LTC Insurance - Balancing Affordability and Benefits

When purchasing a long term care insurance policy, your goal should be to balance affordability and benefits. The cost of the policy depends on a number of factors – the most important being the total benefit provided. Some policies provide very rich benefits but few of us (especially retirees on a fixed income) can afford the premiums. But as the cost of care escalates (the average cost of a year in a nursing home is now $78,000) it is important that each of us plan for the possibility of needed long term care.

One way to plan is by purchasing long term care insurance. But because of the cost of such insurance it is important that you understand the policy and the level of benefits you are buying before you make the purchase.
In this article you will learn:

1. The relationship between the policy benefits and the monthly premium.
2. How to “dial up” or “dial down” the level of benefits you select in order to find the proper balance between affordability and benefits.

Relationship between policy benefits and the monthly premium

It should come as no surprise that the richer the policy benefits the higher the cost of the monthly premium. Benefits are typically expressed in terms of a daily or monthly amount paid for care.

Among other factors, the premium will be determined by the amount of benefit paid per day (e.g., $190) and the length of the benefit period (e.g., 5 years). The benchmark used to determine a reasonable daily benefit is the average daily cost of nursing home care. The current national average is $187 per day – but this varies greatly by where you live. The average daily cost in Alaska is $515 while in Louisiana the average daily cost is $118!

But keep in mind that most claims for long term care benefits are for the cost of care received at home. A good long term care policy should pay for care whether received at home or in a facility.
The second factor in our example is the number of years of coverage. While lifetime coverage would be ideal (an Alzheimer’s patient can live for 10 years or more with this devastating disease), most of us cannot afford the premiums. Remember, we want to balance benefits and affordability.

How many years of coverage are sufficient? On average, individuals over age 65 need 3 years of long term care assistance. The assistance may provided at home, in a facility such as a nursing home or – most likely – a combination of both. So a policy providing 3 years of coverage should be sufficient to protect you in most (but not all) circumstances. However, approximately 20% of older adults will need assistance for 5 years or more. You may want to consider a policy providing for 5 years of more of assistance if your family has a history of, for example, Alzheimer’s disease or if you are “risk averse” and would be more comfortable insuring yourself for a long period of time - but only if you can afford it. Buy the level of coverage you can afford. When it comes to long term care insurance some protection is better than no protection. The exceptions are impoverished seniors with little in the way of assets to protect and who may qualify to have their long term costs covered through Medicaid.

Dialing the Benefits Up or Down

A good long term care insurance sales professional will work with you to select the right balance of affordability and benefits. This can be done by “dialing the benefits up or down” to meet your budget. While an insurance agent makes more money when he or she sells a richer policy, it does the agent little good to sell a policy that is soon dropped because the premiums put too much strain on the family budget.

A long term care professional will also know the costs of care – both home care and facility care – in your area. This knowledge is important when selecting the daily or monthly benefit paid under the policy.

One measure of how buyers of long term care insurance view their policy is “persistency” or how many policies are allowed to lapse by the policyholder. Historically, long term care insurance policies have very low lapse rates (much lower than other types of insurance policies) – policyholders understand the value of their policies and are unlikely to give the protection up once they have it.

Note in the example, we could have selected 5 years of coverage and opted to “dialed down” the daily benefit from $280 until the premium was more affordable. In other words we trade off one benefit (the daily coverage) for another (the years of coverage). A knowledgeable long term care professional can suggest such tradeoffs and the pros and cons of each.

In a separate article we will discuss other important policy benefits that impact the cost of the premium including inflation protection and the elimination period. We will also discuss ways you can reduce the cost of the policy by buying a shared policy with your spouse and paying premiums annually rather than monthly.