Chapter 5 — Determining Suitability

The great majority of agents selling long-term care insurance strive to always conduct themselves with honesty, integrity, fairness, and professionalism, and with a sense of duty to those they serve. An LTCI professional has the obligation to recommend a product that is suitable for his client. Suitability means that the policy design, benefit amounts, selected options, and costs match the circumstances, needs, goals, and financial resources of the purchaser.

To ensure that a policy is suitable, a salesperson must exercise diligence and competence. He must make a systematic effort to obtain all pertinent information about a client’s personal and financial situation and his concerns and goals, then use his knowledge of LTCI products to find the best solution. A salesperson must not simply get a general sense of a client’s situation and recommend a product that “seems about right.”

A salesperson must not knowingly and deliberately recommend a product that does not meet a client’s needs — must not sell LTCI to a person for whom it is not appropriate, and must not recommend a policy with more or fewer benefits than the purchaser needs. He must also not engage in churning or twisting — selling a new policy to someone who already has perfectly suitable coverage, simply to earn a commission.

The laws and regulations governing the sale of LTCI vary from state to state. The NAIC Long-Term Care Insurance Model Law and Model Regulation, adopted by most states, provide a good sense of the rules that generally apply:

• A salesperson must give a prospect an outline of coverage and a shopper’s guide to long-term care insurance (either the NAIC version or one issued by the state).
• The application must be clear and understandable by the consumer.
• The application must disclose the insurer’s right to contest the policy if the applicant makes false statements.
• The policy must include a 30-day free look provision.
• The insurer must have procedures that ensure fair and accurate policy comparisons and prohibit the sale of excessive coverage.

Many states also have regulations preventing misleading advertising, requiring certain guidelines in the design of advertising materials, and requiring state insurance department review and approval before use. Some states also require all salespeople to complete training in ethical market conduct.

In this course we have studied long-term care and the ways people expect to pay for it, and we have learned why, for many, long-term care insurance is the best funding method. Here is a summary of why buying an LTCI policy is usually a better approach than planning to pay for care out of one’s savings or relying on Medicaid:

However, long-term care insurance is not right for everybody. If a person has limited income such that paying premiums will be difficult, LTCI coverage is not normally the best approach. Nor should those with few assets buy an LTCI policy; such people will often have to rely on Medicaid despite its drawbacks. But every situation is different, and each person must consider his own circumstances, concerns, preferences, and weigh the costs and benefits of an LTCI policy.

All states require insurance companies and agents to make a reasonable effort to determine the suitability of the sale of an LTCI product or the replacement of one policy by another. Specifically, an agent must:

• Make reasonable efforts to obtain information relevant to determining whether a policy is suitable for an individual.
• Comply with the insurer’s suitability standards.
• Comply with any specific state requirements, such as using a personal worksheet or educational materials issued by the state.
• Maintain in client files written information demonstrating compliance with these standards.

A suitability determination based solely on an income or asset threshold does not always provide a good indication. Sometimes people of very modest means have a strong motivation to buy insurance to protect their small but important assets or to avoid relying on Medicaid. But looking at a person’s financial situation is a good place to begin. General rules:

• If a person cannot afford to pay the premium now or continue to do so in the future, she should not buy LTCI. One rule of thumb: a person may not be able to afford coverage if the premium would be more than 7 percent of her income.
• If a person’s assets are less than $30,000, it may be appropriate to consider other options for financing long-term care.
• If a person is currently eligible for Medicaid, she probably should not buy LTCI.

Each insurance company must establish its own market and suitability standards that agents must follow. These vary by company. As an example, one company considers a sale not suitable if any of the following apply:

• The applicant has an annual income under $20,000.
• The applicant will fund premiums solely from income, and premiums will amount to more than 10% of that income.
• Premiums will be paid solely from income, the applicant expects income to decrease over time, and the premium represents more than 7% of income today.
• The applicant’s assets (savings and investments other than a home) total less than $30,000.

Such standards are not the only consideration. A company is not required to prohibit a sale if the standards are not met — it must establish standards, make agents and clients aware of them, and ensure agents educate clients about when a purchase might not be suitable. As long as the agent has clearly discussed suitability issues with the client and the client indicates he is making the decision in full consideration of these issues, the client will not be denied the opportunity to apply for coverage.

The agent interviews the client to learn about his needs and reasons for wanting coverage. While the agent has an obligation to help clients think through whether coverage is appropriate, she cannot make this decision for them. Her responsibility is to review the company’s suitability standards with clients and discuss whether they meet them.

Agents must provide documentation showing that suitability considerations have been addressed. Many states require agents to give clients a “Things You Should Know Before You Buy Long-Term Care Insurance” form and have them complete an LTCI personal worksheet submitted with the application. The worksheet asks the applicant to specify the premium, how premiums will be paid, and about current and future income and assets. Both the applicant and agent must complete the disclosure statement at the bottom. If the client’s responses do not satisfy the company’s standards but he still wants coverage, he must check a box stating: “My agent has advised me that this policy does not seem to be suitable for me. However, I still want the company to consider my application.”

