WA LTC Refresher 4 Hour Course
Chapter 2
Long-Term Care Benefits
Partnership plans, while preserving assets also have many other components. Just like a non-partnership policy, the applicant must make decisions regarding the type and quantity of benefits they wish to purchase. Just like traditional LTC policies the applicant must medically qualify for the Partnership plans. Since insurers underwrite the policies, even asset protection models must be an acceptable risk.
Not every person will feel they need the same policy benefits in their long-term care insurance policy. While most states mandate some types of coverage, such as equality among the levels of care, there are other options that may be purchased or declined. A trained and caring agent can help the consumer understand those options and make wise choices.
Making Benefit Choices
When a consumer decides to purchase a long-term care policy, several buying decisions must be made. Such choices must be made whether a traditional policy or a Partnership long-term care policy is purchased. Such choices might include:
1. Daily benefit amounts: this is the daily benefit that will be paid by the insurer if confinement in a nursing home occurs.
2. The length of time the policy will pay benefits: this could range from one year to the insured’s lifetime. Of course, the longer the length of policy benefits, the more expensive the policy will be.
3. Inclusion of an inflation guard: Non-partnership plans do not mandate inflation protection, but Partnership plans are required to include this benefit. An inflation protection guards against the rising costs of long-term care by providing an increasing benefit according to contract terms. Partnership plans have two types: an increase based on a predetermined percentage and an offer at specific intervals allowing the insured to increase benefits without proof of insurability.
4. The waiting period, also called an elimination period, must be selected. This is the period of time that must pass while receiving care before the policy will pay for anything. It is a deductible expressed as days not covered. The option can range from zero days to 100 days. A few policies may have a choice of a longer time period.
5. Home Health Care, which may also cover adult day care and community care. Many nursing home policies include coverage for such things as assisted living, because it saves the insurer benefit dollars. Generally assisted living is less expensive than care in a nursing home.
6. Other policy options might be available in a long-term care policy. Insurers will offer any additional options at the time the individual applies for coverage. Some offer such things as a waiver of premium under specified conditions, for example.
As every field agent knows, clients often prefer to have the agent make selections for them, but this is not wise. Although the agent will be valued for the advice he or she gives, the actual benefit decisions need to be made by the consumer. This means the agent must fully explain each option so that the consumer can make informed choices.
Benefit choices will be similar between traditional and Partnership policies: there is a daily or monthly benefit, elimination or waiting periods, a home health care and adult day care benefit level, an inflation feature, and a benefit period with a lifetime maximum generally offered. Most people do not purchase a lifetime benefit period due to cost, but a policy that offers three to four years of benefits is usually adequate.
Both traditional and Partnership policies will require underwriting; this is the process the insurer uses to assess the risk posed by the applicant. Therefore, the applicant must medically qualify in order to purchase such a plan. The younger the applicant is, the less expensive the policy will initially be.
Daily Benefit Options
While there are many policy options, the daily benefit amount is usually the first policy decision, with the second one being the length of time the benefits will continue. Both of these strongly affect the cost of the policy, but they also affect something else that is very important: the amount of assets that will be protected from Medicaid spend-down requirements if a Partnership policy is purchased. The total benefit amount (daily benefit multiplied by the length of benefit payouts) determines the amount of assets protected in dollar-for-dollar Partnership plans.
The type of policy being purchased will affect how the daily benefit works; for example a non-partnership policy may be purchased that covers home health care only (not institutionalized care). The daily benefit is based upon the type of policy selected. Policies that cover institutional care in a nursing home will have options that may vary from policies that cover only home care benefits. Integrated policies will vary from those that pay a daily indemnity amount. Many states have mandatory minimum limitations ($100 benefit per day for example). Insurance companies will determine the upper possibilities. Obviously, the consumer cannot select a figure higher than that offered by the issuing company. Nor can an insurer offer a daily indemnity amount that is lower than those set by the state where issued.
This daily benefit can have variations. Some policies will specify an amount (not to exceed actual cost) for each nursing home confinement day. Other policies (called integrated plans) offer a more relaxed benefit formula. These policies have a "pool" of money, which may be used however the policyholder sees fit, within the terms of the contract. As a result this pool of money could be spent for home care rather than a nursing home confinement, as long as the care met the contract requirements. Benefits will be paid as long as this maximum amount lasts regardless of the time period. The danger in having a pool of money, however, is that the funds may be used up by the time a nursing home confinement actually occurs. If the funds have been previously used up, there will be no more benefits payable. Since people prefer to stay at home, this may work out well, but it can also quickly deplete funds in a wasteful manner.
