Chapter 3 — Long-Term Care Insurance

In the preceding chapter we learned why personal savings and assets, Medicare, and Medicaid are for most people not good ways to fund long-term care. But there is another approach: long-term care insurance (LTCI). A person can buy an LTCI policy, pay premiums of a set amount, and when she needs care, she will receive benefits to help cover the cost.

All LTCI policies work in essentially the same way and have many of the same provisions. But there is also a great deal of variation, resulting from different product designs and optional features. We’ll start with policy design — the basic package of benefits offered by insurers — and then examine purchaser options — the choices a consumer makes to tailor a particular LTCI product to meet his needs.

When designing an LTCI product, an insurer must answer a number of basic questions:

• Will the policy be federally tax-qualified?
• Does the policy qualify for a state long-term care partnership program?
• What conditions must be met for benefits to be paid?
• What long-term care settings and services will the policy cover?
• On what basis are benefits paid?
• What rights will the policyholder have regarding renewal and premium increases?

The answers to these questions directly affect the level of coverage the insured can rely on, and the cost of the premiums for that coverage.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) established a class of LTCI policies: federally tax-qualified (TQ) policies. To be tax-qualified, a policy must meet certain requirements, and owners of TQ policies enjoy certain tax advantages. Around 90 percent of all LTC policies in force today are tax-qualified — the rest are referred to as nonqualified (NQ) policies.

It is important to note that all LTC Partnership programs (discussed later in this course) must be tax-qualified. But being a tax-qualified plan does not automatically make the policy a Partnership plan. Partnership plans must be tax-qualified and meet certain other requirements explored in later chapters. The tax treatment of LTCI is covered in detail in Part B of this chapter.

To receive benefits under an LTCI policy, the insured must meet at least one condition stipulated in the policy, known as benefit triggers. For an LTCI policy to be tax-qualified under HIPAA, the policy must meet certain requirements regarding benefit triggers:

HIPAA establishes six standard ADLs (bathing, dressing, toileting, transferring, continence, and eating) and defines them in detail. Tax-qualified policies must include at least five of these six and must use the HIPAA definitions. A physical impairment is defined as the inability to perform at least two of the standard ADLs without substantial assistance from another person.

A TQ policy may define substantial assistance in two ways: hands-on assistance (physical assistance without which the individual would be unable to perform the ADL) or stand-by assistance (the presence of another person within arm’s reach, necessary to prevent injury). A TQ policy may require hands-on assistance, or it may accept stand-by assistance, but it may not use a standard less rigorous than stand-by assistance.

A licensed healthcare practitioner must certify that the insured’s inability to perform ADLs is expected to last at least 90 days. This provision is required because LTCI benefits are not intended for those with temporary conditions. This 90-day requirement does not apply to cognitive impairment, as such impairments are not usually temporary.

To qualify for benefits on a cognitive basis, the insured must suffer a severe cognitive impairment — such as Alzheimer’s disease or irreversible dementia — such that substantial supervision is needed to protect her from threats to her health and safety.

Benefit triggers have become largely standardized under HIPAA. “Medical necessity” and “prior hospitalization” may not be benefit triggers in a TQ policy. Among TQ policies, some room for variation remains: most include all six standard ADLs, but a few include only five; some require inability to perform two ADLs, others three. The standard used for “substantial assistance” may also vary. Seemingly minor changes in a policy’s benefit trigger can have a large impact on coverage.

In most policies, benefit triggers for home care coverage are the same as for nursing home coverage. After meeting a benefit trigger, the insured must also satisfy an elimination period before benefits begin.

Once the insured meets the benefit trigger, the LTCI policy will cover only services in certain settings:

• Facility-only policies pay benefits only for care in a nursing home or other residential facility.
• Some insurers offer policies covering only home health care, or only home care and community-based care.
• Comprehensive policies cover both nursing home care and home healthcare — most also pay benefits for assisted living and community-based services such as adult day centers. This is the most common policy type.

Among the services commonly found in policies are: homemaker services and transportation; informal caregiving; respite care; bed reservation; care coordinator services; durable medical equipment; and an alternate plan of care provision that allows the insurer to pay for goods and services not specifically covered by the policy when all three parties (insured, physician, and insurer) agree.

Even if benefit triggers are met, an LTCI policy will not pay benefits if long-term care results from a cause excluded by the policy, such as alcohol and drug abuse, illnesses resulting from participation in a felony, attempted suicide, war or military service, or aviation (if the insured is not a fare-paying passenger).

Some policies limit benefits for preexisting conditions (conditions for which treatment was received or recommended within a certain period — normally six months or less — before the policy was purchased). Policies also generally exclude services for which no charges were incurred.

