When we present any form of Living Benefits, an almost automatic reaction is: “Oh my! That is EXPENSIVE!” We need to realize the benefits that will be provided in relation to the premium being charged and adjust the premium as needed to fit the client’s budget.
In the illustration that follows, I am using a female age 65 because females live longer than males, are more likely to use the protection, and their premiums are higher. Remember that males pay less and that if anyone purchases before age 65, the annual cost is lower AS IS THE TOTAL THAT YOU WILL PAY PRIOR TO CLAIMING. I have also deliberately chosen to use the most complete, and hence the most expensive, product in order to make my point as clear as possible.
I have also included the Inflation Protection feature because it is generally accepted that costs of care will increase rapidly over time. Of course, if you elect not to purchase that option, the cost will be lower, as will be the benefits received.
For the purpose of this illustration, the initial benefit is $3,000/month. This amount will increase every year by 2% compounded, however, the premiums will not increase.
Based on data from 2011, the average age of claim is 76 (a 65 year old should anticipate paying premiums for 11 years). A reasonable duration for claim payout is about 6 years. For purposes of my example, I will divide the claim into two equal parts: the first 3 years at home and the last 3 in a long-term care facility. While in a facility, benefit payments double.
Let us look at 2 options:
Option 1 Option 2
Premium (age 65) $826.73/month $655.49/month
Paid in premiums over 11 years $109,128.36 $86,524.68
Benefits paid out (over 6 years) $416,545 $395,961
Residual (balance) $399,072 no residual
Option 1 would cost $826.73/month. This would create a total 11-year cost of $109,128.36. The total benefit payouts over the 6-year claim period would be $416,545 – or just under 4 times what was paid in. In addition, there would be an available balance of $399,072 to either continue payments for this claim or to use for any future claims.
Alternatively, if $826.73 is outside the client’s budget, there is option 2.
Option 2 would cost $655.49/month. This would create a total 11-year cost of $86,524.68. Payouts for the first 5 years of the claim would be identical to option 1. The only difference would be that benefits would run out after a total of $78,251 had been paid in year 6 and there would then be no balance. The total benefit payouts in this case would be $395,961 – still more than 4 times what was paid in.
The key number in all of this is the 4 times what was paid in. You choose the amount you are comfortable with in terms of benefits to be received and price to pay. Whatever that amount is, you can feel confident that you should receive significantly more in pay out than you will pay in.
THE HUGE BENEFITS OF NOT WAITING!
Over and above the fact that you will probably be healthier at age 55 than at age 65, let’s take a look at some more numbers:
Option 1 Option 2
Premium (age 55) $462.02/month $361.52/month
Benefits paid out (over 6 years) $513,770 $486,471
Residual (balance) $482,679 no residual
Rather than paying $826.73/month if you wait to 65, the cost for the identical initial benefit starting at age 55 is $462.02/month AND the payout over 6 years starting at age 76 is $513,770 – with a balance available of $486,471
Alternatively, what would cost $655.49/month at age 65 would cost $361.52 at age 55 AND the payout over 6 years would be $482,679.