Short and fat LTCI plans are the way to go

By Julie Gelbwaks Gewirtz

Gelbwaks Executive Marketing Corp.


There has certainly been quite a bit of debate over the last two decades about the "correct" way to structure a long term care insurance (LTCI) plan. A large part of the reasoning behind the continued debate had been the fact that very little claims data was on the books to help insurance agents advise clients on the policy design as an industry. The entire book of business was too young, and the answers that were needed just weren't there. It's a different story now. Many things in the long term care environment have progressed to date, and we now have substantial reasoning behind why we do what we do.

In the early days of comprehensive LTCI sales, there was a generally clear trend. Agents would advise clients to purchase a benefit that equaled the average cost of care in the area where the insured planned to receive care at the time of claim. A large percentage of the time, an unlimited or lifetime benefit period would be sold. And many times, inflation would be left out completely. The thinking behind selling a lifetime benefit period was basically the idea that if a person has no knowledge of what might happen to them in the future, or what the statistical chance is that they may actually need a very lengthy benefit, they are better off insuring for the possibility of a long claim. The idea made sense, but because of the cost of a lifetime benefit period, in addition to the average age buyer in the past (which of course was much higher than it is today), other benefits had to be cut due to the affordability issue. A good example of that was the inflation rider.

So much has changed and therefore, the policy designs of today have been altered. First, claims are coming in by the truckload. Because of that, the industry truly has a much clearer understanding of how they work. They can tell carriers and agents alike what benefits are worth the money and which actually get utilized at claim time. Advisors now know from many of the studies that have come out that the large majority of claimants do not run through a five-year benefit period.

Because of this relatively new claim duration knowledge, the more current trend now is to sell what is typically referred to as a "short and fat" plan. It has taken the industry as a whole quite a few years to get to this point, but most of the advisors out there are now on board. This is where the agent structures a plan to show a bit higher benefit amount than is average, a three- to five-year benefit plan, and a comprehensive inflation rider that will fit the needs of that particular client depending on age at purchase.

Most LTCI plans being sold currently are "pool of money" products. This means that they take the daily benefit amount purchased (for example $200 a day) and multiply it by the amount of days in the benefit period (for example in a five-year policy, it would be 1,825 days). In this example, the client is basically left with a bank account balance of $365,500. If they use their full $200 every single day for the full five-year period, their benefit ends. But, if they only end up using $100 a day or $200 a day three times a week, the benefit could last them 10 years! The money just sits in the account, waiting to be used. Therefore, the benefit period purchased is actually the minimum amount of time the policy would pay in the "pool of money" type contract.

Why is that important? Well, it helps to bring together the concept of why "short and fat" plans make sense. If the client purchases $200 per day (when the average cost of care is $150) with a five year benefit plan, for example, in many cases, it would cost about the same in premium as a $150 per day with an unlimited benefit. The rationale here is that if, at claim time on the $200 day/five year plan, the client only uses what the average cost of care is (in this case $150), that five-year benefit period will extend and last longer than expected. But if they happen to need more than the average cost of care, they have it available to them. On the $150 day/lifetime benefit plan (the "long and lean" one, for lack of a better term), there is a very good chance that they may never get past that five year mark and in addition, they may even have out of pocket costs along the way.

Many carriers have either raised rates on lifetime benefit periods for new business or gotten rid of the option to buy lifetime benefits altogether. Some advisors have brought a bit of attention to this issue by stating that if carriers want to raise rates or remove the option overall, that must mean that the claim studies are incorrect and most people really are in need of lifetime coverage. Not true. One of the main reasons for this action from the carriers is actually the higher utilization/occurrence rate of claims from insureds who own lifetime benefit plans. Because the benefits are unlimited, people tend to use them more often because they are not afraid to use them up.

Lastly, we now have a variety of other reasons why consumers might be interested in a "short and fat" plan. Now that partnership has become available in most states, there is more protection for people in the unlikely event that they do happen to run through their entire limited benefit plan. They could possibly become a Medicaid recipient and receive an asset disregard. This means that the amount of money the long term care policy had paid to them at claim time could be the same amount of their assets that would be protected when applying for Medicaid. In addition, there are so many new types of affordable inflation options in the marketplace today that work very well when designing a policy with a high benefit amount.

No matter what though, do not misunderstand that a lifetime benefit policy is still the best. The advice given here is to just make sure your client does not undercut the other very important options like benefit period and inflation to get it.

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