Module 11 Long Term Care Insurance

List the reasons that insurance companies have been dissatisfied with the LTC insurance product structure.

(a) LTC insurers have been subject to reinvestment risk. Because interest rates have been low for so long, insurers are forced to invest cash flows from expiring assets at rates lower than what was previously assumed. (b) Asset-and-liability mismatch problem. The duration of LTC liabilities can be 20 years or more, but it is difficult to find assets with such long durations. (c) Use of genetic information in LTC underwriting. Insurers are concerned that the Genetic Information Nondiscrimination Act (GINA) may prevent the use of genetic information for underwriting, but potential policyholders may have this personal information, thus creating a situation for adverse selection. (d) Use of unisex rates. LTC policies have typically employed unisex rates, but this can be viewed as inequitable, since males have much lower claim costs than females. (e) Negative consequences when applying for rate increases. Bad publicity and even expensive class action lawsuits can result from applications to increase rates. (f ) Fewer agents and advisors discussing LTC insurance with their clientele. (g) No increase in actuarial expertise for LTC products. (h) Moral hazard. Beneficiaries (and their providers) may have a financial incentive to create or maintain disability. (i) Claim criteria. It is hard to objectively specify claim criteria due to the complexity of disability.(j) Data security issues. As systems have moved online, data security concerns (e.g., identity theft, confidentiality) have increased.

With regard to employee-paid LTC insurance premiums, what is the relevance of (a) Section 1035 exchanges and (b) Section 125 plans?

(a) The Pension Protection Act enables 1035 exchanges of existing annuity products to qualified LTC policies. This could be a potential avenue for financing an LTC policy without any adverse tax consequences. (b) Employers are not allowed to enable employee-paid premiums for qualified LTC insurance coverage through a Section 125 plan or a flexible spending account. LTC insurance is specifically excluded from these types of plans.

The typical LTC legacy product is flawed for several reasons and has produced an imbalance of risk and flexibility for both the carrier and the consumer. List the reasons that this is the case.

(a) The typical LTC legacy product was designed to satisfy multiple constituents (e.g. health code, insurance code, etc.) at the unintended expense of the consumer. (b) Legacy products build up level premium equity and require the policyholder to lose it if he or she exits the policy. (c) Legacy products are supported by investor capital, whereas the typical whole life contract does not rely solely on investor capital. (d) The legacy LTC carrier bears tremendous risk by attempting to project and match assets to liabilities for time horizons of up to 40 years. (e) Legacy carriers have made 40-year assumptions with respect to morbidity

The National Association of Insurance Commissioners (NAIC) has developed a set of minimum standards and practices that insurance organizations should abide by with regard to LTC insurance. What are some of the additional standards NAIC released to address various concerns and unfair practices present within the LTC insurance market?

Additional standards released by NAIC to address various concerns and unfair practices present within the LTC insurance market are: (a) The prohibition of postclaim underwriting practices to promote clarity for consumers during the policy issuance process and to prevent insurers from unjustifiably cancelling policies upon identification of a claim (b) Disclosure requirements to consumers and insurance companies during the policy replacement process, to mitigate the frequency of agents replacing existing policies with new ones simply for the additional commission (c) Suitability requirements, to ensure customer understanding of product details in order to identify the most appropriate policy type to suit their needs (d) Standards for the use of benefit triggers within an LTC policy.

What is the special tax treatment given to qualified LTC insurance contracts, and what are the major requirements of a qualified LTC policy?

All qualified LTC insurance contracts receive the special tax treatment provided to accident and health insurance contracts and employer-provided accident and health plans under the Internal Revenue Code (IRC). The favorable tax treatment accorded to qualified contracts includes the exclusion from gross income of amounts received as benefits under the contract, the exclusion from gross income of premiums paid by an employer on behalf of an employee for LTC insurance and the deduction of eligible LTC insurance premiums paid on the tax returns of the self-employed.The major requirements of a qualified policy include: (a) The policy must only provide coverage for qualified LTC services. (b) The policy cannot provide coverage for amounts reimbursable under a specified section of the Social Security Act. (c) The policy must be guaranteed renewable. (d) The policy must not provide a cash surrender value or other money that can be paid, assigned or pledged as collateral for a loan, or borrowed. (e) The policy must provide that all policyholder dividends and premium refunds be applied against future premiums or to increase benefits. (f ) The policy must provide certain consumer protection provisions

Explain the concern about meeting LTC needs with Medicaid benefits.

