Long-term Care Insurance
In the preceding chapters we learned why personal savings and assets, Medicare, and Medicaid are for most people not good ways to fund long-term care. Let us review why:
• Savings and assets. Because of the high cost, it is not realistic for most Americans to expect to be able to save the amount of money they would need to pay for long-term care, especially while trying to buy a home, and save for their children's education, and fund their own retirement. And those who do rely on their own funds to pay for care must often deplete most or all of the assets they have spent a lifetime accumulating, leaving little or nothing for a comfortable retirement or for a surviving spouse or other heirs.
• Medicare and Medigap insurance. While Medicare provides some benefits for long-term care services, these are very limited. Benefits for both nursing home care and home care are provided only for a short time to those needing skilled care to recover from an acute illness or injury. Medicare does not cover ongoing personal or supervisory care needed to cope with a chronic impairment. And neither Medicare supplement (Medigap) insurance nor Medicare Advantage plans provide any significant additional coverage for long-term care.
• Medicaid. The Medicaid program does pay for long-term care services. However, those who are not indigent must generally deplete their life savings and assets before they can become eligible for Medicaid, and while receiving Medicaid benefits they must usually spend almost all their income on care. Moreover, because many state Medicaid programs focus on nursing home care and because Medicaid does not usually pay providers as much as they get from private patients, care options are often limited for Medicaid beneficiaries.
But there is another approach to funding long-term care, long-term care insurance, which we will now explore. 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.
Long-term Care Policy Design
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. In this discussion we will look at product design-we will examine the different types of LTCI products consumers may choose from and learn how they differ. In the following section we will look at purchaser options-the choices a consumer makes when she buys a particular LTCI product (such as how much she wants to receive in benefits or whether she wants a feature designed to protect against inflation).
Our discussion of LTCI product design will address these questions:
• Is the policy 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 does the policy cover?
• On what basis are benefits paid?
• What rights does the policyholder have regarding renewal of the policy and premium increases?
Tax-Qualification and LTC Partnership Programs
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. Thus, in terms of tax treatment, there are two categories of LTCI policies:
• federally tax-qualified (TQ) policies (around 90 percent of the total") and
• nonqualified (NQ) policies.
Some of the requirements of tax-qualified policies are mentioned in this section and the ones that follows.
In addition, for an individual to be eligible to participate in a state's long-term care partnership program, her policy must meet certain requirements. So LTCI products can also be divided into those that qualify for these programs and those that do not. The requirements of partnership programs and the benefits of participating in them will be covered in depth later in this course. But we will mention here that to be qualified for a partnership program a policy must be federally tax-qualified.
To receive benefits under an LTCI policy, a person covered by the policy (an insured) must meet at least one of certain conditions stipulated in the policy, known as benefit triggers. There are two common types:
• Physical (or functional) impairment-the insured's physical condition prevents her from performing a specified number of activities of daily living.
• Cognitive impairment-the insured suffers from a serious cognitive condition such that close supervision is necessary to protect her health and safety.
These benefit triggers are used because they are the most reliable indicators of when someone needs long-term care and because they can be measured in a relatively objective way that leads to a high degree of accuracy and consistency in determinations of eligibility for benefits.
For an LTCI policy to be deemed tax-qualified under HIPAA, it must meet certain requirements in relation to benefit triggers:
• Standardized ADLs. HIPAA establishes six standard ADLs (bathing, dressing, toileting, transferring, continence, and eating) and precisely defines them. 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.) There is no such requirement for a 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 that is comparable to and includes Alzheimer's disease and similar forms of irreversible dementia and that can be reliably measured by clinical evidence and standardized tests.
• Medical necessity. 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. But this is no longer considered an appropriate way of determining need and may not be a benefit trigger of a TQ policy.
Variation in Benefit Triggers
To a great extent, benefit triggers have become standardized, as tax-qualified policies must adhere to the rules described above.
But the few policies that are nonqualified may base benefit eligibility on other criteria (such as medical necessity). And even among TQ 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.
It should also be noted that while in most policies the benefit triggers for home care coverage are the same as for nursing home coverage, a few policies use different triggers for each.
Finally, in most cases, after an insured has met a benefit trigger, she must satisfy an elimination period before she can receive benefits. Elimination periods are examined in the following section.
Even if benefit triggers are met, an LTCI policy does not pay benefits if the need for long-term care results from a cause excluded by the policy. Such causes may include alcohol and drug abuse as well as illnesses or medical conditions resulting from participation in a felony, attempted suicide, war or service in the armed forces, or aviation if the insured is a not a fare-paying passenger. Mental or nervous disorders (except cognitive disorders of an organic nature, such as Alzheimer's disease) were previously often excluded, but this exclusion has become less common and is not permitted in several states.
Some policies limit the payment of benefits for preexisting conditions. A preexisting condition is a medical condition for which treatment was received or recommended within a certain period before a policy was purchased. This period is normally six months or less, and typically benefits are not paid for a preexisting condition for the first six months that a policy is in force. It is becoming much less common for insurers to exclude preexisting conditions in individual LTCI policies. Instead, they simply require applicants to disclose such conditions and underwrite the policy accordingly. In group insurance, in which there may be no underwriting of individuals or only very limited underwriting, preexisting condition exclusions are still used.
Policies also generally exclude services for which no charges were incurred. For example, if Medicare or another government program covers a service and the insured pays nothing, she cannot receive benefits for the service.
Covered Settings and Services
In terms of the long-term care settings that are covered, there are three main types of LTCI policies:
• Comprehensive policies cover both nursing home care and home healthcare. Most also pay benefits for care provided in assisted living residences and other residential settings and for a variety of home-based and community-based services, such as adult day centers. This is the most common policy type.
• Facility-only policies pay benefits only for care in a nursing home or only for care in a nursing home or other facility (such as an assisted living residence).
• A few insurers offer policies that cover only home health care, or only home care and community-based care.
Some comprehensive policies pay the same benefit amount for facility care and home care, while others pay different amounts.
And as mentioned, while for most policies benefit triggers are the same for facility care and home care, a few use different triggers.
An LTCI policy may be designed to provide benefits for the following services:
• Homemaker services and transportation. A policy may pay for help with household chores and transportation to medical appointments and shopping. Some policies pay for these services only if other home healthcare services (such as those provided by a home health aide, nurse, or therapist) are needed. For other policies, the only requirement is that a benefit trigger be met.
• Informal caregiving. Some policies pay a benefit when a family member or other informal caregiver provides care to the insured. Others pay for the training of an informal caregiver.
• Respite care. Most policies cover paid services needed for a short period so that a family caregiver can take a break. For respite care benefits to be paid, the insured must meet a benefit trigger, even if she is being cared for by a relative or other unpaid person and has not filed a claim for paid services. A policy may cover a certain number of days of respite care per calendar year (typically from 14 to 30), or it may pay up to a certain dollar amount per year.
