A Traditional Long-Term Care Policy
A traditional long-term care policy is really pretty simple. It’s like auto insurance, home owners insurance and health insurance. You pay a premium (either monthly or annually) for a certain benefit (what the policy will cover, how much it will cover and for how long) and then hope you never need to use it.
The Actuaries Messed Up
When the policies started becoming popular in the 1980’s, they were more affordable for the average person. By the 1990’s and early 2000’s something started happening…The premiums people had been paying for years started going up.
What happened? When these policies were first being created and marketed, the actuaries (these are the mathematicians working for the insurance company that have to figure out how likely you are going to use a policy, how long you are going to keep it for and how much it will cost the insurance company) made a big mistake. Turns out, they underestimated how long people would keep their long-term care policies.
The insurance companies, in the end, found that people who purchased long-term care policies kept them much longer than an auto policy or even a life insurance policy. You see, the goal of the insurance company is to collect premiums from you as long as possible while not paying anything out. You’d be surprised how many people purchase a life insurance policy, pay into it for years and then cancel it prior to passing away.
With the higher than expected claims, many of the insurance companies raised the premiums and a good number of them ceased offering traditional long-term care policies.
How Traditional Long-Term Care Policies Work
Before any long-term care policy will pay claims, you must be at a point where a doctor can state that you can not do at least two of the six Activities of Daily Living.
The Six Activities of Daily Living are:
- Bathing
- Dressing
- Eating
- Transferring
- Toileting
- Continence
What To Consider: When considering a traditional long-term care policy, you need to determine the following:
- How much is the cost of care at a facility? I suggest you check out Genworth’s Cost of Care here: https://www.genworth.com/aging-and-you/finances/cost-of-care.html
- How much coverage do you want? That could be a daily amount of coverage, a monthly amount of coverage or a lifetime amount of coverage. You can decide if you want a policy to pay $200 per day for three years or, you can decide if you want a policy to be able to pay out $250,000 worth of claims over your lifetime or need.
- When do you want the coverage to start? Do you want the policy to start paying for claims on day 1 of your need or day 100 or somewhere in between. Many people choose a 100 day waiting period before the coverage will kick in.
- What premium amount are you comfortable funding the long-term care policy with?
- Do you want coverage for in-home care?
- Would you like your premiums returned to you in the event you no longer want the policy or use the policy? This is called a Return of Premium rider. You pay an extra premium to be able to receive your premiums back in the future in whole or in part.
Once you figure all this out…which is something that I can help you with, then it’s time to apply.
Applying for a traditional long-term care policy does take more effort and time when compared to applying for health insurance. You will need to gather as much medical information as you can. You may need letters of explanation from your doctor. And then you will likely have to wait 30-90 days for approval or denial.
For some people, a traditional long-term care policy will be what suits them the best. With the newer policies being more conservatively priced and still offering outstanding value (compared to the alternative of paying for LTC care yourself), there’s a higher likelihood that premiums will be more stable moving forward. This is mostly due to more careful and stringent health underwriting.
Is there a better option? For the right person or couple, I believe so. And that option is what is known as a hybrid long-term care policy or linked benefit policy. For more info, see Hybrid LTC.
