Frequently Asked Questions - LTC Plan Design

Nine basic features are key components of any LTC insurance plan:

While many LTC plans offer other benefit features, these are the most important features, which are essential elements of any plan design.

The daily benefit amount is the maximum amount you can expect to receive for any day on which you are eligible for benefits. In designing your LTC insurance plan, you want to choose a daily benefit that will cover most, if not all, of your likely cost of care when you become benefit eligible. With many types of insurance, one minimizes the cost of the insurance by accepting some level of risk in the form of copayments. However, with LTC insurance, we recommend that any such self-insurance be in the form of (1) an elimination period or (2) a limited benefit duration (i.e., lifetime maximum benefit). As a general rule, a “short and fat” LTC plan – i.e., one with a large daily benefit and a somewhat short benefit duration – is better than a “long and thin” one.

Most LTC plans pay benefits by reimbursing you for costs incurred for covered services. With such plans, it is important to determine (1) how costs are accumulated for reimbursement purposes and (2) which costs will be considered to be “covered services.” For example, a plan that accumulates costs throughout the month and compares them to the daily benefit times the number of days in the month will pay as much or more than a plan that reimburses only on a day by day basis. Likewise, if only covered services are paid for, it is important to understand the definition of covered services to ensure that benefits will be payable for all of your anticipated costs of care.

For instance, does the policy pay benefits for caregiver training? Emergency response systems? Home modifications?

By contrast, plans that pay a flat per diem amount – also called “indemnity based” or “cash benefit” plans – pay benefits without regard to the cost of services received. Such plans typically require less paperwork and are easier to understand at time of claim. Some cash benefit plans even pay benefits if all care is provided free of charge by friends and/or family members. Because such plans are much more user-friendly, they typically cost more than traditional reimbursement-based plans.

LTC insurance plans typically pay benefits until you use up the plan’s lifetime maximum benefit (also known as the “pool of benefit dollars.” Often, plans will also speak of a benefit duration in terms of calendar days or years. However, that stated benefit duration is simply a multiplier that is used to calculate the lifetime maximum amount. As long as the lifetime maximum has not been used up, benefit payments can continue. This means that benefit payments may continue well beyond the stated calendar duration.

Some LTC plans offer an unlimited lifetime maximum benefit or “lifetime” benefit duration. Under such plans, one can receive benefits indefinitely – as long as one is alive and benefit eligible.

In selecting your benefit duration, you should consider how long you are likely to need care. For example, an individual with a family history of longevity and Alzheimer’s disease will want a longer benefit duration than an individual whose family members have all died at a somewhat younger age.

Your age when you purchase your coverage will also affect your decision as to benefit duration: the younger you are when you apply, the longer the benefit duration you should consider. A young person (i.e., someone age 50 or less) needs to purchase coverage that will be adequate even if he or she requires care at a young age, perhaps due to an accident, but will still have enough benefits left to address LTC needs later in life.

To date, no comprehensive and integrated study has addressed the question, “How long does the need for long term care last?” However, statistics suggest that an elderly person will spend an average of 2¼ years in a nursing home1 and that family caregivers will care for loved ones in a home setting for 4½ years.2 Therefore, as a general rule, we recommend that a benefit duration of five to seven years is likely adequate for most individuals. However, a lifetime benefit duration will offer even greater peace of mind.

1 Jones AL, Dwyer LL, Bercovitz AR, Strahan GW. The National Nursing Home Survey: 2004 Overview. (National Center for Health Statistics. Vital Health Stat 13(167). 2009), 11. Internet, July 20, 2010. Available: http://www.cdc.gov/nchs/data/series/sr_13/sr13_167.pdf.
2 “Caregiving in the U.S. 2009,” (n.p.: National Alliance for Caregiving in collaboration with AARP, November 2009), 19. Internet, August 17, 2010. Available: http://assets.aarp.org/rgcenter/il/caregiving_09_fr.pdf.

Increases in the cost of long term care have historically exceeded the consumer price index. Accordingly, if an LTC benefit is to keep pace with the rising costs of care, it is important to include a strong inflation protection feature in the plan. The most common and generally most generous inflation protection option is automatic 5% compound inflation protection, with no limit on inflation increases. With this option, both the daily and lifetime maximum benefits increase by 5% of the prior year’s inflated benefit amount, while premiums do not increase due to benefit increases. Alternatively, many carriers also offer a 5% simple inflation protection option. This option increases benefits annually by 5% of the original benefit amount.

