Long Term Care (LTC) Protection – Where to Begin?

By Tammie Smith, President at Bdlife212

When building a Long Term Care Design Strategy for your client here are some key characteristics we find important to consider:

  1. Daily or monthly benefit amount
  2. Total pool of benefit dollars
  3. Duration of benefit dollars
  4. Type of benefit payout – reimbursement/indemnity or both
  5. Inflation protection (compound or simple)
  6. Elimination period (can be different based on type of care)
  7. Premium duration (lifetime or short pay)
  8. Waiver of premium (when on claim)
  9. Nonforfeiture option
  10. Type of covered care – Home Health Care (HHC), Nursing Home Care (NHC), Assisted Living Care (ALC)
  11. Return of premium
  12. Guarantees
  13. Death benefit

While there are many LTC plans and benefit features, we feel these are the more critical factors of which should be determined when deciding what needs are required and what risk the insured is willing to accept and what risk the insured is willing to pass to the life insurance carrier.

The more risk received by the insured the lower the cost.

When deciding on a design strategy keep in mind that a plan with a larger daily/monthly benefit and short benefit duration is more efficient than a smaller daily/monthly benefit and a longer benefit duration.


1. How to choose a daily or monthly benefit amount?

The daily or monthly benefit amount is the maximum amount you can expect to receive for any day/month you are eligible for benefits. To determine how much you may need, you can research each state’s average costs through the U.S. Department of Health and Human Services site. http://longtermcare.gov/cost-of-care-results. We typically begin with an amount directed toward nursing home care (aka convalescent care).

2. Total Pool of Benefits 

The total pool of benefits available for long term care protection are affected by the benefit duration and the daily/monthly benefit amount. Example: if you have a total benefit pool of $200,000 and you have a month maximum benefit amount of $4,000 (2%) you will receive this payment for a total of 50 months. If you do not use the full $4,000 maximum monthly benefit amount each month the total benefit pool will last longer than the 50 months.

Note: The pool of benefits are not vested, therefore, your right to those funds terminates at death. If your long term care protection policy is linked to a life insurance policy with a death benefit product, the remaining amount may be paid out in a death benefit to the beneficiary(s).

3. Duration of benefit dollars

Duration of benefit dollars is determined based on how long your client is likely to need care. When deciding on the duration, consider the insured’s family history. Is there a history of Alzheimer’s disease, dementia or longevity?

Statistics show that women need care longer (3.7 years) than men (2.2 years) and 20% of people over 65 will need care for longer than 5 years. (quoted fromhttp://longtermcare.gov/the-basics/how-much-care-will-you-need/). We recommend a benefit duration of 4 to 6 years to provide adequate coverage for most individuals.

4. Type of Benefit Care – Reimbursement or Indemnity or Both?

Reimbursement plans pay benefits (up to the maximum daily/monthly benefit amount) based on “covered services” stated in the contract. “Covered services” are identified in the contract. You can request a “sample policy” from the carrier to familiarize yourself with the carriers covered services. Receipts are then turned into the life insurance carrier and reimbursement payments are sent to the insured or a facility providing the care – the insured designates where the payment is to be received.

Indemnity plans pay the benefit amount stated in the contract while the insured is receiving qualified care. There are no receipts required for payment so the insured determines how the funds are distributed. The insured can direct the carrier to pay the maximum daily/monthly benefit or less.

Some carriers will offer a reimbursement plan for nursing and assisted living care and offer a discounted indemnity plan for home health care. This can be helpful when home health care costs include additional expenses that wouldn’t normally be covered in the “covered services” of a reimbursement plan.

Most covered care expenses include caregiver training, emergency response systems and home modification expenses but may be limited to a specified dollar amount so be sure to review the details.

5. Inflation protection (compound or simple).

Be sure the maximum benefit amount designed keeps up at a minimum with with the cost of inflation. Our general rule is that if the insured is under age 70 when purchasing Long Term Care Protection we include a 5% compound inflation or at the very least a 3% compound inflation rider. If the insured is between 70 and 75 we recommend either a 3% or 5% simple inflation rider. If the insured is greater than 75 and they are comfortable paying the difference in costs, we do not typically include the inflation rider.

Note that with an automatic compound inflation option, the amount of benefit doubles after approximately 15 years, whereas with simple inflation protection takes an additional 5 years.

Some carriers offer what is called a “future purchase option” (FPO) which allows the insured to purchase additional benefits without proving evidence of insurability. However with FPOs whenever an increased offer is accepted the premium is also increased based on the age when the increase was purchased. Many times this increase can result in higher premiums in the future than had the insured purchased the automatic inflation protection options at issue. Automatic inflation protections are priced at the age and time the policy is originally issued so when the increased to the benefit occur the price is not effected.

6. Elimination period (can be different based on type of care)

An elimination period is a time-based deductible and once met will begin the qualified monthly benefit payments to the insured. The longer the elimination period the lower the cost for the insurance benefit. The most common elimination period for Long Term Care Insurance is 90 days.

Some carriers will require that you satisfy an additional elimination period for each separate episode of care so be sure to review the policy specifications to determine if this is a one time elimination period or if you must satisfy the elimination period for each separate episode of qualified long term care.

Elimination periods can be fulfilled in a variety of ways. Some plans count the fulfillment of elimination days as “service” days and other plans count the elimination dates as “calendar” days. Service days can cause the elimination period to remain in effect longer than calendar days. So be sure to review the policy specimen to determine how these days apply.

Some carriers now offer an option of waiving the requirement to fulfill an elimination period if initial care is received at home versus in a nursing facility.  We do not typically recommend this option because the cost for this feature is typically 15% or higher in cost.

