WA LTC Refresher 4 Hour Course
Chapter 3
Basic Policy Considerations for Traditional LTC Policies
Traditional Coverage
Since long-term care benefits cover multiple types of care, a long-term care policy might cover home care, assisted living, community-based services, adult day care (both medical and non-medical), or a nursing home. As time goes by, other forms of care may be developed. With these various services in mind, a long-term care policy is a contract that provides benefits for an extended period of time in some location other than a hospital. The exact benefits will vary, but each contract will have a policy schedule that states precisely what is covered. It will include the elimination period, the maximum daily benefit for home and adult day care, the maximum nursing home benefit and the maximum lifetime benefit. Even life insurance policies may have a nursing home benefit provision.
Like other types of contracts, traditional and Partnership long-term care contracts contain specific items. There will be a copy of the original application, policy provisions and attachments, if any. The policy contract is a legally binding contract between the applicant and the insurance company. No one, including the agent, can change any part of the policy or waive any of its provisions unless the change is approved in writing on the policy or on an attached endorsement by one of the company officers.
Policy Issue
Issuance or rejection of the policy application will be based on the applicant’s health and lifestyle. Both Partnership and traditional long-term care policies have underwriting.
Underwriting will be based on the answers provided to medical questions on the application and on the responses received from attending medical professionals. Intentionally incorrect or omitted information on the part of the applicant or agent can cause the policy to be rescinded or cause benefits to be denied. If the policy has been in force for less than six months an otherwise valid claim has the possibility of denial if information was knowingly omitted or given incorrectly.
Once the policy has been in force for two full years, only fraudulent misstatements in the application may be used to void the policy or deny a claim. All contracts must conform to the laws of the state of issue. They must also conform to federal law, especially if the contract is a tax-qualified form. If any provision conflicts with the laws of the issuing state, the provision is automatically changed so that it will comply with the minimum requirements of that state.
Individuals of any age can require long-term care. While the elderly are most likely to utilize such care, those involved in accidents and with some types of illness, such as AIDS, may also find themselves in a nursing home facility or in community-based care. However, long-term care policies are typically designed with the elderly in mind. Coverage is designed to cover some aspect of long-term care, most often the nursing home. Such policies do not include coverage for the hospital or hospital related services. Nor do they cover the costs of care generally connected with benefits provided under Medicare and Medigap policies.
Protecting Assets
Obviously, no one really wants to go to a nursing home. That is one reason for the popularity of alternative care options, such as assisted living. At one time, AARP reported that the majority of elder Americans believed the government would take care of them through Medicare. Today, most people realize that is not the case. In the past ten years, the sale of long-term care policies have increased as people sought ways to protect their assets from medical costs.
Protecting one’s assets is a valid concern. Many elderly people do eventually qualify for Medicaid, but only after they have depleted most of their personal non-housing resources. Medicaid is the joint federal-state program that pays for health care costs for needy low-income residents of all ages (not just the elderly). Benefits are typically available to the poor, to certain disabled citizens, and to persons over the age of 65 who meet the economic means test. To meet this economic means test, the person must be impoverished. Some items are exempt while still allowing qualification. One asset that would be exempt is the person's personal home, in which they have been residing. Also exempt are some personal items, one vehicle for transportation, and in a few cases, specific types of annuities. Income producing property may be exempt as long as the income goes towards the person's care. Since each state controls some aspects of Medicaid qualification, it is very important to understand your own state’s guidelines. While each state pays approximately half of the cost (with the federal government paying the other half) the exact amount paid by the state varies depending on multiple factors. Each state also is allowed to administer many elements according to their own desires, as long as it does not clash with federal guidelines. As a result, what worked for Uncle Joe in California may not work for Aunt Mabel in New York.
There is one aspect of Medicaid that is uniform to all states: the fact that qualification depends upon “spending-down” assets. People who prided themselves on always paying their own way may find themselves in the position of having to ask for financial help.
Medicaid Benefits
Even though the states have general control of their Medicaid funds, they must also follow federal laws. Federal law requires states to provide a minimum level of services to Medicaid beneficiaries. Those services include such things as inpatient and outpatient hospital care, laboratory and X-ray services, skilled nursing home care and home health services for those aged 21 and older, examination and treatment for children under the age of 21, family planning and rural health clinics. About half of Medicaid spending goes for federally mandated services. States pay health care providers directly for patient services and almost invariably require doctors to accept the state fees as full payment. Doctors and other medical suppliers are legally required to accept the amount paid by Medicaid, which means they cannot bill their patients for any additional amount. Therefore, some medical providers may not accept Medicaid patients. Medicaid funding, as well as Medicare funding, has become a real concern. As the baby boom generation reaches retirement, adequate funding may not be available under current funding procedures.
All aspects of government have faced budget problems. Medicare and Medicaid perhaps face the greatest challenge since they must deal with the increasing elderly population. Rising medical costs also play a role. It is common to spend the most money on the last three months of our lives. Many of the medical procedures do nothing more than delay death. However, medical professionals are reluctant to do less that everything possible since lawsuits have become pervasive in the United States.
Nearly every state has faced severe budget deficits in their Medicaid funding. Some states have actually put a ban on building additional nursing homes in an attempt to curb the rising costs. The federal and state governments have attempted to control the rising costs in some way.
Fraud and abuse in the medical field has played a major role in the rising cost associated with Medicaid and Medicare. While Medicare has a single administrator (the federal government), Medicaid has 50 separate administrators, because each state is in charge of their own program. This makes it difficult to curb fraud and abuse of the Medicaid system. There is no doubt that part of the funds end up in the pockets of dishonest medical providers.
Many elderly consumers believe the military will, in some way, provide for their nursing home needs. Due to a shortage of beds, even when the veteran might qualify, the chances of actually getting such coverage are small. It only takes a call to the military agency for them to confirm this.
Relying on Insurance for LTC Payment
In the past ten years, insurance policies for long-term care needs have become popular. Not all insurance policies are adequate for long-term nursing home care, however. The consumer must choose wisely. Since many states are now mandating certain requirements, if the consumer (and selling agent) selects a policy labeled Nursing Home Policy it will probably do an adequate job.
