Actor Harrison Ford recently quipped, “you know you’re getting old when all the names in your black book have ‘M.D.’ after them.” It’s a funny one-liner, but it also raises an undeniable point – the older you get, the more healthcare you are likely to need. And, for three out of every four Americans who reach age 65, that includes long-term care.
What is Long-Term Care?
Long-term care is medical care and life assistance necessitated by an enduring illness, disability, or impairment. It encompasses more than just skilled care like physical therapy, also including assistance with basic life functions in non-medical areas.
Long-term care is commonly provided by nursing homes, assisted-living facilities, and at-home care providers but can also come in the form of everyday assistance from non-specialists.
Due to its continuous, time-intensive nature, long-term care is expensive. Nursing home care, for instance, generally costs somewhere around $6,000 per month.
At-home care is usually less but still puts a sizeable dent in the fixed-income budget of most retirees.
These ever-mounting costs can rapidly deplete what might otherwise have been an ample retirement portfolio – unless, of course, you are adequately prepared.
Preparation, though, requires information.
So, it’s a good idea for anyone who plans on living a long life to understand the options available in long-term care insurance (LTCI) and the LTCI variables with potentially significant impact on retirement planning.
Among those variables, the “elimination period” may very well have the biggest and most direct impact on your retirement budget. But it’s not the only one you’ll want to pay attention to.
What is Long-Term Care Insurance (“LTCI”)?
LTCI is insurance you purchase, usually during your working years, to pay some or all of the costs of long-term care if and when it becomes necessary.
Absent a long term care insurance policy, an individual in need of long-term care is faced with the choice of either paying the substantial costs out-of-pocket or spending down assets to qualify for Medicare.
Either option can significantly restrict your ability to provide a legacy for your heirs.
LTCI, though, safeguards other assets by absorbing long-term care costs.
LTCI generally covers fees for nursing homes, assisted-living facilities, and long-term at-home care.
Long term care insurance policies vary as to precisely what types of assistance are covered.
Some limit coverage to care rendered by licensed providers, while others cover the costs of non-specialist caregivers helping with routine items like keeping house and making meals.
The most comprehensive policies even include compensation for care provided by family members who have to limit their time at work to help.
Hybrid LTC Policies
LTCI is available in a stand-alone policy, hybrid long term care insurance obtained with permanent life insurance policies and even as a rider which works by accelerating payment of death benefits to cover the policyholder’s long-term care.
An additional benefit of “qualified” LTCI policies is that some or all premium payments are tax-deductible, depending on the policyholder’s age.
Numerous riders with a myriad of benefits can be added to LTCI policies, usually at an additional cost.
Popular long term care insurance riders include inflation adjustment, waiver of premiums upon eligibility, and premium-refund riders that return premium payments if the policy is never triggered or the total benefits paid is under a defined amount.
How are LTCI Benefits Triggered?
When a long term care insurance policy is “triggered,” the policyholder becomes eligible for coverage, and the insurance company prepares to make payments upon conclusion of the elimination period.
Mandatory triggering events are sometimes defined by state law, and tax-qualified policies must include certain triggers.
With most policies, eligibility for coverage is based upon the insured’s need for assistance with a certain number of “activities of daily living” (ADL), such as bathing, continence, dressing, eating, toileting, and transferring.
Once the policyholder requires assistance with the specified number of ADLs (or upon the occurrence of another triggering event), the policy is triggered and the policyholder is eligible for benefits.
The federal standard is two ADLs, which means a policy requiring assistance with more than two ADLs cannot be tax-qualified.
Qualified policies must also include “cognitive impairment” (e.g., Alzheimer’s, dementia) as a trigger, and some states require a cognitive impairment trigger in all LTCI policies.
What is an ‘Elimination Period’ in an LTCI Policy?
Also referred to as a “qualifying period” or “waiting period,” an LTCI policy’s “elimination period” is the time period between the occurrence of a triggering event and when the insurer actually starts issuing payments.
An elimination period works similarly to a deductible except that it is expressed as a number of days rather than as a dollar amount.
