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Making the best decision on long-term care policies

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I’ve been getting a lot of calls from government employees and retirees about the long-term care policies they have with John Hancock. These people signed up for this insurance while working, and they are now facing some decisions.

Most of the calls I’ve received are about a rate increase, so I want to explain how I work through these numbers. It is particularly important to think through this decision, as you will keep and pay for this type of policy for the rest of your life. Insurance companies have to ensure they have enough money to pay for future claims, so if they experience more claims than expected, they have to raise premiums.

Long-term care insurance premiums are created by three major factors: the daily benefit the policy pays, the inflation rider and the number of years the policy pays a benefit. There can be other variables and riders, but these are the main policy elements. Claims for this sort of insurance are triggered by your inability to perform certain “activities of daily living,” like bathing yourself or a cognitive impairment.

Let’s say you have a policy that pays $140/day, for five years, and the policy has a 5 percent compound inflation rider. The inflation rider increases the daily benefit by 5 percent each year. The offer from John Hancock states that you can keep your current coverage but pay more each month, or reduce the inflation rider to either keep your premium the same, or allow it to increase moderately.

It is very important, especially if you are young, to look way down the road in making this decision. Let’s say you are currently age 55. The average age for initiating a claim on this type of insurance is 75, so let’s look at how the benefits differ in this example.

I use an Excel spreadsheet to calculate future, compounded daily benefits. The daily benefit for the current policy, outlined above, would increase to $353.77 per day in 20 years. If the lower, 4.2 percent inflation rider was selected, the daily benefit would increase to $305.92, and if the lowest inflation rider was selected, 2.2 percent, the daily benefit would be $211.69 in 20 years.

There’s a big difference between $353 per day, and $211 per day. If you were on claim for a year, that’s the difference between receiving $129,126 for care, and $77,266.

John Hancock also has mailed letters to other policyholders who have reached a trigger point in their policy, which allows them to increase their daily benefit without a health screening. This increases the premium, but for someone who has a known, expensive health condition, this could be a very good thing.

If you receive one of these letters, read the information completely, and do some research so you will understand the choice you are making.

Sherri Goss is V.P. of Rosenberg Financial Group, Inc., with offices in Macon and Warner Robins. You can reach her by calling 922-8100, or via email at sherri@rfmoney.com.

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