Although Medicaid does provide some LTC services for individuals who meet the needs-based eligibility requirements, Medicaid benefits may be scaled back (or eligibility tightened) in coming years due to the severity of fiscal constraints at both the state and federal government levels.

Consumers have been, and continue to be, generally resistant to buying LTC insurance. What are the complaints consumers have about this coverage?

Consumers have a number of complaints with LTC products. These complaints are: (a) Rate increases that have accompanied many LTC products. These increases, and the negative publicity generated by them, have eroded the public trust in insurance companies that sell LTC. The NAIC "rate stabilization law" of 2000 was meant to make rate increases rare, but the frequency of rate requests has been increasing due to the inconsistently adverse experience that has developed. (b) Inability to "walk away" from their policy after a large rate increase. Policyholders who are facing large rate increases cannot simply change carriers, because their higher age (and possibly lower health status) may make their new entry-level premiums even higher than what their current carrier is charging after the rate increase (if they are even insurable at all). Policyholders who choose to lapse their policies get back nothing, despite all the premiums they have paid. (c) Laborious process required to receive benefits. Policyholders who ultimately receive benefits have complained about the claims process (e.g. multiple phone calls and mountains of paperwork). (d) Too expensive. Many Americans simply resist purchasing LTC insurance, because it is perceived as being too expensive. NAIC suggests that individuals should not spend more than 7% of their annual income on LTC insurance and, following this rule, many consumers would not be able to afford this coverage. (e) LTC insurance does not fully cover the entire elderly disabled population. About half of this disabled population does not meet the eligibility requirements for tax-qualified LTC insurance policies due to not satisfying either the ADL trigger definitions or the cognitive impairment trigger of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). To be eligible for LTC benefits, the individual must be "unable to perform without substantial assistance from another individual at least two . . . ADLs . . . for at least 90 days due to a loss of functional capacity," or the individual requires "substantial supervision to protect himself or herself from threats to health and safety due to severe cognitive impairment." (f ) Using genetic testing in underwriting. Studies have shown a strong link between genetic composition and one's likelihood to develop Alzheimer's disease, and genetic testing can identify the presence of these gene markers which, if allowed as a rating factor, would increase rates on those affected. However, consumers feel that it is unfair to discriminate based on genetic factors, since (unlike lifestyle factors) one has no control over one's genetic composition or family history.

Describe the tax incentives that HIPAA extended to long-term care insurance plans.

HIPAA extended a variety of tax incentives to long-term care plans, including not requiring long-term care insurance providers to pay taxes on reserves, allowing for long-term care benefits to be paid out tax-free to claimants and enabling taxpayers who paid private long-term care insurance premiums to count these premiums as deductible medical expenses if their total medical expenses exceeded 7.5% of AGI. HIPAA also set forth the tax treatment of employer- and employee-paid long-term care insurance premiums. HIPAA stated that qualified long-term care insurance policies will be treated as accident and health insurance contracts

Why are many individual LTC policyholders unable to deduct the premiums paid for their policies?

IRC states that, generally, a taxpayer can only deduct premiums once the taxpayer's medical expenses exceed 10% of adjusted gross income (AGI). If LTC premiums were allowed as a deduction above the "AGI line" on an individual's federal tax return, similar to the treatment of contributions to retirement benefits or health insurance for the self-employed, more taxpayers would realize the benefits of such a deduction.

Describe the tax treatment of qualified LTC premiums paid by Subchapter C corporations.