The amounts paid will usually vary depending upon whether they are going towards a nursing home confinement, home health care, adult day care, and so forth. The "pool of money" type is gaining popularity where offered, since consumers see it as a way to make health care choices more freely. Integrated policies are generally more expensive than indemnity contracts. Like the daily indemnity plans, integrated plans have benefit qualification requirements, exclusions, and limitations; they do not simply hand the insured money to be used in any manner desired.
Expense-Incurred and Indemnity Methods of Payment
When benefits are paid from a specific dollar schedule for a specific time period, they are generally paid in one of two ways:
1. The expense-incurred method in which the insured submits claims that the insurance company then pays to either the insured or to the institution up to the limit set down in the policy.
2. The indemnity method in which the insurance company pays benefits directly to the insured in the amount specified in the policy without regard to the specific service that was received.
Of course, both methods require that eligibility for benefits first be met.
Determining Benefit Length
While the daily benefit is typically the first choice made, the second choice is just as important to the policyholder: the length of time for which benefits will be paid. This may apply to a single confinement or it can apply to the total amount of time spent in an institution. An indemnity contract offers benefits payable for a specified number of days, months or years (depending upon policy language). An integrated plan pays whatever the daily cost happens to be unless the contract specifies a maximum daily payout amount. When funds are depleted, the policy ends.
While statistics vary depending upon the source, most professionals feel a policy should provide benefits for no less than three years of continuous confinement. Some people will only be in a nursing home for three months while others may remain there for five years. While it does not make sense to over-insure, it is also important to have adequate coverage. Since the majority of consumers will not be willing to pay the price for a life-time benefit, three or four year policies are likely to do a good job for them and still be affordable.
Policy Structure
We have seen much legislation by the states directed at long-term care policies. Even the federal government has been involved in this with the tax-qualified plans. It is important to note that tax-qualified plans always come under federal legislation whereas non-tax qualified plans come under state legislation. Each state will have specific policy requirements. Partnership plans come under federal requirements and will be tax-qualified. The states will assign descriptive names in an effort to identify policies in a way that consumers can easily identify, such as Nursing Facility Only policy, Comprehensive policy, or Home Care Only policy. It is common for individuals to pay premiums for a long-term care policy for years after purchase. Therefore, these initial policy decisions are very important to the consumer. An error on the part of the agent can have devastating consequences.
Home Care Options
While it is very important to cover the catastrophic costs of institutionalization in a nursing home, most Americans would prefer to remain at home. It is often possible to obtain both nursing home benefits and home care benefits in the same policy. In such a case, home care is typically covered at 50 percent of the nursing home rate. Therefore, if the nursing home benefit is $200, the home care rate will be $100. This may not be adequate funding for home care, especially as time goes by and costs go up. If home care is a primary concern, it may be best to purchase a separate policy. Some home care policies carry additional benefits such as coverage for adult day care and community care.
Inflation Protection
Industry professionals generally recommend inflation protection, but the cost can be high. Those who purchase at younger ages are especially encouraged to add this feature since the cost of long-term care is certain to increase over time. The cost of providing long-term care has been increasing faster than inflation. At older ages, the consumer will need to weigh the cost of the additional premium option with the amount of increase in benefits that will be produced.
The rising costs of institutional care surpass the increase in the Consumer Price Index. Since LTC policies are expensive, consumers may not purchase features that are designed to keep the coverage adequate. Traditional policies allow the applicant the choice of accepting or refusing inflation protection, but Partnership policies must include inflation protection, often making traditional policies financially more attractive to consumers. Although Partnership policies mandate inflation protection, insurers still charge the same rate they would for this benefit in a traditional LTC plan.
Partnership policies have specific inflation protection requirements under the Deficit Reduction Act of 2005:
· Applicants under 61 years old must be given compound annual inflation protection,
· Applicants 61 to 76 years old must be given some level of inflation protection, and
· Applicants 76 years old or more must be offered inflation protection, but they do not have to accept it.
Many in the health care field believe the amount of increase offered is not adequate, but it will help to offset the rising costs of long-term care. The inflation protection, usually a 5 percent compound yearly increase, may eventually become part of all policies, but currently it is most likely to be just an option that the consumer must accept or reject. Some states require the consumer to sign a rejection form as proof that the agent offered the option.