Federal legislation, under HIPAA, has established policies that are "tax-qualified." These tend to be uniform from state to state. Therefore, consumers must choose between non-qualified and qualified forms. When we speak of qualified and non-qualified we are always referring to the tax implications. The tax-qualified plans meet certain tax qualifications; the non-tax qualified contracts do not. However, few people choose a long-term care plan based on a potential tax deduction. Luckily, the main focus is typically on the benefits provided. In many cases, non-tax qualified plans offer better home care benefits and better benefit qualification.
Age as a Policy Factor
The age of the applicant will have an impact on the cost of the LTC policy, the older the applicant the more expensive the policy. Age matters because the less time the insurance company has to collect premiums, the greater the company's risk exposure is. Therefore, the price for the policy is higher. There are two ways to price policy applications: by attained age and by age banding. Attained age relates to the age of the person at the time of application. Age banding also looks at the age at application, but rates are based on several ages banded together. When each birthday determines the rate, the policy rate book will show it as such:
|
Age: |
Price: |
|
65 |
$ |
|
66 |
$ |
|
67 |
$ |
|
68 |
$ |
|
69 |
$ |
This will continue until a point is reached where issue ages discontinue. Most companies will not issue a long-term care policy past a specified application age, usually around 80 years old. Of course, by this age, the policy cost is very high.
Contracts that use age banding usually go in groupings of 5:
|
Age: |
Price: |
|
65-69 |
$ |
|
70-74 |
$ |
|
75-79 |
$ |
|
80-84 |
$ |
Age banded contracts quote the same price for each age within the banding. For example, an applicant aged 69 would pay the same premium amount as an applicant aged 65 would. The 65 year old may get a better buy if he or she purchased from a company that priced by attained age whereas the 69 year old may find banding more advantageous.
Not all companies will issue a policy past the age of 79. This example showed an age banding of 80-84, but individuals will want to check with the company they are considering to see if they can obtain a policy if they are in that age bracket.
Insurance Pricing
Consumers play a role in determining the cost of their long-term care policy based on their selection of benefits at the time of application. We have already mentioned another pricing factor: application age. The benefit options chosen will also affect how much the policy costs. Obviously, if greater benefits are selected, the cost of the policy will reflect that. Policy options will be discussed further in another chapter, but basically the consumer can choose from a wide variety, including an inflation rider option, the daily benefit amount, home health care benefits and the deductible (called a waiting period or elimination period). Some companies may offer additional options. Premium can also be affected by whether or not the applicant smokes and whether or not both spouses are applying. Some companies offer discounts if both spouses take out a policy. Some companies may also offer a discount in premium for those that are considered extremely healthy physically and in their lifestyle.
Premium Mode
Premium mode payment is similar to other types of policies in that they may be paid yearly, semi-yearly, quarterly, or monthly. When the consumer desires monthly payments, they might be required by the issuing company to use a monthly bank draft rather than direct billings. A few companies will allow the applicant to pay personally each month, but most companies require monthly payments to be through a bank draft. This makes good sense, since a person could easily overlook the payment of their premium if they were sick. As a result, someone who mailed in a check each month could allow their policy to lapse just when they needed it most. A few insurers allow only annually, semi-annually, or quarterly payment modes, except in states that have specific payment requirements. California, for example, does not allow the agent to collect more than one month's payment at the point of application. The consumer can pay a larger premium mode later directly through the company.
Reducing Benefits to Save Premium
When premium rates jump unexpectedly, not all consumers will be able to absorb the additional cost. Some individuals will allow their policies to lapse. Others will strive to find a solution. Some states have provisions allowing the policyholder to reduce their benefits, which reduces their premium. This is an attempt by the states to keep long-term care policies in force even when the consumer has to cut back on costs. It is better for both the consumer and the state to have some benefits in place rather than no benefits at all.
There are several ways that benefits may be reduced:
1. Reduce the length of benefit payments (from lifetime to 4 years, for example).
2. Reduce the daily benefit amount.
3. Discontinue some benefits, such as home health care options.
4. Convert from one policy form to another, if the state has provisions that allow this.
The premium reductions are typically based on the policyholder's age at the time of original application. This may not be true where benefits are added rather than reduced. Where there are no state provisions allowing benefit reduction in order to reduce premium, companies may require a totally new application, which means that the reduction of benefits may not save any premium if the applicant is older now than when he or she originally applied for coverage.
Example:
Bert is now 70 years old. He purchased his long-term care policy when he was 68 years old. Even though only two years have passed, the difference in age can make a great deal of difference when it comes to premium rates. Bert feels the current premium of $1,600 is more than he can continue to pay. As he explains: "Every year I have to take this amount out of my savings. That's more than I earn during the entire year in interest. Either I have to lower my cost or drop the policy."
If there is not a state requirement requiring Bert’s issuing company to allow benefit reduction in order to save premium then a new application must accomplish this. A new application will be based on Bert’s current age of 70. Even though he is only two years older, the extra premium caused by this additional age saves little, if any, premium even with fewer benefits. As a result, Bert still cannot afford a long-term care policy. Bert may eventually have to rely on Medicaid to pick up any long-term care expenses. Because this is often the case, it is in the state's best interest to mandate that a consumer can lower benefits on an existing policy. Such a requirement is likely to save the state Medicaid dollars.
Although there will be policy variations, even within the same company, there will also be similarities. Of course, every policy must conform to state requirements.
Policy Renewal
It is not likely that a long-term care policy would be written with premiums guaranteed to remain the same. Most long-term care policies are now guaranteed renewable, meaning the premiums are subject to change. In a guaranteed renewable policy the insured's contract will remain in effect during their lifetime, as long as premiums are paid in a timely manner. The policy benefits cannot be changed without the policyholder's consent.
Policy Review: 30-Day “Free Look”
While most people now realize the need to protect themselves from the costs of long-term care expenses, not everyone agrees that an insurance policy is the best avenue for doing so. Therefore, many people desire a time to review the actual policy and think it over. Companies issuing long-term care policies allow a 30-day period to do just that. It is commonly called the "free look" period. Within that 30-day period of time, they may change their mind and return the policy to either their agent or the issuing company. All of their premium must be returned to them. The consumer need not say why they have changed their mind. The refund must be issued within 30 days of the consumer’s notification to cancel the policy.
