Ethical Considerations and Suitability
The great majority of those selling long-term care insurance strive to always conduct themselves with honesty, integrity, fairness, and professionalism, and with a sense of duty to those they serve. In doing so they are guided by their own sense of right and wrong.
But LTCI products are complex, and many different situations and circumstances may arise. Consequently, as important as a strong moral compass is, it is not always sufficient to ensure that one acts in every instance in accordance with established rules of ethical conduct-these rules must be learned. In addition, each state has laws and regulations that govern the sale of LTCI products, both partnership and nonpartnership policies, and insurance agents and brokers must be familiar with these requirements.
In this chapter we will explore some general ethical principles and how they apply to LTCI sales, and we will review the main regulatory requirements that must be complied with during the sales process we will end this discussion with a detailed exploration of the suitability of partnership and nonpartnership LTCI policies.
General Ethical Principles in Insurance Sales
An LTCI sales professional must disclose to her clients the information they need to make informed decisions. She must tell them about the disadvantages as well as the advantages of the products and services she recommends, and she must inform them of all costs. She should also disclose to them her own interest in any transaction. For instance, if she will receive a commission for the sale of an LTCI policy, she should let the purchaser know this.
An LTCI professional must maintain the confidentiality of personal and financial information provided by a client. She may not share this information with others unless two conditions are met:
• The person receiving information needs it to perform a legitimate and appropriate business function (as when data is passed to an insurance company underwriter).
• The client gives his informed consent-that is, the salesperson explains to the client how the information he provides will be used, and the client agrees to this use. The client must give his consent in writing.
A salesperson must also make a reasonable effort to ensure that personal and financial information is not accidentally revealed to others. She should not leave applications, correspondence, and similar documents in open view, and she should take precautions to prevent sensitive conversations from being overheard. Finally, a salesperson must comply with all state and federal privacy regulations.
An LTCI professional has the responsibility to serve her clients with competence. Competence requires knowledge -- a salesperson must be familiar with a broad range of LTCI products and have a thorough understanding of the features and provisions, the benefits and costs, and the advantages and disadvantages of each.
An LTCI professional must also have some knowledge of the other means of financing long-term care discussed in this course , and she should understand the implications long-term care insurance has for taxation, financial planning, retirement planning, and estate planning. But at the same time, she has an ethical obligation not to go beyond the bounds of her competence when advising clients. A salesperson who is not also an attorney, accountant, tax expert, financial advisor, or estate planner must always bear in mind her lack of expertise and credentials in these fields. While she can do her clients a service by alerting them to issues and concerns in related areas that they may want to explore, it would be inappropriate for her to offer specific advice in these areas.
An LTCI professional must exercise diligence in serving her clients. She must take all reasonable steps to meet their needs and obtain necessary information and explore potential solutions.
Finally, an LTCI professional has the obligation to recommend a product that is suitable for her client. Suitability means that the policy design, benefit amounts, selected options, and costs match the circumstances, needs, goals, and financial resources of the purchaser.
To ensure that a policy is suitable, a salesperson must exercise diligence and competence. She must make a systematic effort to obtain all pertinent information about a client's personal and financial situation and his concerns and goals. She must then use her knowledge of LTCI products and other approaches to find the best solution for the client. A salesperson must not simply get a general sense of a client's situation and recommend a product that "seems about right."
And of course, a salesperson must not knowingly and deliberately recommend a product that does not meet a client's needs. She must not sell long-term care insurance to a person for whom it is not appropriate, and she must not recommend a policy with more or fewer benefits than the purchaser needs.
She must also not engage in churning or twisting. Churning and twisting occur when a salesperson, simply to earn a commission, sells a new policy to someone who already has perfectly suitable coverage.
As mentioned, the suitability of partnership and non-partnership LTCI products is discussed in detail in the following chapter.
Certain activities violate one or more of the ethical principles discussed above and are legally prohibited in the sale of long-term care insurance. Some of the most important are the following:
• Misrepresentation-in selling a policy, an agent must not misrepresent any material fact (a fact that the consumer will likely take into account in making her decision).
