Chapter 5 - Inflation and Suitability

Future Purchase Option (Not Automatic)

A policy option that permits an increase in benefit levels periodically throughout the term of the policy (i.e., once every two or three years). If the insured utilizes the option to increase benefit levels each time it is offered, he or she generally does not have to provide proof of insurability. However, if a benefit level increase is purchased, a premium charge will apply and increase the premium for the LTC insurance policy. A future purchase option (FPO) is NOT a form of automatic inflation protection. It is an option the policyholder purchases to permit periodic benefit level increases during the life of the policy, usually at intervals of every two or three years for a specified period-of-time. If the policyholder utilizes the option to increase benefit levels each time it is offered, the insured is usually not required to provide evidence of insurability. However, if a benefit level increase is purchased, an additional premium will apply and will increase the policy's total annual premium. FPO premiums are based on the insured's age at the time of purchase as well as the additional amount of benefit purchased. FPOs vary greatly by insurer. If the policyholder chooses not to purchase an increase in benefit when it is offered, some contracts do NOT make the option available in the future. Other contracts only withdraw future option offers if the policyholder chooses not to elect an option offer two or more time in a row. Producers should read the policy to see how FPOs are affected by declinations to purchase additional coverage. In addition, they should understand and explain to the policyholder whether the policy will offer benefit level increases while the policy is actually paying benefits; most policies do not. Available options when selecting inflation protection coverage must be reviewed carefully. What may appear to be the best alternative for one consumer will not be appropriate or suitable for another. The following considerations should be taken under advisement when choosing inflation protection options: Policies that include automatic inflation protection options generally cost more than those without them When a premium charge applies to an automatic inflation protection option, it will be higher when interest is compounded than if it is applied on a simple basis; the premium will also be higher as the interest rate increases If purchasing an automatic inflation option, the age of the insured is an important issue; it is more likely that inflation will impact benefits significantly for younger insureds Policies that include automatic inflation protection provisions usually have higher premiums than those with FPOs; however, if the policyholder purchases all available benefit increases under an FPO, the ultimate combined premiums of the base policy and options may actually exceed the premium for a policy with an automatic inflation provision Premiums are not guaranteed, regardless of the inflation option chosen If choosing not to purchase inflation protection, the consumer should plan to fund the difference between the actual cost of care in the future and the benefit level provided by the policy

Client Understanding of the Claim Process

Another suitability issue is the importance of confirming the client's knowledge about the basis for the payment of claims. Specifically, producers should verify that clients have a clear understanding of: What the activities of daily living are, what cognitive impairment is, and how these conditions trigger the policy's benefits What the policy's ancillary benefits and features are, such as homemaker services, and that they do not provide coverage until the policy's other benefits are triggered How the 90-day certification works and its importance in triggering benefits How the elimination period works and that no benefits are paid during the elimination period What the policy's exclusions are and the fact that they will be required to pay the costs of care associated with excluded conditions What the policy's benefit period is, and/or what the policy's maximum benefits are, and that the policyholder is responsible for all costs of long-term care once they are depleted

Client Understanding of Policy Limitations and Restrictions

Any policy limitations and/or restrictions should be explained. For example, some restrictions are included in the definitions section of the policy form. Producers and policyholders cannot simply look at the benefit provisions, exclusions, and limitations sections of the LTCi contract to understand it; the entire contract must be read. Claude Thau, an acknowledged expert in the long-term care industry, makes the following recommendations to producers who sell LTC insurance: Do not use the phrase unlimited with respect to benefits. LTC insurance policies contain many limitations and restrictions. Avoid the risk of clients losing sight of those limitations because they mistakenly believe the policy's benefits are unlimited. Do not use the phrase inflation protection without making it clear the provision is intended to offset inflation rather than erase its effects absolutely. CPI-linked benefits are not guaranteed to keep pace with inflation. Do not describe the policy's elimination period as the period during which the policyholder must pay for his or her own costs of LTC. Such a statement implies clients will not have to pay for long-term care costs once the elimination period has expired. If LTC costs exceed the insurance policy's benefits, the policyholder will still be required to contribute to the cost of care although the elimination period has been met. Do not suggest that consumers do not need long benefit periods. Although statistics show few people need long benefit periods, some people do actually need them and their numbers may increase in the future. If long benefit periods were never needed, they would be priced at the same level shorter benefit periods are priced.

