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Little-known Advantages of Long Term Care Insurance
September 6, 2011
Parsipanny, NJ
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While many long term care insurance specialists are enthusiastic about the merits of the policies they offer, they are often dismayed that those advantages do not seem to be apparent to others. Here are several of those little-known key points: Guaranteed Renewable Long term care insurance (LTCI) is a guaranteed renewable policy, which means that once an insurance company approves an LTCI policy, the company is contractually obligated to keep coverage in place as long as the premium due is paid. This is one of the reasons that health underwriting is so vigorous for long term care insurance. At the outset, the insurance company, seeing a snapshot of the person at a point in time, makes a no-recourse decision. The company can't change its mind, even if it adopts different underwriting guidelines in subsequent years. Nor can an insurance company notify policyholders that their policy is being modified (for any reason) or cancelled (for any reason other than nonpayment). What if the insurance company decides that they no longer want to be in the long term care insurance business, and stops writing new policies? In that scenario, nothing has changed for existing policyholders, whose contracts continue to be in force. Given the fact that many LTCI policyholders purchase coverage in their 40s and 50s -- and may not file a claim for many decades -- it is easy to see the advantages of a policy with such enduring quality as that offered by guaranteed renewable policies. The Impact of Inflation Protection Whether or not you believe that it was Albert Einstein who said "The most powerful force in the universe is compound interest," it's true that compound inflation protection makes a dramatic difference in LTCI policy values over time. If we assume that an individual purchases a policy at age 50 with $100 daily benefit (DB) and 5% compound inflation, in 10 years the DB will have grown to $155; in 20 years it will be $253! Assuming a claim at age 85 (35 years down the road), the DB would be $412. At that point, the yearly benefit which started out at $36,500 would have become $150,239. A 5% compound inflation rider doubles policy values approximately every 10 years. Adding built-in inflation protection to a policy can be an expensive proposition, and now you know why! Benefit Periods May Be Minimums, not Maximums The typical LTCI policy states coverage in terms of a daily benefit and a benefit period. But this benefit period may bear little resemblance to the amount of time policy benefits are paid at claim. Since most claims start at home, where the insured may not be using the full daily benefit, it's important to understand what happens to the unused DB balance. For example, imagine a policyholder who uses $100 a day and has a policy with a daily benefit of $200. What happens to the unused $100? That amount is not forfeited, but instead remains in place and available for the policyholder to access it. Continuing the earlier example of a DB of $200, assuming a policy benefit period of two years, and care that costs only $100/day, the policy would not be exhausted until 4 years had passed. Of course, if more expensive care is needed (that meets or exceeds the policy's daily benefit), each day of claim payment would take a day off the benefit period. Keep in mind, though, that when the daily benefit is not completely used each day, the policy will continue to pay benefits beyond the stated benefit period, until benefits are exhausted. While virtually all long term care insurance policies are guaranteed renewable and have a "you don't lose what you don't use DB," built-in compound inflation protection is a policy option that may (or may not be) recommended by a long term care insurance specialist.
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Brigitte Bromberg, MS, CFP(R), CSA(R) is a long term care insurance specialist and president of Winning Strategies Group LLC, an independent insurance and risk management firm located in Parsippany, NJ. She is one of the first agents nationwide to become involved in the Association of Jewish Family and Children's Agencies affinity long term care insurance program.
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Contact Information ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
email:
brig@winstrat.com
phone:
973-244-9499
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