Jan 21st, 2020
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 in most cases.
The Long-Term Care Benefit Period is simply a multiplier on most Long Term Care Insurance policies. 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.
Hybrid Life + LTC Policies: Special Considerations
If you're considering a Hybrid Long Term Care Plan you may want to ask your adviser where the "sweet spot" is for the company you are considering. With hybrid policies, adding more Long Term Care benefit will reduce your life insurance benefit, but that's a trade-off that most consumers are happy with.
For example, looking at a Nationwide Care Matters II (2020) policy with a $100,000 premium, for a 58-year-old female would get $349,280 in initial LTC benefits with a 6-year benefit period. We can scale back to as low as 2 years and that same premium would buy more Life Insurance but less Long Term Care. For many, it seems the six-year benefit period is the ideal "sweet spot."
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. You must opt for this extra protection, and pay more in premiums, but the cost can be worth it.
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.
Shop Around and get Expert Advice
Every carrier offers different benefit periods, but most cover 2-5 years. We generally recommend most shopping for this coverage to consider between 3-5 years of benefits. In some states, the Medicaid asset look back of 5 years can be relevant but you would want to consult with an attorney if considering this as part of a larger eldercare plan.
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