Inflation

Because long-term care insurance is intended to last for the lifetime of the insured, inflation protection is one of the most important features of the LTCi contract. Inflation The rate at which the general level of prices for goods and services increases over time and, as a result, the rate at which the purchasing power of cash falls over time. If the rate of inflation is 5% and it costs $1.00 to buy a cup of coffee this year, it will cost $1.05 to buy the same cup of coffee next year. Because it costs more money to buy the cup of coffee next year, the inherent value of $1.00 has fallen. According to the Federal Reserve: "Inflation occurs when the prices of goods and services increase over time." Inflation is not specific, nor can it be applied specifically to a single product or service. The term inflation refers to "a general increase in the overall price level of the goods and services in the economy." In some economies inflation increases rapidly; in others, it increases slowly.

Replacement

California law considers a long-term care insurance policy replacement that results in a decrease in benefits and an increase in premium to be an unnecessary replacement. Unnecessary replacements of LTCi in California are prohibited. When replacing insurance, agents must use the Notice to Applicant Regarding Replacement of Accident and Sickness and Long-Term Care Insurance (see Appendix IV). LTCi in California is subject to replacement laws for the protection of consumers against unscrupulous sales practices. For this reason, if an insurer replaces a LTCi policy it issued previously, it must credit the previous policy's premiums to the insured under the replacement policy. The premium credit must equal 5% of the prior policy's annual premium for each full year the policy was in force; however, the total credit cannot exceed 50%. In addition, the premium credit must be applied toward all future premiums for the replacement policy. Insurers are not required to provide this replacement credit if a claim was filed under the original policy. When issuing group LTCi coverage, insurers must contain a provision that allows the individual certificate holders to continue or convert their coverage if the group insurance terminates for any reason other than the following two reasons: Nonpayment of premium by the insured The terminated group coverage is replaced within 31 days, if it:Provides the same substantial benefits provided by the original coverageCalculates premiums based on the insured's age at the time the original group coverage was issued

