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Long Term Care Insurance – Understanding the Four Basic Components

You’ve done your research and have decided that Long Term Care Insurance (LTCI) is right for you and your family. The next step is to become familiar with the basic structural components of an LTCI policy.

When building an LTCI policy there are four primary variables that must be considered. They are:

• daily benefit amount
• benefit period
• elimination period
• inflation protection

Daily benefit amount refers to the maximum amount an insurance company will pay per day if extended care is needed. To determine the proper daily benefit amount you must first determine the cost of care in your part of the country. In Orlando, Florida, where I live, a private room at a nursing facility will cost you $215 a day. Alternatively, that same room in New York City will cost you $400 a day. An LTCI policy with a $200 daily benefit amount would provide excellent coverage in Orlando but would be grossly insufficient in New York City.

The second major structural component of an LTCI policy is the benefit period. Benefit period refers to the length of time an insurance company will pay benefits if the insured receives the full daily benefit amount. If the insured receives less than the daily benefit amount then the insured’s policy will last longer than the defined benefit period. Under this scenario, the benefit period serves as a multiplier in calculating the lifetime maximum benefit.

For example, Carolyn has an LTCI policy with a $200 daily benefit amount and a three year benefit period. The lifetime maximum benefit of Carolyn’s policy is $219,000, which is calculated by multiplying the daily benefit amount by the number of days in the benefit period (i.e. $200 x 1,095 days). Suppose Carolyn receives extended care totaling $200 per day. Under this scenario Carolyn will have used her entire lifetime maximum benefit in three years. Alternatively, Carolyn receives extended care totaling only $100 per day. In this scenario, it will take Carolyn six years to exhaust her entire lifetime maximum benefit or twice as long as the defined benefit period.

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