Should You Buy Long-Term Care Insurance with a Long Elimination Period?

Most people are deterred from buying long-term care insurance due to the high cost of the premiums (and the hope that they'll never need it). Choosing a longer "elimination period" is one way to reduce premiums.

The premium level is based on a number of factors, including:

• Your age
• Your health
• The daily benefit you choose -- such as $200 or $300 a day
• The length of coverage you choose -- such as two years or five years
• Whether you purchase an inflation rider, so that the daily benefit increases each year by a set percentage
• The elimination period -- the amount of time before the long-term care insurance policy begins to pay out

If you choose a longer elimination period -- for example 90 days -- you can reduce the premiums a bit.  After all, Medicare may cover some or all of the first 100 days of skilled nursing care following a hospitalization, and anyone who can afford long-term care insurance in the first place should be able cover the first three months of care without a huge problem. To the extent this choice lowers the annual premiums, more people may be comfortable purchasing the insurance.

Steve Samuel of Samuel Financial in Dedham, Massachusetts, suggests going even further. He recommends looking at policies with a one-year elimination period and to think of the policy as catastrophic long-term care insurance. He says that most people who can afford long-term care insurance can afford to pay for a year of care. It is care needs that go on for years that can damage the ability of a spouse to remain financially independent or deplete an inheritance earmarked for children and grandchildren.

Richard Eisenberg of Eisenberg Associates in Newton, Massachusetts, and Scott Everton of LTC Financial Solutions in Tampa, Florida, agree that this strategy could make sense for older individuals, but not necessarily for younger ones for whom the premium savings may be relatively small.

They provided annual premium quotes for a typical policy to illustrate the financial effects of longer and shorter elimination periods. The quotes are for a Genworth policy paying $200 a day for three years with a 3 percent annual inflation rider at the ages and with the elimination periods indicated below. The quotes are from spring 2013 and in all cases they are for a healthy male insurance purchaser.

 As you can see, the difference between a 30-day and a 90-day elimination period is relatively small, a bit over $300 a year for a 50-year-old, $400 a year for a 60-year-old and $1,100 a year for a 70-year-old. However, the difference between a 90- and a 365-day elimination period is much more significant, and interestingly it is almost as much for a 50-year-old -- $571 -- as for a 60-year-old -- $632. For a 70-year-old buyer of long-term care insurance, the savings in buying a policy with a 365-day elimination period over one with 90 days is a significant $1,794. This would bear out, at least for older buyers, Samuel's recommendation to lengthen the elimination period.

If a couple is buying two policies, the premium and the savings from extending the elimination period will, of course, increase. But it may not double, because insurance companies often offer discounts for couples.

In short, a lot of factors can increase or reduce the cost of long-term care insurance. One effective way of lowering the cost can be to opt for a longer elimination period and plan to pay out of pocket, or self-insure, for any care needs up to a year in duration.

For more information about long-term care insurance, click here.