Long term care insurance planning can be a confusing process. Trying to decipher the differences between two different policies can be complicated. Choosing the least expensive option can end up being the most expensive option.
All long term care insurance policies have Four Basic Components (benefit amount, benefit period, elimination period, and inflation protection). Of the Four Basic Components of a Long Term Care Insurance Policy, the component that affects the cost of a policy the most is inflation
protection. It will also affect the benefits available from the policy in the future the most.
For example, most policies offer a Guarantee Purchase Option (GPO), 3% simple or compound inflation, or 5% simple or compound inflation.
A policy with a Guarantee Purchase Option provides the insured with the opportunity to purchase additional coverage every three years (this can differ based on the policy purchased). The option to purchase additional coverage is generally based on a factor of 5% compound inflation. Choosing a policy with GPO is initially the least expensive, but over the long run can end up costing the most.
If an individual purchases a policy with a $200 daily benefit, in 3-years they will be given the option to purchase an additional $31.50 of coverage per day. If the insured takes advantage of this offer there policy will have a total daily benefit amount of $231.50. Provided the insured continues to take advantage of this option they will be able to increase their coverage every three years.
When the insured chooses to increase the daily benefit from $200 to $231.50 the policy premium will increase based on the insured’s age at the time of the increase, along with the amount of the increase. It is very difficult to predict how much more the increase will cost. The following table is used for illustrative purposes only. This information is meant to provide an idea of how a policy with Guarantee Purchase Option can increase over time.
Age | Daily Benefit | Premium |
55 | 200 | 1,050 |
58 | 232 | 1,243 |
61 | 269 | 1,508 |
64 | 311 | 1,886 |
67 | 360 | 2,471 |
70 | 417 | 3,396 |
73 | 483 | 4,907 |
76 | 559 | 7,338 |
79 | 647 | 11,198 |
Initially the premiums of a policy with Guarantee Purchase Option are relatively small at $1,050 per year compared to the same policy with 5-percent compound inflation, which costs $3,060 per year. However, assuming the individual purchases the policy with the Guarantee Purchase Option increase their benefits by 5% every three years there premium will eventually exceed $11,000 per year.
The more likely scenario is the premiums will reach a point the coverage is no longer affordable. Instead of taking advantage of increasing the benefit overtime the insured is likely to settle on what they have. The result of this will have a tremendous impact on what is available to them when it is time to receive care.
Assuming a worst case scenario where an insured purchases a policy with the Guarantee Purchase Option and does not take advantage of any benefit increase offerings over time, they will have access to the original $200 daily benefit that was originally purchased, today and in the future.
According to the Genworth 2011 Cost of Care Survey the average cost of a semi-private nursing home room in the United States costs $70,445 per year, this equates to a daily cost of $193. The average annual increase in cost of this type of carrier is 5-percent according to the same survey. Assuming the cost of care continues to grow at 5-percent, the cost of care in 30-years will be $304,459 per year or $834 per day.
By purchasing a policy with the Guarantee Purchase Option the insured will have saved $2,010 per year in our previous example. Over a 30-year period this is savings of over $60,000. But, when it comes time to receive benefits the insured will only have access to $200 per day or $73,000 per year. We have only insured for less than 25-percent of the actual risk in this example.
Assuming one year of care beginning at age 85 the insured would have paid $31,500 in premium ($1,050 times 30-years), but would have paid $231,000 ($304,000 cost of care less $73,000 of long term care benefits) in out-of-pocket expenses for care that was not covered by the policy. Based on this example the cost of care and premiums over 30-years adds up to more than $260,000.
If the same individual had elected a policy with 5-percent compound inflation, they would have paid annual premiums of $3,060 per year for a total of $91,800 of premiums over the same 30-year period. Using the same example as above, the insured would have access to $315,000 of benefits based on the benefits of policy increase by 5-percent every year. If the cost of care is $304,000 per year all of the costs would be covered under the policy with 5-percent compound inflation.
In our example where the insured elects to purchase a long term care insurance policy with the Guarantee Purchase Option they would have paid a premium that is nearly one-third the cost of a policy with 5-percent compound inflation. But, when it came time to receive care they would have paid out more than $260,000 for premiums and benefits received that weren’t covered by the policy. The individual who purchased the coverage with the automatic 5-percent compound inflation paid $91,800 of premiums, but did not have to come out of pocket any money for long term care services since it was covered by the policy. For a short term savings on premium, the insured almost tripled the actual cost.
These are hypothetical, isolated examples. We do not know what the future cost of care will be or what the actual premiums will be in the future. It is important to make decisions today based on the information available. Each situation is different, just like each family is different. Planning for a long term care event should be based on your individual needs. That is why we try to provide each family with a customized plan designed to satisfy your family’s goals.