• Bed reservation. Because of the high demand for beds in nursing homes and rooms in assisted living residences, a person can lose his place while he is in the hospital or away for some other reason unless he continues to pay for it while he is gone. Many policies pay the facility to hold the insured's bed or room during his absence. Some policies pay this benefit only if the insured is away for a specified reason (such as medical care); others pay regardless of the reason for the absence. (An insured might want to spend time with his family, for example.) Benefits are usually limited to a specified number of days (such as 20 or 50) per calendar year.
• Care coordinator. A care coordinator is a person (typically a specially trained nurse or social worker) who works on behalf of the insured to see that she receives the best care possible and gets the most out of the benefits her policy provides. For example, a care coordinator can identify the best local providers of the services the insured needs. He may also send regular care reports to family members, and a policy that pays for a care coordinator is especially desirable when the insured has no relative who lives nearby and can look after her welfare. Some insurers maintain networks of contracted care coordinators and provide their services to insureds free of charge. In other cases, the insured hires a care coordinator himself, and the insurer pays benefits to cover the cost.
Some policies also pay benefits for such things as home modifications, durable medical equipment (such as wheelchairs), and medical alert systems. Many policies include an alternate plan of care provision (also called an alternative care benefit, supplementary care benefit, emerging trends benefit, and other names). Under this provision, the insurer may pay for a variety of goods and services not specifically covered by the policy. For example, an insurer might pay for home enhancements such as bathroom alterations, handrails, and ramps to enable a person to safely remain at home instead of going into a nursing home. Or an insurer might cover long-term care services that are not mentioned in the policy because they had not been developed when it was written. In this way an alternate plan of care provision makes a policy more flexible and helps keep it from becoming obsolete. Generally, for benefits to be paid for an item not specified as covered in the policy, three parties must agree-the insured, the insured's physician, and the insurance company.
LTCI policies normally have a set dollar amount of benefit per day or month. (A few policies have a weekly benefit.) But there are three models in terms of how the daily or monthly benefit is paid:
• reimbursement (or expense-incurred),
• indemnity, and
• disability (or cash).
The reimbursement (or expense-incurred) model is the most common. In this model, the insured is reimbursed for the expenses he incurs that are covered by the policy, up to the daily or monthly benefit amount. In other words, the daily or monthly benefit amount serves as an upper limit on benefits, and for this reason it is sometimes referred to as the maximum daily (or monthly) benefit.
Marianne has a reimbursement LTCI policy with a daily benefit of $200. For several months she receives home healthcare services costing $80 daily, and the insurer pays her $80 per day Later she needs more home care, and her expenses total $125 per day The insurer now pays $125 per day Still later she enters a nursing home where care costs $220 per day, and the insurer pays the full daily benefit, $200.
In the other two models, the full daily or monthly benefit amount is paid regardless of the actual amount of covered expenses incurred. Under the disability (or cash) model the benefit is paid when the insured meets a benefit trigger whether he is actually incurring expenses for long-term care services or nor. Under the indemnity model the insured must both meet a benefit trigger and be receiving services covered by the policy for benefits to be paid. The indemnity model is most commonly used for facility care only, with the reimbursement model applied to other types of care. The disability model is often used for non-facility care only, with the reimbursement or indemnity models applied to assisted living or nursing home care.
Norma has an LTCl policy that covers facility care on an indemnity basis and has a daily benefit of $200. For several months she receives nursing home care costing $150 daily; later she needs more care, and the daily nursing home charge is $180; still later she receives care costing $220 per day. The insurer pays the daily benefit amount of $200 for all days on which Norma meets a benefit trigger and is receiving services covered by the policy, regardless of the cost of those services.
Oliver has an LTCI policy that pays for home care on a disability basis and has a daily benefit of$150. For a several months he meets the physical impairment benefit trigger of the policy, but instead of receiving paid services, he is cared for by his daughter. Later he receives paid home healthcare services costing $80 daily, and still later he receives home care costing $125 per day. The insurer pays the daily benefit amount of$150 for all days on which Oliver meets a benefit trigger, whether he is receiving paid services covered by the policy or not, and regardless of the cost of any services may he receive.
Daily, Monthly, and Weekly Benefits
Many policies (especially newer ones) pay a monthly benefit instead of a daily benefit, and some policies pay a weekly benefit. A monthly or weekly benefit allows for greater flexibility in meeting expenses.
Joyce has a reimbursement policy with a daily home care benefit of $100. Her family provides much of her care, so on Saturdays and Sundays she needs no paid services. On Mondays, Wednesdays, and Fridays a home health agency provides services costing $150, and on Tuesdays and Thursdays the agency provides services costing $75. Her total expenses for the week are $600, but because she can receive no more than her daily benefit of $100 for anyone day of care, she receives $450 in benefits ($100 for Monday, Wednesday, and Friday, and $75 for Tuesday and Thursday) and must pay the other $150 out of her own pocket.
Now let us assume Joyce has a reimbursement policy with a weekly benefit of $700. Her weekly expenses fall below this amount, so she receives $600 in benefits.
A monthly or weekly benefit may cost slightly more than an equal daily benefit, but it can enable an insured to cover more services with the same benefit amount.
Advantages and Disadvantages
Policies that pay on an indemnity or disability basis are attractive to consumers for several reasons:
• These models are easy to understand-the insured knows exactly how much he will receive for each day he qualifies for benefits.
• They allow the insured great flexibility in choosing how to spend benefit dollars. An insured with a disability policy can use the money he receives any way he wishes. He might, for instance, use it to pay a family member to provide care, to pay a neighbor to provide transportation and homemaker services, or to make home improvements enabling him to continue living independently. He could even use the money for purposes completely unrelated to long-term care, such as paying the rent or meeting household expenses. Likewise, if the actual long-term care expenses of an insured with an indemnity policy are less than the benefit amount, he will have excess money that he can use any way he wishes.
• The documentation required for a claim is limited. While to receive benefits under a reimbursement policy, an insured must submit bills and receipts documenting the exact amount of his expenses, for an indemnity policy the insured must show only that he is receiving covered services, not how much those services cost, and for a disability policy he does not even have to show that, only that he meets a benefit trigger.
On the other hand, reimbursement policies also offer advantages:
• They tend to be less expensive than comparable indemnity and disability policies.
• The benefits of reimbursement policies are entirely tax-free, while benefits paid on an indemnity or disability basis above a certain amount may be subject to taxation -- discussed later in this Chapter.
• Under a reimbursement policy, if the entire benefit amount is not always paid out, benefits last longer. This is because, as explained later in this Chapter, LTCI policies pay benefits only until a lifetime maximum is reached.
Peter has an indemnity policy with a daily benefit of $250 and a lifetime maximum benefit of$200,000. For several years he receives nursing home care costing $160 per day. His policy pays $250 for each day he receives care, so his benefits last 800 days.
Paul has a reimbursement policy with a daily benefit of$250 and a lifetime maximum benefit of $200,000. For several years he receives nursing home care costing $160 per day. His policy pays $160 for each day he receives care, and his benefits last 1,250 days, over a year longer than Peter's.