LTCI policies express benefits as a fixed dollar amount per day, week, or month. There are three models for how the benefit is paid:

• Reimbursement (expense-incurred) — the most common. The insured is reimbursed for actual covered expenses up to the daily or monthly benefit amount.
• Indemnity — the full daily or monthly benefit is paid when the insured meets a benefit trigger and is receiving covered services, regardless of actual cost.
• Disability (cash) — the full benefit is paid when the insured meets a benefit trigger, whether or not she is actually incurring expenses for long-term care services.

Many policies pay a monthly benefit instead of a daily benefit, allowing greater flexibility. A monthly benefit can enable an insured to cover more services for the same stated benefit amount, particularly when care is not needed every day.

By law, all tax-qualified LTCI policies must be either guaranteed renewable or noncancellable. A guaranteed renewable policy must be renewed as long as the insured pays premiums; an insurer may increase premiums only when it makes the same increase for all policies of a certain class in a state, with state insurance department approval. A noncancellable policy’s premium can never be increased under any circumstances — making it rare and more expensive.

The National Association of Insurance Commissioners (NAIC) has developed two models for the regulation of long-term care insurance: the Long-Term Care Insurance Model Act and the Long-Term Care Insurance Model Regulation, adopted in whole or in part by most states. Key points include:

• Certain terms may only be used if defined as specified by the NAIC act or regulation.
• Eligibility for benefits cannot depend on prior hospitalization or a prior higher level of care.
• A policy must offer an inflation protection option.
• A policy may not cover only skilled care in a nursing home — all levels of care must be covered.
• The only allowable renewal provisions are guaranteed renewable and noncancellable.
• A policy must have a third-party notification of lapse provision, a non-forfeiture option, and an incontestability clause.

Once insurers have designed their policies, consumers must choose among products in the marketplace and tailor the selected product to meet their specific needs and circumstances.

An elimination period (also called a waiting period or deductible period) is the time between when the benefit trigger occurs and when the policy begins to pay benefits. Most policies offer a choice of elimination periods — 30, 60, 90, 180, and 365 days are common options. A longer elimination period means a lower premium but more out-of-pocket cost if care is needed.

Insurers differ in how they count days toward satisfying the elimination period. Some count only service days (days on which services are actually provided); others use the calendar day approach (counting all calendar days while services are being received). Most newer policies allow days to be accumulated over the life of the policy and require the elimination period to be satisfied only once during the life of the policy.

Some insurers offer a zero elimination period for home care combined with a regular elimination period (often 90 days) for facility care.

The 90-day HIPAA certification requirement should not be confused with the elimination period. The 90-day certification determines whether an insured is eligible to receive benefits; the elimination period determines when those benefit payments will start.

LTCI policies have a benefit amount per day, week, or month — typically ranging from $50 to $500 per day or $1,500 to $15,000 per month. The benefit amount normally has the greatest impact on the premium. There is generally a direct proportional relationship: a daily benefit of $120 is 20 percent more expensive than one of $100.

Purchasers should select a benefit amount based on charges in the area where they expect to spend their old age, keeping in mind that actual charges may exceed stated daily rates. Some policies pay the same benefit for all types of care; others pay different amounts, with the home care benefit often defined as a percentage of the facility benefit (normally 50 to 100 percent).

Most policies today have a lifetime maximum benefit (commonly called a “pool of money”). The insured receives benefits until the total received reaches the maximum stipulated by the policy, regardless of time elapsed. Older policies used a benefit period (a maximum amount of time), but the pool of money approach is more common now.

Long-term care costs have been rising steadily and this trend is expected to continue. Consumers can add optional provisions that protect against inflation for an additional premium. For tax-qualified policies and those governed by the NAIC Model Regulation, an inflation protection option must be offered.

With automatic inflation protection, benefit amounts are increased every year at a set rate with no action by the insured and no corresponding increase in premium. Two common versions:

• 5% simple rate — benefits increased each year by 5% of the initial amount. A $100 daily benefit rises $5/year, reaching $200 after 20 years.
• 5% compound rate — the increase is compounded like interest. A $100 daily benefit grows to $265 after 20 years. More expensive but provides substantially better protection for younger buyers who won’t need benefits for 15+ years.

The GPO (also called the future purchase option) gives the insured the right to purchase additional coverage at set intervals without submitting evidence of insurability. If coverage is increased, the premium is also increased based on the benefit increase and the insured’s age at the time. A policy with a GPO usually has a lower initial premium than one with automatic inflation protection, but it offers less effective protection for those buying at a young age.

Non-forfeiture options allow an insured who stops paying premiums and lets her policy lapse to receive something for the premiums she has already paid. Options include the cash surrender value / return of premium option (a cash payment based on premiums paid) and the shortened benefit period option (the policy remains in force with a reduced lifetime maximum equal to the total premiums paid, or 30 days of benefits if greater, provided the policy was in force three years or more).

Most newer LTCI policies provide contingent non-forfeiture benefits at no extra charge (some states require them), which protect insureds who let a policy lapse due to a large premium increase.