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 thatís the basic track.
And, no, I donít consider nonforfeiture one of the core decisions, as
I donít believe itís in the clientís 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
Iím anxious to share it with you!
Itís 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 Iíll come back to that when I get to the
inflation point in this article.
What are people buying? The new HIAA survey ďWho Buys Long-Term
Care Insurance in 2000?Ē 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.)
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 theyíre 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
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 letís 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 otherís benefit period, or for lower premium, to share one benefit
period. Letís 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 otherís 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 arenít going to buy a lifetime benefit
period, it makes sense to pay the extra 8% and buy the shared care benefit.
(Itís 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.
Thereís about a 20% premium difference between a 20 and a 100 day elimination
period, but thatís a potential 80 days out-of-pocket, not just at todayís
prices but at future prices, which are projected to at least triple in
20 years (GAO, 6/91 and HCFA, 7/99). I say ďpotentialĒ because they might
get lucky and get a few days paid by another source, but there are no
guarantees for that.
Donít ever sell longer waiting periods to people with low assets to cut
the premium. Itís 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 arenít covered under the scope of an insurance
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 doesnít 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 ďsavedĒ 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 - thatís 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 itís a great idea to sell simple or no inflation to people
in their 70's. Well, thereís about an 8-10% premium difference between
simple and compound for a 75 year old, so thereís 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 donít 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,
Iíd bet on the 5% compound rider, because if the client lives longer than
ten years more, itís 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.
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 ďThe Best Bare-Bones Policy for the
Premium ConsciousĒ 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 thatís substantial. The key is to be sure the policy
covers assisted living as well as nursing home benefits.
In the next issue, Iíll 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
Catalog for sales and marketing materials.
©2001 Shelton Marketing Services, Inc