Determining the Suitability of LTC Insurance
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 that is 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, and
· maintain in client files written information demonstrating compliance with these standards.
These obligations are discussed below.
Who Should Not Buy Long-Term Care Insurance?
A suitability determination based solely on an income or asset threshold does not always provide a good indication of who should or should not buy. 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 the discussion. Here are some 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 -- (although it should be kept in mind that one does not usually pay premiums while receiving benefits). One rule of thumb is that 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 now eligible for Medicaid, she probably should not buy LTCI.
Company Market and Suitability Standards
Each insurance company must establish its own procedures and market and suitability standards that agents must follow to help their clients determine whether buying LTCI is appropriate for them, based on financial and other considerations. These standards vary by company. As an example, one company considers a sale not suitable if any of the following conditions apply:
· The applicant has an annual income under $20,000.
· The applicant will fund premiums solely from his income, and premiums will amount to more than 10 percent of that income.
· Premiums will be paid solely out of income, the applicant expects his income to decrease as he gets older, and the premium today represents more than 7 percent of income.
· The applicant's assets (savings and investments other than a home) total less than $30,000.
Such standards are not the only important considerations. If an applicant has a terminal illness, it may not be wise for him to invest in long-term care insurance that he may never use, even if he meets the standards. And as mentioned, if someone is already eligible for or could easily become eligible for Medicaid, buying insurance is probably not appropriate.
Some people do not meet a company's market and suitability standards but nevertheless feel strongly that insurance would help them meet their goals. In other cases, an applicant does not meet the standards because of limited income or assets, but family members intend to pay some or the entire premium. An insurer is not required to prohibit such a person from applying for coverage, and most do not. A company has the obligation to establish standards, make agents and clients aware of them, report annually the percentage of the sales made by its agents that do not meet the standards, and ensure that agents educate clients about when a purchase might not be suitable, but a company is not required to prohibit a sale if the standards are not met. Whatever the circumstances, as long as the agent has clearly discussed the suitability issues described above with her client, and the client indicates he is making the decision to buy in full consideration of these issues, the client will not be denied the opportunity to apply for coverage.
The agent interviews the client and learns about his needs and reasons for wanting coverage. This can help the agent determine whether insurance can reasonably address these needs and, if so, to tailor a policy to them. While the agent has an obligation to help her clients think through whether buying coverage is appropriate, she cannot make this decision for them. Her responsibility is to review the company's market and suitability standards with clients and discuss with them whether or not they meet these standards. If they do not, the agent should discuss whether they feel strongly that long-term care insurance will have important benefits for them or whether family will be helping them pay for the coverage.
Agents are required to provide documentation showing that suitability considerations have been addressed. This is done in different ways, depending on the state. Many states require agents to give their clients a form called "Things You Should Know Before You Buy Long-Term Care Insurance" and have them complete an LTCI personal worksheet and submit it along with the application. There is a specific personal worksheet for each state and different versions of the "Things You Should Know" form.
In the states that use them, prospective buyers must review the" Things You Should Know" form and then fill out the personal worksheet. The worksheet asks them to specify the monthly and annual premium for the coverage they are considering. It then asks a series of questions about how they will pay for premiums (income, savings, or family members) and about their current and future income and assets.
The applicant and the agent must then complete the disclosure statement at the bottom of the personal worksheet. The applicant has the right not to complete the worksheet, but he must indicate this choice and sign the worksheet. The agent must also indicate that she has explained to the applicant the importance of completing the worksheet and provide a signature. Finally, if the client's responses on the worksheet do not satisfy the company's market and suitability standards, but he still wants to obtain insurance, he must check the last box on the worksheet that says "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." The client must sign this as well.