Long Term Care Insurance
7/06 Cost/Benefit Matrix Update
© 2006 by Thomas M. Lilly,
JD CLU. All rights reserved.
Since 1999 we have provided several editions of a Long Term Care Cost/Benefit Matrix developed for various Pennsylvania Bar Institute presentations. The purpose of the Matrix was and is to give you a perspective on how premiums can substantially vary depending on a person’s age at the time they purchase coverage, on the duration of the benefit period they select, and on whether or not they are in really good health (receive the best rate offered by an insurer) or are in good health (receive the standard rate for the coverage they request.)
For the 9th Annual Elder Law Institute, our focus was on tactical long term care planning in view of the Deficit Reduction Act of 2005. We developed a special Shared Care LTC Cost/Benefit Matrix for that occasion. The Shared Care Matrix is included in the article, Tactical Use of Long Term Care Insurance, posted on this website.
We have been asked, however, by a number of elder law attorneys to revisit the basic Matrix, particularly in the light of the introduction of new products with higher costs by many LTC insurers and the withdrawal from active sales in the LTC market by a number of previously dominant insurers.
Here, then, is a basic Matrix in the same format as earlier editions but with some language changes which should help convey the intent of the data and updated average costs for the same policy structure used in prior matrices. The rates are for preferred issue and standard issue individual policies for six major LTC insurers currently active in Pennsylvania. The premiums include a spousal or couple’s discount. The average cost for a single applicant without a spousal or couple’s discount would typically be 15 to 25% higher than a cost shown in the Matrix.
This edition of the Matrix should be regarded as replacing the earlier, 1/05, matrix which appears at the end of both Long Term Care: Fact & Fiction and Long Term Care: Insure or Self-Insure, also posted on this website.
The Matrix assumes, for each issue age, an initial HIPAA qualified benefit of $150 a day ($4,500 a month). The cost for a 5% compound annual automatic benefit increase (5% CP) is included for issue ages 50 through 65. The issue age 70 premiums include a 5% simple annual automatic benefit increase (5% S).
The policy is assumed to be comprehensive—100% of the benefit is available for covered care wherever it is delivered, whether at home, in adult day care, in an assisted living facility, or in a skilled care nursing facility.
The “Aggregate Premium Paid to Claim” is the total of premiums paid (assuming no rate increases) for a given Benefit Period (e.g., 3 Years) from the first policy year (“Age At Issue”, e.g., 60) until the “Age at Claim”, e.g., 80. “Days on Claim to Even”, e.g., 94, is the result of dividing the Aggregate Premium Paid to Claim, e.g., $35,580, by the “Benefit At Claim”, e.g., $379. That represents the number of days that it would take at $379 a day to recover in benefit dollars all of the premium paid for the policy over 20 years. The Benefit At Claim is the initial benefit, $150, increased annually at a 5% compound rate over 20 years (Age 60 to Age 80).
We emphasize that, at this point in the development of LTC policies, the premiums are not guaranteed against increase. The above “Days on Claim to Even” is, therefore, not a realistic number. However, we asked what would be the results if a person chose not to purchase LTC insurance but invested the “premium” each year and earned 6% net after taxes each year (“Aggregate Premium @ 6% net”: $65,442). How long would it take, at what would have been his or her LTCI benefit, e.g., $379 a day, before the investment fund would be exhausted in the event of a long term care need (“Days Out of Pocket to Even”: 173 days).
An annual increase of 6% in long term care premiums is likely also unrealistic on the high side. We think, however, that the exercise provides an interesting perspective on the value of insuring against long term health care needs in view of the statistical probabilities of experiencing such a need. Those probabilities are noted in the Fact and Fiction and the Insure or Self-Insure articles posted on this website.
2-4 Year Benefit Period at Preferred Issue Rates
2-4 Year Benefit Period at Standard Issue Rates
5 Year Benefit Period at Preferred Issue Rates
5 Year Benefit Period at Standard Issue Rates
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