LONG-TERM CARE INSURANCE

LONG-TERM CARE INSURANCE

Overview

Since its beginnings as skilled nursing home coverage only back in the 1970’s, long-term care insurance (LTCI) has broadened its scope and depth of coverage considerably while adding important consumer protections; it is thus approaching mainstream acceptance. It has not been easy for those involved with the product—insurers, regulators, and consumers. Although there is healthy tension among all three groups, they have worked together to make the product more reliable and meaningful over time.

According to the Health Insurance Association of America, about 60 percent of people age 55 or older have little or no awareness of long-term care insurance. This translates the importance of the insurance producer/agent to provide guidance to his or her clients about long-term care insurance.

This white paper will define LTCI; review its evolution, and regulation at both the state and federal level.

Defining Long-Term Care Insurance

Long-term care insurance (LTCI) means many things to many people. Some view it as reimbursement for receiving medical attention at home. Some expect it to pay for housekeeping, delivery or preparation of meals, or transportation services to get to and from the grocery store. Others see it as a way to pay for someone to go to a nursing home for their final days.

LTCI helps individuals shift a significant portion of the financial burden of long-term care to a third party, an insurance company. LTCI allows people to maintain choice and control over their life.

LTCI covers long-term care in a variety of settings, not just in nursing homes. Because LTCI covers a broad scope of care, insured’s have greater freedom to choose a service and or a provider that meets their needs.

The National Association of Insurance Commissioners (NAIC) plays an important role in the regulation of insurance products, especially LTCI. So, the best place to look for a common definition of “long-term care insurance” is the NAIC Model Act.

NAIC Model Act

LTCI means any insurance policy or rider that is advertised, marketed, offered, or designed to provide coverage for not less than twelve (12) consecutive months for each covered person on an expense incurred, indemnity, pre-paid or other basis; for one or more necessary or medically necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance or personal care services, provided in a setting other than an acute care unit of a hospital. Such term includes group and individual annuities and life insurance policies or riders which provide directly or which supplement long-term care insurance. Such term also includes a policy or rider which provides for payment of benefits based upon cognitive impairment or the loss of functional capacity.

LTCI may be issued by:  Insurers;

 Fraternal benefit societies,

 Non-profit health, hospital, and medical service corporations;  Prepaid health plans;

 Health maintenance organizations or any similar organization to the extent they are otherwise authorized to issue life or health insurance.

LTCI shall not include any insurance policy which is offered primarily to:  Provide basic Medicare supplement coverage,

 Basic hospital expense coverage,

 Basic medical-surgical expense coverage,  Hospital confinement indemnity coverage,  Major expense coverage,

 Disability income or related asset protection coverage,  Accident only coverage,

 Specified disease or specified accident coverage, or  Limited benefit health coverage.

With regard to life insurance, this term does not include life insurance policies which accelerate the death benefit specifically for one or more of the qualifying events of terminal illness, medical conditions requiring extraordinary medical intervention, or permanent institutional confinement, and which provide the option of a lump-sum payment for those benefits and in which neither the benefits nor the eligibility for the benefits is conditioned upon the receipt of long-term care. Notwithstanding any other provision contained herein, any product advertised, marketed, or offered as LTCI shall be subject to the provisions of this Act.

The Components of the Model Act

As the definition states, LTCI is available as a stand-alone product or in combination with other insurance products. The advantage of a stand-alone policy is that insurers need only focus on establishing and refining the tools, contract language, and technology to support one type of risk. Other insurance related factors do not cloud the long term care need or analysis of the product’s experience. Stand-alone products are also easier for both the consumer and the agent to understand.

The stand-alone product is available as an individual or group insurance product. The individual LTCI product is one that is typically sold by a producer to an individual or couple. The individual stand-alone product is the option that provides the clearest basis for understanding LTCI.

Another way to purchase long-term care insurance which is gaining increasing acceptance is through a group long-term care insurance product presented by employers to its employees. Many of the nation’s largest employers, including the Federal Government, offer long-term care insurance as part of their employee benefit package, typically as an employee-pay-all, voluntary benefit. A growing number of smaller employers also currently offer or are considering it as a benefit to its employees.