As the above example shows, an insured with a reimbursement policy does not lose the difference between his benefit amount and the amount of his incurred expenses. This money remains available, and if the insured needs care for a long time, it will eventually be paid out. However, in the meantime the insurer is able to earn investment income from this money (which is referred to as salvage). Also, it is possible the insured may not need care long enough to claim this money in benefits, in which case the insurer would keep it. For these reasons, insurers generally charge less for reimbursement policies than for comparable indemnity and disability policies.
In the examples above, Peter's insurer pays out $250 every day, while Paul's pays out $160, leaving it with $90 per day. The insurer may eventually pay this money to Paul but it may not (if Paul does not need care for a long time), and in any case in the meantime the company earns investment income from it. Consequently, Paul's insurer can charge him less for the same daily benefit amount than Peter's charges.
For the insurer as well, each model has advantages and disadvantages. For a reimbursement policy, the bills and receipts submitted by the insured have to be reviewed and the amount payable calculated. When the indemnity model is used, it is only necessary to ascertain that a service covered by the policy was provided, and in most cases this means simply confirming that the insured continued to be a patient in a nursing home. No bills or receipts are involved in the disability model. Consequently, for these models the claims process is streamlined considerably and administrative costs reduced. These administrative savings can counterbalance some, but not all, of the savings insurers realize from salvage in reimbursement policies.
However, under the disability model there is a greater potential for fraud. An insured with a reimbursement policy has little incentive to file a claim if he does not really need long-term care, because he will receive no more in benefits than he can document that he has paid for services. On the other hand, an insured with a disability policy has much to gain by filing a false claim-he will receive benefits dollars that he can spend any way he wishes. And because he does not have to submit bills showing he is receiving long-term care services, it can be difficult for insurer personnel to know if he in fact continues to meet a benefit trigger. Therefore, insurers offering disability policies may need to take more steps to detect and prevent fraud, such as arranging for frequent reassessments of an insured's health condition.
By law, all LTCI policies must be either guaranteed renewable or noncancellable.
If a policy is guaranteed renewable, the insurer must renew the policy (that is, continue it year after year) as long as the insured pays the premiums. The insurer may not decline to renew because of the insured's age, health, claim history, or for any other reason. Furthermore, an insurer may not increase the premium on a single guaranteed renewable policy, only on a group of policies. Specifically, an insurer may increase premiums only when it makes the same increase on all the policies of a certain class or form number that have been issued in a state, and only with the approval of the state insurance department. Approval is generally granted only when the claims experience of the class has been worse than projected. In short, an insurer cannot raise an individual's premium; it can only raise the premiums of a group of people when state regulators approve an increase based on the claims experience of the entire group.
A noncancellable policy, like a guaranteed renewable policy, cannot be terminated by the insurer unless the insured stops paying premiums. But unlike with a guaranteed renewable policy, a noncancellable policy's premium can never be increased under any circumstances. Because of this lack of flexibility, insurers must charge higher premiums for these policies. Noncancellable LTCI policies are rare and disappearing.
Under what circumstances may the premium of a guaranteed renewable policy be increased?
Other Policy Provisions
Protection Against Lapse
A person suffering from a physical or cognitive impairment may neglect to pay premiums and unintentionally let her LTCI policy lapse. There are two policy provisions intended to prevent this:
• Under a policy with an impairment reinstatement provision, if an insured who has let her policy lapse can provide proof that she had an impairment at the time, the insurer will reinstate the policy without requiring medical underwriting. Reinstatement must be requested and the premium paid within a specified amount of time after a lapse notice (typically five months).
• A third-party notification of lapse provision allows an insured to designate another person, such as an adult child, to whom the insurer must send a copy of a lapse notice. The insured makes the designation when she applies and must be notified every two years of her right to change the person designated.
Waiver of Premium
Under a wavier of premium provision, the insured does not have to pay premiums while he is receiving benefits for nursing home care or assisted living and, for many policies, also while he is receiving home healthcare benefits. Some policies begin waiving the premium as soon as the insured has satisfied the elimination period (discussed later), while others require additional time after the end of the elimination period before the waiver goes into effect.
The NAIC Models
The National Association of Insurance Commissioners (NAIC) has developed models for the regulation of long-term care insurance. These are the Long-Term Care Insurance Model Act and the Long-Term Care Insurance Model Regulation. The act and the regulation have been adopted, in whole or in part, by most states. The key points related to policy provisions are the following:
• Certain terms may be used in an LTCI policy only if they are defined as specified by the NAIC act or regulation. Examples are "home healthcare services," "personal care," and "skilled nursing care."
• Eligibility for benefits cannot depend on the insured having been previously hospitalized or having previously received a higher level of long-term care.
• Only certain exclusions are allowed. These include preexisting conditions and the other exclusions listed above under "Exclusions. "
• If one policy replaces another, any exclusions of preexisting conditions must be waived to the extent that similar exclusions were satisfied in the earlier policy. For example, if the new policy excludes conditions for which treatment was received within six months before the policy goes in force, this exclusion cannot be enforced if the insured has already fulfilled a six-month period for the previous policy.
• A policy must offer an inflation protection option. An added premium charge for inflation protection is permitted.
• A policy can cover only nursing home care, but it cannot cover only skilled care in a nursing home. All levels of care must be covered. Nor may a policy provide significantly more benefits for skilled care than for other levels of care received in a nursing home.
• The only allowable renewal provisions are guaranteed renewable and noncancellable.
• A policy must have a third-party notification of lapse provision.
• A policy must offer a nonforfeiture optIon.
• A policy must have an incontestability clause. This clause limits the insurer's right to contest the policy based on misrepresentations made in the application.
As stated above, most states have adopted the NAlC models, but some have adopted them only in part and others not at all. And different states have adopted different versions. (Several versions have been developed over time by the NAlC.) Consequently, not all the rules listed above apply in every state. Also, in many regulatory areas the NAlC models provide only general guidelines within which each state must develop its own specific rules. Finally, some states have enacted additional laws and regulations governing long-term care insurance that are not based on the NAIC models. For example, some states require that certain types of care be covered (for example, home care as well as nursing home care), and some states mandate minimum benefit amounts and prohibit certain policy provisions. Thus, although the development of the NAIC models has created some degree of standardization among states in the regulation of long-term care insurance, there are nonetheless many differences.
LTCI Policy Options
In the previous discussion we looked at the various issues that insurer personnel must consider in designing a long-term care insurance product. An LTCI policy may or may not be federally tax-qualified, and it may or may not qualify for a long-term care partnership program. It may cover a wide range of long-term care settings and services or only facility care or home care. It may pay benefits on a reimbursement, indemnity, or disability basis. And although because of HIPAA requirements the benefit triggers of most policies are very similar, some variation is possible.
Each consumer must choose the LTCI product that best meets her needs. But once she has made that selection, she still has other choices to make. She must answer these questions:
• How long an elimination period do I want?
• How large a benefit amount do I want?
• How large a lifetime maximum benefit do I want?
• Do I want inflation protection? If so, what kind and how much?
