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How Does Long Term Care Insurance Work?

Mar 21, 2008
How does long term care insurance work? This is a question I hear almost every day. Many people still do not understand how LTCi works. Due to the heightened awareness of Long Term Care Insurance over the past several years, most people realize that this coverage is an important part of their financial planning.

When you purchase LTC you are simply purchasing a pool of money to be used at a later date. We all hope to live to be 101 and pass away in our sleep. Unfortunately this is not often the case. There is almost 70% chance that one person in a couple will need Long Term Care at some point in their lives. For a single person there is a 40% chance of needing Long Term Care. Your pool of money is equal to your daily $ amount times your benefit period. Thus, if you select 4 year plan with a daily $ amount of $150, your pool of coverage is $219,000 ($150 X 's 365 days = $54,750 X 4 years = $219,000). Keep in mind, even though you have selected a 4-year plan, the policy can last much longer than 4 years. The policy will last as long as you have money in your pool of coverage. It works just like your checking account. As you receive care, the cost of the care comes out of your pool of money. Instead of you writing out the checks, the insurance company now acts as your bank and pays for your care from your pool of coverage. Thus, lets say you need homecare and the cost is only $120 a day, instead of the $150 a day you purchased. The other $30 a day is not lost it stays in your pool of money giving you 5 years of coverage instead of 4 years. If you are in a situation where you are receiving the full $150 a day, but you are only receiving care only 4 days a week, your pool of money would last 7 years instead of 4 years under this regimen.

Now let's assume, you purchase this policy today with $150 daily coverage, but you do not need care until 10 years down the road.Due to inflation, the $150 is not going to stretch far enough. Therefore, it is recommended to purchase an inflation protection option at the time you purchase coverage. With a 5% simple inflation option (which is recommended for people over age 65) the coverage grows and doubles every 20 years. Thus, the $150 you started with would grow to $225 in 10 years and $300 in 20 years. With a 5% compound inflation option, (recommended for people age 65 and under) your coverage grows and doubles every 14.3 years. Keep in mind , your pool of money is also growing and doubling over time, to offset the high rate of inflation.

When it is time to receive coverage under your Long Term Care policy, you are responsible for your elimination period. This is similar to the deductible in your auto insurance policy. It is the number of days before benefits begin. Common elimination periods are 30, 60 and 90 days, with the 90-day being the least expensive.

Long Term Care is not as confusing as many people make it out to be. Hopefully this article will make it a little easier to understand the question "How does long term care insurance work?". The bottom line is, going without this important coverage could easily wipe out your life savings. Remember, when you are looking into this coverage for yourself, you are simply purchasing a pool of money to pay for your future Long Term Care expenses.
About the Author
Before you go out and buy a policy go to Long Term Care Insurance Guide and read Necessary Components LTCi
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