LTC Insurance Premiums


There are various choices that purchasers of LTCI must make, which impact of product design, benefit selections, and optional provisions on the cost of a policy. Let us review the elements that have the greatest impact on the amount of the premium:

The larger the daily or monthly benefit amount, the higher the premium. There is generally a direct proportional relationship.
The larger the lifetime maximum benefit (or the longer the benefit period), the higher the premium.
The longer the elimination period, the lower the premium.
Comprehensive policies are more expensive than those that cover only facility care or only home care. In a comprehensive policy, the higher the percentage of the facility benefit that is paid for home care, the higher the premium.
An automatic inflation protection option increases the premium. A simple rate option is cheaper than a compound rate. There may or may not be a charge for adding a guaranteed purchase option to a policy.
An optional nonforfeiture provision adds to the premium.

Other factors also affect the premium amount. As a general rule, any policy provision that increases the likelihood that the insurer will pay benefits or increases the amount of benefits it will likely pay contributes to a higher premium. Thus a policy with less restrictive benefit triggers would tend to be more expensive than one with more rigorous triggers, and a policy that covers items such as respite care, transportation, and informal caregiving tends to cost more than one that does not. Likewise, the premium of a disability or indemnity policy is usually higher than the premium of a comparable reimbursement policy.

But the premium an insurer charges is not determined solely by the provisions of the policy. The following factors are also important:

the age of the applicant,
the health of the applicant (in some cases), and
any discounts the applicant may qualify for.


Age

Age has a substantial impact on premium. The older a person is at the time she applies for an LTCI policy, the higher her premium. However, the premium is designed to remain the same over the life of the policy -- that is, the premium is not automatically increased as the insured's age increases. (Nevertheless, except for the few noncancellable policies, there is no guarantee that a premium will not increase. As we have seen, if an insurer experiences unexpectedly high claims for a group of insureds with guaranteed renewable coverage, it can ask the state insurance department to approve a rate increase for the group.)

Most insurers use an applicant's actual age (that is, the number of years she had lived at her last birthday) for the purposes of determining the premium amount. An exception to this rule is called saving age -- if the individual has had a recent birthday (usually within 30 days of application), some insurers will use her age before that birthday, resulting in a slightly lower premium. A few companies use what is common in life insurance -- the applicant's age at her nearest birthday, whether that birthday is the last or the next. And a few insurers use age bands for younger ages (commonly below 40) -- that is, rather than establishing a rate for each age, they charge the same rate to all those within a certain age range (such as 35-38).

When Should One Buy Long-Term Care Insurance?

When is the best time of life to purchase long-term care insurance? There are different ways to approach this question. Some compare the total amount an insured would pay if she bought at different ages -- say 50, 65, and 85. Assuming the same daily benefit, this calculation shows that it is less expensive to purchase coverage at age 50. And the savings are even greater when (more realistically) inflation is taken into account and it is assumed that if a person waits until she is 65, she will have to buy twice the daily benefit she would have bought at 50.

The following table shows the calculation of one company's premiums when coverage is purchased at various ages. Except for the daily benefit, how the premiums were determined is unimportant for this exercise. The 5 percent compound automatic inflation protection option is assumed. Some rounding occurs.  

The Cost of Waiting to Buy
Age at purchase
Daily
benefit
Initial
premium
Total cost to age 85
50
$150
$3,360
$120,900
55
$192
$4,590
$142,400
60
$246
$6,620
$172,250
65
$314
$9,960
$209,200
70
$401
$17,790
$284,650


There is another consideration consumers should keep in mind -- the longer one waits to buy, the greater the chance that one will develop an impairment and be unable to purchase coverage. Therefore, it is generally in a person's best interest to purchase sooner rather than later.  


 Health Insurance -- Individual Coverage

All insurers conduct underwriting of applicants for individual LTCI policies -- that is, they seek information about the applicant and, based on that information, decide whether to offer him coverage, and if so, on what terms. Most commonly, the insurer simply has the applicant answer questions about his current physical condition and health history on the insurance application. In some cases the insurer may request a report from the applicant's physician or arrange for a telephone interview or an in-person assessment.

How companies use information about an applicant's health differs. Many insurers take health into account only in deciding whether to accept or decline an applicant; they do not consider it in setting premiums for those they do accept. Other insurers place accepted applicants into two or three risk classes based on health and charge these classes different rates. The majority of applicants fall into the standard risk class, but the healthiest people are placed in a preferred risk class and the less healthy may be accepted into a nonstandard (or substandard) risk class.


Uninsurable Conditions

Uninsurable conditions are medical conditions that make the need for insurance benefits in the near future very probable or even certain. Every insurance company has a list of conditions it considers uninsurable, and it will not accept applicants suffering from one of them. To be able to provide coverage to such individuals, the insurer would have to charge them as much as they would receive in benefits, plus administrative costs, defeating the purpose of insurance.

