Daily benefit amount, benefit period, elimination period, and inflation protection – these are the four basic components of a long term care insurance policy. Any change or variation of these four components will result in an increase or reduction in premium. The most important of these four components is either the daily benefit amount and/or inflation protection.
Let’s start with the daily benefit amount. The daily benefit is the maximum amount a long term care insurance company will pay per day for care once you become eligible to receive benefits. This benefit will be available to you whether you receive care at home or in a nursing home. The biggest challenge for most people is determining how much benefit they will need. The first step is to decide where you think you will end up receiving care.
For example, if you live in New York, but plan on retiring in Florida, the daily benefit you would need to purchase to cover long term care costs will vary greatly. The average cost of care in New York for a semi-private nursing home is $315 per day or just under $115,000 annually, while the same care would cost $210 per day or just over $75,000 annually in Florida.
If your plan is to retire in another state then you should carefully review what those costs will be. Another important consideration when choosing your daily benefit will also be what city or county you will end up receiving care in. Using our previous example, the average cost of a semi-private nursing home room in the state of Florida can range from $193 per day up to $244 per day depending on what county care is received. This may seem insignificant, but the difference is over $18,000 annually.
The second component of a long term care insurance policy is the benefit period. The benefit period is the length of time an insurance company will provide benefits. When an individual purchase long term care insurance the daily benefit and benefit period make up the benefit pool. This can be calculated by multiplying the daily benefit by the benefit period. A $200 daily benefit with a 3-year (1,095 days) benefit period would have a benefit pool of $219,000.
The average nursing home stay is 2.6 years for females and 2.3 years for males. Approximately 75% of people requiring nursing home care require it for three years or less, while 12% require care for 3 to 5 years with the remaining requiring it for 5 or more years. Based on this information when considering a long term care insurance policy it is typically advisable to purchase a policy with a benefit period with a minimum of three years. Each circumstance is different, and individuals should consider their own family history when considering what benefit period to select.
The third component is the elimination period (or waiting period). The elimination period is the period of time an insured will be required to wait prior to receiving benefits from their long term care insurance policy. The most common elimination periods are 30, 60, 90, 180, and 365 days. The shorter the elimination period the more expensive the premium. Many people equate the elimination period to a deductible. However, instead of paying a dollar amount, like you would with auto insurance, you have to wait the chosen elimination period. The desired elimination period is chosen when the insured applies for long term care insurance coverage.
The fourth and final basic component of long term care insurance policy design is inflation protection. This last component should not be overlooked, some might consider this to be the most important part of long term care insurance planning. Inflation protection allows the policy benefit to keep pace with increases in the cost of long term care. In the United States, the average annual increase in the cost of long term care is five percent. If the cost of care today is $200 per day, assuming an annual increase of five percent, the cost of care in 30 years will be more than $850 per day. Most policies offer a different versions of inflation protection, from no inflation to 5% compounded inflation.