• Cold lead advertising occurs when an insurer's advertising or sales method initially conceals that its purpose is to sell insurance. Any marketing method must disclose in a conspicuous manner that its aim is the sale of insurance and that contact will be made by an insurance agent or insurance company.
• High-pressure tactics refer to actions having the effect of inducing the purchase of insurance through force, fright, threat (whether explicit or implied), or undue pressure.
• Churning and twisting are described above in relation to suitability.
Ethical and Legal Obligations in the Sales Process
During the process of selling an LTCI policy, an agent must fulfill certain ethical obligations, and certain actions are legally required or prohibited. We will review the most important of these in this section.
The Sales Interview
In a sales interview with a client, an agent has four main ethical obligations:
• He must educate the client. He should explain in some detail what long-term care is and when it is needed and describe the various services and settings. He must give the client accurate information about the likelihood of a person needing long-term care, the cost of services, and projected future costs. He should discuss the ways people expect to pay for long-term care (savings and assets, Medicare, Medicaid, and long-term care insurance), making clear the limitations and advantages of each.
• After ascertaining that the client is not uninsurable for LTCI, he must determine whether LTCI is suitable for her and help her decide whether buying a policy is in fact the best course of action for her. This involves fact finding, the process of obtaining information from the client needed to do a rough analysis of her current income, expenses, and assets; projected future income, expenses, and assets; and circumstances, needs, goals, and preferences. Although this part of the interview usually begins conversationally, with the agent asking the client general questions about her situation and needs, the agent also normally fills out a standard fact-finding form issued by the
• If the agent determines that LTCI is suitable for the client, and the client decides she wants it, it is the agent's duty to work with her to tailor a policy that best meets her needs and circumstances. He must help her understand the choices she must make in regard to the daily or monthly benefit amount, the lifetime maximum benefit, the elimination period, inflation protection, and optional features. He must make clear the advantages and disadvantages of various choices, as well as the impact on the premium amount.
• Finally, once the client is ready to apply for a policy, the agent must make sure that she understands how the policy will work. He must review such potentially troublesome issues as what must occur for the insured to be eligible for benefits, how long she will have to wait for benefits to begin, how benefits will be paid, when benefits will run out, and in what circumstances the premium might be increased.
Also, during the interview the agent should provide information about the insurance company offering the policy, including its financial strength and stability, as reported by rating agencies such as A. M. Best, Standard & Poor's, Moody's, and Weiss; any past premium rate increases; and the experience of the agent's other clients in filing claims.
Completing the Application
An application for insurance is a legal document-it is the prospect's offer to enter into a contractual arrangement with the insurer, and the statements she attests to in the application become part of the insurance contract. The application is long and complicated, so the agent generally assists the client in filling it out, and in doing so, it is his responsibility to ensure that it is fully and accurately completed. He must do his best to make sure the client understands what is being asked, answers honestly and as completely as possible, and is comfortable with her answers. The agent must of course not try to coach or influence the applicant to supply the "right answers" that will lead to the acceptance of the application and a sales commission for the agent, and he must not include any false or misleading information on the application.
Along with the application, a salesperson generally submits to the insurer an agent's report, in which he provides any pertinent information he has about the client that is not included in the application. It is unethical for an agent to purposefully fail to disclose or distort information in this report in order to gain acceptance and a commission.
At the time of application, the agent is required to give the prospect an outline of coverage and a copy of the NAIC Shopper's Guide to Long- Term Care Insurance (or in some states a similar state-issued guide). Some states also require that other disclosures and receipts be given to the prospect.
The laws and regulations that govern the sale of insurance in general and long-term care insurance in particular vary from state to state. But as discussed in Chapter Three, the NAlC Long-Term Care Insurance Model Law and Model Regulation have been adopted, in whole or in part, by most states, so the market conduct provisions of these models provide a good sense of the rules that generally apply. Some of these provisions have been mentioned above, but we will summarize the main ones here:
• A salesperson must give a prospect an outline of coverage and a shopper's guide to long-term care insurance, either the one developed by the NAlC or one issued by the state.
• The application for insurance must be clear and understandable by the consumer.
• The application must disclose the insurer's right to contest the policy if the applicant makes false statements on the application. (Contestability was discussed in Chapter Four as part of the DRA requirements for PQ policies.)
