Understanding Your Long Term Care Insurance Policy—Part II
If you or a family member own a long term care insurance (LTCI) policy, it’s important to know how the policy works so you can include it effectively in your retirement and financial plans. In addition to understanding the types of care covered, benefit amounts, inflation protection, and elimination periods, you should also be familiar with when coverage begins, what triggers benefits, and how those benefits are paid.
Benefit Triggers
Most LTCI policies require that the insured be unable to perform a set number of activities of daily living (ADLs) before benefits begin. Common ADLs include eating, toileting, dressing, bathing, walking or transferring (for example, moving from bed to a chair), and maintaining continence. Many policies trigger benefits when the policyholder cannot perform two of these ADLs; some require inability to perform three. Policies may also define what “unable” means for each ADL and specify how that inability must be documented.
Many policies also include cognitive impairment—such as dementia or Alzheimer’s disease—as a trigger for benefits. In certain cases, the insurer may require a physician’s certification that the care is medically necessary before paying benefits. Always check your policy for the exact triggers and any required medical or professional certification.
How Benefits Are Paid
LTCI policies typically follow one of two payment methods: expense-incurred (reimbursement) or indemnity (fixed benefit).
With an expense-incurred policy, benefits are paid when care is actually received. The insured or an authorized representative submits receipts or invoices for services rendered. The insurer reimburses the insured or pays the care provider up to the policy’s daily or monthly benefit limit for covered services.
Indemnity policies pay a fixed daily or monthly benefit amount spelled out in the policy, regardless of the actual costs incurred. Once a claim is approved, the insurer pays the benefit directly to the policyowner up to the stated amount while eligible care continues. Because indemnity policies offer guaranteed cash amounts rather than reimbursements for documented expenses, they typically carry higher premiums than comparable expense-incurred coverage.
Hybrid Policies
Hybrid LTCI products pair long term care benefits with a life insurance policy or a deferred annuity. If you meet the policy’s benefit triggers—generally the same ADL and cognitive criteria discussed above—you can access the long-term care benefit. If you never need care or you cancel the policy, the hybrid design ensures you or your beneficiaries receive value through a cash surrender amount or a death benefit.
The main appeal of hybrid policies is that they provide a form of guaranteed return: either care benefits when needed or a financial benefit to the policyholder or heirs otherwise. The trade-offs include higher upfront cost relative to what a traditional LTCI policy would buy. Hybrids often require a lump-sum premium (commonly starting at $50,000 or more) or premiums paid over a limited period such as ten years. Spreading payments over a decade can still result in higher annual costs than a traditional plan with lifetime-level premiums.
Owners of cash value life insurance may be able to exchange an existing policy for a hybrid LTCI product through certain tax-free exchange options, potentially without additional underwriting. This can be advantageous for people who have developed health issues that would make qualifying for a new traditional LTCI policy difficult. Annuity-based hybrid plans often have more flexible underwriting than standalone long term care policies.
Because long term care coverage varies widely by contract, consider requesting a Long-Term Care Insurance Buyers Guide from your state’s insurance department and consult an experienced financial planner or insurance agent who specializes in long-term care. A knowledgeable professional can help you compare traditional, indemnity, and hybrid options and choose the solution that best fits your health, financial situation, and retirement goals.