In addition to automatic inflation options, many carriers offer a “future purchase option” (FPO), under which insureds are offered the option to purchase additional benefits annually (or triennially), without providing evidence of insurability. However, with FPO coverage, whenever you accept an increase offer, your premiums increase based on your attained age when you purchase the increased coverage. Thus, a plan with FPO can look very inexpensive initially, but typically, by the time you reach your late 60s, the cumulative premiums for FPO will exceed premiums for automatic 5% compound inflation protection and the monthly premium may be as much as 10 times what the starting premium was.

Which inflation protection option to choose depends largely on your age when you purchase your coverage. The average age at time of claim is approximately 77, and the cost of care has been increasing faster than the consumer price index. Therefore, ideally one should plan to have benefit that is equal to the anticipated cost of care at age 77. With automatic 5% compound inflation protection, your initial benefit will double after approximately 15 years, whereas with simple inflation protection, it takes 20 years to double. Accordingly, we recommend compound inflation protection for applicants who are age 70 or younger and simple inflation protection for individuals above that age. We do not recommend the future purchase option other than in very limited circumstances.

How much does LTC insurance pay for care received in different care venues – e.g., in a Skilled Nursing Facility, in an Assisted Living Facility, or at home?

As a general rule, the stated daily benefit amount applies to care received in a skilled nursing facility (SNF). Accordingly, it is important to understand what benefit amount is paid if care is received either in some other kind of residential care facility (e.g., and assisted living facility). Many plans pay the same monthly benefit for ALF care as for SNF care, but some plans tie the ALF benefit to the home care amount.

LTC insurance coverage typically describes any home care benefit in terms of a percentage of the daily benefit for SNF care. This percentage is applied to the daily benefit amount – not the cost of covered services for the day. Thus, if you have a plan with a $300 daily benefit amount that pays 75% for home care, then the most you can receive for a day of care at home is $225. If your cost of home care for the day is $225 or more, you will receive that full $225.

Historically, many LTC plans paid a lesser benefit for home care than for SNF care, on the assumption that SNF care included housing costs, which are already covered if one receives care at home. However, because most people prefer to receive care at home, most modern LTC plans pay 100% for SNF, ALF, and home care. There is even one carrier that offers a 150% benefit for home care.

LTC insurance plans typically include a time-based deductible, known as an “elimination period.” The elimination period is a period of time after one has met the benefit eligibility criteria, during which benefits are not paid. The most common elimination period for group LTC insurance is 90 days. However, in designing your LTC plan, you should consider how long you could afford to self-fund your need for care and balance that against the incremental cost of shortening the elimination period.

In evaluating a proposed elimination period, also consider whether the policy requires that you satisfy an additional elimination period for each separate episode of care. Most quality LTC products only require you to satisfy the elimination period once in your lifetime.

Elimination periods can be fulfilled in a variety of ways. Some plans only count days on which covered LTC services are paid for to fulfill the elimination period. Under such a plan, if care is received only every other day, it will take twice as long to fulfill the eliminiation period. Other plans will count one full week for each calendar week during which care is received on at least one day. In still other plans, the elimination period is fulfilled based on days of benefit eligibility, without regard to whether care is paid for. These nuances can significantly affect the ease or difficulty of fulfilling the elimination period.

Several carriers now offer an option of waiving the requirement to fulfill an elimination period if care is received at home. Such “zero day home care elimination period” plans are very appealing, but may increase costs substantially. When considering such an option, it is important to remember that (1) not all LTC needs begin with care being received at home and (2) other sources (e.g., Medicare) may very well cover the cost of care during some portion of the elimination period.

Note that regardless what elimination period you choose, a tax-qualified LTC policy will only pay benefits if your need for care lasts at least 90 days. Thus, for example, if you have hip replacement surgery from which you fully recover in 60 days, that 60-day need for LTC will not result in any benefit payment – regardless of the elimination period you choose – nor will it count towards fulfilling your elimination period. Such surgery could only help to fulfill your elimination period if you needed assistance with activities of daily living for at least 90 days.

Unless otherwise indicated, most LTC plans require that you pay premiums any time you are not on claim, for the life of the policy. However, LTC plans also exist which limit the duration of premium payments. For example, plans may require a specified number of annual payments (typically 1, 5, or 10 years) or may require payments until a specified age (typically age 65).

As a general rule, limited premium durations may provide two benefits: (1) protection against possible future rate increases and (2) a higher tax deduction for premiums paid.

