In the Aug. 2 Money Matters column, I outlined my recommended approach to buying long-term care insurance and specific tips for choosing and configuring the daily benefit limit, the daily rate at which a policy will pay benefits. This week, I’ll complete my coverage of the topic by discussing the remaining benefit choices and riders that you will have to consider when buying a policy.
- Elimination period, the long-term care insurance policy’s deductible. This is usually specified as days of care that you must receive before the policy begins to pay benefits. You can do a little arithmetic — using the daily rates for nursing home care or home health care in your area — to estimate how much this deductible will be in dollars you’ll have to spend. Because Medicare and most private insurance, including the Federal Employees Health Benefits Program, provide benefits for all or part of the first 100 days in certain circumstances, 90 or 100 days are the usual choice. The Federal Long-Term Care Insurance Program, however, offers you a choice of 30 or 90 days.
- Policy limit. The policy limit is usually specified in years of care, or benefit period, but is usually converted to a dollar amount under the terms of the policy. Your objective should be to choose a policy limit that will reduce to an acceptable level the risk of exhausting the policy. I can tell you from experience that six years of benefits for an individual, or eight years of combined benefits for a couple will usually accomplish this. In the case of the federal program, where the choices are three years, five years or unlimited benefits, five years should be the default choice. While it may seem attractive, an unlimited benefit policy typically costs 30 percent to 40 percent more than one covering five or six years of benefits. The money would be better spent raising the daily benefit limit, as explained in the Aug. 2 column.
- Inflation protection. Because of the long time periods involved in long-term care insurance coverage, it is critical that its benefits be protected against the erosive effects of inflation. Typically, you will have two or three inflation protection options to choose from — a compounding option; a future purchase option; and sometimes, although not in the federal program, a simple option. The compounding option automatically increases your benefit limits each year by a factor, usually 5 percent, of the previous year’s ending balance, with no increase in your premium. The future purchase option allows you to buy additional insurance, usually within strict limits, at ever-increasing premium rates. The simple option automatically increases your benefit limits each year by a constant amount, usually 5 percent of your initial limit. Younger people should always choose a compounding option, which accelerates increases in benefit
limits over time. But compounding is more expensive than the other options. Applicants age 70 or older can consider substituting a lower cost option, such as the simple increase option. This is because the values produced by the simple and compound inflation options are fairly close over periods of as long as 15 years.
- Benefit sharing. Some private policies, but not the federal program, offer a benefit-sharing option for couples. The idea is that you and your partner can share a common benefit pool and buy a lower combined policy limit. Actuarially, every year or dollar of shared benefits is worth about 1½ years or dollars in individual benefits. So eight years of shared benefits should be equivalent in cost to two six-year individual policies. The added flexibility of the shared benefit policy makes it more attractive for a couple. If one partner needs care, he or she will be able to draw from the combined benefit pool. In the example above, one
partner could draw as much as eight years worth of benefits, instead of six years from the separate policy. The other partner will be free to draw any remaining benefits. Any combination of benefits, up to eight years, is possible. This effectively addresses the fact that one partner is much more likely than both
to need extraordinary amounts of long-term care. Qualifying couples should seek out policies with this benefit.
- Other options. The simple design of the Federal Long-Term Care Insurance Program focuses attention the core policy elements — the daily benefit limit, inflation protection, elimination period and the benefit period. But many individual policies offer a confusing array of options and riders, most of which are designed to appeal more to your emotions than to good financial reason. Riders offering to do things such as replenish used benefits, return your premium when you die or pay your premium should your spouse die before you may provide a feeling of security, but they generally offer poor value and should be avoided in favor of the more important benefits.
I generally recommend avoiding the bells and whistles offered on many long-term care policies. I haven’t found a rider or option yet that delivers more bang for the buck than the daily benefit limit. If you feel you must spend more money, spend it on additional daily benefit.
Written by Mike Miles
For the Federal Times
Publication August 16, 2004