Required Disclosures and Notices

Cancellation No LTC insurance policy can be canceled or non-renewed based on age or the mental or physical health condition of the insured. New Waiting Period No LTC insurance conversion or replacement can establish a new waiting period other than for a voluntary increase in benefits. Skilled Nursing Care Only No LTC insurance can only provide coverage for skilled nursing care or provide significantly more coverage for skilled care in a facility than it does for coverage for lower levels of care. Pre-existing Conditions No long-term care insurance coverage, other than a group policy, can define "pre-existing condition" more restrictively than "a condition for which medical advice or treatment was recommended by, or received from, a provider of health care services with 6 months preceding the effective date of coverage." In addition, no long-term care coverage (other than a group policy) can exclude coverage for a loss or confinement that is the result of a pre-existing condition unless it begins within six months of the policy's effective date. Long-term care insurance policies and certificates cannot exclude or use waivers or riders to exclude, limit, or reduce coverage of benefits for specifically named or described pre-existing diseases or physical conditions beyond the waiting period. Prior Hospitalization No LTC insurance may condition eligibility based on a prior hospitalization requirement or the receipt of prior care in an institutional setting. In addition, if LTC insurance provides post-containment, post-acute, or recuperative benefits, it must clearly state any limitations or conditions on eligibility for benefits and may not require a prior institutional stay of more than 30 days. Free Look Period LTC insurance policies must contain a free look period of at least 30 days from the date of policy delivery during which the insured may receive a full premium refund if deciding not to accept the policy. The insured may decline to accept the policy for any reason. Outline of Coverage An outline of coverage must be delivered to a prospective LTC insurance applicant at the time of initial solicitation. The outline must meet formatting requirements of the department of insurance and agents must deliver the outline before presenting an application for insurance or an enrollment form. The outline of coverage must include a: Description of the policy's principal benefits and coverage Statement that includes the policy's principal exclusions, reductions, and limitations Statement of the policy's terms under which the policy's premiums may be changed or the policy may be continued or discontinued Statement that the outline is a summary and not a contract of insurance Description of the terms under which the policy may be returned for a premium refund Brief description of the relationship between the costs of care and benefits Statement about whether the policy is tax-qualified under IRC Section 7702B(b) Policy Delivery within 30 Days of Approval If a LTC insurance application is approved, the policy must be delivered within 30 days of the approval date. Policy Summary A policy summary must be delivered with the policy and must include: An explanation about how the LTC insurance benefits interact with other parts of the policy, including deductions from any death benefits An illustration of the amounts of benefits, the length of those benefits, and any guaranteed lifetime benefits for each person covered by the policy Any exclusions, reductions, or limitations on LTC benefits A statement that any LTC inflation protection option is either chosen or declined If applicable, disclosures pertaining to the effects of exercising policy rights, any guarantees related to LTC costs of insurance charges, and current and projected maximum lifetime benefits Monthly Report of Accelerated Benefits If an accelerated benefit option funded through life insurance is in payment status, the insurer must provide the insured with a monthly report of LTC benefits paid out during the month, an explanation of any policy changes pertaining to the monthly payout (i.e., reduction in death benefits or values), and the amount of remaining LTC insurance benefits. Unintentional Lapse No individual long-term care policy may be issued until the insurer has received from the applicant either: A written designation of at least one person, in addition to the applicant, who is to receive notice of policy lapse or termination for nonpayment of premium within 30 days prior to the effective date of such termination or lapse A written waiver dated and signed by the applicant electing not to designate additional persons to receive notice An applicant for long-term care insurance has the right to designate at least one person who is to receive the notice of termination, in addition to the insured. Designation does not constitute acceptance of any liability on the third party for services provided to the insured. In the case of an applicant who elects not to designate an additional person, the waiver must state: Protection against unintended lapse. I understand that I have the right to designate at least one (1) person other than myself to receive notice of lapse or termination of this insurance policy for nonpayment of premium. I understand that notice will not be given until thirty (30) days after a premium is due and unpaid. I elect NOT to designate a person to receive this notice. A policyholder has the right to change his or her written designation no less often than once every 2 years. Long-term care insurance policies must provide for reinstatement of coverage within 5 months after termination in the event of lapse if the policyholder was cognitively impaired or had a loss of functional capacity