Simple and Compound Protection
Inflation protection based on percentages is offered in one of two ways: simple increases in benefits or compound increases in benefits. Like interest earnings, the benefits increase based on only the original daily indemnity amount or on the total indemnity amount (base plus previous increases). Some states mandate that all inflation protection options offered must be compound protection; others allow the insurers to offer both types. Under a simple inflation benefit, a $100 daily benefit would increase by $5 each year. Under a compound inflation benefit the protection increases by 5 percent of the total daily benefit payment. This is called a compound inflation benefit because it uses the previous year's amount rather than the original daily benefit amount. This is the same basis used with interest earnings on investments. Compound interest earnings are always better than simple interest earnings. The following graph more clearly illustrates how compounding works with the inflation protection riders:
|
|
Year 1 |
Year 5 |
Year 10 |
Year 15 |
Year 20 |
|
Base Policy |
$100 |
$100 |
$100 |
$100 |
$100 |
|
Simple |
$100 |
$120 |
$145 |
$170 |
$195 |
|
Compound |
$100 |
$121 |
$155 |
$197 |
$252 |
Elimination Periods in LTC Policies
In auto and homeowner’s insurance, higher deductibles are recommended as a way of reducing premium cost. The point is catastrophic coverage – not coverage of the small day-to-day losses. The same is true when it comes to health insurance. In long-term care contracts, there are a variety of waiting or elimination periods available in policies. Basically, a waiting or elimination period is simply a deductible expressed as days not covered. The choice is made at the time of application. Policies that have no waiting period (called zero elimination days) will be more expensive than those that have a 100-day wait. Fifteen to thirty elimination days are most commonly seen, although the zero day elimination period has gained popularity.
As one might expect, the longer the elimination period, the less expensive the policy; the shorter the elimination period, the more expensive it is. Therefore:
Zero day elimination = higher cost.
100 day elimination = lower cost.
All the variables between the two extremes will have varying amounts of premium; 30 day elimination period will cost less than a 15 day elimination time period, and so on.
When considering which elimination period is appropriate, one should consider the consumer's ability to pay the initial confinement. For example, if thirty-day elimination is being considered at $200 per day benefit, by multiplying $200 by 30 days, it is possible to see what the consumer would first pay: $6,000 before his or her policy began. If this is something the consumer is comfortable with, then it may be appropriate to choose a 30-day elimination period. Again, a larger elimination (deductible) period will mean lower yearly premium costs.
Policy Type
The specific type of policy to be purchased can be a harder question. Many of the nursing home policies are basically the same, with differences being hard to distinguish. It is very important that the agent fully understand what those differences are before presenting a policy. Some policies will offer coverage only in the nursing home while others offer a combination of possibilities. The insurer will mark their policy types in some specific way. The agent is responsible for understanding the differences.
Restoration of Policy Benefits
Some policies have a restoration benefit in their policy. This means that part or all of used benefits renew after a specific length of time and under specific circumstances. During this period of time, the policyholder must be claim free.
Preexisting Periods in Policies
Obviously as we age it is more likely that our health will not be perfect. High blood pressure, arthritis, or other ailments are likely to develop. It is possible that conditions existing at the time of application could present claims soon after the policy is issued. Because of this, companies have what are called preexisting condition periods.
A preexisting condition is one for which the policyholder received treatment or medical advice within a specified time period prior to policy issue. Under federal law, that period of time prior to application is six months. Failure to disclose conditions that were known to the applicant can result in claims being denied when benefits are applied for or result from that condition. Medication, it should be noted, constitutes treatment. In some cases, the insurance company will even rescind the policy due to failure to disclose all requested medical history. Some policies will cover all conditions that were disclosed but apply the preexisting period to any that were not listed as a means of encouraging full disclosure.
When the preexisting period has passed, all medical conditions are then covered. Not all policies will impose a preexisting period; as long as the condition was disclosed at the time of application, all claims will be honored in such policies. Other policies do impose preexisting periods, but usually no more than six months from the time of policy issue (which may be mandated by state statute). Policies tend to specifically list preexisting conditions in a separate paragraph in the policy.