If a Subchapter C corporation pays for qualified LTC insurance premiums for an employee, officer or owner, the amount is 100% deductible to the business as a business expense, and the premium is not considered compensation to the employee, officer or owner. These deductions are not in any way subject to the AGI or age-based limits discussed earlier. These premiums are also excluded from payroll taxes. In summary, the company gets a deduction, the employee does not get taxable income and the benefits are received tax-free. Even more powerful is the fact that these premiums can be paid for retired employees, eligible dependents and certain dependents after the employee's death

Describe the tax benefits of paying qualified LTC premiums for the self-employed.

If a self-employed individual pays qualified LTC insurance premiums, the tax treatment will be the same as above, except the individual will need to pay payroll taxes on the premiums paid, and the taxpayer will have to meet a variety of other requirements, such as having taxable income. If a self-employed or sole proprietor pays for qualified LTC premiums for his or her employees, the premiums paid will not be included in the employees' compensation, and the amounts will be deductible for the business.

Describe the tax treatment of LTC premiums paid by S corporations, partnerships and limited liability companies (LLCs).

If an S corporation, partnership or LLC pays premiums for an employee who is also an owner of the business, the premium is considered compensation. Such an individual is taxed as self-employed. The amount is fully deductible to the employer and taxable to the owner-employee. However, the owner-employee may deduct the amount of the premium paid by the employer up to the age-based limits that apply to individual purchasers of LTC insurance, as long as he or she satisfies the other IRC requirements. The owner-employee will not be subject to the AGI limit.

Describe the tax treatment of qualified LTC premiums paid by individuals who are not self-employed.

If an individual who is not self-employed pays qualified LTC insurance premiums, they are 100% deductible but subject to AGI and age-based limits. Premiums paid on such policies can be treated as medical expenses for purposes of the itemized medical deduction

Innovations in the LTC insurance market include partnership programs and combo,or linked, products. What are these innovations?

In a partnership program, insured individuals who become chronically disabled first draw on their private LTC insurance, albeit with a more limited benefit period than with traditional LTC plans. Then, when their benefits expire, they are eligible to receive publicly funded Medicaid.Combo, or linked, products involve an LTC rider sold jointly with either a life insurance policy (whole life or universal) or an annuity (immediate or deferred).

How does the expected health care inflation rate compare to the expected general rate of inflation?

In the 2010s, health care inflation is expected to continue to be significantly larger than the general inflation rate due to increased utilization of medical services and new medical technologies that escalate the cost of health care.

Indicate the status of the LTC insurance market in terms of individual versus group sales.

Individual sales of LTC products are much greater than group sales.

There have been several major areas in actuarial pricing assumptions for LTC products where reality turned out to be quite different from prior expectations. What were these assumptions that turned out to be incorrect, and how were they wrong?

Key assumptions that subsequently were proven to be incorrect were: (a) Investment income was lower than expected and has been insufficient to fund liabilities. This resulted from interest rates remaining low for so long. (b) Lapse rates turned out to be lower than expected. When a policyholder lapses or dies, his or her accumulated reserve is distributed to those who remain in the pool. Lower-than-expected active life terminations result in less-than-expected funds distributed to survivors and, therefore, inadequate assets to fund benefits. (c) Morbidity experience was higher than expected. Because LTC products are relatively new, there was not a large degree of credibility with experience when these products were priced. In addition, there is not yet a standard LTC morbidity table that companies can use to increase data credibility, which is especially a problem for insurers just entering the market when they cannot even rely on baseline projections. (d) Higher-than-expected margins were needed to account for adverse selection. The average issue age has trended younger recently and, with persistency rates continuing to fall, the duration of claims liabilities is lengthening so as to create significant long-tail risk. As the time horizon for blocks of LTC business increases, the confidence in model projections, especially those incorporating any type of lifetime guarantees, becomes shaky

List the type of services covered by LTC insurance.

LTC insurance may cover custodial care, home health care, hospice care, assisted living care, adult day care and skilled nursing care (although not short-term hospital stays). Many of these services are not covered by Medicare, despite the assumption by many elderly that they are

Can LTC plans be tailored to meet the needs of only a few highly compensated employees? Explain.