• Do I want a nonforfeiture provision?
• What optional features do I want?
In this section we will examine these benefit selections and options.
The Elimination Period
An elimination period (sometimes called a waiting period or deductible period) is an amount of time that must elapse after an insured meets a benefit trigger before she begins to receive benefits. In other words, when an insured begins to need long-term care services, she normally has to pay for them herself for a certain time before benefits begin. The elimination period functions like a deductible in other forms of insurance. It is designed to reduce an insurer's benefit and administrative costs and thereby enable the insurer to offer a lower premium.
When purchasing a policy, an individual sets the length of the elimination period by choosing among options offered by the insurer, which may include some or all of the following: zero, 30,45,60,90, 100, 180, or 365 days. The options an insurer can offer may be limited by state regulations.
Since the insurer does not pay benefits during the elimination period, the longer the period, the less the insurer pays, and the lower the premium it must charge. Therefore, a purchaser can reduce her premium by choosing a long elimination period. However, the longer the elimination period, the more the insured will pay out of pocket if she needs care. For example, if an insured chooses a 90-day elimination period and has to pay for nursing home care for 90 days at $150 per day, she will pay a total of $13,500 before she begins to receive benefits. On the other hand, if she chooses a 30-day elimination period, she will pay only $4,500. Each individual must weigh paying a higher premium for a short elimination period against paying a lower premium bur having to fund care our of her own pocket during a long elimination period.
While the purchaser sets the length of the elimination period, the insurer determines how it functions. For example, when the elimination period is considered to begin differs by insurer. For some it starts as soon as the insured meets a benefit trigger, whether he incurs expenses covered by the policy or not. For others it starts only when the insured meets a benefit trigger and begins incurring covered expenses.
Dave has a 90-day elimination period that begins as soon as he meets a benefit trigger, whether or not he receives any paid services. He meets the policy's physical impairment benefit trigger, and for 90 days his wife takes care of him and he does not pay for any services. At the end of90 days, the elimination period is satisfied and he can begin receiving benefits. At that point he obtains paid services.
Margaret also has a 90-day elimination period, but hers does not begin until she both meets a benefit trigger and is receiving paid services covered by the policy. Unlike Dave, she must pay for care for 90 days before she can receive benefits.
Companies that require insureds to receive paid services during the elimination period differ in how they count days toward satisfying the period. Some take the service day approach-they count only the days on which services are provided. Others take the calendar day approach-they count all days while services are received, whether these services are provided every day or not. Typically the insurer gives the insured credit for every day of any week in which he received services on at least one day, or sometimes two or three days. Some insurers allow the purchaser to choose the approach to counting days, with the calendar day option costing more since benefits begin sooner.
Judy has a 60-day elimination period that counts only service days. On May 1 she begins receiving home healthcare services three days a week, so that it takes her 20 weeks to satisfy her elimination period.
David has a 60-day elimination period that gives him credit for every day of any week in which he receives covered services on at least one day. On May 1 he begins receiving home healthcare services three days a week. Every day of the week is counted, and he satisfies his elimination period in 60 calendar days.
Most newer policies allow days to be accumulated over the life of the policy. For example, if a person with a 90-day elimination period receives covered services for 70 days but then no longer needs care, the next time he meets a benefit trigger, those 70 days will count toward his elimination period and he will need only 20 more days. But some policies have an accumulation period-to continue our example, if the insured does not accumulate 90 days within a certain time (such as two years), he loses any days he has and must begin again.
Under most policies today the elimination period must be satisfied only once during the life of the policy. That is, an insured who satisfies the elimination period, receives benefits, then stops needing care, and after an extended time needs care again is not required to satisfy the elimination period again. But a few older policies require the insured to begin a new elimination period under these circumstances.
Some insurers offer the option of no elimination period (called a zero elimination period). Many newer policies offer the option of a zero elimination period for home care combined with a regular elimination period (often 90 days) for facility care. Sometimes under this approach the days on which home care is received are counted toward the facility elimination period, so that if a person receives home care for at least a few months before going into a nursing home, she will have already satisfied her facility elimination period.
The 90- Day Certification Requirement
As we learned in the preceding discussion, for an insured to qualify for benefits under a tax-qualified policy, a licensed healthcare practitioner must certify that the insured's inability to perform ADLs is expected to last at least 90 days. This 90-day certification requirement should not be confused with an elimination period. The two are separate and distinct concepts, and the government's guidance on HIPAA specifically states that the 90-day certification requirement does not establish an elimination period. A few examples will illustrate the distinction:
Doug has an LTCl policy with a zero elimination period. He becomes unable to perform two ADLs, and a licensed healthcare practitioner certifies that this inability results from a physical condition that is expected to last more than 90 days. Doug is eligible for benefits and begins receiving them immediately, since he does not have to satisfy an elimination period.
Betty has an LTC I policy with an elimination period of 180 days. A licensed healthcare practitioner certifies that she cannot perform two ADLs and is expected to be unable to do so for more than 90 days. Betty is eligible for benefits, but she will begin receiving them only after 180 days have elapsed.
Larry has an LTCI policy with a 30-day elimination period. He becomes unable to perform two ADLs. However, this inability is the result of an accident, and he is expected to be fully functional in a few weeks. Since Larry's impairment is not expected to last 90 days, he is not eligible for LTCI benefits.
In other words, whether an insured receives benefits depends on whether her condition is expected to last 90 days or more. When an insured begins receiving benefits, assuming she is eligible for them, depends on the elimination period of her policy.
The Benefit Amount
As explained earlier, LTCI policies have a benefit amount per day or month (or sometimes per week). A person buying a policy selects a benefit amount, which typically ranges from $50 to $500 per day and from $1,500 to $15,000 per month. Within these ranges, the daily amounts the purchaser can select are in increments of $1, $5, or $10, depending on the company, and the monthly amounts are usually based on units of $100.
Of the choices made by the purchaser, the benefit amount normally has the greatest impact on the amount of the premium. In general, there is a direct proportional relationship-a daily benefit of $120 is 20 percent more expensive than a daily benefit of $100, and a daily benefit of $80 costs 20 percent less than a daily benefit of$100.
The benefit amount a buyer chooses should be based on how much is charged by nursing homes, assisted living residences, and home healthcare agencies where she expects to spend her old age. (This might be where she lives now, or it might be where her children live or where she plans to retire.) It is important to remember that actual charges may exceed stated daily rates. For example, a nursing home may charge extra for drugs, supplies, and special services, and this can increase costs by several hundred dollars each month. The buyer should also consider how much of the cost of long-term care (if any) he is willing and able to pay out of his own pocket. Some people prefer to rely on insurance to cover only a portion of long-term care expenses and pay the rest out of their income and assets. And of course the buyer must keep in mind how much she can afford to pay in premiums.