Long-term care insurance is integrated with life insurance, annuities, and even disability income policies. As the NAIC spells out in its definition, only certain riders to a life insurance policy meet the standards of long-term care insurance. Annuities are receiving more attention as a product that can be designed to also address long-term care needs, especially with the recent enactment of the Pension Protection Act of 2006.

Evolution of Long-Term Care Insurance

As compared to other insurance products (life, health and annuities), long-term care insurance (LTCI) is one of the youngest. LTCI was first marketed back around 1970 with policies that primarily covered care delivered in facilities such as skilled nursing homes and intermediate care facilities. This was due to the fact that at that time the predominant method of long-term care services was delivered in a nursing home environment. As time went on, some insurers added home care services, under qualifying conditions that limited their use and prevented people from qualifying for the benefits. The policies were reimbursement-based products: policyholders were reimbursed a per diem rate (up to a daily maximum) for covered expenses when utilized. If the nursing home charge exceeded the daily maximum, the policyholder was responsible for the difference.

These early days of LTCI were sometimes marked by consumer frustration. Due to the fact that many of these earlier policies were initially developed with a number of restrictions and limitations such as:

 Prior hospitalization requirements; a three-day hospital stay was required before nursing home benefits were payable;

 Limitations on the length of time after a hospital stay the insured had to wait before entering a nursing home and still qualify to receive benefits;

 Alzheimer’s disease and certain forms of dementia were not covered or benefits restricted;

 Requirements had to be met before custodian care was paid for by the policy;

 Many contracts were sold that did not guarantee the renewal of the premium with the insurance company;

 Inflation protection was not always available.

A study estimated that policies with these types of requirements, or “gatekeepers”, reduced policyholder’s chances of collecting benefits by about half. However, as time passed with both consumer demand and the intervention of both the federal and state governments, most of those restrictive “gatekeepers,” mentioned above were either dropped or liberalized. The prior hospitalization requirement is no longer found in long-term care insurance policies and Alzheimer’s disease and senile dementia must be covered. Most long-term care insurance policies now include coverage for custodial care and offer home health care and adult day care as options.

Keep in mind, however, the long-term care market will continue to evolve and mature. Back in the early 80’s there were over 145 insurance companies marketing long-term care insurance to the public. Today, there are around 80 insurance companies, and of that number, there are 18 insurance companies that make up 98% of the market. According to data published by the American Association for Long Term Care Insurance, 2012 LTCI Sourcebook, they estimated that some 337,000 new Americans purchased insurance long-term care insurance protection in 2011 either on an individual basis or through their employer bringing the total number of Americans with LTCI protection to 8,100,000.

In order to compete in this market, insurance companies must gather actuarial data and study consumer responses and then make changes to their long-term care policy’s provisions and options.

In this ever changing market, the insurance producer must be more alert than ever to keep up with the changing products and services and match them with their client’s needs and finances.

Regulation of Long-Term Care Insurance

Due to the frustration of many individuals who purchased those earlier marketed long-term care insurance policies, many of them being senior consumers over the age of 65, it forced both the state and the federal government to take action and pass legislation to protect consumers when purchasing long-term care insurance products. Let’s first review the role of the states in regulating LTCI.

State Regulation

State regulators working with state insurance departments have enforcement mechanisms to ensure that quality LTCI products and consumer protections are created to protect their citizens and to provide confidence when purchasing the product.

State insurance departments are the principal watchdogs of the insurance industry. They control insurer activities through the following means:

 Licensing,

 Review and approval of product filings,  Review and approval of rates,

 Guaranty associations, and  Ongoing reports.

Licensing

An insurance company applying for a license must provide the insurance department with proof that it has the financial resources to insure the risks under consideration. The department might even review the experience of the principal officers or the board of directors, including performing criminal background investigations. For new companies, it might prove difficult. An insurance producer/agent selling long-term care insurance normally has a life and health insurance license. Each state has requirements of the insurance producer/agent before a license is granted.