LTC plans can be tailored to meet the needs of only a few highly compensated employees or the entire workforce. IRC does not place any coverage limitations on LTC plans. IRC provides that a "plan may cover one or more employees, and there may be different plans for different employees or classes of employees."

What are ADLs and instrumental activities of daily living (IADLs)?

LTC services are intended to assist individuals in coping with and, to the extent practicable, compensate for a functional impairment in carrying out certain activities. ADLs are activities such as bathing, toileting, dressing, transferring and continence that people routinely do in conducting their lives. Long-term services may also include assistance with IADLs such as cooking, cleaning, shopping, taking public transportation, paying bills, maintaining a residence, using telephones and directories, and using a post office.

How is long-term care defined, and how is it distinguishable from other types of health care such as acute care, subacute care, intermediate care or respite care?

Long-term care is a set of health care, personal care and social services delivered over a sustained period of time to persons who have lost or never acquired some degree of functional capacity. Care provided through health insurance coverage, on the other hand, may include medical and therapeutic services required by an injured or ill individual, but such care generally has durational limits and ceases when the individual's recovery plateaus. Long-term care is ongoing chronic care.

Explain how Medicare does not provide coverage for LTC although many retirees believe it does.

Many retirees erroneously believe that Medicare, either through its basic or supplemental programs, pays for long-term nursing home care. However, Medicare does not cover LTC provided by either custodial or nonskilled workers; it only provides medically necessary care in skilled nursing facilities or, if ordered by a doctor, rehabilitative care in one's home. Medicare Part A will cover only up to 90 days for hospital inpatient stays (plus a limited number of reserve days) but with large copays. Coverage in a skilled nursing facility is subject to coverage limitations, deductibles and coinsurance. Thus, Medicare does not provide a comprehensive care package and, even for services it covers, the patient may be subject to significant out-of-pocket costs in the absence of additional private insurance.

Why are Medigap policies a significant reason for the rising costs of Medicare?

Medicare spending has increased substantially in absolute dollar amounts and as a percentage of gross domestic product (GDP). A significant reason for this increase is the fact that many individuals buy Medigap policies to fill in coverage gaps in basic Medicare (Parts A and B) so as to reduce their out-of-pocket costs, but this may also encourage unnecessary use of health care services and thus increase Medicare expenditures overall. Also, Medicare employs a prospective payment structure, whereby a hospital receives a fixed payment for a service that is not dependent on actual utilization and thus the hospital may get to pocket the remainder of payment for services not rendered.

What are the main reasons that Medicare and Medicaid provide extremely limited solutions to long-term care needs?

Medicare was not designed to support long-term care treatment. Medicaid was designed to cover a continuum of long-term care service settings but, as the number of individuals requiring extensive care grows, the budget is being strained.

The most appropriate segment of the population to which to market LTC insurance is the middle class. Discuss why the middle class has not yet embraced LTC insurance.

Middle class individuals may not embrace LTC insurance because they do not understand the risks that LTC insurance would mitigate, or they perceive the coverage as being too expensive. Perhaps they underestimate future costs associated with LTC. Middle class individuals may also still depend on informal care arrangements, or they might put greater precedence on other retirement risks. Furthermore, many recently retired Baby Boomers may be ineligible for private insurance, because of underwriting requirements, or may be charged prohibitively high premiums if they have already suffered a change in health status requiring chronic-based care.

Why is the pricing of LTC insurance often a very public debate?

Prior to 2000, the vast majority of insurers based their LTC pricing justification on expected loss ratio. However, given the long-tailed nature of the product and the lack of product-specific actuarial data, pricing could not rely on past performance to develop an adequate pricing structure. As a result, LTC policies were often rated far too low to cover losses. Large rate increases became necessary, and this created a "rate shock" for senior consumers who may have invested years in the product that was sold as having a level premium.

What is the rationale for the 90-day waiting period before benefits begin to be paid by qualified LTC policies?