before the grace period. The notice of lapse must be given by first class United States mail, postage prepaid, and may not be given until 30 days after a premium is due and unpaid. Notice is deemed to have been given as of five days after the date of mailing. Renewability Long-term care insurance policies must contain a renewability provision. The renewability provision must be appropriately captioned, must appear on the first page of the policy, and must clearly state that coverage is guaranteed renewable or non-cancellable. This provision does not apply to policies that do not contain a renewability provision, such as long-term care insurance policies that are part of, or combined with, life insurance policies. (Life insurance policies generally do not contain renewability provisions.) Rates A long-term care insurance policy/certificate, other than one where the issuer does not have the right to change the premium, must include a statement that premium rates may change. Riders & Endorsements All riders and endorsements that reduce or eliminate policy benefits or coverage must require signed acceptance by the insured if they are added after the policy's issue date, at the time of reinstatement, or at renewal. This is not the case if the rider or endorsement was requested in writing by the insured. After the policy's issue date, if any rider or endorsement that increases benefits or coverage during the policy term includes an associated additional premium, the insured must agree in writing unless the increased benefits or coverage are required by law. If a separate additional premium is charged for benefits provided in connection with riders or endorsements, the premium charge must be set forth in the policy, rider, or endorsement. Payment of Benefits The NAIC model regulation requires a long-term care insurance policy that provides for the payment of benefits based on standards described as usual and customary, reasonable and customary, or with words of similar meaning to include a definition of the terms. However, in California, LTCi contracts cannot make benefit payments based on standards described as usual and customary, reasonable and customary, etc. Prohibition against Post-Claim Underwriting All applications for long-term care insurance, except those submitted on a guaranteed issue basis, must contain clear and unambiguous questions designed to disclose the health condition of the applicant. If a condition listed in the application, or medications being taken by the applicant, were known by the insurer to be directly related to a medical condition for which coverage would otherwise be denied, the policy may not be rescinded for that condition. In addition, this requirement applies if the insurer should have known at the time of application the disclosed condition or medication was directly related to a medical condition that is grounds for denial of coverage. Before issuance of a long-term care insurance policy to an applicant age 80 or older, the insurer must obtain one of the following: A report of a physical examination An assessment of functional capacity An attending physician's statement Copies of medical records Except for policies or certificates that are issued on a guaranteed issue basis, the following language must be set out conspicuously and in close conjunction with the applicant's signature block on an application for LTC insurance: Caution: If your answers on this application, to the best of your knowledge and belief, are incorrect or untrue, (insurer name) has the right to deny benefits or rescind your policy. The following language, or language substantially similar to the following, must be set out conspicuously on the policy/certificate when it is delivered to the policyholder: Caution: The issuance of this insurance (policy or certificate) is based upon your responses to the questions on your application. A copy of your (application or enrollment form) (is enclosed or was retained by you when you applied). If your answers, to the best of your knowledge and belief, are incorrect or untrue, the insurer has the right to deny benefits or rescind your policy. The best time to clear up any questions is now, before a claim arises! If, for any reason, any of your answers are ncorrect, contact the insurer at this address: (insert address). Tax Consequences With respect to life insurance policies that provide an accelerated benefit for long-term care, a disclosure statement must be included that states the receipt of accelerated benefits may be taxable and that assistance should be sought from a personal tax advisor. The disclosure statement is required at the time of application and must be displayed prominently on the first page of the policy or rider and any other related documents. This paragraph does not apply to qualified long-term care insurance contracts. Benefit Triggers Activities of daily living and cognitive impairment must be used to measure an insured's need for long-term care and must be described in the policy or certificate in a separate paragraph labeled, "Eligibility for the Payment of Benefits." Any additional benefit triggers must also be explained in this section. If the triggers vary for different benefits, explanation of the triggers must accompany each benefit description. If an attending physician or other specified person must certify a certain level of functional dependency to be eligible for benefits, those specifics must also be disclosed. Claim Denial If a long-term care insurance claim is denied, the insurance company must provide a written explanation of the denial within 60 days of receiving the insured's written request the explanation. The written explanation must make all information related to the claim denial available to the insured.

