Just How Much Does This Stuff Cost?
by Phyllis Shelton

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Some agents perceive LTC insurance as complicated because there are so many benefit choices. There are actually only five major benefit decisions:

• How much (daily benefit)

• How long (benefit period)

• When does it kick in? (waiting/elimination period)

• How much does it grow? (inflation)

• Where? (comprehensive or facility only)

There are bells and whistles, of course, but that’s the basic track. And, no, I don’t consider nonforfeiture one of the core decisions, as I don’t believe it’s in the client’s best interest.

A really good LTC agent will have a good feel for premium differences for the main products he or she sells so that during the interview you can ballpark rate variations. It sure has saved a lot of time for me to know, for example, that a lifetime benefit period is about 30% more than a five year benefit period, or that a 100 day waiting period is about 20% less than a 20 day waiting period.

I recently did an analysis of eight major LTC companies that went a little deeper on premium differences for benefit variations. I really had fun discovering this information (yes, I know I need a life), so of course I’m anxious to share it with you!

How much?

It’s common for clients with significant assets to regard LTC insurance as a catastrophic umbrella, not a 100% coverage solution. A common mistake by agents and consumers alike is to manage this expectation by not including inflation coverage in the policy.  Big mistake.  The better solution is to lower the daily benefit and/or the benefit period, or the umbrella may not withstand even a light rain. Premium difference between a $140 and a $100 daily benefit, for example, is 40%, a significant savings and the client winds up self-insuring about a third of the cost. But always include inflation coverage, and I’ll come back to that when I get to the inflation point in this article.

What are people buying?  The new HIAA survey “Who Buys Long-Term Care Insurance in 2000?” which surveyed buyers in late 99 and early 2000, says the average daily benefit purchased was $110, and $120 for incomes of $50,000 and up (results rounded). (Survey can be ordered at www.hiaa.org/pubs/pubs-titles/Research.htm.)

How long?

Premium averages 30% less for a five year benefit and 20% less for a six year benefit period vs. a lifetime benefit period. You would expect this difference to decline at older ages, right? Some companies still carry this difference into the older ages.  Maybe they’re thinking that even though life expectancy is much longer for a 50 year old, the odds of a 75 year old using the policy are much greater, so it balances out.

A six year benefit period vs. a three year averages 32% and five years to three years about 23%. The percentages add, so lifetime to three years is about a 50% difference in premium.

Now let’s complicate the issue a little with the joint benefit period concepts available with a few policies.

For additional premium, a few policies allow spouses to have access to each other’s benefit period, or for lower premium, to share one benefit period.  Let’s look at both situations:

A company that offers the first situation has a 32% premium difference between lifetime and six years. To have access to each other’s benefit period (maximum is a 6 year benefit period for this plan), the premium is about 22% less than buying a lifetime benefit period.  Example: Each spouse has a six-year benefit period. One uses a year of benefits and dies. The surviving spouse now has 11 years of benefits left. If they each bought a six year benefit period, without this feature, the premium would be about 8% less. So if they aren’t going to buy a lifetime benefit period, it makes sense to pay the extra 8% and buy the shared care benefit. (It’s also available for 2, 3 and 4 yr. benefit periods, but the maximum is the six year benefit period.)

A company that offers the second situation of lowering the premium by allowing a couple to share a benefit period offers a savings of about 10% to share a 12 year benefit period first come, first serve.

What are people buying?  Thirty percent of buyers in the HIAA survey bought a lifetime benefit period and 40% of buyers with incomes of $50,000 and over did so. The average was five years.

When does it kick in?

There is so much variety on this answer. Questions to ask:

• Does the company require formal charges or can the family can take care of you during the waiting period?

• Do days paid by Medicare or other health insurance count toward the waiting period?  A few policies say no.

• Is the elimination period satisfied by actual service dates? Some policies have breaks for home care, like one day of home care makes the entire week count.

There’s about a 20% premium difference between a 20 and a 100 day elimination period, but that’s a potential 80 days out-of-pocket, not just at today’s prices but at future prices, which are projected to at least triple in 20 years (GAO, 6/91 and HCFA, 7/99). I say “potential” because they might get lucky and get a few days paid by another source, but there are no guarantees for that.

