Insurance Insights with Claude Thau

Searching the internet, you’d likely find advice such as:

• Make sure your long-term care insurance (LTCi) policy covers dementia and Alzheimer’s. That advice is not helpful because LTCi policies have been required to cover dementia and Alzheimer’s since well before the turn of the century.
• Make sure your LTCi policy covers home care. That’s not helpful because more than 99% of LTCi policies include home care coverage.  The few which are limited to facilities are probably because the buyer prefers to enter a facility and make new friends, rather than struggle trying to stay home without good support.

Critical decisions regarding your LTCi policy include the initial monthly maximum and how long the policy will continue to pay benefits if you need care.  Are you comfortable with a “use it or lose it” policy or would you prefer a death benefit?  For couples, Shared Care is also important.  Those topics will be covered in future Ingram’s articles.

Today, I’ll discuss compounding the monthly maximum.

People are very unlikely to need care soon after buying a policy.  The average claim initiation age is 83.  The cost of LTC will rise before you need care and while you need care, so you should focus on the benefit level in the distant future.  To try to maintain the purchasing power of your LTCi benefit, the maximum monthly benefit should compound over time.

Of course, the inflation rate for LTC is unpredictable.  For many reasons, including the growing need for LTC coupled with a relatively static number of potential commercial caregivers, I expect the inflation rate of LTC costs to increase and to exceed the overall CPI for the next quarter-century.  After that, with the baby boomers gone, demand and supply might be better balanced, reducing price increases.

Beware of being presented an inadequate choice.  Advisors may show the cost of $x/month without compounding and the same $x/month with 3% compounding.  Adding 3% compounding can double the price.*  If the price with compounding is too high, the advisor may conclude that you should buy without compounding.

However, a proper choice involves alternatives that have as similar a price as possible, comparing $x/month without compounding to a lower initial maximum monthly benefit with compounding.  The coverage with compounding will start lower but eventually get higher.  Ask your advisor to project the future benefits, so you can choose the more attractive stream.  (In today’s market, a 5%-compounded often won’t exceed a 3%-compounded benefit until you are age 87.  In such situations, buyers generally prefer 3% compounding, with a higher initial monthly maximum if they want more coverage.)

Another reason to include compounding is because State Partnership programs apply only if your policy includes compounding.  Partnership programs allow you to take $1 off-the-table relative to Medicaid for each $1 you get from a qualified LTCi policy.  If you get $650,00 from your policy, you can take $650,000 off the table permanently, qualifying more easily for Medicaid and protecting the $650,000 from estate recovery.

Partnership programs are of most interest to the middle class.  Affluent people often have sufficient income to pay for care, hence won’t benefit from the Partnership.  But if you (or your spouse or parents) have a long expensive need for LTC, you might spend millions in addition to your LTCi, so a Partnership-qualified policy might eventually add unanticipated value.

Depending on your needs, wishes and preferences and the status of the market, other features may be important to consider and factors related to compounding might change.  It is important to secure advice from an expert and to ask whatever questions are important so you can feel comfortable with your decision.

* The percentage increase in cost for compounding is lower when you buy at an older age because there will be fewer years to compound before a claim occurs.

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Ingram’s Long-Term Care expert, Claude Thau, a former inner-city schoolteacher and actuary, has helped employers, advisors and clients with LTC planning since 1994.  He has written the most-read LTC insurance (LTCi) surveys annually since 2005, was named one of 10 “power people” in the industry by Senior Market Advisor in 2007 and helped develop the LTCi program for Federal government employees.  He can be reached at 913-707-8863 or claude.thau@gmail.com.  He created this website where you can privately study LTC and LTCi: www.usa-bga.com/claude-thau.