THOUGHTS ON LTC PLAN DESIGNS AND ISSUES

I will be considering several issues which seem to be (or certainly should be) important to many people who are considering this product:

1. Income policies vs. Reimbursement policies
2. Lifetime payout vs. Limited Period payout policies
3. Lifetime premium payment vs. Limited premium payment policies
4. Optional features you should or should not consider adding

1.      Income vs. Reimbursement: I know there are many people who prefer the income model to the reimbursement model for several reasons:

·        It may be easier to collect benefits under the income model

·        There is no requirement for receipts – making it possibly easier to obtain lower cost but still qualified assistance

·        There are no rules about WHO can provide the help, as there usually are under the reimbursement model

·        Possibly other advantages as well – but these are the ones I hear most often.

BUT:

·        There is greater control of the benefits and the cost of coverage under the reimbursement model

·        There is at least a reduction in the possibility of elder abuse under the reimbursement model

2.      Lifetime vs. Limited Period payout policies (Limited Period payout policies include the “pool of money” approach because, although the pool may be large, it is NOT UNLIMITED):

·        There is no question that there is at least a psychological benefit to knowing that you cannot outlive your needs

BUT:

·        Remember it is not the eventual cost of care which may cause premiums to be increased (a concern of many people) but rather the DURATION of the care (well, also if care needs occur EARLIER than expected – but given any reasonable projection of what has been happening with aging and health – it is more likely that care will occur LATER on in life). It is the Lifetime benefit payment contracts which - in my opinion - are more likely to see increases in costs

3.      Lifetime premium payment vs. Limited premium payment policies:

·        Obviously budget is a significant factor here but the difference in the premium required for a 20-year period (for example) as opposed to the cost of the identical protection but with premiums payable for life is a very small PLUS. In some ways it may serve to lessen the potential impact of possible premium increases. Of course, once the limited pay period is over, there is no possibility of new charges. However, given Canadian demographics and the typical age for claims, a plan where premiums are only required to be paid for 20 years may significantly lessen the risk of any increases. First, the oldest boomers are today age 65. That gives us 11 years (data indicates that the average age of claim commencement is 76) until claims should really start to occur. Again – it has been regularly stated that the so-called “average claim” is 5 years in duration. That gives us at least 16 years (or 80% of that 20-year payment period) before claims COULD become longer than likely projected. When you also consider the fact that our industry claims to have learned from the American experience (where policies were both underpriced and too generously worded), plus the reluctance to increase premiums on the “in force” business (healthy clients will leave = worsening of the situation), I think we can project at least a reasonable possibility of no significant price increases.

4.      Which optional features should you consider? Which should you ignore?

·        First, which to IGNORE!

Ø       RETURN OF PREMIUM ON DEATH! Do not buy this! Even the carriers tell us to ignore it. Let me quickly show you why. I will use a hypothetical case of an annual premium of $1,000 – payable for 20 years. Structures vary somewhat, but in general the maximum death benefit payable on this policy will reach $20,000 after 20 years. Before that point, a lesser amount may be payable.  If you look at a 20-Pay Life Insurance  policy [premiums only payable for 20 years] (the premium structure is identical), the cost will either be the same or slightly less than the cost of the rider – AND THE FULL $20,000 IS PAYABLE FROM DAY ONE. Superior coverage at the same cost or less? That seems like a “no brainer” to me.

·        Next, which to CONSIDER:

Ø      (a) Guaranteed Insurability and (b) Cost of Living. In effect, these are two different approaches to the same issue. The fact is that costs of care will rise over time. If we use our neighbor to the south as an example, costs of health care have risen faster than the traditional CPI every year save one since these costs have been measured. I know of no reputable source who does not expect these costs to continue to rise over time. If this is the case, we may wish for our coverage to increase as well. There are two ways to offer this feature.

                                                                           i.      Under the Guaranteed Insurability approach, the insured has the right to request new coverage on specific dates without needing to provide proof of health. The complication with this approach is that every time you exercise an option, your premium increases. There is no question that the INITIAL premium is cheaper using this approach than using the Cost of Living approach but that price difference rapidly decreases and it can become significantly more expensive. Further, you must take action in order to benefit from these increases.

                                                                         ii.      Under the Cost of Living approach (as it is used by most carriers) the coverage increases every year on the anniversary date – whether or not you are on claim. The actual percentage increase varies depending on the company. The most important items to note here are that the increases are automatic AND THERE IS NO INCREASE IN COST. The cost of this feature is built into the initial premium you pay.

I STRONGLY SUGGEST PURCHASING AS MUCH COVERAGE AS YOU CAN REASONABLY AFFORD. THIS SHOULD BE YOUR FIRST CONSIDERATION. NEXT, MAKE SURE IT IS PROTECTED AGAINST INFLATION. AND ONLY THEN, IF YOU HAVE EXTRA PREMIUM TO COMMIT, LOOK AT LENGTHENING THE PAYMENT PERIOD.

Above all – talk to ALL Financial Services about the importance of Long Term Care Insurance.

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