Some policies pay the same benefit amount for different types of care, while others pay different amounts. When amounts differ, the home care benefit is often defined as a percentage of the facility benefit (normally from 50 to 100 percent). The purchaser often selects this percentage, and of course the higher the percentage, the higher the premium. Some advisors recommend choosing at least 75 percent or (if possible) 100 percent, since most people prefer to remain at home as long as possible and extensive home care services can be expensive. On the other hand, those seeking to hold down the premium may be able to get by with a lower percentage, especially if family members are available to provide some care.
The Lifetime Maximum Benefit
LTCI policies normally have limits on the total amount the insurer will pay in benefits during the life of the policy. Some older policies have a benefit period, a maximum amount of time benefits will be paid, and some have different benefit periods for different types of care. (For instance, a policy might pay for nursing home care for four years and home care for two years.) But most policies today have a lifetime maximum benefit (commonly called a pool of money). Under this approach an insured receives benefits until the total amount received for all types of care reaches a maximum amount stipulated by the policy, regardless of how much time has elapsed. The insured chooses this amount at the time of purchase.
Some insurers have the purchaser choose among round dollar amounts, such as $100,000, $200,000, or $500,000. Other companies define the pool of money as the daily or monthly benefit amount multiplied times a certain period of time, and the purchaser chooses among options such as two, three, four, five, six, and ten years. For example, an insured might choose a daily benefit of $200 and a lifetime maximum based on three years. His pool of money would be calculated by multiplying $200 times 365 days times three years, yielding $219,000.
However, it must be understood that while the dollar amount of a pool of money may be based on the payment of benefits for a certain period, benefits are not limited to that period, as with a benefit period. As stated above, the insured receives benefits until he has received the maximum amount, regardless of the time elapsed. If an insured spends less than the daily benefit amount on some days, the unspent balance remains in his pool of money, and this allows him to receive benefits beyond the time period on which the pool of money was based.
Barbara buys a reimbursement LTCI policy and chooses a daily benefit of $150 and a lifetime maximum based on five years. Her pool of money is $273,750 ($150 daily benefit X 365 days X 5 years = $273,750). Suppose Barbara enters a nursing home and receives her full $150 daily benefit every day for five years. At the end of five years, she will have spent $273,750, and her benefits will end.
Now suppose that instead of going into a nursing home, Barbara receives limited home healthcare services and needs only $100 of benefits per day. At the end of five years, she will have spent $182,500 ($100 X 365 days X 5 years), leaving $91,250 in her pool of money ($273,750 minus $182,500). In this case, Barbara will continue receiving benefits beyond five years, for as long as there is still something left in her pool of money.
Finally, suppose that Barbara has an older policy with a five-year benefit period instead of a pool of money. Barbara will receive benefits for no more than five years, even if she receives less than her daily benefit amount on many days during those five years.
Under the NAIC Model Act, the lifetime maximum of an LTCI policy must provide at least 12 months of benefits, and some states have 24- or 36-month minimums. But there is no upper limit-some policies (called lifetime policies) have an unlimited lifetime maximum. The insured can continue receiving the daily or monthly benefit amount indefinitely.
How large should the lifetime maximum benefit be? It is difficult to judge, because it is hard to know how much long-term care one might need. The average nursing home stay is two-and-a-half years, but one stay in six exceeds five years. Plus these days most people receive home care or assisted living before they enter a nursing home. But of course, the larger the lifetime maximum, the higher the premium, and an unlimited lifetime maximum can be very expensive.
Restoration of Benefits
Most companies offer a restoration of benefits feature, either as a standard policy provision or as an optional rider for an additional charge. This feature can restore a partially depleted pool of money or benefit period. If an insured uses some of the dollars in his pool of money or some of the days in his benefit period, but then recovers from his impairment and receives no long-term care for a specified period (typically six months), the dollars or days he has used are restored to his original pool of money or benefit period.
Isaac has an LTC I policy with a pool of money of $200,000. He needs home care and receives benefits totaling $15, 000, and his pool of money is reduced to $185,000. But he recovers from his impairment, and for six months does not meet a benefit trigger of the policy or receive any benefits. His pool of money is restored to $200,000, and if he becomes impaired again, he will be able to draw on this amount.
However, this happens very infrequently-people who qualify for LTCI benefits have chronic impairments and do not normally fully recover. And the few who do recover generally have received care for a very short time and have been paid only a small amount of benefits. Consequently, insurers are able to offer this feature for very little added cost or even at no charge, but it is of limited value to the insured.
Long-term care costs, like costs In general, have been rising steadily for many years, and this trend is expected to continue. Consequently, an insured runs the risk that over the years his daily or monthly benefit and lifetime maximum will become inadequate to cover the increased cost of services. However, consumers have the opportunity to purchase optional provisions that protect against inflation. And although it adds to the premium price, inflation protection can be one of the most important features of an LTCI policy, especially for those purchasing coverage many years before they expect to need benefits.
For tax-qualified policies and those governed by the NAIC Model Regulation, an inflation protection option must be offered, although a purchaser may choose not to take it. For group coverage, this option must be offered to the group policyholder (usually an employer), but it is not generally required that it be offered to each individual group member (although some states require this as well).
Automatic Inflation Protection
With automatic inflation protection, benefit amounts are increased every year at a set rate with no action by the insured required and with no corresponding increase in premium. There are two common versions:
• The 5 percent simple rate. Benefits are increased each year by 5 percent of the initial amount. For example, a daily benefit of $100 would rise to $105 in the second year, $110 in the third year, $115 in the fourth year and so on, reaching $200 in 20 years.
• The 5 percent compound rate. The increase is compounded, like interest in a savings account. In other words, each year there is a 5 percent increase based not on the initial benefit amount (as with the simple rate) but on the previous year's amount. This leads to a snowballing effect, such that, although in the early years of the policy the increases are not much greater than with the 5 percent simple option, in later years they are substantially greater. For example, a daily benefit of $100 would rise to $105 in the second year, $110.25 in the third year, and $115.76 in the fourth year, not much more than with the simple rate. But after 20 years, the benefit amount would increase to $265, for a difference in annual benefits of $23,725.
The simple rate option costs less, since in the long run it results in significantly smaller benefit increases. However, as noted, during the early years of the policy benefit increases are almost as great as with the compound rate. Therefore, the simple rate option is probably sufficient for a person who is likely to need benefits fairly soon, such as someone who is already elderly when the policy is purchased. On the other hand, the compound rate provides better protection when the need for the benefit is not expected to occur for 15 or more years, as is the case with younger buyers of LTCI.
Some insurers have introduced additional automatic inflation protection options, ranging from 1 percent to 6 percent, simple or compound. In most LTCI policies, automatic inflation increases continue for the life of the policy. However, a few policies have limitations: Some impose a cap on benefits of double the original amount, and others stop automatic increases after 20 years or when the insured reaches a specified age (such as 80 or 85). Some insurers offer automatic inflation protection with such limitations alongside and as a lower-cost alternative to lifetime automatic increases.
An automatic inflation protection option generally also increases a policy's lifetime maximum benefit. The same rate usually applies to both the daily or monthly benefit and the lifetime maximum, but in some cases the maximum is increased at a lower rate. (For example, an insurer might offer a split rate, with the daily benefit increasing by 5 percent and the lifetime maximum by 3 percent.)
