Understanding Your LTCI Policy—Part II
If you or a loved one own long-term care insurance (LTCI) it is important to understand how the policy works and what it covers so you will be better equipped to incorporate it into your overall retirement plan. In addition to understanding the type(s) of care covered by LTCI, benefit amounts, inflationary adjustments, and elimination periods, you should also be aware of when coverage begins, what triggers coverage, and how benefits are paid.
Before LTCI coverage will pay benefits, the policyholder must be unable to perform at least two of the six activities of daily living (ADLs): feeding, toileting, dressing, bathing, walking/transferring (i.e., moving from bed to wheelchair), and continence. Some policies may require that the policyholder be unable to perform three ADLs instead of two. Policies may also specify what is required before the policyholder is declared “unable” to perform a certain ADL. Additionally, some policies may include cognitive impairments, such as dementia or Alzheimer’s, as a benefit trigger. In some cases, a policy will not pay benefits unless a doctor certifies that the care is medically necessary.
Benefit Payment Methods
LTCI policies are generally categorized as either expense-incurred (reimbursement) or indemnity (set dollar amount). Under an expense-incurred policy, a policyholder only receives benefits when care is received. The policyholder, or a representative for the policyholder, must submit receipts for services. If it is an approved service, the insurance company will pay the insured or the care provider for the cost of services up to the daily (or monthly) benefit amount.
The less common indemnity plan pays the daily or monthly benefit amount stated in the policy, regardless of the actual cost of services. Once the claim is approved the benefit is paid directly to the policyholder, up to the stated benefit amount, and continues as long as eligible services are being received. The premium for an indemnity policy is typically higher than it would be for comparable coverage under an expense-incurred policy.
An increasingly popular type of long-term care plan is actually a hybrid policy combining life insurance (or a deferred annuity) and long-term care insurance. If you meet the benefit triggers, which are typically the same as those described above, then you can tap into the long-term care benefit. However, if you never require long-term care or you decide to cancel the policy you or your beneficiaries will receive money back in the form of the cash surrender value or the policy death benefit, respectively.
The appeal of a hybrid policy is that the policy holder (or the heirs) is assured to receive cash back whether or not they require long-term care. The trade-offs are that a traditional policy will buy more coverage per dollar and a hybrid policy requires premiums to be paid in a lump sum- usually $50,000 or more- or at least within ten years. When premiums are spread out over ten years the amount per year will be higher than it would be for a traditional plan, whereby payments are usually spread out over lifetime.
Those who own a cash value life insurance and are interested in getting long-term care insurance may be able to do an exchange of their existing policy into a hybrid plan without having to pay any additional premiums. This can be particularly beneficial for those who, due to health issues, may not be able to qualify for traditional long-term care insurance because hybrid plans sometimes have more flexible underwriting guidelines. This is particularly true of annuity-based hybrid plans.
For a more detailed explanation of LTCI request a Long-Term Care Insurance Buyers Guide from your state’s insurance department and consider talking with an experienced financial planner or insurance agent who is well-versed in long-term care insurance.
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