When a policy is returned during the applicant’s "free look" period, the policy is null and voided. This means the policy is considered as never having been issued. It also means the insurance company is not liable for any claims.
“Notice to Buyer”
Each issued long-term care policy is designed to cover specific costs related to aging. Under the heading of "Notice to Buyer" the insurance company will list the benefits that are provided by the policy. This statement may be specifically mandated by the state where issued or it may be a general statement made by the insurance company. This notice advises the insured to carefully review the policy's limitations. This should be done within the first 30 days so that the policyholder can return their policy for a refund if they are dissatisfied with those limitations.
Policy Schedule
The policy schedule will list the insured's name and the options that were purchased by the insured at the time of application. Some of the possible items listed include the:
1. Elimination period (deductible expressed as days not covered);
2. Maximum daily home and adult day health care benefit;
3. Maximum daily nursing home facility benefit;
4. Maximum lifetime benefit, and the
5. Type of inflation benefit, if any.
There may be other types of benefits besides the five listed above.
The amount of premium due annually will be stated along with the amount of premium paid with the application. The amount paid with the application may be different than the annual premium stated, since the policyholder may have paid quarterly or semi-annually.
The Policy Schedule page will list the policy number and the policy effective date. The first renewal date may also be listed, which will reflect how the first premium was paid (quarterly, semi-annually or annually).
Policy Terminology
All insurance contracts are legal documents using legal terminology. As part of this, definitions used in the contract will be defined. While some terms may seem standard, this should not be assumed.
The exact listing of the page heading may vary, but probably it will state "definitions" somewhere. Whatever the page heading, it will state exactly what the policy terms mean or give the page number in the policy where the definition is listed.
The following is a list of commonly used definitions:
Activities of Daily Living
The activities of daily living are defined in each insurance contract. The federal government has also defined them for tax-qualified long-term care contracts. These may vary from company to company and between tax- and non-tax-qualified contracts. The activities listed are very important because they determine the conditions under which payment will be made. Policies that list seven conditions are more favorable for the policyholder than those which list only five (2 out of 7 are better odds than 2 out of 5). The following five are generally included:
1. eating
2. dressing
3. bathing
4. toileting & associated functions
5. transferring to and from beds, wheelchairs, or chairs.
Adult Day Health Care
Adult day health care is community based group program that provides health, social and related support services in a facility that is licensed or certified by the state as an Adult Day Health Care Center for impaired adults. It does not mean 24-hour care.
Alternate Care Facility
An alternative care facility is one that is engaged primarily in providing ongoing care and related services to inpatients in one location and meets all of the following criteria:
a) Provides 24 hour a day care and services sufficient to support needs resulting from the inability to perform Activities of Daily Living or cognitive impairment;
b) Has a trained and ready to respond employee on duty at all times to provide that care;
c) Provides 3 meals a day and accommodates special dietary needs;
d) Licensed or accredited by the appropriate agency, where required, to provide such care;
e) Provides formal arrangements for the services of a physician or nurse to furnish medical care in case of emergency; and
f) Provides appropriate methods and procedures for handling and administering drugs and biologicals.
Many types of facilities would meet these criteria.
Caregiver Training
Caregiver training is training provided by a home health care agency, long-term care facility, or a hospital and received by the informal caregiver to care for the insured in his or her home.
Cognitive Impairment
A cognitive impairment is the deterioration of a person’s intellectual capacity which requires regular supervision to protect themselves and others. This often must be determined by clinical diagnosis or tests. Cognitive impairment may be the result of Alzheimer's disease, senile dementia, or other nervous or mental disorders of organic origin.
Effective Date of Coverage
The effective date of coverage is the date listed on the Policy Schedule page, which states the first date of coverage under the policy. It is not necessarily the date of policy application.
Elimination Period
An elimination period, also called a waiting period, is the number of days of qualified care received, but not covered by the policy due to the elimination period selected at the time of policy application. Once the designated number of days has passed, benefits will begin. This time period will be shown on the Policy Schedule page.
Home & Community Based Care
Home and community-based care is required and provided in a home convalescent unit under a plan of treatment, in an alternate care facility, or in adult day health care.
Home Convalescent Unit
Home convalescent units are NOT a hospital. It may be one of the following:
· the insured's home
· a private home
· a home for the retired
· a home for the aged
· a place which provides residential care; or
· a section of a nursing facility providing only residential care.
Home Health Care Agency
A home health care agency is an entity that provides home health care services and has an agreement as a provider of home health care services under the Medicare program or is licensed by state law as a Home Health Care Agency.
Inability to Perform Activities of Daily Living
An inability to perform the activities of daily living means the insured is dependent on another person to help them function on a daily basis. This may be the result of injury, sickness or simple frailty due to age.
Informal Care
Informal care is custodial care provided by an informal caregiver, making it unnecessary for the insured to be in a long-term care facility or to receive such custodial care in the residence from a paid provider.
Informal Caregiver
An informal caregiver is a person who has the primary responsibility of caring for the patient in their residence. A person who is paid for caring for the patient cannot be an informal caregiver.
Long-Term Care Facility
A long-term care facility is a place which:
· Is licensed by the state where it is located;
· Provides skilled, intermediate, or custodial nursing care on an inpatient basis under the supervision of a physician;
· Has 24-hour-a-day nursing services provided by or under the supervision of a registered nurse (RN), licensed vocational nurse (LVN) or a licensed practical nurse (LPN);
· Keeps a daily medical record of each patient; and
· May be either a freestanding facility or a distinct part of a facility such as a ward, wing, unit, or swing-bed of a hospital or other institution.
A long-term care facility is not a hospital, clinic, boarding home, a place which operates primarily for the treatment of alcoholics or drug addicts, or a hospice. Even so, care may be provided in these facilities subject to the conditions of the Alternate Plan of Care Benefit provision, if one exists in the policy.
Medical Help System
Medical help systems is a communication system, located in the insured's home, used to summon medical attention in case of a medical emergency.
Medical Necessity
Care or services that are medically necessary include care that is:
· Provided for acute or chronic conditions;
· Consistent with accepted medical standards for the insured's condition;
· Not designed primarily for the convenience of the insured or the insured's family; and
· Recommended by a physician who has no ownership in the long-term care facility or alternate care facility in which the insured is receiving care.
