Long-Term Care Insurance Benefit BasicsLong-term care (LTC) insurance has changed greatly over the years. Policy features and definitions vary widely. Be sure to carefully examine and inquire specifically about any LTC insurance contract you now have or are considering. Please keep in mind that the general information in this article may not apply to your situation or the policy you are reviewing.
Here is some terminology helpful in understanding how a long-term care (LTC) insurance policy works.
- Benefit triggers. These are the events or conditions that must exist before benefits under a long-term care policy will be paid. They include cognitive impairment and physical infirmity.
- Maximum daily benefit. The maximum the policy will pay for any day that you are eligible for benefits.
- Benefit period. This is the length of time for which the insurance company agrees to pay up to the policy's maximum daily benefit.
- Elimination (waiting) period. This is the number of days you must wait after qualifying for LTC policy benefits before actually becoming entitled to payment from that point forward. Every insurer offers a choice of several elimination periods, which typically range from zero to 180 days. A longer elimination period tends to decrease the policy cost relative to a shorter one. Remember, however, that expenses during the waiting period must be paid by the insured.
- Inflation protection. This provides an annual increase in the maximum daily benefit to account for cost increases due to inflation.
- Guarantee of insurability option (GOI) or future purchase option (FPO). The guarantee of insurability option and the future purchase option both give the policyholder the right to buy a larger daily benefit in future years with no further medical questions or underwriting. Policyholders with a GOI or FPO are periodically offered the chance to add a pre-established amount of dollars to their maximum daily benefit with a corresponding increase in the premium.
For example, every one to three years, an insured whose policy originally had a $100 maximum daily benefit might be offered the chance to buy an additional $25 per day in coverage. While the insurer may estimate the additional premium to be charged for such future offers when the policy is first purchased, the actual extra cost is generally not guaranteed. Many policies provide that if the insured declines the offer several times, no further offers will be made.
Cost of Living Inflation OptionSome companies offer a form of inflation protection that is based on actual changes in the Consumer Price Index (CPI). The insured has an option to buy a larger daily benefit in future years, similar to the guarantee of insurability and future purchase option. But rather than offering a pre-determined benefit increase (e.g., the right to buy $25 per day more coverage), policies with a CPI-based inflation option offer daily benefit increases that match the growth of the CPI.
This allows increases in the policy daily benefit that more closely reflect price changes in the real world. However, the rate of inflation in healthcare and nursing home costs has been significantly higher than the economy-wide inflation rate, so a general CPI increase may in fact not keep pace with the increases in long-term care costs.