• The policy must include a 30-day free look provision.
• The insurer must have procedures that ensure fair and accurate policy comparisons (to prevent churning and twisting) and prohibit the sale of excessive coverage.
In addition, many states have regulations intended to prevent the use of misleading advertising in the sale of LTCI. Some states require that certain guidelines be followed in the design of advertising materials, and many require that such materials be reviewed and approved by the state insurance department before use.
Advertising materials are defined broadly to include letters to prospective clients, sales presentations, and information published in any form (newspapers, Internet, radio or TV commercials, direct mail or point of sale brochures, lead generation dialog, etc.) that will be used to solicit buyers or recruit agents.
Some states also require all salespeople to complete training in ethical market conduct.
Documenting Ethical Conduct
An insurance salesperson should maintain a file for each client containing certain documents, notes, and information, including:
• the fact-finding forms she completed with the client;
• a record of the decisions made by the client during the tailoring of the policy, along with the reasons for these decisions;
• a record of any recommendations she made that the client accept, along with his reasons;
• the rate quotes she showed the client;
• a copy of the application and cover letters to the underwriters;
• any notes she made on the client's needs and concerns;
• copies of her correspondence with the client; and
• notes on any telephone conversations she had with the client or the client's family or other advisors. (These should include the date and time, the persons participating, and the content of the call.)
In addition, if a client's application is accepted but he decides not to take the policy, detailed notes on his reasons should be included in the file. (Some insurers even require a written statement from the client, signed and dated, declining the specifically named insurance policy.) Finally, if a client allows his policy to lapse, his reasons for doing so and any efforts on the part of the salesperson to maintain coverage should be documented.
If a client, his family, the insurance company, the state insurance department, or the courts question the salesperson's dealings with the client, or if a complaint or lawsuit is brought, the contents of the file can serve as evidence that the salesperson competently and diligently worked to provide the client with a suitable product, made all required disclosures, maintained the confidentiality of information, and otherwise adhered to ethical standards. If a salesperson is in doubt about what documents should be retained, she should consult with the insurer she represents.
The great majority of insurance agents do their best to always act in an ethical way and comply with all requirements. But unfortunately it can occur that a client or a client's family members accuse an agent of negligence or improper conduct, and in some cases they may file a complaint or even bring a lawsuit. As a result, an agent may see his professional reputation compromised, and he may have to pay legal fees or even substantial legal damages. When this happens, a person's career, business, and personal assets can be put at risk.
Errors and omissions (E&O) coverage addresses this risk. It can provide an agent with access to experienced legal counsel to fight charges and clear his name, and if an adverse legal decision is made, it can provide funds to pay claims. Agents can obtain E&O coverage through the insurer they represent or a professional association. All agents should keep in mind the following:
• E&O coverage is essential for the protection of an agent's business and assets.
• For E&O coverage to apply, an agent must comply with certain rules, so he must be familiar with these rules and adhere to them.
• An agent should periodically review coverage amounts and make sure they have not been outpaced by inflation.
Professional Codes of Conduct
The ethical principles discussed in this chapter have been formalized in professional codes of conduct, similar to those adhered to by attorneys, accountants, etc. The development of these codes has occurred as part of the trend toward certification of insurance and financial services professionals, and many professional designations (such as CLU, ChFC, RHU, CPCU, and CFP) have their own code of conduct that holders of the designation agree to abide by. We offer two examples below.
The Code of Ethics of the National Association of Health Underwriters (NAHU)
The NAHU Code of Ethics includes the following pledges:
• To hold the selling, service, and administration of health insurance and related products and services as a professional and public trust and do all in my power to maintain its prestige.
• To keep paramount the needs of those whom I serve.
• To respect my clients' trust in me, and to never do anything, which would betray their trust or confidence.
• To give all service possible when service is needed.
• To present policies factually and accurately, providing all information necessary for the issuance of sound insurance coverage to the public I serve.
• To use no advertising, which I know, may be false or misleading.
• To consider the sale, service, and administration of health insurance and related products and services as a career; to know and abide by the laws of any jurisdiction, federal and state, in which I practice; and to seek constantly to increase my knowledge and improve my ability to meet the needs of my clients.