Maximum Lifetime Benefit
The maximum lifetime benefit is the total amount the insurance company will pay during the insured's lifetime for all benefits covered by the policy. This will be shown on the Policy Schedule page.
Plan of Treatment
A plan of treatment is a program of care and treatment provided by a home health care agency. Each company may include additional information that may include:
a) A requirement that it must be initiated by and approved in writing by your physician before the start of home and community based care; and
b) A requirement that it must be confirmed in writing at least once every 60 days.
Pre-existing Condition
A pre-existing condition is a health condition for which the insured received treatment or advice within the previous 6 months prior to application for coverage.
Respite Care
Respite Care is provided as a service for those who perform the primary care services for an individual. It includes companion care or live-in care provided by or through a home health care agency, to temporarily relieve the informal caregiver in the home convalescent unit.
Not all companies offer identical benefits. Therefore, benefits received under the terms of the policy contract will depend on the benefit options available at the time of application.
Elimination Periods in Policies
The beginning date of the benefits will depend upon some options selected. One option affecting this would be the elimination period. The elimination period is a type of deductible. Instead of being expressed as a dollar deductible, however, it is expressed in days not covered. For example, in a major medical plan we commonly see a deductible amount of $500. This amount must be paid by the insured before the insurance company will begin paying for health care claims. In a long-term care policy, the deductible will be expressed as elimination days. A policyholder who selects 30 elimination days will not receive benefits (payment) from the insurance company until the insured begins receiving covered benefits on the 31st day. The first 30 days are not covered. Benefits begin to be payable on the 31st day for covered services. Of course, eligibility must also be established before benefits would be received.
Policy Termination
It would be hard to imagine a consumer terminating a policy when benefits are in process. It would be more likely that termination would happen during a period of good health. Even so, if termination did occur during eligibility of benefits, the insurance company would continue to provide benefits, subject to all policy provisions, until the insured had not received care for the amount of time specified in the policy, usually 180 consecutive days.
If termination occurred during benefit use, it is most likely that it would be due to a group long-term care policy that was terminated by the employing company.
Mental Impairments of Organic Origin
Some aspects of elder care are of specific concern to consumers. One of those is Alzheimer’s care. As a result, some policies may specifically state that Alzheimer's disease is covered. It is common for a perspective client to specifically ask if this disease is covered by the policy. Long-term care contracts do cover mental impairments of organic origin. That would include Alzheimer’s disease, and also senile dementia. These diseases are determined by clinical diagnosis or tests.
Home and Community Based Benefits
Home and community based benefits are available in many LTC policies, either as part of the base plan or as an option that may be added for additional premium. Home and community based benefits are traditionally less expensive than a nursing home confinement so this type of care is less expensive for the insurer to cover. Even though such care is less expensive, however, eligibility standards still exist. Those eligibility standards may have some variations, but typically they require one of the following:
1. The care must be medically necessary.
2. The policyholder must be unable to perform one or more of the activities of daily living stated within the policy.
3. There must be some type of cognitive impairment.
Benefits payable under the policy will depend upon the options selected at the time of policy purchase. If home care is included in the contract, it will typically be paid at 50% of the institutional benefit. In other words, if $100 per day is paid for the nursing home, then $50 per day will be paid for home care. Many of the integrated plans pay the same daily amount for home and community based care as they pay for nursing home care. That’s because an integrated plan uses a “pool of money” that may be applied, as the insured desires. An agent should never take this for granted; he or she should always check the policy or call the benefit department of the insurance company for details.
Bed Reservation Benefit
A Bed reservation benefit is included in many long-term care policies. A bed reservation benefit means the insurance policy will continue to pay the long-term care facility benefit to the nursing home while the policyholder is temporarily hospitalized during the course of their long-term care facility stay. This provides the security of returning to the same familiar surroundings following the hospitalization. It also prevents the family or hospital from having to locate another suitable nursing home facility.
The bed reservation benefit is for a temporary hospitalization. It would not continue indefinitely. Commonly, bed reservation benefits are limited to 21 days per calendar year. Unused days from one year can seldom be carried over into the next calendar year. It may be possible, however, to use bed reservation days to satisfy the elimination period in the policy. Again, the agent will want to check with the issuing company to make sure they allow this.
Waiver of Premium
It is now common for long-term care policies to contain a waiver of premium. A waiver of premium has to do with renewal premiums during an institutionalization or while receiving benefits under the terms of the policy. When the policyholder has received benefits under the policy for the number of days specified, their renewal premiums will be waived (they don’t have to pay them). Many policies will not refund premium that has already been paid, which is why only renewals may apply. Since this is not always the case it is important to understand the terms in each contract. Some policies will refund premium based on quarterly renewal periods. In other words, a policyholder who has paid a yearly premium will receive a refund each quarter of their policy after the conditions have been met qualifying them for a waiver of premium. Some policies also allow hospitalization days during a facility or benefit stay to count towards this waiver of premium.
How the elimination period is counted towards a waiver of premium will vary from contract to contract. Some policies allow the elimination period to be part of the time counted towards the waiver qualification while others do not. Those policies that do not allow the elimination period to count towards the waiver of premium require that benefits actually be due and payable under the policy (the insured must actually be eligible to receive payment from the insurer). Therefore, it would look like this:
Elimination Period + Benefit Days = waiver satisfaction.
For those who selected a 30-day elimination period when purchasing their policy and a 90-day waiver of premium, the equation would be:
30 days + 90 Days = waiver satisfaction
(120 days total time for waiver qualification).
Once the policyholder has not received benefits under their LTC policy for a specified time period (usually 180 consecutive days), the waiver of premium is no longer in effect. The insurance company will again expect premium payment in order for the policy to stay active.
Selecting Other Types of Care
Many insurers now offer an alternative plan of care, which is covered under the policy provisions. If the policyholder would otherwise need a long-term care facility confinement, the company will pay for an alternative service, devices or benefits. The alternative plan of care must be medically appropriate and medically acceptable. This is determined by specific requirements, including:
1. It must be agreed to by the insured, the insured's doctor, and the insurance company; and
2. It must be developed by or with health care professionals (not the patient or the patient's family).
Contracts that allow alternative plans of care follow the policy payment schedule. Naturally, these benefits will count against the maximum lifetime benefits of the policy.
