How the benefit multiplier and pool of money relate in long term care insurance
The following is a couple questions that I received from one of my clients today and are two common questions that people have when researching Long Term Care Insurance. She had a question on what the term benefit multiplier means in long term care insurance.
Client:
The term that I couldn’t remember when we spoke on Friday was “benefit multiplier”. It is on the plan I’m considering at 36 months. It can vary from 24 months to 120 months to unlimited and the price goes up accordingly.Can you explain to me what that is? Does it mean coverage for three years of care?
Our Reply: The three year plan (or 36 months) is the minimum amount of time this policy would last. For example, say you had $150/day for 3 years…the three years is essentially a multiplier to get your policy’s value. To compute the value you’d multiple $150/day, times 365 days in a year, times 3 years. If you do the math you’d get $164,250 which is known as the pool of money. If you were to religiously pull out $150/day each day for 3 years you’d exhaust your plan after 3yrs. However, say you just needed $75/day or half the amount–then your policy would not last three years, but 6 years. You’re not limited to the three years, but rather the pool of money. You have a policy to use for care as long as you have money remaining in your pool. Make sense?
Many of our clients ask us questions to lead us to write blog posts. This post is an example. Long Term Care Insurance is so different than other policies such as disability insurance and it can be confusing to consumers. Today a client asked about ways to extend a policy by spending less than her daily limit and saving the difference.
Long Term Care Insurance policies provide you what is called a benefit multiplier. To arrive at your total benefit, you multiply the daily or monthly benefit in your policy by the time of benefits your policy pays. You then have the total pool of money available for you to spend on long term care insurance.
An Example of Extending Your Policy:
You have $200 daily benefit, for five years. The math looks like this:
$200 x 365 days/year x 5 years = $365,000
This means you have $365,000 to spend, which if you have inflation protection will grow at 5% compounded over time.
In this example, if you only spent $100 daily, your policy would effectively be extended to ten years. The pool of money derived from the benefit multiplier is yours to use how needed with many policies, up to the policy limits.
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