• To be fair and just to my competitors and to engage in no practices that may reflect unfavorably on myself or my industry.
• To treat prospects, clients, and companies fairly by submitting applications that reveal all available information pertinent to underwriting a policy.
• To extend honest and professional conduct to my clients, associates, fellow agents, and brokers, and the company or companies whose products I represent.
The Code of Ethics of the National Association of Insurance and Financial Advisors (NAIFA)
Those engaged in offering insurance and other related financial services occupy the unique position of liaison between the purchasers and the suppliers of insurance and closely related financial products. Inherent in this role is the combination of professional duty to the client and to the company as well. Ethical balance is required to avoid any conflict between these two obligations. Therefore, I believe it to be my responsibility:
• To hold my profession in high esteem and strive to enhance its prestige.
• To fulfill the needs of my clients to the best of my ability.
• To maintain my clients' confidences.
• To render exemplary service to my clients and their beneficiaries.
• To adhere to professional standards of conduct in helping my clients to protect insurable obligations and attain their financial security objectives.
• To present accurately and honestly all facts essential to my clients' decisions.
• To perfect my skills and increase my knowledge through continuing education.
• To conduct my business In such a way that my example might help raise the professional standards of those in my profession.
• To keep informed with respect to applicable laws and regulations and to observe them in the practice of my profession.
• To cooperate with others whose services are constructively related to meeting the needs of my clients.
In this course we have studied long-term care and the ways people expect to pay for it, and we have learned why, for many, long-term care insurance is the best funding method. Let us review here why buying an LTCI policy is usually a better approach than planning to pay for care out of one's savings and assets or relying on Medicaid.
• The individual has greater assurance that there will be sufficient funds to pay for needed care. Although most LTCI policies do not pay unlimited benefits, a purchaser can select benefit amounts that will cover most of the services he is likely to require.
• The individual can be certain that there will be funds to pay for care when it is needed. Because he is not relying on his own financial resources to pay for care, he does not have to worry about needing care at a time when he does not have sufficient assets (such as when he is still young and has not saved enough or during a period when his finances are at a low point because of some unforeseen event).
• The individual reduces financial uncertainty. Instead of bearing the risk of long-term care costs, the amount and timing of which are unpredictable, he regularly makes premium payments of a preset amount.
• The individual can protect against inflation. He can choose an optional provision that increases benefit amounts over time, so that inflation in the cost of long-term care services does not render the benefits inadequate in the future.
• The individual greatly reduces the risk of depleting assets.
Receiving insurance benefits to help pay for care makes it much less likely that savings and assets will be spent to cover costs. Instead, those assets can be used to maintain a comfortable standard of living during retirement, and when the insured dies, he will be able to leave his spouse well provided for and pass assets on to heirs.
• The insured can maintain financial independence and will not become dependent on relatives or the government.
• When the individual needs long-term care services, he can receive high-quality care, choose among many care providers, and have a range of care options so that he can receive the type of care that best meets his needs. The choices will not be limited, like those of Medicaid recipients or individuals relying on limited personal funds.
• The individual will not be a burden on his spouse, children, other family members, or friends. Insurance benefits will help pay for needed services, and family members will not have to sacrifice to provide care themselves, nor will they have to jeopardize their own financial security by paying for his care.
• The individual can provide for long-term care in a way that takes into account his particular needs, goals, circumstances, and financial status. An LTCI policy can be tailored to the situation of each individual insured.
• By purchasing a partnership LTCI policy, an individual can protect some of his assets in the event he needs care for a very long time, exhausts his insurance benefits, and is forced to apply for Medicaid.
However, long-term care insurance is not right for everybody. If a person has limited income such that paying premiums will be difficult, LTCI coverage is not normally the best approach. Nor should those with few assets buy an LTCI policy; such people will often have to rely on Medicaid, despite its drawbacks. But every situation is different, and each person must consider his own circumstances, take into account his own concerns and preferences, and weigh the costs and benefits of an LTCI policy.
Determining the Suitability of LTCI
All states require insurance companies and agents to make a reasonable effort to determine the suitability of the sale of an LTCI product or the replacement of one policy by another. Specifically, an agent must:
• make reasonable efforts to obtain information that is relevant to determining whether a policy is suitable for an individual,
• comply with the insurer's suitability standards,
• comply with any specific state requirements, such as using a personal worksheet or educational materials issued by the state, and
• maintain in client files written information demonstrating compliance with these standards.