Qualified LTC insurance services are provided to individuals who are chronically ill.IRC defines a chronically ill individual as one who has been certified by a licensed health care practitioner as unable to perform, without substantial assistance from another individual, at least two ADLs for a period of at least 90 days due to a loss of functional capacity. This framework established by IRC does not allow policyholders to receive benefits unless the period of disablement is expected to last at least 90 days.

What evidence is there that the federal government has tried to shift the burden of funding long-term care to the care recipient and his or her family and away from publicly funded programs like Medicare and Medicaid?

Repealed on January 1, 2013, the Community Living Assistance Services and Supports (CLASS) Act was designed to shift the cost of long-term care away from governmental sources by providing financial resources to foster independence and to help alleviate the financial burdens of long-term care on family caregivers. This was just one of a variety of initiatives aimed at relaxing the burden placed on public long-term care funding programs by encouraging individuals to purchase long-term care insurance. As another example, the federal government dramatically expanded the availability of the Long Term Care Insurance State Partnership Programs, through which state governments can promote the purchase of private long-term care insurance by offering consumers access to Medicaid under special eligibility rules if additional coverage, beyond what the policies provide, is needed. Medicaid, in turn, benefits by having individuals take responsibility for the initial phase of their long-term care through the use of private insurance. In addition, the government has provided favorable tax benefits, marketing campaigns and Medicaid asset protections.Despite these government initiatives, long-term care insurance ownership has remained disappointingly low. Only a small percentage of the U.S. population aged 45 and older participates in long-term care insurance plans

Indicate the status of the LTC insurance market in terms of concentration among insurers

The LTC market is very highly concentrated, with a small number of companies dominating the market.

What are the major funding sources for LTC?

The federal government, primarily through Medicaid and Medicare, provides the majority of funding for LTC services. Direct out-of-pocket spending also accounts for an important funding source. LTC insurance accounts for a viable yet underutilized funding source.

Describe a possible solution to some of the problems with legacy LTC products (listed above) that would eliminate the need for regulatory approval of LTC rate increases.

The likely solution to address the industry's flawed legacy reimbursement products is to provide portability with coverage for basic care needs. Legacy LTC products are "long-term level-funded," with no policyholder options should the market or the company change. Providing a nonforfeiture value, which does not need to be a cash surrender benefit, would introduce portability into the LTC product. If the regulator approves both the form and the actuarially fair nonforfeiture benefit, then the regulator no longer needs to approve rate increases since the policyholder would have the option of taking his or her accumulated value of the policy to another carrier. Regulators could focus on LTC the same way they focus on life insurance (i.e., market conduct, initial form approval and solvency). The private insurance market would govern the mispricing of products instead of regulators doing so. Finally, LTC insurers should be more careful about contract language, benefit triggers and product definitions while ensuring that the physician assessing disability is both objective and qualified.

List several activities of daily living (ADLs).

The relatively high presence of cognitive dementia and Alzheimer's disease may serve as the greatest example of the need for LTC insurance. The majority of cost associated with these medical conditions is custodial in nature—that is, providing assistance with activities of daily living (ADLs). Examples of ADLs include eating, bathing, dressing, toileting, inside mobility, and getting in and out of bed

Where are long-term care needs generally met?

The vast majority of long-term care needs, about 80%, are met by family members on an unpaid basis. Services are also provided by adult care centers, nursing homes and assisted living facilities.

What are the major demographic and societal reasons that U.S. citizens should save for long-term care (LTC)?

There are a number of demographic and societal reasons that citizens should save for long-term care. First, as the Baby Boomer generation is aging out, there is a growing demand for services that provide care for the elderly. Second, numerous improvements in both science and medicine have contributed to increasing life expectancies. However, much of this increase is spent in disabled, rather than non-disabled, years. Other major reasons include the following: birth rates are falling, average family sizes are decreasing, the geographic distances among immediate family members are increasing and the proportion of women in the labor force is increasing. All of these trends suggest that there is less availability of informal, family-based support to provide in-home health care to elderly dependents. Finally, the rising incidence of dementia, which includes Alzheimer's disease, will increase LTC service needs dramatically.