So regardless of the elimination period you choose, a tax qualified LTC policy will only pay benefits if your need exceeds your elimination period.

7. Premium duration (lifetime or short pay)

Most “traditional long term care plans” require that you pay the premiums every year that you are not on claim, for the life of the policy. If the carrier requests a rate increase from it original pricing assumption, the annual premium paid may be increased to accommodate the required rate increase implemented by the carrier.

However, there are some plans that offer a shorter pay premium duration: 1 year, 5 years and 10 years.  These short pay plans provide protection against possible future rate increases because once the limited premium plan has been paid in full, any future rate increases will not affect the continuation of the paid up policy.

8. Waiver of Premium –

When a person is on claim the policy may include a waiver of premium feature which will waive the premiums due while receiving benefits. Some carriers charge extra for this rider and some carriers include this rider in their policy design and pricing structure.  Also the waiver of premiums may not include the rider premiums so be you understand what part of the premium is waived should you qualify for long term care protection during premium paying years.

Also important to identify when the waiver of premium begins – when the insured is eligible  for benefits (meaning the elimination period is not required to be met first) or as the first day for which benefits begin (after the elimination period is met).

Another important point is to find out if the waiver of premium feature is available for all types of long term care or specific types of care. Some carriers will only offer the waiver on home health care but not nursing home care so be sure to read the policy specifications.

9. Non-forfeiture Options – contingent versus non-contingent – What is the difference?

Most current LTC policies (see your state rules for specifics) include an automatic “contingent non-forfeiture,” 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 non-forfeiture 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. The younger you are when you purchase your policy, the higher the percentage must be to activate the contingency. For example, if your issue age is 30, the required premium increase may be as high as 200 percent, but if your issue age is 80, the required premium increase may be only 20 percent. The contingent benefits offered are the Reduced Paid-Up Benefit and/or the Shortened Benefit Period Benefit.

Some policies also offer, for an additional premium, a “non-forfeiture option,” which guarantees you a certain level of coverage similar to a paid up policy even if you stop paying premiums entirely.  At that time, the company gives you a choice of non-forfeiture benefit, in accordance with the wording in your policy. The typical choices are:

  1. A Reduced Paid-Up BenefitIf you allow your policy to lapse after a specified number of years (typically 3 years), the policy will continue indefinitely with reduced daily benefit amounts, though with some insurance companies, this applies only to nursing home benefits.
  2. A Shortened Benefit PeriodSometimes called an “extended term benefit,” this benefit provides that if you allow your policy to lapse after a specified number of years. the policy will continue to pay the same benefits that would have been covered under your policy until the non-forfeiture benefit amount is exhausted – in other words, for a limited period of time
  3. A Return of Premium                                                                                  Some insurance companies also may offer this option at termination of your policy. With this option, if you drop coverage after a certain number of years, the company will return all or part of the premium that you paid. Usually this is the most expensive type of non-forfeiture benefit.

With any of the three nonforfeiture benefits the premium can increase as must as 40% of the base premium. The cost depends on a number of factors, such as your age at the time you buy the policy, the type of nonforfeiture benefit you select, and whether the policy includes inflation protection.

10. Type of covered care – Home Health Care (HHC), Nursing Home Care (NHC), Assisted Living Care (ALC), Shared Care

Most carriers offer HHC, NHC and ALC coverage in their long term care policies.

Shared care policies are typically a feature chosen at issue and allows for each insured to share any unused benefits with their spouse or partner. When considering this features be sure to review the cost of extending the benefit period on a policy against the additional cost for shared care to determine which benefit provides the most effective cost for the benefit.

11. Return of premium

When purchasing a limited pay long term care policy with a death benefit, the policy typically offers a return of premium feature. The return of premium amount can be 100% on day one subject to loans, withdrawals or benefits paid out or can be a vested amount up to usually 6 years.

This features allows the insured’s money to remain in a liquid based account within their portfolio while also offering long term care protection.  

12. Guarantees 

Insurance companies now offer long term care riders within guaranteed life insurance policies. These guarantees are offered on the policies death benefit, premium rates and sometimes cash values. This allows for the acceleration of the guaranteed death benefit to be available for long term care protection (as long as premiums are paid when scheduled and loans, withdrawals and benefits have not been paid). This type of policy does not allow for an inflation factor to be added to the policy.

13. Death benefit

Some life insurance policies offer a long term care protection rider where the death benefit is available as an acceleration for qualified long term care protection needs.  This type of policy allows the policy owner to provide two types of coverage protection – either long term care protection coverage and/or death benefit coverage protection.

When to decide to buy long term care insurance?

The younger you begin to purchase long term care the lower the annual cost. So at what age does waiting to purchase long term care insurance make more sense based on the time long term care protection is needed and the increased cost of insurance due to the increase in age?

For example at age 40 assuming a healthy individual (preferred class), the long term care costs average a monthly premium of $296 but waiting till age 60 to purchase long term care will increase to an average of $325 (10% increase). And at age 65 the cost increases to $352 (19% increase). This price assumption is based on an average monthly benefit amount of $4,000 a month, a 4 year benefit period, 90 day waiting period, a non-forfeiture rider and a 5% compound inflation option.

But what if the insureds health does not meet the healthy class of preferred at age 60 or 65, this is one large risk factor of waiting to purchase long term care? At a standard health class based on todays price, would cost an additional 29% at age 60 and 40% at age 65.  

If you are interested in obtaining a hassle free personal design for you or your client regarding Long Term Care just send me an email and I will be happy to provide you with options that depending on your need will help you make the right decision for YOU or YOUR CLIENT.

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