No Policy Covers Everything
As every agent knows, no policy covers everything. All policies, including long-term care contracts, have a section in the contract that lists exclusions (items not covered). It is often easier to understand a policy by reading what is NOT covered.
There are traditional exclusions that are in virtually every contract. Policies will not pay for:
1. Losses due to a condition for which the policyholder can receive benefits under Workers' Compensation or the Occupational Disease Act;
2. Losses due to the result of war or any act of war; and
3. Losses payable under any federal, state, or other government health care plan or law, except Medicaid. The company will reduce their benefits in direct relationship to the amount covered by any government health care plan or law to the extent that the combination of payments exceed 100% of the actual charge for the covered service.
Of course, no policy will pay for losses that occurred or began prior to the purchase of the policy. You can’t crash your automobile and then go buy coverage for it.
All policies will list preexisting condition limitations. It is important to disclose all preexisting conditions on the application at the time of policy purchase. If this is not done, an otherwise valid claim could be denied during the preexisting period. If the undisclosed medical condition is serious enough, the policy may actually be rescinded (voided).
Agents who routinely do not disclose obvious or stated medical conditions risk being “red tagged” by the insurers. This means they underwrite all applications to a greater degree because the insurer is not confident that the agent is truthfully listing all medical conditions. In some cases the insurer may even refuse applications from a seemingly dishonest agent. Agents who knowingly fail to list all stated or obvious medical conditions are “clean-sheeting” the application.
There is another reason agents and applicants need to disclose all known medical conditions: many issued long-term care policies will cover all medical conditions immediately (even those existing at the time of policy issue), as long as the condition was listed on the application. If the condition was not listed, it is then subject to any pre-existing time periods listed in the policy. If serious enough, the policy could still be voided as well.
Age Misstatement
Age misstatement on the application is seldom considered a serious offense, although it can be in specific situations. If the age is misstated downward (stating a younger age) any additional premium must be paid to keep the policy in force. An error in age upwards (stating an older age) will trigger a premium refund, if applicable. If a younger age was purposely stated, it is usually done to save money since so many LTC policy premiums are based on age at application. Obviously, the insurers do not allow this. Sometimes the premium cost is considerable between certain ages, such as between a 69-year old and a 70-year old. That is why it is so important to consider this type of coverage at younger ages.
Few companies rescind (void) a policy due to age misstatement. It may happen, however, if the age misstatement puts the applicant in an age bracket that is not acceptable for underwriting (an 80-year old who is listed as 79 might fall into this category). The company would, however, require that the additional premium be paid. If the correct age would have meant that the policy would not have been issued at all, then the premium that was paid will be returned to the consumer and the policy voided.
Third Party Notification
Many policies now allow a third party notification when unpaid premiums are due. The third party is chosen by the insured, usually at the time of policy issue. The insured has the right to change the third party listing at each policy renewal, or at least yearly.
When the policyholder has listed a third party notification, that person would receive notice if the policy were in danger of lapsing due to nonpayment of premiums. The notice would be sent to them in writing at least 30 days prior to policy termination. The intent is to prevent an accidental policy lapse. This is most likely to happen as people age and forgetfulness becomes a problem. If that is the situation, a policy lapse can be especially distressful for the family.
There is one final safeguard if premiums are not paid on time: there is a 31-day grace period. This means that the policyholder has 31 days past the actual premium due date in which to make payment. The policy would remain in force and claims would be covered during this 31-day period. If a claim occurred, the premium would have to be paid in order to receive benefit payment.
Reinstatement of a Lapsed Policy
Under some circumstances, a lapsed policy may be reinstated (put back in force). Sometimes, simply paying the unpaid premium is enough to reinstate the policy. In other cases, a new application for reinstatement must be submitted and perhaps even underwritten. Any back premium will still be due.
Why would a person reinstate rather than simply apply for a new policy? The most likely reason is to keep the issue-age the same, since the policyholder was probably younger when he or she first applied for coverage.
Many states have mandated specific reinstatement requirements as a consumer protection measure. This would especially be true if the lapse were due to some cognitive impairment or some type of functional incapacity. Functional incapacity typically means the inability to perform a specified number of the activities of daily living. When this is the case, the insured will have six months following the policy lapse (due to nonpayment) to reinstate it. Such reinstatement is especially important in these cases, because the insured cannot qualify for a new policy due to their medical problems. Any person authorized to act on behalf of the insured may also apply for policy reinstatement due to cognitive impairment or functional incapacity.
The insurer will require proof of cognitive disability when the insured, or their family, requests policy reinstatement. They will accept clinical diagnosis or tests demonstrating that cognitive impairment or functional incapacity existed at the time the policy terminated. The insured must bear the expense (if any), in most cases, for supplying medical proof.
Long-term care policies can be intimidating to the consumer. As a result, consumers rely on the knowledge of their agent. An agent who does not completely understand the long-term care contracts (policies) should not attempt to market them. The degree of possible error is just too high. When errors are made, they may not be discovered until the insured needs to use the policy – the worst possible time to discover it. It is due to this potential for errors that states are mandating agent education. In the case of Partnership plans, education must relate to those specific policies.
NAIC 2000 Model Act
No one has argued against purchasing a long-term care policy to protect against the costs of receiving care for an extended period of time. However, like so many things, these early policies had many initial flaws that were not consumer friendly or, in some cases, even ethical.
Regulation is often necessary to correct industry flaws that were not corrected by the industry itself. The long-term care insurance market needed consumer protection to protect against product flaws, some intentional and some merely a result of issuing products in a new market place with little statistical data to guide the underwriters. The regulation reflected many issues, including consumer expectations, insurer pricing, and any number of other circumstances. The focus brought about recommendations by the National Association of Insurance Commissioners (NAIC), called the “model” laws and regulations.
The National Association of Insurance Commissioners is a non-profit organization made up of the insurance regulators from the 50 states, the District of Columbian and the four United States territories. They have worked with regulators, legislators, the insurance industry, and consumers to create a comprehensive uniform model law, often referred to as the NAIC Act, and related regulations for long-term care insurance.
State laws can vary widely, but the Model Act and Related Regulations are generally adopted in some form (the state either adopts them as they are or includes language from the model).
