Suitability of Long Term Care Insurance
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. Let us review here why buying an LTCI policy is usually a better approach than planning to pay for care out of one's savings and assets or relying on Medicaid.
• The individual has greater assurance that there will be sufficient funds to pay for needed care. Although most LTCI policies do not pay unlimited benefits, a purchaser can select benefit amounts that will cover most of the services he is likely to require.
• The individual can be certain that there will be funds to pay for care when it is needed. Because he is not relying on his own financial resources to pay for care, he does not have to worry about needing care at a time when he does not have sufficient assets (such as when he is still young and has not saved enough or during a period when his finances are at a low point because of some unforeseen event).
• The individual reduces financial uncertainty. Instead of bearing the risk of long-term care costs, the amount and timing of which are unpredictable, he regularly makes premium payments of a preset amount.
• The individual can protect against inflation. He can choose an optional provision that increases benefit amounts over time, so that inflation in the cost of long-term care services does not render the benefits inadequate in the future.
• The individual greatly reduces the risk of depleting assets. Receiving insurance benefits to help pay for care makes it much less likely that savings and assets will be spent to cover costs. Instead, those assets can be used to maintain a comfortable standard of living during retirement, and when the insured dies, he will be able to leave his spouse well provided for and pass assets on to heirs.
• The insured can maintain financial independence and will not become dependent on relatives or the government.
• When the individual needs long-term care services, he can receive high-quality care, choose among many care providers, and have a range of care options so that he can receive the type of care that best meets his needs. The choices will not be limited, like those of Medicaid recipients or individuals relying on limited personal funds.
• The individual will not be a burden on his spouse, children, other family members, or friends. Insurance benefits will help pay for needed services, and family members will not have to sacrifice to provide care themselves, nor will they have to jeopardize their own financial security by paying for his care.
• The individual can provide for long-term care in a way that takes into account his particular needs, goals, circumstances, and financial status. An LTCI policy can be tailored to the situation of each individual insured.
• By purchasing a partnership LTCI policy, an individual can protect some of his assets in the event he needs care for a very long time, exhausts his insurance benefits, and is forced to apply for 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, take into account his own concerns and preferences, and weigh the costs and benefits of an LTCI policy.
The remainder of this course will review the suitability of Long-Term Care Insurance in general, the suitability of replacing an existing LTC policy and, specifically, the suitability of partnership LTC policies.
Determining the Suitability of Long Term Care 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.
Is LTCI Suitable for the Wealthy?
A few people are wealthy enough to payout of their own pockets for all the long-term care they are likely to need and still have plenty of money 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 is taking on an uncapped liability. That is, the amount he may have to pay is unpredictable and potentially very large, making financial planning difficult. By buying insurance coverage, he can convert that unpredictable expense into a regular, budgetable premium payment.
• A wealthy person may be able to pay a very large amount for long-term care and still have substantial financial resources. But he nevertheless will have spent assets that could have been left to others. When insurance is paying for most of a person's care, he does not have to worry that he is steadily depleting assets he might have passed on to heirs or charities. Also, family members are not frustrated by seeing expected inheritances dwindle, and family harmony is better maintained.
Of course, a person can compromise on the question of long-term care insurance -- that is, she can purchase a policy designed to cover a significant portion, but not all, of her potential long-term care expenses and plan to pay the rest out of her income and assets.