Product Filings

The next way the insurance departments help to maintain consumer confidence is to review and approve product filings. Long-term care insurance falls under most states’ accident and sickness regulations.

Every state and the District of Columbia have regulations on long-term care insurance. All have adopted at least a portion of the NAIC’s Model Act and Model Regulation. Usually, if an insurer meets the NAIC’s requirements, the product approval process is less difficult. But few states accept an insurer’s initial filing without some modification.

The policy form filing is where states spend most of their time reviewing. There are many aspects to the product for which states have established minimum standards that insurers must meet before having their product approved. Even within individual states, these standards can vary depending on who performs the review.

A disclosure form is documentation from the insurer given to the purchaser or prospective purchaser of long-term care insurance. The state reviews and approves these forms. The forms

have become mostly standardized across the industry, but certain states want to see specific language or a variance if it is significant. These disclosures include the following:

 An outline of coverage—a description of the policy’s principal benefits and exclusions;  A 20-year graphical demonstration of the difference between having inflation

protection and not having it (normally a part of the outline of coverage);  An application to obtain the individual’s medical history;

 A replacement form (including the name and address of the insurer whose policy is subject to replacement);

 A personal worksheet (designed to assess the suitability of the sale);  “Things You Should Know Before You Buy Long-Term Care Insurance”;  A form explaining the risk of rate increases; and

 A shopper’s guide - (The NAIC has developed one to meet its standards some states allow insurers to use their own.)

A number of states approve advertising materials; some simply require the insurer to submit them, while others do not require filing them. Advertising materials include anything that is intended for use with a consumer. This includes the product brochure, prospecting letters, consumers’ seminar materials, small brochures, and even sales scripts from training materials. Some states have even mandated that advertising materials be submitted with the product filing while other states won’t review the advertising until after the product has been approved. This review of advertising materials has been known to lead to a regulator’s desire to review the product filing again.

Review and Approval of Rates

States require submission of premium rates. Some states approve the rates, while others simply review them. This is true both of the initial rate filings and filings for adjustments to premiums. In the past, insurers had to represent that they would pay out at least a specific minimum portion of the premiums collected for claims. Normally this claim payment to premiums ratio, or loss ratio, was 60 percent. The NAIC adopted new requirements for rate submissions as part of the Section 10 of the Model Regulation that eliminated the loss ratio standard in new rate filings. Now an actuary is required to certify “that the initial premium rate schedule is sufficient to cover anticipated costs under moderate adverse experience and that the premium rate schedule is reasonably expected to be sustainable over the life of the form with no future premium increases anticipated…” Under the current Model Regulation, loss ratios only come into play if a rate increase is filed.

State Guaranty Associations

Each state has an insurance guaranty association; most actually have two; one for life and health insurance and one for property and casualty insurance because the industries tend to be separate. If an insurance company fails and it is necessary to come up with a certain amount of money to meet the commitments of policyholders, the guaranty association sends out an assessment to all

of the companies doing business in the state. Every insurance company that writes business in that particular state is required by law to be a member of and pay into that state’s guaranty association when needed.

The legislation enacted by each state provides details of guarantees including the dollar limits (up to $500,000 of LTCI protection). Protection is based on where the policyholder resides at the date the insurance company fails. You can visit www.nolhga.com to view your specific state limits.

Generally, there are no differences between an individual long-term care insurance policy or one offered through an employer so long as the policies or certificates are issued by a licensed insurance carrier.

Reporting Requirements

State insurance departments also require ongoing reporting that includes both financial results and product experience. Companies file what is commonly referred to as a “Blue Book” showing annual financial results. This is a detailed analysis of the company’s income statement and balance sheet. Many areas of the common accounting reports show the specific reserves held for product lines and the income of the key officers of the organization.

Long-term care insurers are required by state insurance departments to file a number of annual reports. The NAIC Model Regulation suggests a number of reports that states should review. A rescission report is required to ensure that insurers are performing their underwriting tasks when a policy is issued rather than waiting until claim time and then canceling the policy. A few rescissions each year are understandable, but an excessive number on a regular basis is likely to be an indication the insurer’s operation is in need of review.