Initially, it was the premiums that brought about the attention to this new market of long-term care insurance policies. Health insurance policies had many years of trial and error to smooth out the pricing so it was fair to both the consumers and the insurance companies covering the risks. Health insurance can be adjusted yearly as the insurers see the claims come in. Long-term care policies are issued without immediate access to claims experience. Usually these policies are not accessed for ten to twenty years after issuance. Initially, they were priced to remain constant for many years. Unfortunately, some agents actually marketed them as “never increasing in price.” Since one in three purchasers of long-term care insurance is under the age of 65, long-term pricing becomes necessary.[1] While most policies did not increase with increasing age, they do contain a clause allowing for premium increases if all similar policies are increased (they may not usually be increased individually due to advancing age).
Premiums in Partnership plans may not increase individually or due to the characteristics of an individual policyholder (due to claims, for example), but policies may be increased if all such policies are increased. It was difficult for underwriters to accurately price long-term care policies since so little data existed. Additionally, a larger number of policyholders maintained the coverage than was expected. Why is this important? Because it meant that premiums companies expected to keep, without paying out claims, did not materialize. Since the policyholders kept their policies they could be expected to eventually collect benefits.
Any new insurance market may experience premium rating difficulties, but the long-term market was especially prone to this, due to the length of time between purchase and benefit submissions. In August of 2000 the NAIC adopted new regulatory requirements intended to encourage stronger state legal protections for the long-term care policyholder. The NAIC worked with various groups, including consumer groups and the insurers to develop regulation that would serve as a model for everyone. It was called the NAIC Long-Term Care Insurance Model Act and Regulation.
A major goal of the NAIC model act was premium stability. As amended in August of 2000, the model act and regulation financially penalizes companies that intentionally under-price policies (often called low-balling) and, furthermore, allow state regulators to prohibit insurers that repeatedly engage in such behavior from selling policies in their state. The new model required greater disclosure of premium increases and provided policyholders with more options when premiums did increase.
We might assume that an insurance company would not want to under price their policies, but in fact that can be a competitive strategy to lure in customers with relaxed underwriting and low premiums. At some point, the insurers know they will raise their premium rates. Since long-term care benefits are not accessed quickly (as major medical plans are, for example) insurers can low-ball policy issuances without fear of being hit financially. This is extremely bad for those who buy the policies since they pay in premiums for a policy they may have to lapse when premiums rise beyond their means.
Financial Requirements for Rate Increases
The NAIC model provided measures that would discourage under-pricing of policies, which would inevitably increase in premium at some point. Since many policies had seen severe rate increases in the past (making once affordable contracts financially prohibitive when the rate increased), it was a consumer issue. Rules were established regarding the “loss ratio” (the share of premium the insurer expected to pay in claims). These were based on estimates of future revenues and future claims over the life of the policy for all those who purchased this particular policy form. Under the NAIC model, projected claims must account for at least the sum of:
(a) 58 percent of the revenues that would be generated by the existing premium, and
(b) 85 percent of the revenue generated by the premium increase.
Setting a higher loss ratio requirement for the premium increase than applies to the initial premium creates what is essentially a penalty for increasing rates. It is hoped it will discourage under-pricing from the beginning of the policy. However, consumers must also realize that a company must be able to be profitable in order to remain in business. Most long-term care policy claims do not occur for ten to twenty years after the policy has been issued. Clearly it is in the consumer’s best interest to allow an insurer to take in sufficient premiums on the policies that remain in force.
Rate Certification from the Insurer’s Actuary
The Model Act requires insurers to obtain certification from an actuary that initial premiums are reasonable. When an insurer requests a premium hike the model also requires the actuary to certify that “no further premium rate schedule increases are anticipated.” Reliance on this actuarial certification must assume, of course, that the actuary will use acceptable actuarial practices when evaluating the available data. It must further assume that unethical companies cannot find an actuary willing to make a certification that was inaccurate.
Consumer Disclosure
The NAIC model requires insurers to disclose rate increase histories for the past ten years for long-term care policies of similar type. Since this has been such a forward-moving industry it is unlikely that the exact policy will have been issued for a steady ten years. There may be some cases where this is not required, as in the case of insurer mergers. It is hoped that this disclosure will help consumers select the policy they wish to purchase as well as the company they wish to deal with. The purchaser must also sign a form stating that he or she understands that premiums may increase in the future (this should prevent agents from stating that premiums will remain the same).
LTC Personal Worksheet
Insurers use a long-term care worksheet called the Long-Term Care Insurance Personal Worksheet. This is provided to applicants during the solicitation of a long-term care policy. The worksheet and rate information are provided to the Insurance Department’s Office for review in most cases.
Is the Policy Suitable for the Buyer?
A policy that is purchased and then lapsed a year or two later has benefited no one – not even the insurer in some cases since underwriting has costs associated with it. The selling agent is in the best position to determine whether or not the buyer is financially suitable for the policy they are buying. In other words, if the buyer has no assets to protect (income cannot be protected by Partnership policies – or any other type of policy) it may not be wise to purchase a long-term care policy in the first place.
Agents must attempt to document whether or not an individual should purchase a long-term care insurance policy, whether that happens to be a traditional long-term care contract or a Partnership contract. Most states require companies to develop suitability standards (which agents must follow) to determine if the sale of long-term care insurance is appropriate. These standards must be available for inspection upon request by the Insurance Commissioner.
How does an agent know if a policy is suitable? Simple questions can determine that: Is insurance appropriate for this individual? Can the applicant afford the premiums year after year, especially if the rates increase? Does the policy actually address the applicant’s potential needs and desires?
Insurance companies are required to develop and use suitability standards. Furthermore they must train their agents in their use. Copies of the suitability forms must be maintained and available for inspection.
Consumer Publications
There are consumer publications that enable the buyer to determine themselves if a long-term care purchase is wise for their particular circumstances. “Things You Should Know before You Buy Long-Term Care Insurance” is a consumer publication. Also available is the Long-Term Care Insurance Suitability Letter for consumers.
Producers must provide a Long-Term Care Shopper’s Guide to all prospective buyers of long-term care insurance, whether a traditional long-term care policy or a Partnership long-term care policy. This publication or a similar publication will have been developed by either the individual state or by the National Association of Insurance Commissioners for prospective applicants.