A few people are wealthy enough to pay out of their own pockets for all the long-term care they are likely to need and still have plenty left. Is LTCI suitable for them? Every situation is different, but there are good reasons for wealthy persons to buy an LTCI policy:

• When a person decides to pay for his own care, he takes on an uncapped liability — the amount he may have to pay is unpredictable and potentially very large, making financial planning difficult. Insurance converts that unpredictable expense into a regular, budgetable premium.
• Even a wealthy person will have spent assets that could have been left to others. When insurance pays for most care, assets are preserved for heirs and charities, and family harmony is better maintained.
• In some cases, long-term care providers prefer insured patients — those with a LTCI policy may gain easier access to highly-desired facilities.

Of course, a person can compromise — purchasing a policy designed to cover a significant portion (but not all) of potential long-term care expenses and planning to pay the rest from income and assets.

There has been concern in the industry that agents might inappropriately encourage individuals to drop an existing policy and replace it with one the agent is selling. While a new policy can be an improvement, there are important considerations to take into account. It is seldom appropriate for an agent to sell a policy with fewer benefits than a client’s current coverage.

Questions consumers should consider before replacing coverage:

• How long ago did you buy your current policy? As a general rule, a relatively new policy is more likely to provide good coverage than an older one. Older policies often have numerous exclusions and restrictions that seriously limit coverage.
• How much older are you today than when you bought your existing policy? Premium rates are based on the insured’s age when he buys coverage. Replacing coverage later means a higher premium based on a much older issue age. Is the better coverage worth the higher premium?
• Are you still insurable? A client who may not be insurable based on current health should certainly retain his existing coverage. He stands to lose quite a lot by attempting to switch and finding he cannot be approved.

The ethical considerations that apply to LTCI in general also apply to partnership LTCI coverage. There are three broad categories of consumers to consider:

• Those who strongly wish to avoid Medicaid and can afford a policy with a very high or unlimited lifetime maximum — for these people, partnership coverage is unnecessary.
• Those with low incomes but assets to preserve — a partnership policy with a modest lifetime maximum and low premium may be advantageous, but they must understand that benefits may not last long and Medicaid reliance remains possible.
• Most consumers fall between these extremes — they can afford enough coverage to make Medicaid very unlikely but still possible, and they have assets to protect. For them, a PQ policy offers assurance that if they must apply for Medicaid, some assets will be protected.

Those considering a partnership policy should be aware of important limitations:

• Medicaid benefits for home and community-based care are unavailable or restricted in some states. A person whose LTCI benefits end may have to move from home into a nursing home, or from one facility to another.
• There is no automatic roll-over to Medicaid after LTCI benefits are exhausted. A person must apply and meet all eligibility criteria — acceptance is not guaranteed.
• Partnership programs affect only assets, not income. A person who qualifies for Medicaid will generally still have to spend almost all his income on care.
• Buying a partnership policy protects only an amount of assets equal to the LTCI benefits received — not all assets.
• A person’s home is protected only if the home equity is less than the amount of protected assets (the LTCI benefits received).
• Medicaid eligibility rules could become considerably stricter in the future, making it more difficult to qualify and benefits less generous.
• If an insured moves to another state, Medicaid asset protection may not be available. The new state might not have a partnership program, or might not have reciprocity with the original state.
• Partnership programs are subject to change — federal or state governments could substantially modify or discontinue programs in the future.

An agent determining whether a PQ policy is suitable for a client should consider:

• Is the client’s income too low? If he is unable to afford the premium (or likely will be in the future), the policy is not suitable unless family members will contribute.
• Are the client’s assets too small? If his assets are not substantial enough to benefit significantly from Medicaid asset protection, the partnership policy is not suitable.
• Is the client’s income too high? He may be unlikely to qualify for Medicaid even if he exhausts insurance benefits.
• Does the client want a very large amount of coverage? If he wants and can afford a very large or unlimited lifetime maximum, it is extremely unlikely he will ever apply for Medicaid and need asset protection.
• Does the client understand the drawbacks? If buying limited coverage expecting to eventually apply for Medicaid, the client must understand the uncertainty of qualifying, the limitations of Medicaid coverage, and the possibility that assets may not be preserved.
• How likely is the client to move to another state? Reciprocity may not be available everywhere.
• What is the price difference between a PQ and non-PQ policy? If there is no difference or only a very small one, it may make sense to have the asset protection of a PQ policy just in case.

In short, partnership LTCI policies have their limitations, and an agent must make sure clients understand these and must not over-promise. But partnership policies are an innovative product that offer a valuable advantage to many people — the protection of some of their assets should they ever need to apply for Medicaid.