Long-Term 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.