Other CA Inflation Protection Requirements

In addition to the requirements of California law that have already been discussed, the following requirements apply when insurers offer each applicant the offer of inflation protection: The requirement to offer inflation protection does not apply to life insurance policies or riders that provide accelerated benefits for long-term care Insurers must offer the group policyholder (not the certificate holders) the offer of inflation protection coverage to be extended to existing certificate holders Inflation protection benefit increases cannot be limited based on the insured's age, claim status, claim history, or the length of time insured by the policy Inflation protection benefit increases cannot be reduced due to the payment of claims When offering automatic inflation protection benefit increases, insurers must offer premiums they expect to remain level and, unless the premiums are guaranteed to remain level, must disclose that the premium may change in the future Insurers must post on their websites the fact that specimen LTCi policies are available to prospective applicants upon request. In addition, they must provide written notice at the time LTCi coverage is solicited. The specimen policy must be provided within 15 calendar days of the insurer receiving the prospective applicant's request.

Types of Inflation Protection

Inflation protection on an LTCi policy is usually provided as a provision in the policy, or through a special offer called a Future Purchase Option (FPO).

Con'd

Many LTC insurance companies allow businesses to offer multi-life LTCi contracts to their employees. This process involves the sale of individual contracts that are "bundled" for a group situation rather than the sale of a single group policy to an employer. Major advantages of multi-life LTCi coverage include: Employer flexibility with respect to offering coverage to different classes of employees Policy premium discounts (i.e., typically 5% to 15%) Individual policies generally offer more coverage options than true group policies do Portability - If an employee terminates employment or membership in a union, group, or association, he or she keeps the policy and assumes all premium payments The major disadvantage of multi-life LTCi is the fact that each individual contract is medically underwritten. However, in some circumstance, if a very large group is bundling policies, a carrier may allow special underwriting considerations. If a group LTCi policy issued in another state is offered to a California resident, the group policy must meet the same requirements of law that a California-issued policy must meet. In addition, the insurer must make a filing with the Department at least 30 days before it advertises, markets, or offers coverage in California. The filing must include the following materials: A specimen master policy and certificate An outline of coverage Sample advertising materials to be used in California

Personal Worksheet

Most state governments have mandated LTCi applicants to complete a Personal Worksheet to verify they have reviewed the sources of funds that will be used to pay LTC insurance premiums and whether income is likely to increase, decrease, or remain constant over the next 10 years. (See Appendix A.) The worksheet stipulates a guideline that consumers avoid spending more than 7% of their incomes for LTC insurance; the guideline applies to people who will rely solely on income as a source of funds to pay LTC insurance premiums.

Cont'd

Quite often, insurance products use the Consumer Price Index (CPI) as a measure of performance over time, usually with respect to interest rates. However, the CPI is not a true cost-of-living index. Because a cost-of-living index (COLI) is "a conceptual measurement goal," it takes into consideration changes over time that are necessary for Americans to attain a particular standard of living, which the CPI does not. In addition, a true cost-of-living index will consider factors pertaining to the government and environment that affect consumers, their lifestyles, and their welfare. Because long-term care services are not tangible products like cars or houses are, it is difficult to calculate how they will be affected by inflation—even when using the CPI. LTCi is in its adolescence as a product; it has existed for only a few decades. This factor amplifies the difficulty when trying to gauge inflation's effect on long-term care services. The significant LTCi premium rate increases of the 1980s and 1990s illustrate clearly how difficult insurance companies found the process of anticipating the level to which the cost of long-term care services would rise over time. The state of California requires all insurance companies issuing LTCi to offer all applicants inflation protection at the time of purchase. The offer must include benefit levels and maximums that increase based on reasonably anticipated increases in the costs of long-term care services covered by the policy. If the policyholder does not reject the offer of inflation protection in writing, coverage must be included. The written rejection must contain the following language, verbatim, and be submitted as a separate document: I have reviewed the outline of coverage and the graphs that compare the benefits and premiums of this policy with and without inflation protection. Specifically, I have reviewed the plan and I reject 5% annual compound inflation protection.

