522 Section 3: Long-Term Care Insurance

benefit period

Applicants can also choose the benefit period from several options such as 2, 3, 5 years and lifetime benefits.

more Characteristics of Individual Policies cont.

-Underwriting is based on the health of the insured. It is usually based on questionnaires rather than physical examinations (e.g. health of relatives and medical events affecting the insured). -Some insurers have several classifications. -Some policies have a 6 months preexisting-conditions provision. -LTC policies are guaranteed renewable, i.e. they cannot be cancelled except for nonpayment of premiums.

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-A classic sales argument is that people should consider purchasing long-term care insurance early because the premiums are lower. -This is true, but it has to be kept in mind that the premiums are paid for a longer period of time. -For example, the premium for the 5-yr contract is $1,150 at age 40 instead of $2,900 at age 60. -However, the additional premiums over the first 20 years represent an extra $1,150 x 20 = $23,000 expense.

Development of Insurance Coverage

-Early LTC policies were subject to criticism and prompted government intervention. Policies offered now are much more comprehensive. -LTC policies are typically subject to two sets of requirements: 1. NAIC has a model legislation which is adopted by most states and tends to be amended every year. (All policies must satisfy the NAIC requirements.) 2. HIPAA specifies requirements that a policy must satisfy in order to receive favorable tax treatment. (Only "qualified" policies must meet the HIPAA requirements.)

more characteristics of individual policies

-Most states require that LTC policies offer some type of inflation protection. A typical provision is a 5% annual increase in benefits. -With most tax-qualified contracts, the HIPAA definition of eligibility is used (see criteria on earlier slide). Most contracts specify that Alzheimer's disease is covered.

LTCI: Taxation

For federal taxation, a qualified LTC contract is treated as accident and health insurance: -Self-employed persons may deduct the premiums paid, and persons who itemize deductions can include the cost of LTC services (including insurance premiums) for purpose of deducting medical expenses. (subject to a cap) -Employer contributions for group contracts are deductible to the employer and do not result in any taxable income to an employee. -Benefits received under a qualified LTC contract are usually received tax-free by an employee.

nonforfeiture benefits

Similarly to life insurance policies, LTC policies often have nonforfeiture benefits which allow the insured to receive some value if the policy lapses because the required premium is not paid in the future. -One common option is a shortened benefit period. -Some non-tax qualified policies offer a return-of-premium option, under which a portion of the premium is returned if a policy lapses after a specified number of years.

HIPAA Requirements: qualified long term care services and chronically ill

The Act defines qualified long-term care services as necessary, diagnostic, preventive, therapeutic, curing, treating, and rehabilitative services, and maintenance or personal care services that are required by a chronically ill person and are provided by a plan of care prescribed by a licensed health care practitioner.

NAIC Model Legislation

The NAIC Model Legislation requirements can be divided into those that apply to "policy provisions" and "marketing". Here are a few examples of these requirements: -Limitations and exclusions are prohibited, except for preexisting conditions, mental or nervous disorders (other than Alzheimer's), alcoholism and drug addiction, result of war, felony, or suicide, treatment in a government facility or services available from Medicare. -Preexisting conditions can only be excluded for 6 months -Applicants must be given the right to purchase inflation protection and nonforfeiture benefits.

Characteristics of Individual policies

-Individual long term care policies are not standardized. There is a wide range of contracts available in the market. -Issue Age. At a minimum, a healthy person between the ages of 40 and 79 is eligible for coverage from most insurance companies. Most companies also have an upper age in the range of 84 to 89, beyond which coverage is not issued. Some companies have no minimum age or sell policies starting at age 18.

Types of care covered:

-Nursing home care (encompasses skilled-nursing care, intermediate care, and custodial care in a licensed facility) -Assisted-living facility care (lower level of care) -Hospice care (for the dying patient and family members) -Alzheimer's facilities -Home health care (includes a variety of services) -Care coordination -Alternative plans of care (other cost-effective alternatives may be accepted by insurer)

elimination period

Applicants can choose an elimination period from a set of choices, which may be as low as 0 days or as high as 365 days.

Importance of Long-Term Care Planning

-Population is aging and proportion of over-85 will increase considerably. Proportion of the elderly with chronic conditions is also increasing. -Families may not be able to provide care. -Younger persons may also need LTC, e.g. because of handicaps, mental conditions, illnesses, or accidents. -Cost of nursing home care and home health care increases faster than inflation and represents 11% of national health care expenditures. -Average annual nursing home costs are over $70,000 for private accommodations. -Two visits a day by a home health aid to help with bathing and dressing and household chores can cost $2,500 a month. -Custodial care in a nursing home is typically not covered by medical expense policies & Medicare.

more on it ....

-Premiums are typically payable for life, although they could be paid for a number of years or up to a given age (e.g. 65). -Most LTC policies waive premiums if the insured has been receiving benefits under the policy for a specified period of time, often 60 or 90 days. Factors affecting premiums: Age, types of benefits, Duration of benefits, Inflation protection, Nonforfeiture benefits, Spousal coverage, Nonsmoker discount, Elimination period

Applicants select a daily (e.g. $10-$500/day) amount or a monthly amount of benefits (e.g. $1,000-$6,000/month). Same level applies to all institutional care and a lower level (e.g. 75%) usually applies to home health care. Benefits may be paid either on a:

-Reimbursement basis: reimburse the insured for actual expenses up to the specified policy limit -Per diem basis: payment independent of actual cost of care

Benefit variations:

-The earlier type of policies were known as facility-only policies and were designed to provide benefits only if the insured was in a nursing home. -To supplement this coverage, home health care policies were introduced to cover care outside an institutional setting. -Today, most policies are "comprehensive policies". -They provide benefits both for facility and home health care.

chronically ill individual

-The person is expected to be unable to perform, without substantial assistance from another person, at least two activities of daily living (ADLs) for at least 90 days due to loss of functional capacity. The act allows 6 ADLs: eating, bathing, dressing, transferring from bed to chair, using the toilet, and maintaining continence. A qualified LTC contract must contain at least 5 of the 6 ADLs. -Substantial supervision is required to protect the individual from threats to health and safety because of severe cognitive impairment.

Group Coverage

LTC is increasingly offered as an employee benefit. Main differences with groups: -Eligibility requires that an employee be full-time and actively at work. Coverage may be purchased for other dependents than the spouse (e.g. parents). -Cost is slightly lower than in individual market. Fewer choices with respect to benefit amounts, benefit duration, and the length of the elimination period.