These obligations are discussed below.
Who Should Not Buy Long-Term Care Insurance?
A suitability determination based solely on an income or asset threshold does not always provide a good indication of who should or should not buy. Sometimes people of very modest means have a strong motivation to buy insurance to protect their small but important assets or to avoid relying on Medicaid. But looking at a person's financial situation is a good place to begin the discussion. Here are some general rules:
• If a person cannot afford to pay the premium now or continue to do so in the future, she should not buy LTCI -- (although it should be kept in mind that one does not usually pay premiums while receiving benefits). One rule of thumb is that a person may not be able to afford coverage if the premium would be more than 7 percent of her income.
• If a person's assets are less than $30,000, it may be appropriate to consider other options for financing long-term care.
• If a person is now eligible for Medicaid, she probably should not buy LTCI.
Company Market and Suitability Standards
Each insurance company must establish its own procedures and market and suitability standards that agents must follow to help their clients determine whether buying LTCI is appropriate for them, based on financial and other considerations. These standards vary by company. As an example, one company considers a sale not suitable if any of the following conditions apply:
• The applicant has an annual income under $20,000.
• The applicant will fund premiums solely from his income, and premiums will amount to more than 10 percent of that Income.
• Premiums will be paid solely out of income, the applicant expects his income to decrease as he gets older, and the premium today represents more than 7 percent of income.
• The applicant's assets (savings and investments other than a home) total less than $30,000.
Such standards are not the only important considerations. If an applicant has a terminal illness, it may not be wise for him to invest in long-term care insurance that he may never use, even if he meets the standards. And as mentioned, if someone is already eligible for or could easily become eligible for Medicaid, buying insurance is probably not appropriate.
Some people do not meet a company's market and suitability standards but nevertheless feel strongly that insurance would help them meet their goals. In other cases, an applicant does not meet the standards because of limited income or assets, but family members intend to pay some or the entire premium. An insurer is not required to prohibit such a person from applying for coverage, and most do not. A company has the obligation to establish standards, make agents and clients aware of them, report annually the percentage of the sales made by its agents that do not meet the standards, and ensure that agents educate clients about when a purchase might not be suitable, but a company is not required to prohibit a sale if the standards are not met. Whatever the circumstances, as long as the agent has clearly discussed the suitability issues described above with her client, and the client indicates he is making the decision to buy in full consideration of these issues, the client will not be denied the opportunity to apply for coverage.
The agent interviews the client and learns about his needs and reasons for wanting coverage. This can help the agent determine whether insurance can reasonably address these needs and, if so, to tailor a policy to them. While the agent has an obligation to help her clients think through whether buying coverage is appropriate, she cannot make this decision for them. Her responsibility is to review the company's market and suitability standards with clients and discuss with them whether or not they meet these standards. If they do not, the agent should discuss whether they feel strongly that long-term care insurance will have important benefits for them or whether family will be helping them pay for the coverage.
Agents are required to provide documentation showing that suitability considerations have been addressed. This is done in different ways, depending on the state. Many states require agents to give their clients a form called "Things You Should Know Before You Buy Long- Term Care Insurance" and have them complete an LTCI personal worksheet and submit it along with the application. There is a specific personal worksheet for each state and different versions of the "Things You Should Know" form.
In the states that use them, prospective buyers must review the" Things You Should Know" form and then fill out the personal worksheet. The worksheet asks them to specify the monthly and annual premium for the coverage they are considering. It then asks a series of questions about how they will pay for premiums (income, savings, or family members) and about their current and future income and assets.
The applicant and the agent must then complete the disclosure statement at the bottom of the personal worksheet. The applicant has the right not to complete the worksheet, but he must indicate this choice and sign the worksheet. The agent must also indicate that she has explained to the applicant the importance of completing the worksheet and provide a signature. Finally, if the client's responses on the worksheet do not satisfy the company's market and suitability standards, but he still wants to obtain insurance, he must check the last box on the worksheet that says "My agent has advised me that this policy does not seem to be suitable for me. However, I still want the company to consider my application." The client must sign this as well.
