How to Design a Long Term Care Insurance Policy
Last night, I was watching this great movie about designing a long term care insurance policy.
You know which movie I’m talking about, don’t you?
That’s right, Groundhog Day. What, you don’t see it?
Okay, okay, I’ll explain – Bill Murray gets to keep reliving a single day over and over again until he gets it just right and lives happily ever after.
Now substitute you for Bill Murray, Punxsutawney Phil for me, the script for long term care insurance and there you have it. Well, not really, but it was a heck of a lot better intro than any insurance company brochure you’ve ever seen, isn’t it?
In all seriousness, if designed correctly, long term care insurance is a vital component to your overall financial plan.
A long term insurance policy is a legal contract between you and the insurance company. The only thing that truly matters in a long term care insurance policy is getting the money out of it when you need it.
The main components of a long term insurance policy are:
· Daily Benefit
- The daily or monthly benefit is the amount of money the insurance company will pay for each day or month you are covered by a long term care policy. If the cost of care is more than your daily or monthly benefit, you will need to pay the balance out of your own pocket.
- Make sure your daily benefit covers what you need it to, but don't go crazy with it. On average, for every $10/day that you go up in daily benefit, it will add about 7.5% more to your premium.
· Home Care
- A comprehensive policy pays for long term care expenses in a home setting, an assisted living facility or nursing home facility.
- It's absolutely crucial to make sure your policy pays the full benefit no matter where you receive your care. Many older policies (as well as group policies) only pay a partial benefit for home care.
- The goal is to stay at home as long as possible, not to be financially forced to move into a facility due to your policy's reduced home care benefits.
· Inflation Protection
- Inflation protection, sometimes called a benefit increase rider, increases your benefits each year by a specified percentage (most companies offer choices that include compound, simple and/or CPI options).
- With health care costs rising to new heights every year, buying a policy without inflation protection is probably buying a policy that won't cover much of your expenses.
· Elimination Period
- The elimination period is like a deductible, meaning you will pay for the cost of your care for a limited period of time before the policy coverage begins. Most companies offer a choice of elimination periods ranging from 0 to 365 days.
- We normally recommend a 90 day elimination period. It's a good way to save some money on your premium and still protect the risk at the same time.
· Benefit Period
- The benefit period determines the amount of time that your long term care policy will pay benefits. This is usually represented by years of coverage, i.e., two years, three years, four years, etc.
- The benefit period multiplied by the daily benefit determines the total amount of money available in your policy. For example, if you have a $150 daily benefit with a 6 year benefit period, your total benefit amount is $328,500 (365 days x 6 years x $150).
- This is probably one of your toughest decisions for you in the design of your policy because there is no right or wrong answer. Do you go with statistics? Family history? Gut feel? Premium difference? The answer could be yes to any of those questions. The one thing that is impossible to predict is how long you're going to need care.
While the above list contains the major components of a long term care insurance policy, there are other factors such as shared care and other riders that can significantly alter the benefits (and premium) of your policy.
If you have questions on any components that weren’t covered here, ask away in the comments section. I’ll break each one down and tell you their pros and cons, as well the ones that are a waste of money.
And now, I don’t know about you, but I have a hankering to go watch Groundhog Day again…