How does long-term care (LTC) insurance work?

Put in the context of retirement income planning, Long Term Care (LTC) insurance is a useful tool with a great deal of flexibility to suit both personal and financial goals. While certainly not inexpensive in most cases, note that one of the major benefits of LTC insurance is asset protection.  

In general, there are two types of LTC policies: 

  • Indemnity policies pay a selected daily benefit as soon as you qualify. That amount is paid regardless of the actual cost of care, but it at home or in a long-term care facility.  Cash benefit policies are similar, with a particular benefit being paid per day, and they offer a bit more flexibility regarding uses, given their "anything or anyone" cash disbursement. 
  • Reimbursement policies will pay up to a daily or monthly benefit limit depending on the cost of care.  Any amount over the the daily or monthly limit would be the responsibility of the insured.  The advantage here is the potential to extend the policy life prior to reaching the payout maximum if costs happen to be lower on the front end of the payout period.   

Under most policies, benefits will be paid when the insured is unable to perform two out of six "activities of daily living," or ADLs.  These include bathing, caring for incontinence, dressing, eating, toileting or transferring (mobility in or out of a bed or chair, for example). When these become an issue, a medical review and an approved "plan of care" will begin the claim process. Once approved, the insured will likely have to pay out of pocket for long-term care services during an "elimination period."