Is LTCI Suitable for the Wealthy?
A few people are wealthy enough to payout of their own pockets for all the long-term care they are likely to need and still have plenty of money left. Is LTCI suitable for them? Every situation is different, but there are good reasons for wealthy persons to buy an LTCI policy.
• When a person decides to pay for his own care, he is taking on an uncapped liability. That is, the amount he may have to pay is unpredictable and potentially very large, making financial planning difficult. By buying insurance coverage, he can convert that unpredictable expense into a regular, budgetable premium payment.
• A wealthy person may be able to pay a very large amount for long-term care and still have substantial financial resources. But he nevertheless will have spent assets that could have been left to others. When insurance is paying for most of a person's care, he does not have to worry that he is steadily depleting assets he might have passed on to heirs or charities. Also, family members are not frustrated by seeing expected inheritances dwindle, and family harmony is better maintained.
Of course, a person can compromise on the question of long-term care insurance-that is, she can purchase a policy designed to cover a significant portion, but not all, of her potential long-term care expenses and plan to pay the rest out of her income and assets.
The Suitability of Replacing an LTCI Policy
There has been concern in the industry that agents might inappropriately encourage individuals who already have long-term care coverage to drop an existing policy and replace it with one that the agent is selling. While a new policy can be an improvement over a client's existing coverage, there are important considerations that the agent and the client need to take into account. It may not be in the client's best interests to replace his existing coverage with another product, even if that product offers important advantages and attractive features. And it is seldom appropriate for an agent to sell a policy with fewer benefits than a client's current coverage. Some states significantly limit the amount of commissions that can be paid on a replacement sale in an effort to discourage agents from selling replacement coverage.
Here are some questions consumers should consider before replacing coverage:
• How long ago did you buy the policy you now have? LTCI policies have improved a great deal in recent years, so as a general rule, a relatively new policy is more likely than an older policy to provide good coverage. Older policies often have numerous exclusions and restrictions that seriously limit the coverage and protection they provide. An old policy with limiting provisions like prior hospitalization requirements, conditional renewability, or exclusions for Alzheimer's disease provides little protection to the insured. On the other hand, while some existing policies might not be the best, they offer reasonable and fair protection for the premium. It may not make sense to replace such coverage even if the new policy being considered offers some advantages.
• How much older are you today than when you bought your existing policy? Since premium rates are based on the insured's age when he buys the coverage, there is an advantage to buying LTCI while young-one can "lock in" a low premium based on a young issue age. This advantage would be lost if the insured replaced coverage with another policy when he was much older, as his new premium would be based on a much older issue age. The consumer needs to consider the value of the existing coverage relative to the premium. Is the better coverage of a new policy worth the higher premium?
• Are you still insurable? A client who may not be insurable based on his current health should certainly retain his existing coverage, even if another policy offers improvements. If he would not be approved for the new coverage, he obviously will gain nothing in switching, and he stands to lose quite a lot.
If a consumer decides that it is in his best interests to replace his existing coverage, he should be aware of the following:
• An insured should never drop his existing coverage until he is notified that his application for the replacement policy is approved.
• The agent will need to complete a state-required replacement form and turn it in along with the application.
• The client also receives a replacement notice that he completes and retains.
In the application for a federally tax-qualified LTCI policy, the insurer is required to obtain information about an applicant's existing coverage and his plans to replace it with new coverage. If the client checks "Yes" to the question "Do you intend to replace the above or any other long-term care, medical, or health insurance with this coverage," he is provided with a replacement notice.
The Suitability of a Partnership LTCI Policy
The ethical considerations that apply to long-term care insurance in general of course also apply to partnership LTCI coverage, but in addition there are some suitability issues that are specific to partnership policies, and we will discuss these here.
In regard to the suitability of a partnership LTCI policy, we can divide consumers into three categories:
• Some people strongly wish to avoid relying on Medicaid and have the financial means to buy coverage that makes it extremely unlikely they will ever have to do so. They can purchase a policy with a very high or even unlimited lifetime maximum, a daily or monthly benefit sufficient to cover the cost of any care they are likely to need, and automatic compound inflation protection. For these people partnership coverage is unnecessary.