Deciding Between Federal Tax-Qualified or
State Non-Tax (Non-Partnership) Qualified Policies
For individuals who desire Partnership asset protection, there would be no consideration of non-tax qualified policies since all Partnership plans have tax-qualified status. A major reason for selecting a state’s non-tax qualified plan would be for the additional ease of collecting benefits, based on use of additional ADLs in the policy.
One might easily assume that everyone would want a tax-qualified plan, but that is not necessarily the best choice for every individual. Of course, if asset protection is the goal, there is no choice available – it must be tax qualified. The major difference has to do with benefit triggers. Benefit triggers are the conditions that "trigger" benefit payment from the insurance company. If a person needs to enter a nursing home, but his or her policy will not pay because the policyholder has not met the criterion for collecting benefits, he or she will not be able to access their policy’s benefits. The difference directly relates to the activities of daily living (ADL). In the non-tax qualifies policy forms, ambulation tends to be the primary difference. Ambulation is the ability to move around without help from another individual. This daily activity is often the first to deteriorate as we age.
Tax-qualified plans come under federal legislation. Federally qualified long-term care policies providing coverage for long-term care services must base payment of benefits on certain criteria requirements:
1. All services must be prescribed under a plan of care by a licensed health care practitioner independent of the insurance company.
2. The insured must be chronically ill by virtue of either one of the two following conditions:
a. Being unable to perform two of the following activities of daily living (ADL): eating, toileting, transferring in and out of beds or chairs, bathing, dressing, and continence, or
b. Having a severe impairment in cognitive ability.
There are differences in the tax-qualified and non-tax-qualified long-term care plan ADLS. These differences are important because they relate to the benefit triggers. Tax-qualified plans have eliminated the ADL of ambulation (the ability to move around independently of others).
Nonforfeiture Values
State regulators are giving nonforfeiture values a hard look. With rising premiums, many long term clients are finding they can no longer afford to keep their policy. When a consumer has held a long-term care policy for many years, never claiming any benefits, a lapse of the policy means wasted premium dollars, which have been paid out over several years. It obviously means that insurers have benefited while consumers have merely wasted premium dollars. If they are forced, through rising costs, to abandon their policies as they approach the age of needing the benefits insurers have benefited unfairly. Federal law requires that companies at least offer a nonforfeiture provision to the prospective policyholder in tax-qualified plans. Non-tax qualified plans do not need to offer this additional benefit, unless state law requires it. The importance of Nonforfeiture values are often overlooked by consumers in favor of lower policy premiums. Even agents often fail to realize the importance of nonforfeiture values.
Waiver of Premium
Some insurers include a waiver of premium provision in their policy for no added premium while others view it as an option that must be purchased. Waiver of premiums occurs when the policyholder is in the nursing facility or other contractually covered facility, as a patient. At a given point, he or she no longer needs to pay premiums, but policy benefits continue. The point of time when the waiver kicks in will depend upon policy language. Some policies specify that the waiver starts counting only from the time the company is actually paying benefits; other policies let it begin from the first day of confinement. This is an important point unless the policyholder has selected a zero elimination period. If a zero elimination period were selected there would be no difference between the two types.
Unintentional Lapse of Policy
As people age, forgetfulness is common. Many states now have provisions for unintentional lapses of policies. Both regulators and insurers have realized that this may especially be a problem in the older ages and especially when illness has developed. A long-time policyholder, without meaning to, can allow a policy to lapse for nonpayment of premiums. It can happen when coverage is most needed because illness or cognitive impairment has developed. Therefore, many states have provisions that allow the policyholder to reinstate without having to go through new underwriting. Of course, past premiums will need to be paid.
The length of time that may pass while still allowing reinstatement varies. Typically, insurance companies allow a 30-day grace period anyway, but some reinstatement periods can be as long as 180 days (again, past due premiums must be paid). It is the waiver of new underwriting that is most important since illness or cognitive impairment may be a factor in the lapse. Obviously, having to underwrite a new policy could mean rejection for the insured. The existing policy is simply reinstated as it was before the lapse.
Policy Renewal Features
It is now common for nursing home policies to be either guaranteed renewable or non-cancelable.
Guaranteed renewable means the insured has the right to continue coverage as long as they pay their premiums in a timely manner. The insurer may not unilaterally change the terms of the coverage or decline to renew. The premium rates can be changed.
Non-cancelable means the insured has the right to continue the coverage as long as they pay their premiums in a timely manner. Again, the insurer may not unilaterally change the terms of coverage, decline to renew, or change the premium rates. Please note non-cancelable policies may not change premium rates. Such LTC policies would be rare, if available at all.