Elimination periods usually range from 20 to 100 days, though zero-elimination-period policies are available at a higher cost.
All things being equal, the shorter a policy’s elimination period is, the higher the long term care insurance premium rates will be.
Conversely, a longer elimination period equates to the policyholder shouldering more of the potential risk, so the premiums will be lower.
Elimination periods are generally measured from the date of the triggering event – not the date a claim is submitted.
So, if a policyholder with a thirty-day elimination period becomes eligible on July 1 and submits a claim for benefits on July 15, the elimination period will run through August 1.
Consecutive vs Cumulative
Some policies require consecutive days of eligibility to satisfy the elimination period, while others count all days on which the policyholder is eligible.
That is, if you needed help with two ADLs for ten days but then your condition improves and you no longer require assistance, a policy might count the eligible days toward the elimination period if you trigger coverage again in the future.
But a different policy might restart the period from the next triggering event.
Along the same lines, LTCI policies vary as to whether all calendar days of eligibility are counted, or just days on which services are received.
And the duration of the elimination period can vary within a single policy depending on the form of care received (e.g., 30 days for nursing home, 60 days for at-home care).
Factoring Elimination Periods into Retirement Planning
When shopping for an LTCI policy, you need to make sure you choose a policy with an elimination period that complements your retirement plan and overall financial situation.
Likewise, you will want to design your retirement budget to account for your policy’s elimination period.
For instance, if you have sufficient reserves in savings or alternate income sources to pay long-term care costs out-of-pocket for a longer period, it might make sense to save money now on premiums and opt for a more extended elimination period.
But if the bulk of your wealth is in illiquid assets like real estate that can’t easily be tapped to pay long-term care costs, a shorter elimination period may be the better approach.
Or, if you have a short-term disability policy in place which would cover initial long-term care costs, an elimination period timed so that long-term coverage kicks in just as short-term expires could be an ideal approach.
Like much of retirement planning, selecting an elimination period involves a careful cost-benefit analysis.
Comparing estimated long-term care costs over a possible waiting period to the premium savings gained with a longer period, along with projected growth on the savings, can be a useful exercise in judging the effect the elimination period would have on your overall situation.
How do LTCI Policies Pay Out?
Long term care insurance companies use one of three basic protocols for LTCI benefit payments: expense-incurred, indemnity, or disability.
An expense-incurred policy pays out when covered services are actually received. The amount paid is the actual cost, except to the extent the total cost exceeds any applicable coverage cap. The expense-incurred model is the most common and can be set up to issue payments to the insured or directly to the provider.
An indemnity policy pays a defined amount to the policyholder at regular intervals.
After coverage is triggered and the elimination period concludes, the insurance company makes regular benefit payments regardless of the actual costs of care received during that relevant interval.
Benefit amounts may be described as dollars per day, week, or month, and payment amounts may vary according to the precise services received (i.e., a policy may offer a greater payment for nursing-home care than for at-home care).
A disability policy is similar to an indemnity policy except that the policyholder’s actual receipt of long-term care is not a factor in determining benefits.
Once coverage is triggered and the elimination period concludes, the insurer issues payment, even absent direct long-term care expenses. This type of policy can be useful for a policyholder receiving informal care and assistance from a family member or friend.
“Benefit Period” and “Benefit Amount.”
Most LTCI policies include a lifetime benefit cap expressed as either a “benefit period” or “benefit amount.”
A policy’s “benefit amount” is the maximum aggregate monetary sum of benefits the policy will pay.
Lifetime benefit amount is separate and distinct from a policy’s monthly coverage limits.
Alternatively, a policy’s “benefit period” is the maximum length of time the policy will pay out – usually between one and five years, but lifetime policies are available.
A policy that uses “benefit period” may be the better option if you anticipate needing higher-priced services like continuous nursing home care.
On the other hand, a policy limit based on “benefit amount” can be more beneficial for intermittent care or lower-cost services like at-home care.
With either measure of lifetime benefits, it’s important to review the policy closely to make sure it includes the options best-suited to your present financial situation, retirement-planning strategy, and expected future long-term care needs.