  • All LTC insurance in the market today is “guaranteed renewable,” which means that the carrier has the right to request a rate increase if its original pricing assumptions are proved inappropriate based on actual experience. Most current LTC plans are subject to rate stabilization and therefore are much less likely to experience increased rates than older policies were. However, with a limited premium plan, once the final premium has been paid, any rate subsequent increases will not affect the policyholder.
  • If premiums are tax deductible – for instance, if they are paid by a C-Corporation on behalf of an employee – it may be desirable to pay all of the premiums for the coverage while the insured is still working, so as to take maximum advantage of that tax deduction.

The answer to this question depends on the waiver of premium feature included in your policy. Most policies provide that when you are on claim and receiving benefits, your premiums are waived. If/when you recover and stop receiving benefits, premium payments begin again. Some coverage will waive premiums as of the first day of benefit eligibility, regardless of the elimination period. Although most policies waive premiums as of the first day for which benefits are paid.

Some LTC policies offer a feature that allows two spouses or partners to receive benefits from each other’s policy. The logic of such a provision is that if one spouse dies before using his or her lifetime maximum benefit, the other spouse has access to those dollars; or if one spouse has a much greater need for care, the benefits can be given to that spouse.

Naturally, adding shared care to a policy increases the premiums fairly significantly. The risk with shared care is that one partner will use up all the benefits, leaving the other spouse with no LTC insurance. While statistics suggest that only 60% of Americans will need LTC, one cannot assume that this means that only one partner in any couple will need care. Instead, one’s plan must be adequate if both partners need care. As a result, it is usually more cost effective to purchase somewhat longer benefit durations without shared care than to add shared care to a policy.

While the nine plan design features discussed above are essential components in any plan, many policies will offer or automatically include one or more of the following features. Most of these features are considered “nice to have,” but generally are not deciding factors in plan design:

  • Bed reservation: this plan provision ensures that you can return to the same nursing facility or assisted living facility after a hospital stay or other absence from your nursing facility, by paying necessary charges to reserve your space in that facility. Plans typically include 14 to 30 days per year.

  • Respite care: most policies will include some amount of benefit which is available to give a primary informal caregiver (e.g., a friend or family member) a break from his or her caregiving responsibilities. This benefit is typically limited to 14 to 30 days per calendar year.

  • Restoration of benefits: some policies offer a feature that restores your benefits to their original level if, after a period of receiving benefits, you fully recover and do not receive benefits for a specified period of time (usually 180 days). However, this feature increases the premium, typically by four to ten percent. Also, if you exhaust your benefit pool before recovering, this feature is generally invalidated. This feature is not relevant with a lifetime benefit period.

  • Return of premium at death: some policies include an automatic feature that returns all premiums you have paid, net of any benefit payments received, if you die before a specified age – usually age 65. These policies typically phase out the return of premium by reducing the percentage returned for each year you live beyond age 65, such that by age 75, no premiums are refunded. Given that current US mortality exceeds age 75, this feature is of limited value. Other policies offer a special feature that returns premiums paid net of any benefits received regardless of the age at time of death. This feature typically increases the premium for the policy. We generally do not consider it to offer a good value.

  • Contingent nonforfeiture: Most newer LTC policies include a feature that is designed to protect you if the policy is subject to a significant rate increase. If rates increase over the life of the policy by more than a specified percentage, then you have the option to exercise this contingent nonforfeiture option, by stopping paying premiums but retaining a reduced lifetime benefit equal to the total premiums you paid over the life of the policy. The specified percentage increase varies depending on your age when you purchased the policy. While this feature is nice to have, it is one that offers little value, because the nonforfeiture benefit is so small and because the specified increase percentages are relatively high.

  • Nonforfeiture option: While contingent nonforfeiture is built into most current policies, one also has the option of purchasing an enhanced nonforfeiture option that provides that if you lapse your coverage for any reason whatsoever, you can nonetheless retain the rights to a reduced lifetime benefit equal to the total premiums you paid over the life of the policy. Typically, your coverage must be in force for at least three years before you can exercise this nonforfeiture option. Typically such a “shortened benefit period” or “reduced paid up” feature increases premiums anywhere from 10% to 58%. This option only adds value if you lapse your coverage, which occurs to less than 2% of all policies. Also, because LTC insurance premiums are usually minimal in comparison to the cost of care, this benefit is likely to be negligible. Accordingly, we do not believe this feature offers good value.

  • International coverage: Most LTC plans limit payment of benefits if you receive care outside of the United States. If you are contemplating retiring outside the US, you should read these provisions carefully. In particular, note that some carriers that say they cover care received outside the US may place substantial limits on the benefits for such care – e.g., benefits may be limited to no more that 1 year over the life of the policy, or may be limited to as little as 25% of the US home care benefit.