Items Not Covered by the LTC Policy
All policies have exclusions (items that are not covered by policy benefits). While states will vary to some extent on what may be excluded, some items are fairly standard in the industry. These include, but may not be limited to:
1. Preexisting conditions, under certain circumstances;
2. Mental or nervous disorders, except for Alzheimer's and other progressive, degenerative and dementing illnesses;
3. Alcoholism and drug addition;
4. Treatment resulting from war or acts of war, participation in a felony, riot, or insurrection, service in the armed forces or auxiliary units, suicide, whether sane or insane, attempted suicide, or intentional injury, aviation in the capacity of a non-fare-paying passenger, and treatment provided in government or other facilities for which no payment is normally charged.
Extension of Benefits
If an insured is receiving benefits and for some reason the policy cancels, most states have provisions that require benefits to continue. This is called Extension of Benefits. It does not cover an individual whose benefits under the policy simply run out or are exhausted.
Affordability of Contracts
No matter how important asset protection might be, if the policies are not affordable they will not accomplish what was intended. The individuals who developed the Partnership programs recognized that the consumers most likely to buy long-term care Partnership coverage were also going to be sensitive to rate and premium increases. The goal was to give Partnership policies economic value to those insured, both when issued and at the time a claim occurs. Of course, they also wanted to encourage a competitive marketplace since that tends to keep prices down and values high. Low lapse rates were also a priority, since a policy that is purchased but not maintained does not benefit anyone. It is necessary to have a long-term commitment to LTC policies since they are typically purchased many years prior to need. Since Partnership plans were an experiment in the four states that initially offered them, Federal law actually discouraged other states from enacting them through restrictive language. That changed in 2005 (signed into law in 2006) with the Deficit Reduction Act of 2005.
Standardized Definitions
As is so often the case, definitions need to be standardized to avoid misunderstandings. No policy may be advertised, solicited or issued for delivery as a long-term care Partnership contract which uses definitions more restrictive or less favorable for the policyholder than that allowed by the state where issued.
Minimum Partnership Requirements
Long-term care Partnership policies do, of course, have minimum standards, which must be met. Standards are based on the state where issued. In all states, an agent would be acting illegally if he or she told a prospective client that the policy he or she was demonstrating for sale was a Partnership policy when, in fact, it did not meet partnership criteria.
The minimum standards set down by each state are just that: minimums. They do not prevent the inclusion of other provisions or benefits that are consumer favorable, as long as they are not inconsistent with the required standards of the state where issued.
Benefit Duplication
It is the responsibility of every insurance company and every agent to make reasonable efforts to determine whether the issuance of a long-term care Partnership policy might duplicate benefits being received under another long-term care policy, another policy paying similar benefits, or duplicate other sources of coverage such as a Medicare supplemental policy. The insurance company or agent must take reasonable steps to determine that the purchase of the coverage being applied for is suitable for the consumer's needs based on the financial circumstances of the applicant or insured.
Partnership Publication
In states that offer Partnership policies, every applicant must be provided with a copy of the long-term care Partnership publication (which was developed jointly by the commissioner and the department of social and health services) no later than when the long-term care Partnership application is signed by the applicant.
On the first page of every Partnership contract, it must state that the plan is designed to qualify the owner for Medicaid asset protection. A similar statement must be included on every Partnership LTC application and on any outline or summary of coverage provided to applicants or insured.
Abbreviations
As the student reads this course, he or she will see many abbreviations. To fully understand the long-term care program, it is necessary to understand the abbreviations commonly used:
ADL = Activities of daily living
ACS = American Community Survey
CBO = Congressional Budget Office
CMS = Centers for Medicare & Medicaid Services
DOI = Department of Insurance
DRA = Deficit Reduction Act of 2005
GAO = The United State’s Government Accountability Office
HHS = Department of Health and Human Services
HIPAA = Health Insurance Portability and Accountability Act of 1996
HRS = Health and Retirement Study
IADL = Instrumental activities of daily living
LTC = Long Term Care
NAIC = National Association of Insurance Commissioners
OBRA ‘93 = Omnibus Budget Reconciliation Act of 1993
RWJF = The Robert Wood Johnson Foundation
UDS = Uniform Data Set
End of Chapter Two
United Insurance Educators, Inc.