Lapses and replacements are a potential problem area. If insurers or agents have an excessive number of either, churning business to gain first-year premiums is suspected. The NAIC Model Regulation spells out the reports used to monitor this activity. These include the following:

 A list of the agents with the greatest percentage of lapses and replacement activity,  The number of lapsed policies as a percentage of total sales,

 The number of lapsed policies as a percentage of the total in-force as of the end of the preceding calendar year,

 The number of replacement policies as a percentage of total sales, and

 The number of replacement policies as a percentage of the total in-force as of the end of the preceding calendar year.

Consumers are also concerned about having claims evaluated fairly. No insurer wants to deny a valid claim or pay for an inappropriate claim. To ensure that companies are treating their insured fairly, the NAIC Model Regulation has a form for insurers to submit to insurance departments showing their experience with denying claims. (Denials resulting from not satisfying the elimination period or because of a pre-existing condition are shown in this report, but they are excluded from the final denial ratios.)

Suitability reporting is also part of the Model Regulation, to help ensure that long-term care insurance is being sold appropriately to those who can financially benefit from what it has to offer. In the states that have adopted this part of the Model, insurers are required to submit:

 The total number of applications received from residents of the state,

 The number of those who declined to provide the information requested on the personal worksheet,

 The number of applicants who did not meet the suitability standards, and

 The number of those who chose to confirm that they felt the policy was suitable for them after receiving a suitability letter.

All of these reports have an indirect influence on product development. If an insurer’s in-force business is being replaced regularly, it should introduce a new product or modify its existing policies. If many policies are lapsing, this is likely an indication that there is either something wrong with the product or the way it is being sold (although it may be due to a rate increase). If too many claims are denied, there is probably a problem with the way the qualification for benefits language is written or administered. If the financials show an unprofitable product line, the product could be in need of re-pricing (or this could result from poor underwriting or claim-paying practices).

Insurance fraud has become a major concern for regulators. Some states now want to know what insurers are doing to curb the frequency of fraud and require an organized plan. They ask the insurer to report the frequency of claims investigated for potential fraud and the results of the investigation. They may assist in prosecuting fraudulent activity through the judicial system. These experiences and reports can influence the type of policy language they feel insurers need to include to minimize the potential for fraudulent activity.

The National Association of Insurance Commissioners (NAIC)

The National Association of Insurance Commissioners (NAIC) is an association of insurance regulators from the 50 states, the District of Columbia, and four US territories. The role of the NAIC is to meet regularly to discuss various insurance issues and to propose recommendations and model acts that are intended to create better and more uniform insurance laws throughout the country. The NAIC has developed minimum standards to long-term care insurance policies that attempt to balance the consumer’s interest with the insurance company’s ability to successfully market quality insurance coverage (See www.naic.org.).

The NAIC became aware of the need to provide guidance for such assistance for long-term care insurance in the mid-1980s and developed their first Long-Term Care Insurance Model Act and Long-Term Care Insurance Model Regulation in 1986. This was the result of input from consumers, organizations representing consumers (such as the American Association of Retired Persons—AARP), insurers, and state insurance department representatives. The same parties continue to provide input to the NAIC as it develops long-term care insurance models.

The NAIC Model Act is designed for use as legislation—language written and passed by a state legislature and then signed by the governor to become law. The Model Regulation is for use by the insurance departments in regulating long-term care insurance (although in some cases provisions of it are enacted into law.) Because it is regulatory in nature, the Model Regulation is more detailed and undergoes more changes than the Model Act.

Both Models are subject to regular scrutiny. Over the past years, there have been great debates on their content. The latest version of the Model Regulation is the result of a lengthy and sometimes controversial debate on how to best regulate for rate stability. The end result is based on consensus that grew out of many discussions. Many states have adopted the Model Regulations while others have passed even more stringent regulation. The two most significant regulator-initiated policy features are the 5 percent compounded inflation protection and non-forfeiture benefits that are required options.

