By Thomas "Greg" Darden, CLTC | January 17, 2020
Your approach to funding a long-term care (LTC) plan may include insurance. While all LTC insurance policies are required by law to contain specific standard provisions, four features play a fundamental role when designing a long-term care policy that fits your needs.
Each of these features affects the amount of premium you will pay. They are:
- Benefit amount,
- Benefit period,
- Elimination period, and
- Inflation benefit.
Let’s look at how each one of them influences your policy.
The Benefit Amount
The benefit amount is either a daily or monthly maximum amount that the policy will pay once you file a claim. Benefits may be paid under a reimbursement or cash indemnity model.
The reimbursement model works similarly to your health insurance, under which a provider (or you) submits a bill to the insurance company. The insurer either pays the provider or reimburses you. The insurance company or the provider bills you for any uncovered expenses.
The advantages include:
- higher benefit than cash indemnity,
- an audit trail, and
- unused balances staying in the “pool” of benefits.
One disadvantage is that the benefits can only be used to pay for covered services, as defined in the contract.
The cash indemnity model entails you receiving a check each month for the full amount of the benefit, regardless of your costs in a given month.
- being able to pay for informal care (such as that received from family caregivers) or non-traditional services, and
- “future-proofing,” by having funds available to pay for possible new care technologies in the future that aren’t explicitly defined in a reimbursement contract.
Disadvantages include the potential for fraud or squandering of funds. Most important, under the cash indemnity model, you receive a lower amount of benefit for the premium paid.
The Benefit Period
The benefit period is the time over which benefits will be paid, typically 2-10 years.
Think of your total available benefits as a pool of money based on the amount of the periodic benefit times the period stated in the policy. For example, if you have selected a maximum monthly benefit of $6,000 and a benefit period of three years, your initial total pool of money for LTC expenses is $216,000 ($6,000 x 12 x 3).
The Elimination Period
The elimination period is essentially a waiting period during which you have to pay the expenses for care out of your pocket, similar to your health insurance deductible. The range is typically 0 days to 1 year, and the most common is 90 days. Some policies have a 0-day elimination period for home care services and 90 days for facilities.
Decreasing or increasing this period will impact your premium. That decision calls for input from you: How long would you be able to cover the expenses (most typically starting with home care) before the insurance company pays? What will the cost of that care be 20 or 30 years out?
Companies credit you for ‘days’ differently. Most policies credit each calendar day that passes once you go on claim. Others use a service day, which means you have to receive a covered service that day. Still other policies give you seven days for every one day service is received.
It’s commonly assumed, partly incorrectly, that Medicare will pay for the first 100 days of long-term care. Medicare does not pay for custodial care. However, it will pay for up to 100 days of skilled nursing care if that care follows a 3-day hospital stay, you are transferred to a skilled nursing facility within 30 days of leaving the hospital, and you require skilled, rehabilitative services.
The Inflation Benefit
The inflation benefit feature allows your LTC benefits to keep up with the rising cost of care by offering 1-5%, simple or compound. At least one insurance carrier offers an option to start with a low inflation rate and gradually increase it over time, without having to re-qualify based on your health.
The effect is to lower the premium in the early years, which is very important since it’s likelier you will use the benefits several years from now.
Because this feature has a significant impact on your premium, it should be carefully considered. The determining factors are your age, your budget for the premium, and the extent to which you can fund part of your care.
Three questions should be answered before designing and funding your LTC plan:
- How much benefit do you think you’ll need, and for how long?
- What type of care do you want to cover, and where you want to receive that care?
- What are your available funding sources for the premium and the portion of care you might self-fund?
LTC carriers include flexibility in their policy offerings to accommodate your individual situation and preferences. That flexibility lets you design the optimal policy for you.
To help you in that process, we will cover those considerations in greater detail in future articles.