Long-Term Policy Options

Once a consumer has selected an LTCI product, she still has several choices to make about how to configure it. She must answer these questions:

• How long an elimination period do I want?
• How large a benefit amount do I want?
• How large a lifetime maximum benefit do I want?
• Do I want inflation protection? If so, what kind and how much?
• Do I want a nonforfeiture provision?
• What optional features do I want?

An elimination period (sometimes called a waiting period or deductible period) is an amount of time that must elapse after an insured meets a benefit trigger before she begins to receive benefits. The elimination period functions like a deductible — it reduces the insurer’s benefit and administrative costs, enabling the insurer to offer a lower premium.

When purchasing a policy, an individual sets the length of the elimination period by choosing among options offered by the insurer: 0, 30, 45, 60, 90, 100, 180, or 365 days. Florida regulations cap the maximum elimination period at 180 days.

The longer the elimination period, the lower the premium — but the more the insured will pay out of pocket if she needs care. For example, a 90-day elimination period at $150/day means $13,500 in out-of-pocket costs before benefits begin; a 30-day period means only $4,500.

Insurers differ on when the elimination period starts:

Companies that require paid services during the elimination period differ in how they count days:

• Service day approach — only days on which services are actually provided are counted.
• Calendar day approach — all calendar days are counted while services are being received, even if services are not provided every day. Typically the insurer gives the insured credit for every day of any week in which she received services on at least one (sometimes two or three) days.

Most newer policies allow days to be accumulated over the life of the policy. For example, if a person with a 90-day elimination period receives covered services for 70 days but recovers, the next time she meets a benefit trigger those 70 days count and she needs only 20 more. Some older policies have an accumulation period — if the insured doesn’t accumulate enough days within a set time (such as two years), she loses any days already counted.

Under most policies today the elimination period must be satisfied only once during the life of the policy. A few older policies require a new elimination period if care resumes after an extended break.

Some insurers offer a zero elimination period for home care combined with a regular elimination period (often 90 days) for facility care. In some versions, home care days received count toward the facility elimination period, so a person receiving home care before entering a nursing home may have already satisfied the facility period.

These are two separate and distinct concepts. The 90-day certification requirement (HIPAA) requires a licensed healthcare practitioner to certify that the insured’s inability to perform ADLs is expected to last at least 90 days — this determines whether benefits are payable. The elimination period determines when benefits begin.

A person buying a policy selects a benefit amount, which typically ranges from $50 to $500 per day or from $1,500 to $15,000 per month. Daily amounts are generally available in increments of $1, $5, or $10; monthly amounts are usually based on units of $100.

Of all the choices made by the purchaser, the benefit amount normally has the greatest impact on the premium. The relationship is directly proportional — a daily benefit of $120 costs 20 percent more than one of $100, and a daily benefit of $80 costs 20 percent less.

The appropriate benefit amount should be based on the actual charges in the area where the insured expects to receive care — which may be where she lives now, where her children live, or where she plans to retire. It is important to note that actual charges often exceed stated daily rates, as extra fees for drugs, supplies, and special services can add several hundred dollars per month.

Some policies pay the same benefit amount for all types of care; others pay different amounts. When amounts differ, the home care benefit is often defined as a percentage of the facility benefit (normally 50 to 100 percent). Advisors generally recommend choosing at least 75 percent, since most people prefer to remain at home as long as possible and extensive home care can be expensive.

LTCI policies normally have limits on the total amount the insurer will pay during the life of the policy. Most policies today have a lifetime maximum benefit (commonly called a pool of money). An insured receives benefits until the total amount received for all types of care reaches the maximum stipulated by the policy, regardless of how much time has elapsed.

Some insurers have the purchaser choose among round dollar amounts (such as $100,000, $200,000, or $500,000). Others define the pool of money as the daily or monthly benefit multiplied by a time period:

Importantly, the pool of money is not a time limit — it is a dollar limit. If an insured spends less than the daily benefit on some days (for example, under a reimbursement policy), the unspent balance remains in the pool and benefits can continue beyond the time period on which the pool was based.

Under the NAIC Model Act, the lifetime maximum of an LTCI policy must provide at least 12 months of benefits; some states require 24 or 36 months. There is no upper limit — some policies (called lifetime policies) have an unlimited lifetime maximum.

The average nursing home stay is about two-and-a-half years, but one stay in six exceeds five years — and most people also receive home care or assisted living before entering a nursing home. The larger the lifetime maximum, the higher the premium, and an unlimited lifetime maximum can be very expensive.

