LTC Insurance

In the preceding chapter we learned why personal savings and assets, Medicare, and Medicaid are for most people not good ways to fund long-term care.  But there is another approach to funding these expenses: long-term care insurance. A person can buy an LTCI policy, pay premiums of a set amount, and when she needs care, she will receive benefits to help cover the cost.


All LTCI policies work in essentially the same way and have many of the same provisions. But there is also a great deal of variation, resulting from different product designs and optional features. We’ll start with product design (the basic package of benefits offered by insurers) and then we will examine purchaser options -- the choices a consumer makes to tailor a particular LTCI product to meet his needs.



Long-Term Care Policy Design


When designing LTC insurance product, an insurer must ask  a number of basic questions: 


· Will  the policy be federally tax-qualified?

· Does the policy qualify for a state long-term care partnership program?

· What conditions must be met for benefits to be paid?

· What long-term care settings and services will the policy cover?

· On what basis are benefits paid?

· What rights will the policyholder have regarding renewal of the policy and premium increases?


The answers to these questions directly affect the level of coverage the insured can rely on, and the cost of the premiums for that coverage.



Tax-Qualification of LTC Policies


The Health Insurance Portability and Accountability Act of 1996 (HIPAA) established a class of LTCI policies: federally tax qualified (TQ) policies. To be tax-qualified, a policy must meet certain requirements, and owners of TQ policies enjoy certain tax advantages. Around 90 percent of all LTC policies in force today are tax-qualified -- the rest are referred to as nonqualified (NQ) policies.  Specific requirements for TQ policies and the tax treatment of LTC policies is discussed later in this chapter.


It is important to note that all LTC Partnership programs (discussed later in this course) must be tax-qualified.  But being a tax-qualified plan does not automatically make the policy a Partnership plan.   Partnership plans must be tax qualified and meet certain other requirements.  Those additional requirements are explored in later chapters.



Benefit Triggers  


To receive benefits under an LTCI policy, the insured must meet at least one of certain conditions stipulated in the policy, known as benefit triggers.   For an LTCI policy to be deemed “tax-qualified” under HIPAA, the policy must meet certain requirements in relation to benefit triggers:


· Standardized Activities of Daily Living (ADLs). HIPAA establishes six standard ADLs (bathing, dressing, toileting, transferring, continence, and eating) and defines them in detail. Tax-qualified policies must include at least five of these six and must use the HIPAA definitions. Also, they must define a physical impairment as the inability to perform at least two of the standard ADLs without substantial assistance from another person.


· Substantial assistance. A TQ policy may define substantial assistance in two ways. Hands-on assistance is the physical assistance of another person without which the impaired individual would be unable to perform the ADL. Stand-by assistance is the presence of another person within arm's reach of the impaired individual that is necessary to prevent, by physical intervention, injury to the individual while she is performing the ADL. For example, if a person cannot wash herself and must be washed by another, she needs hands-on assistance with the ADL of bathing. If, on the other hand, she can take a bath without any help but needs someone there in case she falls getting into or out of the bathtub, she needs only stand-by assistance. A TQ policy may require an insured to need hands-on assistance, or it may require only a need for stand-by assistance, or it may accept either standard, or it may use a more rigorous standard, but it may not use a standard less rigorous than stand-by assistance.


· The 90-day certification requirement. A licensed healthcare practitioner must certify that the insured's inability to perform ADLs is expected to last at least 90 days. This provision is required because LTCI benefits are not intended for those unable to bathe themselves or dress for a short time while they are recovering from an illness or injury. (Medicare or medical expense insurance generally covers the care of those with temporary conditions.) This 90-day requirement does not apply to cognitive impairment; as such impairments are not usually temporary.


· Severe cognitive impairment. To qualify for benefits on a cognitive basis, the insured must suffer a severe cognitive impairment such that substantial supervision is needed to protect her from threats to her health and safety. A TQ policy cannot pay benefits for mild disorders such as the increased forgetfulness that often accompanies aging. HIPAA defines a severe cognitive impairment as a loss of or deterioration in intellectual capacity -- including Alzheimer's disease or irreversible dementia.


Variation in Benefit Triggers


To a great extent, benefit triggers have become standardized, as tax-qualified policies must adhere to the HIPAA requirements described above.  In the past "medical necessity" was a trigger in many LTCI policies. In the context of long-term care insurance, medical necessity means that a physician determines that a person has a need for long-term care.  Medical necessity may not be a benefit trigger in a TQ policy, nor may “prior hospitalization”, another benefit trigger found in some older policies.


But the few policies that are nonqualified may base benefit eligibility on other criteria (such as medical necessity). And even among tax qualified policies, there is room for some variation: Although most TQ policies include all six standard ADLs, a few include only five. Some TQ policies require the inability to perform only two ADLs, while others require three (requiring more is permitted but rare). Finally, under some TQ policies the insured must need hands-on assistance to qualify for benefits, while under others the less rigorous standard of stand-by assistance is used.  Seemingly minor changes in a policy’s benefit trigger can have a large impact on the insured’s level of coverage.


In most policies the benefit triggers for home care coverage are the same as for nursing home coverage, but a few policies use different triggers for each.


Please note: in most policies, after an insured has met a benefit trigger, she must also satisfy an elimination period before she can receive benefits. Elimination periods are examined in the following section.



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