• Other people have low incomes but assets they wish to preserve. It may be advantageous for them to purchase a partnership policy with a modest lifetime maximum and a low premium. But they must realize that even though they are paying for insurance, their benefits will not last long, and it is very possible that they will have to rely on Medicaid at some point. Furthermore, if the individual will find it difficult to pay the premium, now or in the future, coverage is not suitable, however much she may want to protect assets. And if her assets are not large enough for her to benefit significantly from Medicaid asset protection, there is no reason to buy a partnership policy.
• Most consumers fall between these two extremes. They can afford enough LTCI coverage to make a need for Medicaid very unlikely, but still possible, and they have assets they want to preserve. For them, a PQ policy offers some assurance that in the event they do have to apply for Medicaid, some of their assets will be protected.
However, those considering a partnership policy should be aware of a number of important limitations and drawbacks:
• As we learned in Chapter Two, Medicaid benefits for home and community-based long-term care are unavailable or restricted in some states, assisted living is not generally covered, and the choice of facilities may be limited. Consequently, a person who goes on Medicaid when her LTCI benefits end may have to move out of her home and into a nursing home. Or she may have to move from one facility to another, and the new facility could be far from home or less desirable for some other reason.
• There is no automatic roll-over to Medicaid coverage after one's partnership LTCI benefits are exhausted. A person who uses up her insurance benefits must apply for Medicaid like anyone else, and acceptance is not guaranteed. Such a person must meet Medicaid criteria for general eligibility and functional eligibility (need for care) as well as asset and income eligibility limits. In the four original partnership states, it is not uncommon for an individual to exhaust her insurance benefits but not qualify for Medicaid.
• Partnership programs affect only assets, not income. A person who has exhausted his insurance benefits might not qualify for Medicaid because his income exceeds eligibility limits. And if he does qualify, he will generally have to spend almost all his Income on care.
• Buying a partnership policy does not protect all of a person's assets, only an amount equal to the LTCI benefits received. If a person exhausts his insurance benefits and applies for Medicaid, he will still have to spend down any assets above this amount. (The Indiana and New York programs do offer total asset protection, but these are exceptions, and the DRA does not allow this for new programs in other states.)
• If a person's home is deemed a countable asset by Medicaid and subject to spend-down requirements, a partnership policy protects it only if the amount of home equity is less that the amount of protected assets (that is, the amount of insurance benefits the person has received). Likewise, if a home is subject to estate recovery, partnership coverage protects it only if the equity is less than the LTCI benefits received. (See Chapter Two for Medicaid treatment of homes.)
• Given the financial strains on the system, Medicaid asset and income eligibility limits could be considerably higher in the future, making it more difficult to qualify, and benefits could become less generous.
• There is no guarantee that any assets will be preserved, even if one qualifies for Medicaid. If the daily or monthly benefit of a partnership policy is insufficient to cover the cost of care, a person could spend his assets before he uses up his insurance benefits and applies for Medicaid.
• If an insured moves to another state, Medicaid asset protection may not be available there. The new state might not have a partnership program, or it might not have reciprocity with the old state. A person in this situation would have to either forgo asset protection, or move back to the old state when he needs to apply for Medicaid, or move to another state that has a partnership program with reciprocity with his original state. And consumers should also be aware that even in cases where the new state does extend reciprocity, the benefits and eligibility of its Medicaid program might be different from the old state's.
• Partnership programs are subject to change. The federal government or state governments could substantially modify or discontinue partnership programs in the future, possibly affecting the asset protection provided by a PQ policy.
These are important concerns, and a person thinking of buying a partnership policy should give them serious consideration. But it should also be pointed out that most LTCI policies sold today meet the DRA requirements for PQ status, except in some cases for inflation protection. So if a person is planning in any case to buy an LTCI policy with the inflation protection required for his age by the DRA, there is no reason not to buy a PQ policy rather than a non-PQ policy, assuming the price is the same or very close. In such cases, the fact that a policy happens to have PQ status and entitles the insured to Medicaid asset protection in the event he ever needs it is simply an extra.