Recently, the NAIC has prepared a new draft. In this new Model Regulation Act a new Section 9 calls for special producer training requirements.

The Act states the following:

 An individual may not sell, solicit or negotiate long-term care insurance unless the individual is licensed as an insurance producer for accident and health, or sickness or life and has completed a one-time training course by or before July 1, 2008 and ongoing training every 24 months thereafter.

 The training requirements may be approved as continuing education courses.

 The one-time training required by this section shall be no less than eight (8) hours and the on-going training required by this section shall be no less than four (4) hours.

 The training required shall consist of topics related to term care insurance, long-term care services and, if applicable, qualified state long-long-term care insurance Partnership programs, including but not limited to:

o State and federal regulations and requirements and the relationship between qualified state long-term care insurance Partnership programs and other public and private coverage of long-term care services, including Medicaid;

o Available long-term care services and providers;

o Changes or improvements in long-term care services or providers; o Alternatives to the purchase of private long-term care insurance;

o The effect of inflation on benefits and the importance of inflation protection; and o Consumer suitability standards and guidelines.

 The training shall not include training that is insurer or company product specific or that includes any sales or marketing information, materials, or training, other than those required by state or federal law.

 Insurers subject to this Act shall obtain verification that a producer receives such training before a producer is permitted to sell, solicit or negotiate the insurer’s long-term care insurance products, maintains records subject to the state’s record retention requirements, and make that verification available to the state insurance department upon request.

 Insurers subject to this Act shall maintain records with respect to the training of its producers concerning the distribution of its Partnership policies that will allow the state

insurance department to provide assurance to the State Medicaid agency that producers have demonstrated an understanding of the care, including Medicaid, in this state.

 The satisfaction of these training requirements in any state shall be deemed to satisfy the training requirements in that state.

Federal Regulation

On April 23, 1996, the U.S. Senate passed and President Bill Clinton signed into law the Health Insurance Portability & Accountability Act (Kennedy-Kassenbaum Health Insurance Reform Bill), which was primarily about health insurance. However, one section of this legislation included long overdue regulation of long-term care insurance.

Health Insurance Portability and Accountability Act of 1996

This federal law defines what constitutes a “qualified” LTCI policy. Up until the time HIPAA was signed into law, a number of questions regarding LTCI policies were left unanswered. Such as:

 Can premiums for long-term care insurance be deductible as a medical expense?  Are long-term care insurance benefits taxable as income?

 Are contributions made by an employer toward a group long-term care insurance coverage excludable from the employer’s income?

LTC Awareness Programs

“Own Your Future" Long Term Care Insurance campaign is a joint awareness program between the federal government and individual states that was developed in January 2005. It was

specifically designed to raise awareness to individuals about the need for planning for Long Term Care.

The Campaign is a collaboration of the Centers for Medicare & Medicaid Services (CMS), the Office of the Assistant Secretary for Planning & Evaluation (ASPE), and the Administration on Aging (AoA), and has support from the National Governors Association (NGA).

State Activities

As of January 2010, 25 states have participated in this campaign to raise awareness to the residents between the ages of 45 - 70. Each state mails a letter about the importance of planning for Long Term Care, if one responds to the letter they will receive a free Long Term Care Planning Kit.

This program is the first of its kind and it is another way for the Government to raise awareness about the importance of planning for Long Term Care. For more information visit:

www.longtermcare.gov.

About the Author: Edward J. Barrett CFP®, ChFC®, CLU, CEBS®, RPA, CRPC®, began his career in the financial and insurance services back in 1978 with IDS Financial Services,

becoming a leading financial Advisor and top district sales manager in Boston, Massachusetts. Mr. Barrett is a qualifying member of the Million Dollar Round Table, Qualifying Member Court of the Table® and Top of the Table® producer. He holds the Certified Financial Planner designation CFP®, Chartered Financial Consultant (ChFC), Chartered Life Underwriter (CLU), Certified Employee Benefit Specialist (CEBS), Retirement Planning Associate (RPA), and the Certified Retirement Planning Consultant (CRPC).