Guaranteed Purchase Option
Another kind of inflation protection is the guaranteed purchase option (GPO) (also called the future purchase option, or FPO). This feature gives the insured the right to purchase additional coverage to keep up with rising costs. Specifically, at set intervals (such as every year or every three years), the insured has the option of increasing benefit amounts. He does not have to reapply for coverage and submit evidence of insurability, as would an insured without the guaranteed purchase option. If an insured does increase his benefits, his premium is also increased. The increase in premium is based on the amount of the benefit increase and the insured's age at the time of the change.
The guaranteed purchase option is included in some policies at no additional cost, while others charge extra for it. That is, under some policies the insured pays a higher premium simply to have this option, whether or not he ever uses it to raise benefits.
A policy with a guaranteed purchase option usually has a lower premium than a comparable policy with automatic inflation protection. But the GPO does not usually work well for those buying a policy when they are relatively young, as after many years increasing the benefit amount enough to keep up with inflation requires larger and larger premium increases, sometimes eventually making the policy unaffordable. Automatic inflation protection, on the other hand, gives the insured a known, budgetable premium.
In addition, the GPO is subject to certain limitations. If an insured declines a certain number of opportunities to increase coverage, most insurers stop offering them. And an insurer generally makes no further increases available after the insured becomes eligible for benefits.
A nonforfeiture option allows an insured who stops paying premiums and lets her policy lapse to receive something for the premiums she has already paid. This could be a cash payment or continuation of coverage for a limited time.
Under a cash surrender value option or return of premium option, a cash payment is made.
• The cash surrender value option is triggered by the surrender (termination) of the policy by the insured while she is still living. The amount is based on the total amount of premiums she paid over the life of the policy, in some cases reduced by the amount of any claims paid. (This option is not available in TQ policies.)
• The return of premium option is triggered by the death of the insured, and the payment is made to her estate or designated beneficiary. The amount is based on premiums paid and, for some policies, the insured's age at death. Some policies do not pay a benefit if claims have been made, or the amount of benefit is reduced by the amount paid in claims. Some insurers require the policy to have been in force for at least 10 years before the death of the insured.
Under the shortened benefit period option, an insured who quits paying premiums retains the right to benefits equal in amount to the total premiums she has paid (without interest), or 30 days of benefits if this is greater, provided the policy was in force three years or more. The name "shortened benefit period" is used because the policy remains in force but the lifetime maximum benefit is reduced to the amount of premiums paid.
Marianne purchases a policy with an annual premium of$1,500. Ten years later, after she has paid a total of $15,000 in premiums, she lets the policy lapse. She is entitled to $15,000 in benefits, and two years later, when she enters a nursing home, she receives the policy's daily benefit ($150) for 100 days.
For these options there is an extra premium charge that can be quite substantial, depending on the age of the insured and the type and amount of nonforfeiture benefits. For those who do not choose one of these options, newer LTCI policies generally provide contingent nonforfeiture benefits at no extra charge, and this is required in some states. The purpose of this feature is to give those faced with a large premium increase the opportunity to let their policy lapse and receive nonforfeiture benefits. An insured may receive contingent nonforfeiture benefits only if the insurer increases his premium above a specified level.
Other Optional Features
It is increasingly common for insurers to make available shared care, in which two people, usually a married couple, share coverage. There are several ways to accomplish this:
• The two spouses buy one policy that covers both.
• Each spouse buys her own policy, but each policy has a rider allowing a spouse who has exhausted benefits under her own policy to draw benefits from the other spouse's policy.
• Each spouse buys her own policy, and they also buy a joint policy. If either spouse uses up the benefits in her individual policy, she can draw on the joint policy.
The rules that apply if one spouse dies or if the couple divorces vary from policy to policy. Shared care generally increases the cost of a policy, as the insurer is more likely to pay claims if two people are eligible to receive benefits from a policy instead of just one. But by the same token, shared care can enable a couple to stretch their premium dollars by buying coverage that either spouse can access.
Dual Waiver of Premium
Some policies include a waiver of premium provision, under which the insured does not have to pay premiums while he is receiving benefits. Some insurers offer the option of a dual waiver of premium, whereby when an insured qualifies for the waiver, it also applies to a spouse covered by the same policy or a linked policy.
Some insurers offer an optional survivor benefit. This feature provides that if an insured dies and a surviving spouse is covered by the same policy or a linked policy, the surviving spouse will continue to receive coverage without paying any further premiums. Usually the survivor benefit applies only if the policy has been in force for at least 10 years at the time of death and there were no claims during the first 10 years of coverage. Some insurers offer a survivor benefit that applies after only seven years and regardless of whether claims have been paid. And some insurers combine the survivor benefit with the dual waiver of premium, as both are relevant to coverage of a couple.
Limited Payment Options
Some companies offer payment options in which premiums are paid for a limited period of time, rather than over the life of the policy or until the premium waiver takes effect. The most common limited payment option is 10 years, but other options are available, including one year, five years, 20 years, and until age 65. With all these approaches, premiums are higher than they would be under a normal payment plan, but once the payment period has ended, the insured receives coverage for the rest of his life at no further cost. This has obvious advantages for those nearing retirement. Also, once a policy is paid off, the premium cannot be increased (the policy becomes in effect noncancellable). Only a small minority of LTCI policyholders pay premiums on this basis, and some states do not allow limited pay options or restrict their availability.
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 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
Total cost to age 85
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 -- Individual Insurance
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 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.
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.
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 -- Group Insurance
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.
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.
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.
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.
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.
Taxation of LTCI
For many years the tax treatment of long-term care insurance was in dispute. Some argued that LTCI was a type of health insurance, and consequently premiums were deductible and benefits could be excluded from taxable income. Others rook the position that because LTCI benefits most commonly cover such things as help with ADLs, supervision, and room and board in facilities, rather than medical care, LTCI was nor health insurance, and therefore premiums could not be deducted as medical expenses and benefits had to be considered taxable income. Because long-term care insurance was simply not addressed by Internal Revenue Service regulations, the issue remained unresolved.
This changed with the enactment of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). HIPAA addressed a wide array of health insurance issues, including the tax treatment of LTCI. Essentially, HIPAA established a new class of LTCI policies, federally tax-qualified (TQ) policies, set requirements that must be met for a policy to be tax-qualified, and granted favorable tax treatment to the policies that meet those requirements.
The Tax Status of LTCI Policies
Federally tax-qualified policies now make up a very large majority of the LTCI policies sold and have become the industry standard. The benefits of TQ policies are generally tax-free, and premiums may in some circumstances be partially tax-deductible. (The requirements for TQ status and the tax treatment of TQ policies are discussed later.)
However, not all LTCI policies are tax-qualified. HIPAA allows insurers to continue to market products that do not meet the requirements for TQ status, referred to as nonqualified (NQ) policies. But the owners of these policies do not enjoy the tax advantages that apply to TQ policies. The tax status of NQ policies is "pre-HIPAA"-that is, their tax status is the same as that which applied to all LTCI policies before HIPAA. In other words, whether benefits are taxable remains unresolved, and premium payments are not tax-deductible.