In summary, an agent trying to determine if a PQ policy is suitable for a client should ask me following questions:
• Is the client's income too low? If he is unable to afford the premium, or will likely be unable to in the future, the policy is not suitable (unless family members will contribute).
• Are the client's assets too small? If his assets are not substantial enough for him to benefit significantly from Medicaid asset protection, the policy is not suitable.
• Is the client's income too high? He may be unlikely to qualify for Medicaid.
• Does the client want a very large amount of LTCI coverage? If he wants and can afford a policy with a very large or unlimited lifetime maximum, it is extremely unlikely he will ever apply for Medicaid and need the asset protection afforded by a PQ policy.
• Does the client want to buy limited coverage, in the expectation of eventually applying for Medicaid, in order to protect assets? He must understand the drawbacks of being a Medicaid recipient and the uncertainty of qualifying for Medicaid. Also, it may be advisable to tailor the amount of coverage to the amount of benefits to be protected.
• Is the client attracted by the asset protection a PQ policy affords in the unlikely event he must apply for Medicaid? He must be aware that not all assets are protected, including possibly his home. He should also select a daily or monthly benefit amount sufficient to cover at least most of his likely long-term care needs so that his assets are not depleted before his insurance benefits run out. He should also be warned about the uncertainty of Medicaid eligibility.
• How likely is the client to move to another state? Some people are very well established in a locality, and for them reciprocity may not be a serious concern. Others must be made aware that the Medicaid asset protection that a PQ policy provides may not be available in other stares.
• What is the price difference, if any, between a PQ policy and a comparable non-PQ policy? There may be no difference or only a very small one, in which case it may make sense to have the asset protection of a PQ policy just in case.
In short, partnership LTCI policies have their limitations, and an agent must make sure clients understand these and must not over-promise. But in our discussion, we should not lose sight of the fact that partnership policies are an innovative product that offer a valuable advantage to many people-the protection of some of their assets should they ever need to apply for Medicaid.
To ensure that she always acts in an ethical way, a sales professional in the long-term care insurance field must be guided both by her own sense of right and wrong and by a knowledge of the established rules of conduct and the applicable legal and regulatory requirements.
An agent must disclose to clients the information they need to make informed decisions, maintain the confidentiality of the information entrusted to her, strive to serve her clients with competence and diligence, and sell a product only when it is suitable to the needs and circumstances of the client. An agent must never engage in certain prohibited activities, including misrepresentation, churning, twisting, cold lead advertising, and high-pressure tactics.
As part of the sales process, the agent must educate the client, determine whether the proposed product is suitable for him, tailor the product to his needs, help him accurately and completely fill out the application, and make all required disclosures to him. The agent must comply with all state laws and regulations governing LTCI sales, and she must document that she has done so and otherwise acted ethically. But despite all her efforts, an agent may still be accused of negligence or improper conduct, and she should obtain errors and omissions (E&O) coverage to protect herself against this risk.
Long-term care insurance offers many advantages, and for many people it is a better approach to funding long-term care than relying on one's savings and assets or on Medicaid. But LTCI is not suitable for everyone.
There are no hard-and-fast rules about who should and should not buy LTCI, but in general a person should not buy if he will have difficulty paying the premiums, has limited assets, or is eligible for Medicaid. .
An agent must make reasonable efforts to obtain information relevant to suitability, discuss suitability standards with the client, and document that she has done so, usually by filling out with the client a standardized personal worksheet. If a client does not meet suitability standards and still wants to buy, he may do so, but the agent must document her discussions with him.
Replacing an insured's existing LTCI policy with a new policy can improve his coverage, but it is not always advisable. The insured and his agent should compare the premium rate as well as the benefits and features of each policy. They should also take into account whether the client is insurable under the replacement policy.
In addition to the suitability issues relevant to all LTCI coverage, there are a few considerations specific to partnership policies. Consumers considering a PQ policy should be aware of the following: Medicaid recipients may have limited choices in facilities and types of long-term care services; there is no guarantee that someone with partnership coverage will qualify for Medicaid; income is not protected by a partnership program, and not all assets are protected, including possibly one's home; and asset protection may not be available in another state. Nonetheless, a PQ policy offers an important advantage for many people-some assurance that some of their assets can be preserved in the event they have to apply for Medicaid.