Choosing Long Term Care Insurance -- Part 2

In the last post we reviewed the basics of how most Long Term Care policies work and discovered how to select your level of coverage. In this post we will briefly visit some of the riders that are typically available and how they enhance the basic Long Term Care plan.

The first and most important rider you should consider is one for inflation protection. Generally, inflation protection comes in one of three forms -- future purchase options (FPOs), simple interest, or compound interest.

FPOs essentially guarantee you the right to purchase more Long Term Care coverage (usually by increasing the daily or monthly benefit a specified amount) down the road at specified intervals such as 5 or 10 years after the original plan was purchased. FPOs are attractive because they add little or no cost when the original plan is issued. However, they do have some disadvantages.

For one thing, FPOs are all or nothing. If you have the option to buy more coverage in 10 years, but you end up using the plan in 9 1/2 years; then you will most likely not be eligible to get more protection even though you will likely need it due to inflation. Also, if you decide not to purchase additional coverage at the FPO date (i.e. 10 years); then you will not usually still have that option at a later date (i.e. 12 years).

Secondly, FPOs tend not to keep up with inflation over the long run even for those who buy more coverage at every opportunity. This is because FPOs offer limited buying opportunities such as an additional $10,000 per year perhaps once in 5 or 10 years.

Lastly, in the long run FPOs often end up being more expensive than other forms of inflation protection because although you are guaranteed the right to purchase more coverage, the rates for that coverage will usually be based on your age at the FPO date and not the original plan's date.

The other common strategy to deal with inflation of Long Term Care costs is to add a rider that enables your benefit amount to accrue interest. Basically, there are two factors two consider: first, what is the rider's interest rate (typically 2% to 5%); and second, is the interest simple or compound.

Obviously, the higher the interest rate, the more coverage you will have available as time passes. Based on Long Term Care costs' past inflation rates, I would recommend that an interest rider's rate be approximately 5%. Although you might want to select a lower interest rate or no inflation protection at all depending individual factors such as your age or types of costs you are insuring against, you should be well informed about the risks you are assuming before doing this.

Simple or compound interest? Simple interest accrues only on the principle amount of the plan. For instance, if your plan gives you $100,000 of protection and you select a 5% simple interest rider, then you will accrue $5,000 more protection (5% of $100,000) each and every year no matter what your accumulated total is.

On the positive side, simple interest riders are usually less expensive than compound ones and the amount of protection they give generally keeps up with inflation for the first few years. However, over time simple interest riders tend to lag behind the inflation in costs because this inflation is compound in nature.

True inflation is compound, and for this reason a compound interest rider is the only true form of protection against inflation in the long run. A 5% compound interest rider on $100,000 would give 5% more protection on the accumulated total each year. This means that there is no difference in the protection afforded between simple and compound plans after the first year, but for each successive year the compound plan will grow increasingly greater than the simple plan.

Many people believe that inflation protection is unnecessary. However, you should keep in mind that today's Long Term Care costs of about $160 per day are likely to amount to approximately $650 per day in 30 years. If you do not want to pay for the relatively inexpensive inflation rider now, you may find yourself paying a whole lot more later to make up the difference between what your plan pays and what your actual expenses are.

Another feature or rider on many Long Term Care plans is waiver of premium. This means that your premium may stop during a claim. Although there may be a fairly brief waiting period such as 90 days, the general benefit is that while your plan is paying for your Long Term Care costs you are not having to pay your premiums. This feature or rider will free up more money for you while you receive Long Term Care.

Another feature or rider of most plans is the types of care the insurance covers. You want a plan that covers as much as possible. For instance, you should make sure that your policy pays for care not only at nursing homes but also at assisted living facilities, adult day care, home health care, and respite care. This feature permits you and your loved-ones the most choices for your care and will maintain your coverage if your needs change.

Additionally, you should try to secure a plan that includes an alternate plan of care provision so that it will cover innovations in Long Term Care that may not be specifically listed in your policy. Also, you may want to consider a plan that includes a bed reservation feature so that you will not loose your nursing home bed if you leave the home to visit family or for a hospital stay. Finally, you should select a plan that is guaranteed renewable. This means that your plan can never be cancelled no matter your age or your use of the insurance as long as you pay the premiums.

Choosing Long Term Care Insurance -- Part 1

During the course of our myth-busting we have seen that Long Term Care is very expensive, is very likely to be needed, is not covered by other types of insurance, and strains family relationships. So, if you are choosing a Long Term Care policy, then which one is right for you?

Selecting Long Term Care Insurance may affect your and your family's future more than any other single decision you will make. Also, the process can be complicated at times; so don't go it alone. Just as you would seek an attorney's assistance to draft a will, you should seek out a licensed insurance agent who is trained in Long Term Care when you are considering such insurance. Finally, you should ask loved-ones or family members to be present with you while you consider your options.

The key to selecting the best Long Term Care Insurance for you is the policy's benefits. Your health insurance likely has a deductible. Usually the higher the deductible the lower your premiums. Most Long Term Care Insurance has a deductible in the form of time called a waiting period. A waiting period is the number of days you will pay (or wait) before the plan begins paying.

For instance, if your doctor certifies that you will need Long Term Care on April 1st and your policy has a 30-day waiting period, then your plan would not start paying towards your Long Term Care costs until on or about May 1st. Although longer waiting periods will reduce your premiums, you should do your best to ensure that you can afford to pay for your Long Term Care out of your pocket before your insurance begins coverage.

Although your personal situation and expectations should be taken into consideration, I would recommend the following waiting periods as a general guideline based on your total assets not including your primary residence and primary automobile:

• If your assets are less than $100,000, then select a waiting period of 30 days or less.
• If your assets are between $100,000 & $500,000, then select a waiting period between 60 & 90 days.
• If your assets are more than $500,000, then select a waiting period of 100 days or more.

Another decision to make regarding Long Term Care Insurance is the daily or monthly benefit, which is the amount of money the policy will pay each day or month that you need Long Term Care. For instance, if you were drafting a plan in the Carolinas to pay for either round-the-clock care in a nursing home or approximately 10 hours per day of home health care, then you would want a daily benefit of about $160 or a monthly benefit of about $5,000. Your daily or monthly benefit may need to be adjusted higher or lower depending on where you live, your preferences regarding your care, or if you have other means to pay for care.

Closely related factors are your benefit period and benefit maximum. Benefit period refers to the length of time you can receive benefits, and benefit maximum refers to the amount of money you have for benefits. The majority of people receiving Long Term Care will need it between 6 months and 5 years. Most of these will receive care from 1 to 3 years.

For example, if your policy's benefit period is 60 months or 1,825 days and your benefit amount is $5,000 per month or $160 per day, then your benefit maximum would be approximately $300,000. Depending on the specific details of your plan, your coverage may end either when your benefit period ends or when your benefit maximum is spent.

Personally, I would prefer a policy that pays until the benefit maximum is reached. Let's say that you have the above policy but your care only costs $80 per day instead of the anticipated $160 per day. If your policy ends with your benefit period, then after 60 months your coverage ends even though it only paid out half of what it was worth. On the other hand if your plan doesn't end until your benefit maximum is spent, then it essentially creates a bucket of money ($300,000) to draw from. Although at $160 per day it would be exhausted in 60 months, if your care only costs $80 per day, then it would last 120 months.