What is Long Term Care Insurance and How it Works

Long term care insurance is an important product to ensure your health and protect your assets the moment you need assistance with daily activities and supervision for cognitive impairment or illnesses. Although its importance is often stressed, most Americans have very little knowledge on how this insurance works and how it affects them. After all, this is important part of financial planning for the future.

According to several studies and surveys, the probability of a spouse needing long term care is 70 percent, while single individuals are 40 percent. When you purchase long term care insurance, you are buying benefits that can be used for various services such as hospice care, respite care, and home care.

When buying long term care insurance, you are purchasing benefits (usually a pool of money) that are expressed in the daily amount and the benefit period. For instance, if you purchased two year coverage with daily benefit of $200, then your total benefit is $146,000. Although you have purchased a four year plan, there is also a possibility that it may extend for several years. The policy can be paid for long term care services as long as there is enough money in the pool. It lessens the stress on your part and your family members from writing out checks because the insurance company will do that on your behalf and pays for the care out of money stored in the pool. If a certain service is less than the daily benefit amount the remainder will stay in the pool of money, for example nursing home expenses cost $150 a day but your daily benefit is $200 a day the remaining $50 will be accumulated in the coverage pool, thus increasing the benefit period to several years. Otherwise, if you are consuming $200 daily benefit but the number of days is cut to 4 instead of 7, your pool of money could last at least 5 years instead of 2 years.

The most important feature is the inflation protection. The inflation protection increases your benefits at certain percentage to manage any increase in the price of LTC services. A 5 percent simple inflation is recommended for seniors older than 65 because it increases the coverage every 20 years. The 5 percent compound inflation rider, on the other hand, is recommended for people below 65 because it doubles the benefits every 14.3 years. As your daily benefits grow, your pool of coverage also increases to cope with high inflation rate.

The elimination period is another factor that lowers your LTCi premiums. The elimination period or simply waiting period is the time you are responsible paying for your care before the insurance company disburse payment for the services. The 90-day elimination period is the most commonly purchased rider to reduce the LTCi premiums. The long term care insurance tax deduction also applies on individuals and businesses.

By: Ashley Owens

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