Now That I Know What To Consider, How Do I Determine What To Buy?
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UPDATED: Jul 16, 2021
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Like a kid in a candy store, once a consumer realizes the need for long term care insurance, the multitude of choices and options can be overwhelming. Consequently, it is a good idea to have a preliminary but flexible budget in mind. Let us assume that, should you need assistance, you would want to stay in your home for as long as it is practical. If necessary, you would enter a “comfortable” nursing home in your community.
To illustrate some of the factors that a person should consider, here is one possible approach to buying:
1) Determine the current daily cost of an agreeable nursing home in your area. (For this illustration, we will use $125.)
2) Determine the proportion that you expect to be able to bear out of your pocket. (For this illustration, we will use 20% or $25, so that our basic daily benefit will be $100.)
3) Assuming you want to stay at home, you will want to select a comprehensive policy.
4) Now you must determine if you want a qualified or non-qualified product. One way to evaluate the qualified policy is to weigh the benefit of the medical expense tax deduction against the more strict definition of the triggers for benefits. (Assume we take the standard deduction on our tax return and favor the non-qualified plan.)
5) The next item is the benefit period. (Let’s assume that we want lifetime benefits.)
6) Now we have to look at the waiting period. How much of an emergency fund do you have to pay for a relatively short stay in a nursing facility? (Let’s use $9,000, or enough for 90 days at $100 per day).
7) Inflation protection is the next issue. Since inflation in general and medical care costs in particular increase in a compound manner, a compounding cost of living rider is preferable. The rate of increase in the daily benefit level is typically 5%.
8) Now that we have chosen a $100 per day comprehensive, non-qualified policy with lifetime benefits and a 90-day elimination period, we can turn to the length of time we wish to pay premiums. Obviously, the choice is to pay less each year for life, or more each year for say 10 years. While this is obvious, you must make a choice between these two options and choose the one that suits your particular needs. Let’s assume that we want to pre-pay our long term care protection while we have the means to do so, and that we are concerned about the company’s ability to raise rates at some future date when funds may be scarce. Consequently we choose the 10-pay plan.)