Why Advisors Need To Compare LTC Provisions

Understanding long term care insurance terminology is often the cause of great confusion and frustration for advisors as well as consumers.

Much of the benefits terminology was derived from the long term disability industry, where it also bewildered applicants. Today, many LTC policies use simpler and more understandable concepts, but assessing the terms carefully is still essential, because terms differ between contracts and they may involve tradeoffs from traditional comprehensive LTC insurance.

The definitions of elimination period (EP) and benefit period (BP) are examples.

Elimination period provisions. The EP is essentially a deductible, defined as a period during which policy owners are responsible for their LTC expenses before the LTC benefit payments start. Typically, the EP options are 30-, 60-, 90-, or 180-day periods. Agents and brokers must be able to communicate to consumers how these definitions differ among products offered, and how the definitions can significantly impact what benefits may be payable at claim time and how those benefits are paid.

There are typically two types of EPs–service-day and calendar-day.

With a service-day EP, each day the insured receives a covered service and incurs an expense for which a bill is rendered (e.g., home care or assisted living care) counts as one day towards satisfying the EP. This provision stipulates that a day may only be counted toward meeting the deductible when both services were rendered and covered charges were incurred on that day. But if home care is needed only 2 or 3 times weekly, satisfying a 90-service-day EP could take 6 months or longer, costing the claimant sizeable layouts of personal money.

By contrast, a “calendar-day” EP does not require that charges be incurred or that services be rendered to satisfy the elimination period. As long as the LTC policy benefit is triggered by the insured needing assistance on any given calendar day with at least 2 of 6 activities of daily living (ADLs), and that condition is expected to last at least 90 days, each calendar day counts as satisfying one day of the deductible, even when no services are provided or expenses incurred on that day. 

There’s more. Some LTC policies with “service-day” EPs have a “1=7” provision either built in to the core benefits or offered for an extra premium. Here, if one day of covered services is provided during a calendar week, 7 days are counted towards satisfying the EP, even if no services are rendered during the remaining 6 days. As a result, this provision can shorten the EP considerably, appreciably reducing the policyholder’s out-of pocket costs.

Service-day EPs may also offer a zero-day EP for home care that further reduces or minimizes the personal claim costs. Depending on the product, this type of EP may be built in to the core benefits or added on for an extra premium.

Benefit period provisions. Also called the “maximum benefit limit,” the BP represents the minimum number of years that LTC coverage is provided–typically ranging from 2 to 10 years or even lifetime. The number of years selected is used to define the “total pool of money” available for covered LTC services.

BPs are defined in terms of a daily amount, generally ranging from $100 to $500 per day in $10 increments, or a monthly benefit, typically offered in increments of $100 ranging from about $3,000 to $15,000. It is essential for customers to have a clear understanding of how the daily and monthly benefit options may impact claims.

Table 1 illustrates the differences. The monthly benefit design produces a slightly smaller total pool of money than the daily benefit design. This is so even though premiums for the monthly benefit design are generally slightly higher.

That would appear to make the daily benefit design a better buy for the customer. However, the advisor needs to be aware that, for someone needing home care services, the monthly benefit can offer significant advantages.

To illustrate, let’s say Kate based her purchase decision between two policies on the total pool of money available (slightly greater with the daily benefit) and the cost (slightly lower with the daily benefit). Unfortunately, she wound up needing physical and speech therapy at home following a stroke. The cost for this care in New York City where she lives was about $125/hour, but the skilled services that were typically provided on the same day increased her daily costs to $250. With only $200 in daily benefits, Kate’s policy left her having to pay, out of pocket, the remaining $50 per day.

Since Kate needed this care three days a week over a six-week period, her policy paid a total of $3,600 in benefits, but Kate herself wound up paying the remaining charges, amounting to $900.

By contrast, if Kate had purchased a policy with a monthly home care benefit of $6,000, her policy would have covered all expenses–because the $4,500 total charge for three days of home care over six weeks was significantly less than the $6,000 total monthly benefit available.

Lesson learned: When Kate chose her policy, she assumed she had coverage for LTC expenses up to $216,000, but she overlooked the fact that her coverage was limited to $200 per day. Had she been advised that home care services can often exceed the $200 daily amount, leaving her to pay the excess, she might have made a different and much wiser decision.

Since BPs ultimately determine the total pool of money for covered LTC services, which benefit period should a person choose? First, determine the annual budget for LTC insurance. In Table 2, the “short and fat” versus “long and thin” illustrations clarify the differences at time of claim.

Note that the total pool of money available in both cases is the same–$216,000. The important differences in the two policies come from the benefit amounts and the BPs. Claimants are reimbursed for covered services up to the maximum daily or monthly benefit they select. In both cases, if the entire monthly amount available is not needed, it remains in the pool of money for later use, thus lengthening the period over which benefits can be paid. It does not, however, increase the monthly benefit amount for any single month. That amount remains fixed.

For example, with a $6,000 monthly benefit in a “short and fat” plan, if the insured spends $4,500 in a given month for eligible benefits, the remaining $1,500 would stay in the pool of money until needed–but it would not increase the following month’s benefit from $6,000 to $7,500.

By contrast, if the insured spent that same $4,500 in a given month with a “long and thin” policy and the monthly reimbursement maximum was $3,000, the insured would be left to pay the remaining $1,500 out of personal funds. Even if there were no charges during the previous or following month, the insured cannot “borrow” that $1,500 from past or future month’s benefits or from the total pool of money. The monthly benefit amount remains limited to the amount specified in the contract, and any overage must be paid out of pocket.

In the two scenarios, then, the claimant with a “long and thin” policy would incur significantly higher out-of-pocket expenses on a monthly basis than would the person who chose a “short and fat” contract.

In sum, consumers should first be educated about basic policy provisions, how they differ, and how they may impact future claims before they choose a LTC policy. Choosing a knowledgeable LTC planning specialist capable of providing a clear explanation of these increasingly complex and varied policy provisions is an essential step when purchasing LTC insurance these days.

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