To be federally tax-qualified, LTCI policies issued on or after January 1, 1997 must meet all HIPAA requirements. However, policies that were issued before that date and so were already in force when HIPAA's long-term care provisions took effect are governed by HIPAA's "grandfather" clause and referred to as grandfathered policies. These policies are deemed tax qualified (that is, the same tax treatment applies to them as to regular TQ policies) even if they do not meet HIPAA requirements. The grandfather clause was included in HIPAA so that large numbers of policyholders would not need to replace their LTCI policies to gain favorable tax treatment. Such a massive replacement would have caused a major disruption in the industry and would not have been in the interest of consumers. An important restriction applies-an insurer cannot make changes in a grandfathered policy so substantial that the insurer is in effect issuing a new policy that does not meet HIPAA standards. If such changes are made, the policy may lose its grandfathered status.
The Requirements for TQ Status
The requirements an LTCI policy must meet to be deemed federally tax-qualified are numerous and in some cases complex. We will summarize the most important ones in this section.
The Cover Page
The cover page of a tax-qualified LTCI policy must include certain information:
• It must clearly indicate that the policy is intended to be federally tax-qualified. A typical statement would be, "This policy is intended to be a qualified long-term care insurance contract under Section 7702B(b) of the Internal Revenue Code."
• It must notify the insured that for 30 days after delivery he has the right to return the policy for a full refund of all premiums and fees paid, even though the policy has already gone into effect. (This is called the 30-day free look or right to return provision.)
• If the policy includes a preexisting condition exclusion, this must be explained on the cover page.
Covered Services and Benefit Triggers
HIPAA requires that a tax-qualified LTCI policy pay benefits only for "qualified long-term care services." HIPAA defines qualified long-term care services as "necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services" that are "required by a chronically ill individual" and "provided pursuant to a plan of care prescribed by a licensed healthcare practitioner." Let us examine these terms.
In defining "qualified long-term care services," HIPAA does not name specific services (such as skilled nursing care, assistance with bathing, supervisory care, etc.) but rather deems a service qualified if it has one of several purposes ("diagnostic, preventative, therapeutic," etc.). This purpose-based approach allows for a great deal of flexibility in the care of an individual. Any service that serves one of the purposes approved by HIPAA is acceptable, and benefits may be paid for it. This approach also makes possible the introduction of newly developed services, which is particularly important in an ever-evolving field like long-term care. (If HIPAA had dictated a list of specific long-term care services, new services not on the list would not be reimbursable without a change in the law.)
A chronically ill individual is defined by HIPAA as one who meets the benefit triggers for TQ policies described in earlier. Essentially, a chronically ill individual is a person who is expected to be unable to perform at least two of the standard ADLs without substantial assistance from another person for at least 90 days, or one who suffers a severe cognitive impairment such that substantial supervision is needed to protect her from threats to her health and safety.
There is another requirement a long-term care service must meet to be qualified-it must be appropriate for the impairment the insured suffers from. HIPAA ensures that services match a person's impairment by requiring that they be "provided pursuant to a plan of care prescribed by a licensed healthcare practitioner." Physicians, registered nurses, and discharge planners at hospitals have used plans of care for years. These professionals look at the underlying cause of a person's need for services, her overall medical condition, and the types of services available. They also consult with her and her family on their care and setting preferences. They then draw on their expertise and experience to summarize the insured's needs and broadly outline the services that can meet those needs. The purpose of a plan of care is to ensure that a person receives safe and appropriate services, which might not occur if she and her family had no professional guidance.
A plan of care should be reviewed and updated frequently. As a person's condition changes, different services are required. Typically, as her physical or cognitive impairment worsens, she needs additional services. On the other hand, in some cases therapy and proper care can lead to a person regaining functional ability so that a reduced level of services is appropriate. For this reason, HIPAA states that insurers must require recertification of an insured's impairment by a licensed health care practitioner every 12 months. (Many insurers review an insured's case more frequently if her condition is one that could change in the near term.)
HIPAA defines a licensed healthcare practitioner as "any physician (as defined in section 1861(r)(l) of the Social Security Act) and any registered professional nurse, licensed social worker, or other individual who meets such requirements as may be prescribed by the Secretary [of the Treasury]."
Generally, a TQ policy may not make payments to an insured that are not intended to cover qualified long-term care services. However, in the case of nonforfeiture and policy dividends, payments of certain types may be made under certain circumstances.
Finally, a TQ policy may not pay benefits for a service to the extent that Medicare pays benefits for the same service. This rule is intended to prevent insureds from receiving double benefits. However, it does not apply to indemnity or disability policies.
HIPAA requires TQ policies to include many of the consumer protection provisions mandated by the NAIC LTCI Model Act and Model Regulation discussed earlier. To mention a few of the most important, a TQ policy must:
• be either guaranteed renewable or noncancellable,
• include a third-party notification of lapse provision,
• offer an inflation protection option,
• offer a nonforfeiture option.
Finally, the provisions relating to exclusions must be those described earlier.
The Tax Treatment of TQ Policies
Benefits paid by TQ reimbursement LTCI policies are not considered income for purposes of federal income tax. Benefits paid by TQ indemnity or disability policies (referred to by the IRS as per diem policies because they pay a flat dollar amount per day) may be taxed if they exceed a certain limit ($260 per day in 2007, adjusted annually for inflation). However, if an insured with a per diem policy can furnish proof that her qualified long-term care expenses were greater than this limit, benefit payments up to the actual amount of expenses may be excluded from taxable income, even if they exceed the limit. This rule is based on the principle that LTCI benefits that are not actually spent on long-term care should not be tax-free, but rather treated as ordinary income.
Gary has a TQ reimbursement policy with a daily benefit of $300. He receives benefit amounts ranging from $225 to $300 for different days, depending on the amount of covered expenses he incurs. Since all his benefits go to pay for care, the entire amount each day is tax-free.
David has a TQ policy that pays a daily benefit of$300 on a disability basis. He is paid $300 for every day he meets a benefit trigger of the policy, even though his actual ling-term care expense range from $180 to $240. Only $260 of each daily benefit is tax-free, and the other $40 is taxed as ordinary income.
Robert also has a TQ policy that pays a daily benefit of $300 on a disability basis. He is paid $300 for every day he meets a benefit trigger of the policy, even though his actual expenses range from $200 to $330. For days on which he receives services costing $260 or less, only $260 is tax-free, but if he can show that he received qualified services costing more than $260 on certain days, his benefits for those days are tax-free up to the actual amount of incurred expenses.
The above rules apply to both individually purchased policies and group coverage.