Post Claim Underwriting
Most policies underwrite the applicant at the time of application. The long-term care industry has not always done so. At one time some companies quickly issued the long-term care policy and delayed underwriting until a claim was submitted. Obviously, this was not good for the insured. No one wants to find out their policy is useless when a claim has been presented.
Most states prohibit post-claim underwriting since it is anti-consumer and encourages insurers to find a reason to invalidate the policy (since a claim has been submitted). Especially in long-term care policies it is important that the contract be underwritten at the time of application. In this way, the applicant can be sure that his or her policy is valid and will pay covered claims when they occur.
Additionally, many states mandate that applications contain clear and unambiguous questions on the application regarding the applicant’s health status. Of course, the consumer must honestly answer the insurer’s questions. A question that could be misunderstood puts the applicant in the position of possibly having their policy rescinded or a claim denied due to misrepresentation if the health questions are not worded in a manner that is easily understood.
Tax-Qualified Policy Statement
If it is a Partnership plan, then it is tax-qualified. If the insured files long-form for their federal taxes, he or she may deduct the premiums of his or her long-term care policy. Policies must include a statement regarding the tax consequences of the contract so that the insureds do not have to guess whether or not the policy meets the tax requirements. The statement must be included in the policy and in the corresponding outline of coverage.
The Outline of Coverage is a freestanding document that provides a brief description of the important policy features. Usually the statement would read similar to:
“This policy is intended to be a federally tax-qualified long-term care insurance contract under section 7702(b) of the Internal Revenue Code of 1986, as amended. Benefits received under the policy may be taxable as income.”
Replacement Notices
When an application is taken for long-term care insurance, the agent must determine whether or not it will replace an existing long-term care contract. The method of determination is very specific. A list of replacement questions must be on the application forms and replacement notices. If replacement will take place, there is a specific format for the replacement process.
When a policy is replaced by another, the replacing insurer must waive the time period applicable to preexisting conditions and probational periods to the extent similar exclusions have been satisfied under the original policy. In other words, once a probational or preexisting medical period has been met under one policy, any subsequent contracts that replace the original must recognize the previous satisfaction of these conditional periods.
Policy Conversion
In some states it may be possible to convert a recently issued tax-qualified policy over to a Partnership policy if the issuing company offers Partnership policies. If this is the case, it is likely that there will be specified time limits for doing so. The insurer will mail out notices to their policyholders notifying them of this possibility. Some insurers may allow any tax-qualified policyholder to convert to a Partnership plan; benefits will remain the same since only asset protection will be added by the conversion.
When a policy is converted from one form to another states nearly always have conversion rules that apply. Typically the insurer may not impose new or additional underwriting, nor may they impose a new or extended preexisting period for claims.
An Overview
The Model Act provides guidelines for qualified long-term care policies, including:
· Policies may not limit or exclude coverage by type of illness, such as Alzheimer’s disease.
· Policies cannot increase premiums due to advancing age. In other words, premiums may not increase when a policyholder has a birthday. Premiums may increase simultaneously for all who hold similar policies.
· Policies cannot be cancelled because of advancing age or deteriorating health.
· Policies must offer a nonforfeiture benefit that, if purchased, ensures the consumer that a lapsed or cancelled policy means some benefits would still be available for a specified period of time.
· Policies must offer an inflation protection that, if purchased, ensures benefits keep pace with inflation. This is especially important for those purchasing their policies at younger ages.
The Model Act Applies to All
All 50 states and DC have adopted the NAIC Model Act. The states have adopted the NAIC Model Regulation in some form, although they have not necessarily adopted all of the provisions.
The Model Act applies to all long-term care insurance policies and even to life insurance policies that have an acceleration benefit that may be used for long-term care services prior to the insured’s death.[2] Any policy or rider that is advertised, marketed, or designed to provide coverage for no less than 12 consecutive months on an expense incurred, indemnity, prepaid or other basis is considered a long-term care policy if it is providing for one or more necessary long-term care services in a non-hospitalization setting.
So, what is a qualified long-term care insurance contract? For our purposes, it would include any insurance contract if:
a) The only insurance protection provided under such contract is coverage of qualified long-term care services;
b) Such contract does not pay or reimburse expenses incurred for services or items to the extent that such expenses are reimbursable under title XVIII of the Social Security Act or would be so reimbursable but for the application of a deductible or coinsurance amount;
c) Such contract is guaranteed renewable;
d) Such contract does not provide for a cash surrender value or other money that can be paid, assigned, or pledged as collateral for a loan, or borrowed.
e) All refunds of premiums, and all policyholder dividends or similar amounts, under such contract are to be applied as a reduction in future premiums or to increase future benefits, and
f) Such contract meets the requirements of subsection (g).
These long-term care policies must have renewable provisions and include a statement of how they are renewed. If the policy contains a rider or endorsement, there must be a signed acceptance by the policy owner.
Payment Standards must be Defined
Standards that refer to the payment of benefits must be defined. Such terms as “usual, customary, and reasonable” must be defined in a clear, unambiguous manner. In this definition, for example, the policy must state how the usual, customary, and reasonable charge is determined. Is it based on the local areas? How often are the fees updated to reflect current costs?
Preexisting Standards
Preexisting conditions limitations will be in most of the long-term care policies, but there are restrictions as to how they limit benefits. For example, the preexisting period may be no more than 6 months following policy issue. There can be no exclusions or waivers, such as exclusion on a particular heart condition of the insured. The applicant must be accepted or denied for coverage.
Policy Type Must Be Identified
The policy must clearly state whether it is a tax-qualified or a non-tax qualified long-term care policy. All Partnership policies will be tax qualified.
ADLs
Policies must describe the ADLs in a clear unambiguous manner. Policies may not be more restrictive than using three ADLs or cognitive impairment for qualification of benefit payments. Of course, policies may be more lenient in allowing payment of benefits, but they may not be more restrictive than that.
Benefit triggers, the conditions that begin the benefit payment process, must be explained in the policy and the policy must specify whether or not certification is required.
There must be a description of the appeals process should a claim be denied.
