Long-Term Care Insurance Basics and Policy Design
Long-Term Care Insurance Basics and Policy Design
This domain tests the building blocks of a long-term care insurance contract: what triggers benefits, how benefits are measured and paid, and how policy design choices affect cost and suitability.
Core rules
- Benefit triggers: inability to perform at least two of six activities of daily living (bathing, dressing, eating, toileting, transferring, continence) expected to last at least 90 days, or severe cognitive impairment. Cognitive impairment does not require an ADL deficit.
- Elimination period: a waiting period, often stated in days of service or calendar days. It can be satisfied once or per benefit period depending on the contract.
- Benefit amount and period: a daily or monthly maximum and a maximum benefit period or dollar pool. A 3-year policy at $5,000 per month has a $180,000 pool if benefits are paid at the maximum.
- Reimbursement policies pay actual charges up to the limit; indemnity policies pay a stated cash benefit regardless of charges.
- Inflation protection increases benefits over time, usually compound or simple. It raises premium and is essential for younger buyers.
- Other design features: nonforfeiture, waiver of premium, restoration of benefits, shared care, home care and assisted living coverage, and exclusions for pre-existing conditions or mental/nervous disorders.
- Tax-qualified policies follow IRC 7702B and receive favorable tax treatment; Partnership policies must be tax-qualified.
Worked example
A policy has a 90-day elimination period, a $5,000 monthly benefit, and a 3-year benefit period. The insured enters a nursing home and incurs $7,000 per month. After the elimination period, a reimbursement policy pays $5,000 per month; the insured pays the $2,000 difference. The total pool is $180,000, not an unlimited three years at any charge level.
Traps
Do not treat the elimination period as always calendar days; do not assume a 3-year benefit period means 36 months of full charges; do not require ADL loss for cognitive claims; and do not assume home care is covered automatically.