Premiums -- Individual Policies
Premiums paid by an individual on a tax-qualified LTCI policy may in certain circumstances be partially tax-deductible. It works like this: A taxpayer may include premiums up to a maximum amount in itemized deductions on Schedule A. This maximum depends on the taxpayer's age at the end of the tax year and is adjusted annually for inflation. (See Table 9.1.) If LTCI premiums (up to the allowed maximum) and other deductible medical expenses add up to more than 7.5 percent of the taxpayer's adjusted gross income (AGI), the amount in excess of 7.5 percent of AGI is deductible from taxable income.
Gloria is 57. In 2007 she pays an annual premium of$1,250 on a tax-qualified LTCI policy. She had $4,000 in deductible medical expenses that year, and her adjusted gross income was $35,000. At her age, she can add $1,110 of her LTCl premium to her deductible medical expenses for a total of $5, 110. This amount exceeds 7.5 percent of her AGl ($2,625) by $2,485. Therefore, $2,485 is deductible from taxable income.
TABLE 9.1 Limits to Tax Deductibility of LTCI Premiums The maximum amount of premiums paid by an individual on a tax qualified LTC I policy that may be included in itemized deductions (2007)
For the self-employed, premiums are treated somewhat differently. The same age-based maximums listed in Table 9.1 apply, but a self-employed person may exclude the full amount of premiums up to these maximums from taxable income (unlike an employed person, who may only deduct any amount that, together with other deductible medical expenses, exceeds 7.5 percent of adjusted gross income).
In addition, a growing number of states offer credits or deductions on state income taxes for LTCI premiums.
As a general rule, employers paying premiums or portions of premiums for TQ long-term care insurance on behalf of their employees may deduct their payments. The premium payments must be deemed reasonable and ordinary business expenses, but meeting this test is relatively easy, and the deduction is unlikely to be challenged as long as the long-term care insurance is offered as an employee benefit.
Employees do not have to include as taxable income any premium payments made on their behalf by their employer. The tax treatment of premium payments made by employees themselves for employer-sponsored coverage is the same as for individual policies-that is, premiums may be partially deductible in certain circumstances, according to the rules explained above.
There is an exception for employees who are self-employed owners. A self-employed owner is someone who is both an owner and an employee of the same business, such as a partner in a law firm. Unlike other employees, a self-employed owner may not exclude from her taxable income LTCI premium payments made by her employer on her behalf. However, a self-employed owner can take a deduction for a portion of such premium payments; the rules are similar to those for the self-employed, described above.
All long-term care insurance policies function in essentially the same way, but there is also a great deal of variation in product design.
Most policies are designed to meet the requirements for federal tax-qualified status, but a few are nor. Some policies meet the requirements of state long-term care partnership programs, and others do not.
The benefit triggers of tax-qualified policies must adhere to HIPAA rules, and as a result there is a high degree of standardization in this area. Benefit eligibility is based on a physical impairment (the inability to perform a certain number of ADLs without assistance) or a severe cognitive impairment.
LTCI policies may cover only facility care or only home care, but most cover care in a variety of settings. Policies may provide benefits for such items as homemaker services, transportation, informal caregiving, respite care, bed reservations, and care coordination.
Under a reimbursement policy (the most common type), the insured is reimbursed for the actual covered expenses he incurs, up to a daily or monthly benefit amount. Under indemnity and disability policies, the full daily or monthly benefit is paid regardless of the actual amount of covered expenses incurred. Each of these payment models has advantages and disadvantages, for both the insured and the insurer.
An LTCI policy must be either guaranteed renewable or noncancellable. The NAIC models, which have been adopted in whole or in part by most states, mandate other policy provisions designed to protect the consumer.
When an individual purchases an LTCI policy, she must select benefit amounts and decide if she wants any optional features.
The purchaser sets the length of the elimination period by choosing from options offered by the insurer. A long elimination period makes a policy cheaper, but it means that the insured will have to pay for care out of her own pocket for an extended time before she receives benefits. Elimination periods vary in terms of when they start, how days are counted, whether they must be satisfied more than once, and whether there is an accumulation period.
The buyer selects a daily or monthly benefit amount, and also sometimes the percentage of the facility benefit that will be paid for home care. The benefit amount should be based on the cost of long-term care services, but the buyer must also keep in mind that this amount has a direct proportional impact on the premium.
An LTCI policy normally limits the total amount of benefits the insured may receive during the life of the policy. Most commonly, the purchaser selects a lifetime maximum benefit, and she receives benefits until the total amount received for all types of care reaches this maximum, regardless of how long this takes. Some older policies have a benefit period-they pay benefits until a certain amount of time has elapsed.
As long-term care costs rise, fixed benefit amounts become inadequate. Inflation protection options are available to address this problem. They add to the cost of a policy, but they are important, especially for those who expect to need care many years after they purchase coverage. One approach is automatically increasing benefit amounts every year at a set rate, without a premium increase. An alternative is allowing the insured to purchase additional benefit amounts at set intervals, with a corresponding increase in the premium.
A nonforfeiture option adds to the price of a policy, but it allows an insured to receive something if she decides to let the policy lapse. Other options, such as shared care, the dual waiver of premium, and a survivor benefit, can be advantageous to couples. And a limited pay option may be attractive to those who do not want to pay premiums during retirement.
The amount of the premium of an LTCI policy is based on product design, the benefit amounts selected by the purchaser, and any options she chooses. It also depends on the purchaser's age, in some cases her health, and any discounts she may qualify for.
An LTCI premium is not increased automatically as the age of the insured increases, but it is based on the insured's age when she applied for the policy. For that reason, it is generally advantageous to purchase coverage earlier in life rather than later.
Some insurers adjust the premium of an individual LTCI policy according to the health of the applicant. Most people pay a standard rate, but the healthiest people may be offered a discount and the less healthy may be charged more.
Most commonly, group LTCI coverage is offered on a guaranteed issue basis, without underwriting of individual participants. But in some cases modified guaranteed issue is used, or simplified or full underwriting is conducted.
Premium discounts may be offered to those who meet certain health criteria as well as to married people or members of the same family. Discounts normally apply to group coverage and may be offered to members of groups buying individual policies.
HIPAA established requirements that must be met for an LTCI policy to have federal tax-qualified (TQ) status and granted TQ policies favorable tax treatment. Most policies today are tax qualified, but a few are not, and some are grandfathered-that is, they do not meet HIPAA requirements but are granted favorable tax treatment anyway because they were already in force when HIPAA became effective.
To be federally tax-qualified, an LTCI policy must include certain information on its cover page, including an indication of its TQ status. Benefits must generally be paid only for "qualified long-term care services" provided to a "chronically ill individual" under "a plan of care prescribed by a licensed healthcare practitioner," as these terms are defined by HIPAA. Certain consumer protection provisions related to renewability, inflation protection, nonforfeiture, exclusions, and other matters must be included.
Benefits from TQ reimbursement policies are not subject to federal income tax, and benefits from TQ indemnity and disability policies may be taxed only to the extent that they exceed a certain level. Premiums paid by individuals on TQ policies are not generally tax-deductible; but taxpayers with large deductible medical expenses may be able to deduct their premiums to some extent. Premiums paid by employers on behalf of employees are generally deductible by the employer and not included in employees' taxable income.