Don’t ever sell longer waiting periods to people with low assets to cut the premium. It’s very likely they will spend what little they do have just to satisfy this deductible. They will need every penny they have for miscellaneous charges that aren’t covered under the scope of an insurance policy.

What are people buying?  HIAA says 58% buy 90 days or longer, and 42% buy shorter. A full 23% bought 0 day, which - ask any actuary - rate increases are already happening with that benefit choice.

How much does it grow?

Only 41% of policies were sold with inflation in the 2000 survey, and 1/3 of the purchasers were under 65 years old. Even considering only purchasers with incomes of $50,000 or more, only 53% of policies had an inflation benefit, and that is truly staggering.

Taking an example from p. 30 of my book (the Long-Term Care Planning Guide, 2000 edition), a married 65 year old can buy $150 day, lifetime benefit period, 20 day waiting period and 100% home health care with 5% compound inflation for $4,286, whereas the same policy without compound inflation is $2,313. This policy has the opportunity to purchase extra benefit in future years at attained age, which will send the premium to $25,000 a year by age 86 if all the offers are accepted - not a good idea for the client.

If the client doesn’t accept the future purchase offers and keeps the $150 benefit, at age 85 the cost of care is projected to be $450/day, so the client has a deficit of $300 a day, or a shortfall of almost $110,000 the first year, which will grow each year as costs continue to rise. This client “saved” about $40,000 in premium over the 20 years, but especially considering that premium stops at claim time, is this the best deal for the client?  You decide.

On the other hand, perhaps the best idea is to sell simple inflation instead of compound inflation - that’s about a 25% premium savings at age 50, or about $400 a year. By age 80, a $150 daily benefit will grow to only $390 vs. $653 with the 5% compound rider, a difference of $95,000 a year! Is it worth the premium savings of less than $12,000 over the 30 year period?  You decide.

But surely it’s a great idea to sell simple or no inflation to people in their 70's.  Well, there’s about an 8-10% premium difference between simple and compound for a 75 year old, so there’s some savings, and the benefit will be almost the same for the first ten years of the policy.

An interesting question for a 75 year old is should she buy what the benefit will grow to in 10 years or opt for a benefit that reflects current costs with a simple or compound inflation rider? The majority of purchasers in this age range don’t buy the inflation riders.  At age 75, the premium is about the same for a lower benefit with the 5% compound rider vs. a benefit that reflects what the lower benefit will grow to in 10 years - say $150 with 5% compound vs. $240 without the rider. Simple inflation is about 10% less. The benefits will be close between simple and compound by year 10 of the policy.  If the person lives longer than age 85, the benefit gap widens - $30 a day apart by age 87, $40 apart by age 90, and so on.

If the 75 year old appears to be in really good health, for the money, I’d bet on the 5% compound rider, because if the client lives longer than ten years more, it’s a better deal.  Gender has an impact, of course.  Do 75 year old women live past age 85?  All day long. . . like the 81-year-old Clarksville, TN woman who just got back from an elephant-riding expedition in Nepal!

The HIAA survey said only 22% of the purchasers bought compound. We have work to do.

Where?

Almost 80% of the policyholders in the HIAA survey bought comprehensive coverage, meaning benefits are available for assisted living, home health care, adult day care and nursing home care.  Fourteen percent bought facility only and 9% bought the delusional policies -- home health care only.  Wake up, Florida - you are not in the majority here!

In my book, I give my opinion of “The Best Bare-Bones Policy for the Premium Conscious” and that is a facility-only policy with a 2 or 3 year benefit period, a short waiting period, and the appropriate inflation coverage. The savings for a facility only policy vs. a comprehensive policy is about 60%, and that’s substantial. The key is to be sure the policy covers assisted living as well as nursing home benefits.

In the next issue, I’ll project the true cost of long-term care by considering lost investment opportunity and tax implications with the help of an exciting new software, so stay tuned!

Phyllis Shelton is President of LTC Consultants, a Nashville, TN based company that specializes in training and marketing materials for long-term care insurance.  Call 800-844-4893 or go click the Seminar button for a training schedule, including the CLTC designation, and browse our Product Catalog for sales and marketing materials.

©2001 Shelton Marketing Services, Inc