Do you Need Nonforfeiture Benefits on LTC?

Insurance can be difficult to understand with all the jargon, but understanding it is important. What many do not understand is the nonforfeiture benefit, and what it does. Many ask do they need nonforfeiture benefits? So continue reading and you will be enlightened as to what it is and its value.

A nonforfeiture benefit is essentially a useless option added to a contract to give a sales person something to be proud or, and make more commission off. Ok, so that still does not tell you much, does it?

Basically the promise is that the carrier will return to the policyholders some of their "investment" in the policy if they discontinue coverage. Still need further explanation?

Ok, essentially, it exists because without a nonforfeiture benefit term, companies claim that it would be unfair to you if you drop the policy say 10 or 20 years down the road and never used it. That sounds nice, right? Right, but there is a catch.but before we get to that, let's look at home the nonforfeiture benefit is paid out.

These companies usually offer a nonforfeiture benefit in the form of a reduced paid up policy in which lesser benefits are provided after you drop the coverage. So you stop paying the premiums, but you still get some benefits anyway since you paid premiums for so long. That is one option of what nonforfeiture does, the other is that carriers may offer a "return of premium" in which they return a portion of the premiums after a certain number of years if the policy is cancelled. So you get a small refund. Ok, so it still sounds good, but wait, there is more.

Basically the downside is, a nonforfeiture benefit is a cost item carefully calculated by the carrier's actuary. It has a cost that is added to the underlying policy. So you pay to have it. It is like buying insurance for your insurance. And chances are you pay more for that then you would be getting back.

Let's look at some facts:
First, an example: If a policy is purchased at age 60 and remains in effect until age 80, (the age by which 50% of all seniors will need a nursing home), the average policyholder will have paid somewhere around $60,000, which is about the cost of a year of nursing home care. So in this case, if their policy covers their care for more than a year, it was a good investment. However, that is unlikely.

Statistics show, that most who purchase LTC insurance don't keep it.

- Most seniors have difficulty maintaining their policies until they reach age 80, when they most probably will need them. Why? It becomes too expensive for their fixed incomes.

- The National Association of Insurance Commissioners reports that 16% of all nursing home insurance buyers drop their coverage each year because they can no longer afford it.

- Insurance companies know that of those who buy coverage at age sixty, 95% will have cancelled the coverage by age 80( when they will use it). The U.S. General Accounting Office confirmed those figures. Of insurance company files that were investigated and excluding those who had died, 60% or more of the original policyholders allowed their policies to lapse within 10 years and one insurance company reported a lapse rate approaching 90%.

From the above bullets you can see, that nonforfeiture benefits is something many people take advantage of, however, they pay for it. LTC insurance is not used often because most drop the coverage before they need it. Thus, by offering something back, (nonforfeiture benefits) insurance companies are offering incentive to the policy holder to drop coverage.

If the coverage is making their budget strain, the thought of getting some of their investment back is appealing, and coverage is dropped. Which means, yes the insurance company pays them a little something, but they also get a big something out of it. The insurance company collects high premiums, and never has to pay for long term care.