Long-Term Care Basics

A large number of people believe Medicare also provides long-term care. What they do not know is that those benefits are quite limited and mainly apply to brief rehab stays in nursing facilities. Because of these severe limitations, advisors should counsel their clients about the pros and cons of long-term care.

 

Most long-term care policies provide benefits once the insured is unable to do at least two “activities of daily living” (e.g., bathing, eating, dressing, etc.). Many of the newer policies also cover dementia. Long-term care insurance premiums are based on age and health. The three areas the advisor should focus on are: [1] the daily benefit amount, [2] length of coverage, and [3] any annual inflation adjustments (all three of these points are discussed below).

 

Daily Benefit

The prospective insured should gauge how much help he/she could expect from family members if long-term care was needed. For example, the person may have a son or daughter who could provide a few hours of free care each day. The insured should also determine how much of his/her savings could be used to supplement daily costs.

 

Coverage Period

Long-term care coverage generally lasts from 2-6 years. If a $250 a day for three year policy is selected, it would be the equivalent of a “pool” of $273,750. If < $250 a day wee used, the benefit period is likely to be increased beyond three years.

 

CPI Protection

The reason why a policy with an inflation adjustment may be a strong consideration is because it may be 10-20+ years after the policy is first issued before a claim is submitted. Unless there is an inflation adjustment, a daily amount that looks sufficient in 2013 is probably not going to look so good in 2023 or 2033 when benefits might be needed. The “gold standard” is a policy whose daily benefit automatically increases 5% each year (compounded). The $273,750 pool mentioned earlier would be worth $726,343 in 20 years. Because of the increasing costs of these 5% policies, many prospective clients are looking at 3% annual compounding policies or policies that grow by 5% simple interest each year.

 

Policy Costs

A 55-year old single adult will pay ~ $2,100 a year for $162,000 in benefits that include a 3% annually compounded increase (from 2013 to 2038 coverage would grow to $330,000 with the 3% increases). A survey of 12 long-term care insurers in 2013 showed that their most expensive policy cost 87% more than their cheapest policy.