As a policyholder, the “Pool of Benefits” is the total amount of money you have available from the insurance company in order to pay for your care.
The amount in the “pool” is generally determined at the time of initial purchase by selecting the amount of coverage you want available for each month of care, multiplied by the number of years you want the coverage to last, then, multiplied by 12 months per year.
For example, let’s say you select a monthly benefit of $5000 and a benefit period of five years. If we multiply $5000/mo. x 60 months (the number of months in 5 years) you have a pool of benefits of $300,000.
Most long term care insurance companies reimburse you for your actual costs of care up to the full $5000 per month in this example. If your care costs less than the $5000 per month, you would be reimbursed for the actual costs and the excess would remain in the pool of benefits. The result is that the pool would actually last longer than five years. As long as money remains in the pool, benefits would continue to be payable.
If you used the full $5000 per month, you would empty the pool in five years. If you only used $2500 (half of it) each month, the pool would actually pay for care for 10 years.
Some insurance companies approach this slightly differently and at the time of purchase you select the amount of money in the pool and the amount that you can withdraw for each month of care. In this situation you simply reverse the math. If your pool of money is $500,000 and you can take out $6000/month, you now have a policy that will pay for your care for 83 months or almost seven years. ($500,000/$6000 = 83 months/12 months/yr. = 6.9 years).
In addition to being called a “pool of money”, you may hear it referenced as your “pool of benefits” or your “benefit account”.
(FYI, there are some policies that were available 15-20 years ago that may work a little differently from what I am describing here. So if you have a parent who has an older policy, you may want to consult with the agent or even call the insurance company for an update on how the coverage works.)
In your long term care planning it is always important to address inflation. We address that differently based on the age of the individual. Someone who is 45 at the time of purchase will be more impacted by inflation than someone who is 75.
There are various inflation options available and those are addressed in a different post. However, if your monthly benefit increases based on your chosen inflation option, your overall pool of money also increases so the period of time covered remains constant. For example, if you had a 3% automatic compound inflation rider on a policy that started with a $5000 monthly benefit and total pool of money of $300,000, in 10 years that monthly benefit would grow to over $6720/month and the total pool of money available to you for care increase to $403,200. ($403,200/$6720 = a minimum of 60 months of covered care—or longer if less than the full monthly amount is used.)
The monthly benefit amount and total benefit pool are only two of the decisions to make when selecting a long term care insurance policy. Everyone’s needs are different. Most of the people with whom I work are not looking for an insurance policy to cover the entire cost of care. Most are in a position to pay at least a portion of the costs out of their own pocket but prefer to shift a portion of the risk to an insurance company.
Long term care insurance planning should involve a discussion of your overall financial situation, your resources and responsibilities, and your preferences regarding what you want to happen when and if you need long term care services.
Just in case.