Benefit Periods in Long Term Care Insurance
Benefit Periods are commonly misunderstood when comparing Long Term Care Insurance. The first mistake most clients make is in assuming that when you buy a set number of years, you are actually buying a finite time period. You are not.
The Benefit Period is simply a multiplier. For example, 2 years is 730 days. Some math:
- If you buy a “2 year” policy at $100 per day, it means your LTC benefit is going to be worth 730 x $100 (number of days x dollars per day)
- Your benefit could last longer than two years if you didn’t use the full $100/day benefit each day.
In Short, the Benefit Period is a Minimum.
A client once referred to the benefit period as the “Benefit Window” which would indicate a finite period of time. That’s not how it works with any Tax Qualified plan, which is pretty much anything you’re comparing these days. What your benefit period is good at illustrating is the minimum amount of time your care will be covered if you use it to its maximum daily or monthly benefit every single day/month.
As a policyholder, if you are able to spend less than your daily benefit maximum, your policy is effectively extended on the tail end. So, for example, if you purchase a policy with 3 years benefit period and $200/day benefit:
- Pool of money = 3 years x $200/day = $219,000 initial pool of money.
- Assuming you spend just $100/day or half of the benefit, your three year plan would last six years.
Inflation Protection: Extending Your Benefit Period
Policies that have inflation protection (which should be all policies sold to those under 75 years old) will also continue to grow while you are on claim and receiving benefits payments. Your three year policy is guaranteed to last longer than three years if only by a marginal amount because of the growth in the pool of money you experience while making a claim. Of course, if prices rise, your benefit is designed to keep up with that growth more so than get ahead of costs. A standard inflation rider provides annual 5% compound increases.