it is still possible for your "available lake" to increase if you have inflation protection. Now the last I was aware, actual cost rises were running about 7% per year, so 5% isn't really long-term adequate, but it's what's available. If you're relatively young, you probably want to overbuy by some factor to compensate for this.



One rider that you probably do not want is return of premium. Return of premium means if you die without using benefits, your estate gets the money you paid in premiums back. This is very attractive to laypersons, and it makes a nice addition to the salesperson's commission. Unfortunately, it can also double - or more - your cost of coverage, and the older you are, the larger the multiplier will be. This can cause people who can and should buy a policy to buy a smaller policy benefit than they really need, smaller than they should have. Even though they are spending the same amount of money on the premium, their coverage is far less. Furthermore, the return of premium is usually with only a very small interest, or none at all. It takes comparatively little time before you would have been better off investing the difference.



Now, who should and should not buy a policy of long term care insurance. There are no hard and fast rules, but if you have no assets to protect or the policy premiums are a real hardship, then you should not buy a policy. The state of California defines this as assets between $50,000 and $250,000, but those standards are the same as when I took my training, and would suspect that a truer picture would be those with liquid assets under $75,000 should not bother. On the other hand, California has some very smart millionaires with top of the line advisers buying Partnership policies because they are never certain their circumstances will not change. Income wise, the state of California has a .pdf document that they referred me to. Furthermore, someone who could afford long term care indefinitely would have no reason to purchase an insurance policy - the insurance company doesn't work for free. In California Partnership Policies, at least, you do have an additional protection in that the company is required to advise you if you are not within the income and asset guidelines for policy purchase, and offer a full refund.



The best time of life to buy long term care is as early as practical. If you buy at 40, your premiums will always be less - a lot less - than someone who buys the same policy at 50, who in turn will save a lot over someone who buys at 60, and so on. Typically, if you wait until after you are sixty, you will have to pay far more in yearly premiums than you saved by waiting - even considering the time value of money. I always called this the "penalty box", and it makes sense for the same reason life insurance is cheaper the younger you buy it. This is not to say it doesn't make sense to buy after age 60; what I'm saying is that the statistically average person will save a lot of money over the course of their life expectancy by buying earlier. I've had people eighty years old ask me for quotes, and are surprised when minimal coverage is thousands of dollars per year. This is because, first, if you're buying at age 80, you are overall more likey to use benefits, and for a longer time, and second, because it's likely to be sooner rather than later, leaving less time for the insurance company to invest your premium dollars and earn a return.



Caveat Emptor

UPDATED here

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About this Entry

This page contains a single entry by Dan Melson published on December 22, 2005 10:01 AM.

Long Term Care Insurance: Non-Tax-Qualified versus Tax-Qualified, and Partnership was the previous entry in this blog.

Amending the Budget Process is the next entry in this blog.

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