Life Insurance Policies with Accelerated Benefits
While many professionals feel it is best to keep benefits for death and benefits for long-term care separate, there are life insurance policies that will accelerate death benefits for use for long-term care services. When this is the case, disclosure of tax consequences of life proceeds payout must be in the policy.
How is one to know if the life policy has the option of accelerated benefits? Treatment of coverage provided as part of a life insurance contract, except as otherwise provided in state regulations, generally apply if the portion of the contract providing such coverage is a separate contract. While it is always necessary to refer to the actual policy, the term “portion” means only the terms and benefits under a life insurance contract that are in addition to the terms and benefits under the contract without regard to long-term care insurance coverage.
Nonforfeiture Provisions
Generally a nonforfeiture provision must meet specific requirements:
Extension of Benefits
When policies include extension of benefits, these must be available without prejudice regarding benefits that have already been paid for prior institutionalization or care.
Home Health & Community Care
Minimum standards and benefits must be established for home health and community care in long-term care insurance policies.
Additional Provisions for Group Policies
Many companies are curtailing insurance benefits in major medical coverage so it is doubtful that group long-term care coverage will be offered to any great extent. However, where it is, there must be provisions for individuals to continue their coverage when they leave the group plan. Individuals who are covered under a discontinued policy must be offered coverage under a replacement contract.
Outline of Coverage
In general an Outline of Coverage must be provided at the time of the initial solicitation. As it pertains to the agent, it must be presented during the completion of the application. There is a prescribed standard format for the Outline of Coverage in a long-term care policy. The content of the Outline of Coverage is also stipulated. Use of specific text and sequence is mandatory as is a list of categories that include:
· Benefits and coverage;
· Exclusions and limitations;
· Continuance and discontinuance terms;
· Change in premium terms;
· Any policy return and refund rights;
· The relationship of cost of care and benefits; and
· Tax status.
There must also be consumer contacts within the Outline of Coverage.
Policy Delivery
Once the policy has been approved and issued, the buyer must receive it within 30 days of approval. The policy must also include a policy summary.
No Field Issued LTC Policies
There was a time when long-term care policies could be field issued by the agent because underwriting was completed when a claim was filed rather than at policy issuance. Field issued policies are not allowed under the Model Act and Regulation since it is not good for the consumer. Policies must be underwritten prior to policy issuance.
Policy Advertising and Marketing
Prior to advertising a policy for long-term care benefits, whether it will be viewed on television, heard over the radio, or read in print, it must be approved by the state’s insurance commissioner’s office.
Any company marketing long-term care policies have standards that must be followed. There must be marketing procedures established and state training requirements for agents must be followed. The NAIC is recommending that states adopt a Partnership training requirement of eight initial hours of continuing education, followed by four hours each licensing renewal period thereafter.
The point of training agents is to ensure that marketing activities will be fair and accurate. Training will hopefully prevent a single person from over-insuring as well.
No Policy Covers Everything
As we previously discussed in this text, no policy covers everything. LTC policies must prominently display a notice to buyers that the policy may not cover all the costs associated with long-term care services. Even when agents have discussed what will not be covered, most claims will occur ten or twenty years later. It would be unlikely that the buyers would remember what the agent said and it certainly makes sense to state this in the policy as well.
Prior to the Sale
Agents and insurers have pre-sale responsibilities. They must provide the applicant with copies of personal worksheets and potential rate increase disclosure forms. They must also identify whether or not the applicant has long-term care insurance or coverage elsewhere. If there is existing coverage, the agent must find out if the applicant intends to replace the existing LTC policy with the new coverage.
The insurer must establish procedures for verifying compliance with the requirements. Written notice must be given that senior insurance counseling programs are available and provide contact information.
Such terms as “non-cancelable” or “level premium” may be used only when the policy conforms. There must be an explanation of contingent benefits upon policy lapse.
Shopper’s Guide
A Shopper’s Guide must be given to the consumer prior to the application for long-term care coverage. If it is a direct solicitation, it must be provided at the time of application.
It’s Just Plain Illegal: Twisting and High-Pressure Tactics
Some practices are just plain illegal. This would include what is referred to as “twisting,” which means using the facts to suit one’s own needs (not the needs of the consumer). A person who uses twisting is either changing the facts to suit their own needs or providing some facts, but omitting others in order to complete the sale. It might be omitting information that should be disclosed, or it might be stating facts in a way that will allow the consumer to assume that which is not true. Often twisting is used to make an existing policy appear unfavorable, when in fact the policy is appropriate for the consumer.
High pressure tactics are not new to the insurance industry, but it is illegal. Agents who pressure people into buying are not really helping themselves anyway, since these individuals are very likely to cancel the policy (which means lost commissions too).
Of course, any misrepresentation of the policies, the insurers, or any aspect related to the sale of insurance is illegal.
Association Marketing
There are also requirements for those who market to association members. Marketers must provide objective information; specified disclosures, compensation arrangements and all brochures or advertisements must be truthful.
Following the Sale
The consumer’s rights continue after the sale has been made. They have the right to return the policy if it does not meet their needs or even if they just plain change their minds. No reason for returning the policy needs to be given by the insured. As long as it is returned within 30 days a full refund will be received.
If the applicant failed to provide full information an incontestability provision exists. For material misrepresentation, the time period for rescinding the policy is six months. A misrepresentation pertaining to both material information and medical conditions the time period is two years for policy rescission. Information that was knowingly and intentionally misrepresented may cause a policy rescission for more than two years. When a policy is rescinded, benefits may not be recovered.
Failure to Pay Premiums
When a policy is in danger of lapsing due to nonpayment of premiums, the insurer has some obligations. It must notify the insured 30 days after the premium is due and unpaid. After 5 days of mailing the notice, it can be assumed that the insured has received it. Termination would be effective 30 days after the notice was given to the insured and the designated third party.
In Conclusion
Long-term care insurance has been closely observed by the NAIC since the product’s introduction. The NAIC developed its Long-Term Care Insurance Model Act and Regulation in the 1980s with the intent of promoting the availability of coverage, protecting applicants from unfair or deceptive sales or enrollment practices, facilitating public understanding and comparison of coverages, and facilitating flexibility and innovation in the development of long-term care insurance. Generally, the NAIC Model Act and Regulation establish:
End of Chapter Three
United Insurance Educators, Inc.