When long-term care insurance came on the scene in the mid-1980s, the policies were comparatively simple, with only a few options. While there are lots of choices today, there are still some basics that are important to understand.
How does ltc coverage finance the care?
What LTC coverage does is create a “pool of money” or a dedicated “long-term care fund” which will be used to pay for covered care. The size of the pool or fund is one of the principle factors that determine the cost of the coverage.
How is the amount of money in the pool or fund determined?
The first step is to research the cost of long-term care in the buyer’s geographic area. In Orange County the median cost of a semi-private room in a nursing home is $247 per day or about $90,000 per year. A nursing home is the most expensive care as it covers all long-term care needs and room and board twenty-four hours-per-day, seven days- per-week. Care in an assisted living facility, adult day care, and home care are less expensive, but may not cover all the buyer’s living costs.
For our purposes here, let’s say we want the “pool” to be based on $225 per day. Next we select a “multiplier” which is loosely based on the number of days of care. Since history shows that a 4-year or 1,460 day multiplier would cover most people’s LTC needs, we’ll use that number. So, we have $225 x 1,460 for a pool of $328,500.
Does that mean the coverage only lasts 4 years?
Not necessarily. There is no time limit. It may take many more years for the pool to completely deplete. Sometimes, all or part of the money isn’t needed for LTC services. Some LTC coverage is designed with features that use the remainder of the pool for benefits such as a life insurance or for the return of the premiums paid for the coverage.
How is the money distributed from the pool?
There are two possible ways, “reimbursement” and “indemnity.” Each method requires that the insured meet the requirements for the commencement of benefits. Reimbursement means that the insurance company reimburses actual long-term care expenses. Indemnity means that the insured is sent a predetermined payment (say $5,000 per month) and the insured pays his or her own expenses. Indemnity benefits would be paid until the pool is depleted or until the insured no longer needs LTC services.
What if ltc isn’t needed right away and costs rise?
Long-term Care policies have “inflation protection” options that can be added. Inflation protection may include several optional levels. For example, generally, the highest level of protection is 5%, compounded; meaning that the pool of money is increased by 5% per year on a compounded basis. Of course the actual design and administration of inflation protection benefits varies with each long-term care insurance carrier.
Long-term care coverage, while sounding complex, is much easier to understand once one becomes familiar with its terminology. A glossary of terms is available at no cost. To receive the glossary, or if you have questions, please call or email me (my contact information is below). There is never a charge for providing information and consultation.