For long-term care insurance, an uninsurable condition is one that already requires long-term care (such as Alzheimer's disease) or one that carries a high risk of the future need for care (such as a currently stable case of Parkinson's disease). And regardless of what conditions they may have, individuals who have recently used long-term care services are generally at high risk for using such services again and are likely to be considered uninsurable.


Nonstandard Risk  

While some people with conditions that make them a higher-than-average risk for long-term care may be considered uninsurable, some may be accepted by an insurer into a nonstandard (or substandard) risk class.  Such a class is handled differently by the different companies that have one (many do not). Some simply charge those accepted on a nonstandard basis an additional premium. Others charge them the same premium as standard risks but make available to them only certain coverage options (such as facility-only coverage or a low lifetime maximum). Still others do both -- they charge nonstandard insureds extra and also limit their coverage choices.

What constitutes a nonstandard risk varies widely among companies. Some insurers accept some applicants on a nonstandard basis individuals that another insurer might consider a standard risk. In other cases a company may admit into its nonstandard class a person that other companies would not accept at all.  


 Preferred Risk

Some insurers place certain healthy applicants in a preferred risk class and offer them a discount of 10 to 15 percent off the standard premium rate. The criteria for considering a person a preferred risk may include some or all of the following:

The applicant has had a comprehensive physical examination within the last two years, has no uninsurable conditions, and has no medical condition with a likelihood of progression.
She has a height and weight within a range specified by the Insurer.
She exercises at least three times a week (either as part of her job or on her own).
She has not used tobacco products in the past one to five years.
She does not need assistance with activities like preparing meals, laundry, housekeeping, or taking medications, and she does not use any mechanical devices such as a wheelchair, walker, cane, or similar items.
She is not currently on medical leave and is not currently receiving workers' compensation, disability income insurance benefits, or Social Security disability income benefits.

However, in order to offer this discount to some, the insurer must compensate by charging a slightly higher premium to those who are considered standard risks.



Health Insurance -- Group Coverage

Employer-Sponsored Long-Term Care Insurance

Most long-term care insurance in the United States is in the form of individual policies, bought by private persons for themselves (and sometimes a spouse), without any involvement by their employers. But a substantial portion of those with LTCI are covered by employer-sponsored insurance, and this is the fastest growing segment of the LTCI market.

There are two approaches to employer sponsorship of long-term care insurance. One is group insurance, in which the employer owns a group policy that provides coverage to those employees who enroll in it (and sometimes spouses, other family members, and retirees). Group LTCI is usually a voluntary benefit, meaning that the employer makes the coverage available to employees but pays none or only a portion of the premium cost, and each employee chooses whether to enroll and pay a premium. Group long-term care insurance is typical of large employers, although it is also available to small and mid-size businesses.

The other approach is worksite marketing of individual insurance, in which the employer sponsors the sale of individual LTCI policies to employees. Each employee who participates purchases her own policy and pays her own premium, and the employer is not a party to any insurance contract. But the employer works with an insurer or broker to select an insurance product and make it available to employees, and it sometimes facilitates the payment of premiums by means of payroll deduction. Sponsorship of individual LTCI is typical of small employers, but midsize employers are increasingly involved.

LTCI policies obtained through worksite marketing are underwritten like other individual policies, as described above. In this section we will look at how the health of group members is considered by insurers providing group coverage.  


Adverse Selection

With a voluntary group benefit, there is a risk of adverse selection. In the context of group LTCI, adverse selection occurs when the members of an employee group who enroll are more likely to need long-term care than those who do not. If this happens, claims may be higher than the projections on which the insurer based its premium charge, and premiums may be insufficient to cover claim costs. Adverse selection is especially likely when enrollment rates are low, as is typical of group LTCI, because it is easier for a small group to be dominated by those likely to make claims than a large group.  

Consequently, adverse selection is a potential problem for insurance companies offering group LTCI. In some cases insurers address this problem by means of underwriting -- that is, as for individual policies, they require employees who want LTCI coverage to supply information about themselves, use this information to identify those who already need long-term care or are very likely to need it in the near future, and decline to offer coverage to these uninsurable individuals. More often, however, insurers take measures other than underwriting to minimize the risk of adverse selection. These measures and the various levels of underwriting are discussed below.


Guaranteed Issue

Most commonly, insurers offer group LTCI on a guaranteed issue basis -- that is, without underwriting of individuals. This means that the insurer guarantees to the employer that it will provide coverage to all employees who request it; the insurer may not refuse to insure an employee with a condition that makes a need for long-term care likely, nor may it charge her a higher premium based on that condition.

Since under guaranteed issue any employee can enroll, even those very likely to need long-term care, adverse selection is obviously a concern for the insurer. To minimize the risk, the insurers generally limit guaranteed issue to employees who are actively at work -- that is, those who have the status of full-time employees (generally at least 30 hours of work per week) and are currently working. With some exceptions, such people are normally in reasonably good health and insurable for LTCI.