Recommendation of Appropriate Benefit Period

Recommending an appropriate benefit period is a suitability issue that often depends upon a client's risk tolerance profile, risk exposure profile, and affordability. A lifetime benefit period best fits the classic scenario of insuring events that are unlikely to occur, but would involve great severity if they do occur. Of course, these factors vary among insurers and by the age and circumstances of the insured. A client may be motivated to buy LTCi because he or she fears a potential need for long-term care and services for a very long period-of-time. Peace of mind might require the client to purchase protection against a catastrophic LTC event. If the client chooses a large deductible on an auto or health insurance policy, or is interested in a long LTCi elimination period, he or she is probably most concerned about a catastrophic loss. On the other hand, a client may be more focused on covering the occurrence most likely to occur than on spending additional dollars to cover a contingency far less likely to occur. Such an individual is more apt to choose a lower deductible on an auto or health insurance policy and a short LTC insurance elimination period. When recommending shorter benefit periods, shared care features become more significant when two people are insured—such as a husband and a wife. Generally, shared care combines two policies so that instead of each policy having a separate benefit period (i.e., five years), the policies share a single benefit period (i.e., ten years). If either person uses up the five-year benefit period on his or her policy, it is almost certain the coverage purchased was not sufficient. In other words, if an individual exhausts his or her LTC insurance, it is unlikely he or she will recover or die at the exact moment the last dollar of benefits is used. Therefore, if one of the pair needs more benefits than provided by a single five-year benefit period, the opportunity to dip into the other person's benefit period can be of great value. However, the more coverage one person uses from another person's benefit period, the less coverage is available for the second person if he or she should also require LTC services. It is unlikely both individuals will need benefits for long periods, so shared care is sometimes an attractive alternative to lifetime benefit periods. If one person dies, the survivor is entitled to any remaining coverage; if the deceased person did not use any benefits, the survivor would be able to take advantage of the entire benefit period.

NAIC Suitability Standards

The NAIC's Long-Term Care Model Regulation includes the following suitability guidelines: LTC suitability does not apply to life insurance policies that accelerate benefits for LTC. Every insurer that markets LTC insurance must:Develop and use suitability standards to determine if the purchase or replacement of LTC insurance is appropriate for the applicant's needsTrain producers in the use of its suitability standardsMaintain a copy of its suitability standards and make them available to the insurance department Every insurer and producer should use the following factors when considering whether the applicant meets insurer's suitability guidelines:The applicant's financial information and ability to pay premiums for desired coverage and featuresAdvantages and disadvantages of the proposed insurance with respect to meeting the applicant's needs and goals as they pertain to long-term care and servicesWhen considering a new LTC insurance purchase or replacement, the values, benefits, and costs of any existing insurance when compared to the new or replacement coverage Every insurer and, if involved in the purchase of LTC, every producer, must make reasonable efforts to collect all pertinent financial information along with insured's LTC goals and needs, including the Personal Worksheet (which must be completed at or before submission of the application) A disclosure form titled "Things You Should Know Before You Buy Long-Term Care Insurance" must be provided when the Personal Worksheet is provided An insurer cannot consider a LTC insurance application for coverage without a completed Personal Worksheet; an exception exists for employer group LTC insurance sales Insurers and producers are prohibited from selling or disseminating information contained on the Personal Worksheet outside the company or agency Insurers must develop and use their own suitability standards, which must be based on the NAIC suitability standards Producers must use the insurer's suitability standards when marketing LTC insurance Insurers may decline LTC insurance applications if the applicant does not meet financial suitability standards or refuses to provide required financial information If an applicant declines to provide financial information on a LTC insurance application, the insurer may use another method to verify the applicant's intentions with respect to the purchase of LTC insurance, including a letter confirming suitability Insurers must provide to the Commissioner an annual report that contains the total number of LTC insurance:Applications it receives from state residentsApplicants who refused to provide information on the Personal WorksheetApplicants who failed to meet suitability standardsApplicants who chose to provide or verify information after receiving a suitability letter

Inflation Protection

The inflation protection offer can be no less favorable than at least one of the following: An annual benefit level increase of at least 5%, compounded annually A guaranteed right for the insured to increase benefit levels periodically without evidence of insurability and without regard to health or claim status, age, claims history, or policy term This right is only guaranteed if the insured did not decline this particular offer the previous time it was offered The additional benefit can be no less than the difference between the policy's current benefit and that benefit compounded annually at 5% when applied to the benefit for the year prior to the most recent offer A specific percentage of the actual or reasonable charges without including a maximum specified indemnity limit Insurers must extend the same inflation protection offer to group LTCi policyholders for the benefit of the existing individual certificate holders. However, the insurer is no longer required to extend the inflation offer once the group policyholder declines the offer. Life insurance with accelerated benefits for LTC are exempt from requirements to offer inflation protection.

