The Benefit Amount
As explained earlier, LTCI policies have a benefit amount per day or month (or sometimes per week). A person buying a policy selects a benefit amount, which typically ranges from $50 to $500 per day and from $1,500 to $15,000 per month.
Of the choices made by the purchaser, the benefit amount normally has the greatest impact on the amount of the premium. In general, there is a direct proportional relationship -- a daily benefit of $120 is 20 percent more expensive than a daily benefit of $100, and a daily benefit of $80 costs 20 percent less than a daily benefit of $100.
LTCI purchasers should select a benefit amount based on how much is charged by nursing homes, assisted living residences, and home healthcare agencies where she expects to spend her old age. (This might be where she lives now, or it might be where her children live or where she plans to retire.) It is important to remember that actual charges may exceed stated daily rates. For example, a nursing home may charge extra for drugs, supplies, and special services, and this can increase costs by several hundred dollars each month. The buyer should also consider how much of the cost of long-term care (if any) he is willing and able to pay out of his own pocket. Some people prefer to rely on insurance to cover only a portion of long-term care expenses and pay the rest out of their income and assets. And of course the buyer must keep in mind how much she can afford to pay in premiums.
Some policies pay the same benefit amount for different types of care, while others pay different amounts. When amounts differ, the home care benefit is often defined as a percentage of the facility benefit (normally from 50 to 100 percent). The purchaser often selects this percentage, and of course the higher the percentage, the higher the premium. Some advisors recommend choosing at least 75 percent or (if possible) 100 percent, since most people prefer to remain at home as long as possible and extensive home care services can be expensive. On the other hand, those seeking to hold down the premium may be able to get by with a lower percentage, especially if family members are available to provide some care.
The Lifetime Maximum Benefit
LTCI policies normally have limits on the total amount the insurer will pay in benefits during the life of the policy. Some older policies have a benefit period, a maximum amount of time benefits will be paid, and some have different benefit periods for different types of care. (For instance, a policy might pay for nursing home care for four years and home care for two years.) Most policies today have a lifetime maximum benefit (commonly called a “pool of money”). Under this approach an insured receives benefits until the total amount received for all types of care reaches a maximum amount stipulated by the policy, regardless of how much time has elapsed. The insured chooses this amount at the time of purchase.
Some insurers have the purchaser choose among round dollar amounts, such as $100,000, $200,000, or $500,000. Other companies define the pool of money as the daily or monthly benefit amount multiplied times a certain period of time, and the purchaser chooses among options such as two, three, five or ten years. For example, an insured might choose a daily benefit of $200 and a lifetime maximum based on three years. His pool of money would be calculated by multiplying $200 times 365 days times three years, or a lifetime maximum of $219,000.
Please note that a pool of money’s maximum lifetime benefit might be expressed as a period of time, the benefits are not limited to that period. The insured will receive benefits until he has exhausted the pool of money, regardless of the time elapsed. If an insured spends less than the daily benefit amount on some days, the unspent balance remains in his pool of money, and this allows him to receive benefits beyond the time period on which the pool of money was based.
Barbara buys a reimbursement LTCI policy and chooses a daily benefit of $150 and a lifetime maximum based on five years. Her pool of money is $273,750 ($150 daily benefit X 365 days X 5 years = $273,750). Suppose Barbara enters a nursing home and receives her full $150 daily benefit every day for five years. At the end of five years, she will have spent $273,750, and her benefits will end.
Now suppose that instead of going into a nursing home, Barbara receives limited home healthcare services and needs only $100 of benefits per day. At the end of five years, she will have spent $182,500 ($100 X 365 days X 5 years), leaving $91,250 in her pool of money ($273,750 minus $182,500). In this case, Barbara can continue receiving benefits beyond five years, for as long as there is still something left in her pool of money.
Finally, suppose that Barbara has an older policy with a five-year benefit period instead of a pool of money. Barbara will receive benefits for no more than five years, even if she receives less than her daily benefit amount on many days during those five years.
Under the NAIC Model Act, a LTCI policy must provide at least 12 months of benefits, and some states impose 24- or 36-month minimums. But there is no upper limit -- some policies (called lifetime policies) have an unlimited lifetime maximum. The insured can continue receiving the daily or monthly benefit amount indefinitely.
How large should the lifetime maximum benefit be? It is difficult to judge, because it is hard to know how much long-term care one might need. The average nursing home stay is two-and-a-half years, but one stay in six exceeds five years. Plus, it is not uncommon for many people to receive home care or assisted living before they enter a nursing home. Of course, the larger the lifetime maximum, the higher the premium, and an unlimited lifetime maximum can be very expensive.