Today is the second of a three part series interview with Long Term Care Insurance expert Scott Olson. Scott is an insurance professional with over 12 years of experience specializing in long term care insurance. He is the author of "Making Long Term Care Insurance Easier" which can be purchased on his website: www.ltcinsuranceshopper.com. To read more about Scott Olson, please see the previous posting by clicking here.
LTCD: In your book, you talk about the 5 Foundational Features of Long Term Care Insurance Policies. Could you tell us a little about each of these?
Scott Olson: Sure. The first is "care settings": In which settings will the policy pay benefits for qualified care that you receive? There are 3 main types of policies: Home Healthcare Only, Facility Care Only, or Comprehensive (which is a combination of the two). When looking at policies, make sure the care settings are what you want and that you are comparing apples to apples. .
The second Foundational Feature is the Daily Benefit. How much will the policy pay for each day that you receive qualified care? When comparing policies, make sure you understand how much of the Daily Benefit is available for each care setting. Some policies may pay a smaller percentage of the Daily Benefit for care that is received at home or in an assisted living facility.
The third Foundational Feature is the inflation benefit. This is the most confusing part of a LTCi policy. There are 3 different ways to structure the inflation benefit:
- No inflation benefit – the Daily Benefit never grows. It remains the same for the life of the policy,
- Future purchase option—you have a limited right to periodically increase your Daily Benefit. When you choose to increase your Daily Benefit you do not have to prove that you’re still healthy. When you choose to increase your Daily Benefit, your premium will go up because you are buying additional coverage,
- Automatic Inflation Benefit—your Daily Benefit automatically grows each year by a certain percentage which you choose when you purchase the policy. The automatic increases in the Daily Benefit each year do not make the premium go up. There are many different types of Automatic Inflation Benefit. The most common are 5% Compound, 5% Simple and 3% Compound. In my book I include a chart that compares how the different types of inflation benefit impact the Daily Benefit over a 30 year period.
Word of caution: One of the biggest mistakes people make when comparing policies is comparing a policy with a Future Purchase Option with a policy that has an Automatic Inflation Benefit. A policy that gives an "automatic option to increase" is not the same as a policy with an Automatic Inflation Benefit.
The fourth Foundational Feature is the Benefit Period. How long is the policy designed to pay benefits while you qualify to receive benefits? It is sometimes described in terms of dollars, sometimes in terms of years, and sometimes in terms of days. It is similar to, and sometimes referred to as, the "Lifetime Maximum Benefit". The most commonly offered Benefit Periods are 3 years, 5 years, or Lifetime/Unlimited. A 3-year Benefit Period means that if you use up all your Daily Benefit each day, your policy would run out of benefits after you’ve been on claim for 3 years. A Lifetime/Unlimited Benefit Period means that the policy could never run out of benefit.
This is easy to understand but hard to decide because it requires some prognosticating. This can be very subjective. One way that I try to make it more objective is by having my clients approximate their future net worth at retirement and choose a Benefit Period that will approximate that figure. A policy with a starting Daily Benefit of $200 and an 8 year shared Benefit Period, would have a starting Lifetime Maximum Benefit of $584,000 ($200 x 365 x 8 = $584,000). That Lifetime Maximum Benefit would grow each year according to the Inflation Benefit chosen. If this couple chose a 5% Compound Automatic Inflation Benefit, then the $584,000 would grow every year by 5% compounded growth (e.g. the Lifetime Maximum Benefit would grow to $951,274 within 10 years.)
The fifth and last Foundational Feature is similar to a deductible, and is called the "Elimination Period". It is the number of days that you receive qualified care before the policy will start to pay benefits. As with any insurance, the higher the deductible, the lower your premium. The most common Elimination Periods that are offered are 30, 60, or 90 days.
To read more on the Five Foundational Features, check out Scott’s book by clicking here.