Suitability

The most important component of the LTCi sales process is for the producer to do everything possible to match the product sold with the client's future long-term care plans and goals. Specifically, the producer should confirm: The insured is a fitting candidate for long-term care insurance based on age, financial condition, level of product knowledge, timing, and other factors The policyholder understands the LTC insurance policy was designed to remain in force for the duration of the insured's life and is committed to retaining it The policyholder can pay for the policy for the duration of the insured's life The policyholder and the insured have reasonable expectations with respect to the policy, its benefits, and its features The appropriate forms of coverage and benefit levels are selected The insurance carrier is financially stable, ethically sound, and an appropriate match for the client Any replacement is carried out legally, ethically, and in the client's best interests To maximize the likelihood that LTCi will be in effect when needed, it is important to substantiate that the client can both afford to buy the insurance today and afford paying for it in the future, particularly during retirement. If the client is unsure about the ability to obtain the policy, or maintain it in the future, the purchase of long-term care insurance may not be appropriate. The producer and client should consider the client's likely post-retirement income and determine whether continuing to pay premiums at that time is possible. Considerations should include the client's future income, anticipated savings, the expected premium amount, tax deductibility, and other expenses that might be incurred. Considerations should also include expenditures that might disappear before or during retirement.

Inflation and Group LTCi

Under Section 10231.6 of California Insurance Code, group long-term care insurance is a policy issued in California to any of the following: One or more employers purchasing coverage for the benefit of employees, and/or one or more labor unions purchasing coverage for the benefit of members A professional, trade, or occupational association purchasing coverage for the benefit of its members and/or retired members; the association must be formed for purposes other than obtaining insurance and its members must all be actively engaged in the same profession, trade, or occupation An association maintained for the benefit of the members of one or more associations and that purchases coverage for the benefit of those members; the association must have at least 100 members when it is established, have been in active existence for more than one year, and meet other requirements Any other group that meets specific requirements of the Department True group LTCi is not widely available due to several factors. Most true group LTCi plans are issued on a guaranteed issue basis for full-time employees who voluntarily opt to purchase coverage. This means employees are not required to participate and, if they do, they pay the full premiums themselves. Obviously, insurers are very selective when offering this type of coverage because they do not want to insure a group that consists of individuals with health conditions that create an adverse selection situation. The costs of administering a true group plan tend to be higher than those of administering individual policies do because the pricing of group LTCi is generally less than the pricing for individual LTCi policies is.

Automatic Inflation Protection

When automatic inflation protection is provided, the daily benefit provided by the policy increases annually at a stated interest rate, usually 5%, for a fixed number of years (i.e., 10 or 20), or until a specified attained age (i.e., age 80 or 85). Automatic inflation protection is usually offered as a provision in the policy and does not incur any additional premium because the cost of this feature is built into the policy premium. Of course, policies that include this provision will usually have a higher premium than policies that do not include it. Interest may be applied on a simple or compound basis. Simple interest rates increase the benefit level by a stated dollar amount each year. Compound interest rates increase the benefit level by an increasing dollar amount each year. Although inflation protection that includes the application of compound interest is more attractive to the policyholder, not all policies will apply compound interest. As previously stated, the laws in each state govern LTC insurance and the required offer of inflation protection. Producers should check with their state's department of insurance to learn if LTCi contracts are required to include compound interest in their automatic inflation protection provisions. All individual TAX-QUALIFIED long-term care insurance policies MUST offer automatic inflation protection options with COMPOUND interest. Statistics show the annual increase in the cost of care in a nursing home in recent years has been approximately 5%. If inflation were to continue at a rate of 5%, today's daily nursing home charge of $150 per day would be: If using compound interest, $398 in 20 years If using simple interest, $300 in 20 years