Most companies offer a restoration of benefits feature (as a standard provision or optional rider). If an insured uses some of her pool of money but then recovers and receives no long-term care for a specified period (typically six months), the used amount is restored to the original pool.

Long-term care costs have been rising steadily for many years. Without inflation protection, an insured runs the risk that his daily benefit and lifetime maximum will become inadequate by the time he needs care. For tax-qualified policies and those governed by the NAIC Model Regulation, an inflation protection option must be offered, though a purchaser may choose not to take it.

With automatic inflation protection, benefit amounts increase every year at a set rate with no action by the insured and no corresponding increase in premium. The two most common versions are:

• 5 percent simple rate — benefits increase each year by 5 percent of the initial amount. A $100/day benefit rises to $105 in year 2, $110 in year 3, reaching $200 in 20 years.
• 5 percent compound rate — each year’s increase is based on the prior year’s benefit, not the original. A $100/day benefit rises to $105 in year 2, $110.25 in year 3, and $265 after 20 years — $65 more per day than the simple rate, resulting in $23,725 more in annual benefits.

Automatic inflation increases generally continue for the life of the policy, though some policies impose a cap (such as double the original benefit) or stop increases after 20 years or at a specified age (such as 80 or 85). An automatic inflation protection option generally also increases the policy’s lifetime maximum benefit at the same rate (or sometimes at a lower rate).

The guaranteed purchase option (GPO) (also called the future purchase option, or FPO) gives the insured the right to periodically increase benefit amounts without submitting evidence of insurability. At set intervals (such as every one or three years), the insured may increase benefits — but his premium is also increased, based on the benefit increase amount and his age at the time.

A policy with a GPO usually has a lower premium than one with automatic inflation protection. However, the GPO does not work well for younger buyers — after many years, keeping up with inflation requires ever-larger premium increases, eventually making the policy unaffordable. Automatic inflation protection provides a known, budgetable premium.

Limitations of the GPO: if an insured declines a certain number of opportunities to increase coverage, most insurers stop offering them. And an insurer generally makes no further increases available once the insured becomes eligible for benefits.

A nonforfeiture option allows an insured who stops paying premiums and lets her policy lapse to receive something for the premiums she has already paid — either a cash payment or continuation of coverage for a limited time.

Triggered by the insured’s surrender (termination) of the policy while still living. The cash payment is based on the total premiums paid, sometimes reduced by claims already paid. Not available in tax-qualified (TQ) policies.

Triggered by the death of the insured; the payment goes to the estate or designated beneficiary. The amount is based on premiums paid and, for some policies, the insured’s age at death. Some policies do not pay if claims have been made, or reduce the benefit by claims paid. Some require the policy to have been in force for at least 10 years.

An insured who stops paying premiums retains the right to benefits equal to the total premiums she has paid (without interest), or 30 days of benefits if greater, provided the policy was in force for three or more years. The policy remains in force but the lifetime maximum is reduced to the amount of premiums paid.

For those who do not choose a nonforfeiture option, newer LTCI policies generally provide contingent nonforfeiture benefits at no extra charge (required in some states). This feature allows an insured who faces a large premium increase to let the policy lapse and still receive nonforfeiture benefits, provided the insurer has increased the premium above a specified level.

It is increasingly common for insurers to offer shared care, in which two people (usually a married couple) share coverage. Common arrangements include:

• Both spouses buy one policy covering them both.
• Each spouse buys a separate policy, but each has a rider allowing a spouse who has exhausted her own benefits to draw from the other’s policy.
• Each spouse buys an individual policy, and they also buy a joint policy that either can draw on after depleting their individual benefits.

Shared care generally increases the cost of a policy (the insurer is more likely to pay claims when two people can access benefits), but it can enable a couple to stretch their premium dollars effectively.

Some policies offer a dual waiver of premium, whereby when one insured qualifies for a premium waiver (because she is receiving benefits), the waiver also applies to a spouse covered by the same or a linked policy.

Some insurers offer an optional survivor benefit: if an insured dies and a surviving spouse is covered by the same or a linked policy, the surviving spouse receives coverage at no further premium cost. Usually this applies only if the policy has been in force for at least 10 years with no claims during the first 10 years, though some insurers offer it after only seven years regardless of claims.

Some companies offer limited payment options in which premiums are paid for a set period (commonly 10 years, though 1, 5, 20, and “to age 65” are also available) rather than over the life of the policy. Premiums are higher than under a normal payment plan, but once the payment period ends the insured receives lifetime coverage at no further cost. Once paid off, the premium cannot be increased — the policy effectively becomes noncancellable. Only a small minority of LTCI policyholders pay on this basis, and some states restrict or do not allow limited pay options.