An insurer may also take other steps to guard against adverse selection when offering coverage on a guaranteed issue basis:  

Insurers generally offer guaranteed issue only to large employers. With a large number of employees, even if the percentage who enroll is low, the group of insureds will generally be reasonably large, making adverse selection less likely.
An insurer may set a minimum participation requirement -- unless a certain percentage (for instance, 10 percent) of all employees enroll, coverage will not take effect. This requirement, like limiting guaranteed issue to large employers, ensures that the group of insureds will be reasonably large. (In some cases, if the minimum participation requirement is not met, the insurer will issue coverage but require underwriting.)
Usually, employees may enroll on a guaranteed issue basis only during an enrollment period (normally lasting 30 to 60 days) or, for new employees, during the first 30 to 60 days of employment. Employees who want to enroll at other times are subject to underwriting. This rule protects the insurer from having to accept employees who request coverage only after something occurs to make them think they will need long-term care.
Some insurers exclude preexisting conditions when they offer guaranteed issue.
Some insurers limit the daily or monthly benefit amount or lifetime maximum benefit they offer on a guaranteed issue basis. Employees can apply for higher benefit levels but must submit to underwriting.

 Levels of Underwriting

In some cases, insurers offering group coverage do conduct underwriting, but to a very minimal degree. This approach is called modified guaranteed issue (MGI). Employees seeking coverage must submit an application, but it requests only very limited information, and only a few people are declined. Typically, these are individuals who:

have been diagnosed with certain specified conditions that often make long-term care necessary (such as Parkinson's disease, Alzheimer's disease, multiple sclerosis, and similar progressive, degenerative conditions);
are currently unable to perform one or more ADLs; or
have received long-term care services within a certain amount of time before enrollment. (This period can be anywhere from six months to three years.)

In other cases, the insurer requires somewhat more extensive underwriting. Applicants must supply the same information as in MGI, but the application also asks about medication use, recent hospitalizations, height and weight, and some other areas. If an applicant's answers suggest he may be a high risk for long-term care, the insurer may require a report from his physician, a telephone interview, and/or an in-person assessment. Some insurers also subject all applicants above a certain age to this increased level of scrutiny. This approach is known as simplified underwriting (in contrast to full underwriting, described below) or short-form underwriting (because the application is shorter than that used in full underwriting).

Finally, insurers offering group LTCI sometimes require very thorough underwriting, similar to that used in individual insurance. This is called full underwriting. A long-form application is used, which requests the same information as the short form but also asks about many other health conditions. As in short form underwriting, a physician's report, a telephone interview, and/or an in-person assessment may be required for applicants above a certain age and those whose application suggests that they may be a high risk.

Although short-form and full underwriting are more rigorous than the other approaches discussed, they also have advantages for employers and employees -- there is generally no minimum participation requirement or limit on benefits. And with full underwriting, all employees may apply, even those not actively at work.


Which Approach Is Taken?

As a general rule, the smaller the employee group, the less likely an insurer is to offer guaranteed issue. If underwriting is conducted, the smaller the group, the more rigorous the underwriting.

Different approaches may be used within the same group. We saw that insurers may offer guaranteed issue during an enrollment period (or within 30 to 60 days of hiring) but require underwriting for those applying at other times. Likewise, short form underwriting might be used during enrollment periods and full underwriting at other times. Similarly, limited benefits may be offered on a guaranteed issue basis or with a low level of underwriting, but additional coverage is available only with more thorough underwriting.

The approach used also depends on the category of the applicant. Family members are generally subject to more rigorous underwriting than employees. When guaranteed issue or modified guaranteed issue applies to employees, spouses may have to undergo short-form or full underwriting, and retirees and their spouses and parents and parents-in-law of employees are usually subject to full underwriting.



 Premium Discounts

As discussed above, some insurers offer a premium discount to applicants who qualify for a preferred risk class. Some individuals may be eligible for other discounts.


Group Discounts

A group discount normally applies to the premiums paid by those covered by an employer-sponsored group policy. Some companies offer discounts to those who purchase individual policies through worksite marketing. In both cases the discount may be extended to employees' spouses and other family members. Discounted group coverage or discounts on individual policies may be offered to members of non-employee groups, such as service clubs (Rotary or Lions, for instance), college alumni associations, or customers of a bank.


Spousal and Family Discounts

Many insurers offer a spousal discount ranging from 20 to 40 percent if both husband and wife purchase an LTCI policy, based on the assumption that married people can care for each other and so are less likely to file claims for paid long-term care services.

There is considerable variation by company and state in this area. Some insurers require that both spouses obtain coverage; others require only that both apply for coverage and grant the discount even if one of them is declined. Many companies grant a smaller discount to any married person, even if her spouse does not apply for or purchase LTCI coverage. Some states do not allow any discounts for married couples; other states allow insurers to grant discounts to married person, but they may not require that both spouses be insured. Most companies maintain the spousal discount even if the couple divorces or one spouse dies.

Some insurers in some states extend a spousal discount to same-sex couples, other committed couples not legally married, and siblings living together. Some companies offer family discounts when three or more members of a family purchase coverage, regardless of whether they live together. However, this discount is based the savings realized when multiple sales are made at one time rather than the expectation that family members will care for one another.