LTC Insurance Premiums

The following policy design choices have the greatest impact on premium cost:

• The larger the daily or monthly benefit amount, the higher the premium. There is generally a direct proportional relationship.
• The larger the lifetime maximum benefit (or the longer the benefit period), the higher the premium.
• The longer the elimination period, the lower the premium.
• Comprehensive policies are more expensive than those covering only facility care or only home care. In a comprehensive policy, the higher the home care benefit as a percentage of the facility benefit, the higher the premium.
• An automatic inflation protection option increases the premium. A simple rate option is cheaper than a compound rate. There may or may not be a charge for a guaranteed purchase option.
• An optional nonforfeiture provision adds to the premium.

As a general rule, any policy provision that increases the likelihood or amount of benefits the insurer will pay contributes to a higher premium. A policy with less restrictive benefit triggers tends to cost more than one with more rigorous triggers, and a policy covering respite care, transportation, and informal caregiving costs more than one that does not. The premium of a disability or indemnity policy is usually higher than that of a comparable reimbursement policy.

Beyond the provisions of the policy itself, three additional factors affect the premium: the age of the applicant, the health of the applicant, and any discounts the applicant may qualify for.

Age has a substantial impact on premium. The older a person is when she applies, the higher her premium. However, the premium is designed to remain the same over the life of the policy — it is not automatically increased as the insured ages. (For guaranteed renewable policies, the insurer may seek state approval for a rate increase for an entire class, but this is not automatic.)

Most insurers use the applicant’s actual age (years lived since last birthday). Some use saving age — if the individual has had a recent birthday (usually within 30 days of application), some insurers will use her age before that birthday, resulting in a slightly lower premium.

The table below shows one company’s premiums when coverage is purchased at various ages, assuming 5 percent compound automatic inflation protection. Daily benefit amounts are adjusted to provide equivalent coverage at age 85.

All insurers conduct underwriting of applicants for individual LTCI policies — seeking information about the applicant and deciding whether to offer coverage, and if so, on what terms. Most commonly the insurer has the applicant answer questions about current physical condition and health history. In some cases the insurer may request a physician report, a telephone interview, or an in-person assessment.

How insurers use health information differs. Many consider it only in deciding whether to accept or decline an applicant, without using it to set premiums. Others place accepted applicants into two or three risk classes with different rates: standard (the majority), preferred (healthiest applicants), and nonstandard/substandard (higher-risk but still insurable).

Uninsurable conditions are those that make the near-term need for long-term care very probable or certain. Every insurer maintains a list of such conditions and will not accept applicants suffering from them — to do so would require charging premiums as large as the expected benefits, defeating the purpose of insurance.

For LTCI, an uninsurable condition is one that already requires long-term care (such as Alzheimer’s disease) or one that carries a high risk of future need (such as a currently stable case of Parkinson’s disease). Individuals who have recently used long-term care services are also generally considered uninsurable, as they are at high risk of needing care again.

Some applicants with higher-than-average risk who are not uninsurable may be accepted into a nonstandard (substandard) risk class. Handling varies by company: some charge an additional premium; others offer only limited coverage options (such as facility-only coverage or a low lifetime maximum); still others do both. What constitutes a nonstandard risk varies widely among companies.

Some insurers place certain healthy applicants in a preferred risk class and offer a discount of 10 to 15 percent off the standard premium. Criteria for preferred risk status may include:

• Comprehensive physical examination within the last two years, with no uninsurable conditions and no condition with a likelihood of progression
• Height and weight within a range specified by the insurer
• Regular exercise at least three times a week
• No tobacco use in the past one to five years
• No need for assistance with meal preparation, laundry, housekeeping, or taking medications; no use of a wheelchair, walker, cane, or similar devices
• Not currently on medical leave and not receiving workers’ compensation, disability income, or Social Security disability benefits

To offer this discount to preferred applicants, the insurer must compensate by charging a slightly higher premium to standard risks.

Most LTCI in the United States is in the form of individual policies. But a substantial and growing portion is covered through employer-sponsored insurance. There are two approaches:

• Group insurance — the employer owns a group policy providing coverage to employees who enroll. Usually a voluntary benefit: the employer makes coverage available but employees choose whether to enroll and pay premiums. Typical of large employers.
• Worksite marketing of individual insurance — the employer sponsors the sale of individual LTCI policies to employees. Each employee purchases her own policy and pays her own premium; the employer is not a party to any insurance contract, but may facilitate premium payment through payroll deduction. Typical of smaller employers.

Worksite-marketed individual policies are underwritten like other individual policies. The discussion below focuses on underwriting for group coverage.

Adverse selection occurs when the group members who enroll are more likely to need long-term care than those who do not. If this happens, claims may be higher than projected and premiums may be insufficient to cover costs. Adverse selection is especially likely when enrollment rates are low — which is typical of group LTCI — because it is easier for a small insured group to be dominated by those likely to make claims.

Most commonly, insurers offer group LTCI on a guaranteed issue basis — without underwriting of individuals. The insurer guarantees to provide coverage to all employees who request it and may not refuse or charge extra based on health conditions.

To minimize adverse selection under guaranteed issue, insurers typically:

• Limit guaranteed issue to actively at work employees (full-time employees currently working)
• Offer guaranteed issue only to large employers (larger groups reduce adverse selection risk)
• Set a minimum participation requirement — unless a minimum percentage (e.g., 10%) of employees enroll, coverage does not take effect
• Restrict guaranteed issue enrollment to a defined enrollment period (usually 30 to 60 days) or the first 30 to 60 days of employment
• Exclude preexisting conditions
• Limit the daily/monthly benefit or lifetime maximum available on a guaranteed issue basis; higher amounts require underwriting

Modified guaranteed issue (MGI) — a minimal level of underwriting. Employees submit a short application and very few are declined — typically only those who have been diagnosed with specified progressive conditions (such as Parkinson’s, Alzheimer’s, multiple sclerosis), are currently unable to perform one or more ADLs, or have received long-term care services within a specified recent period (six months to three years).

Simplified (short-form) underwriting — somewhat more extensive. In addition to MGI questions, the application asks about medication use, recent hospitalizations, height and weight, and other areas. High-risk applicants may require a physician report, telephone interview, or in-person assessment. Some insurers apply this level to all applicants above a certain age.

Full underwriting — very thorough underwriting similar to individual insurance. A long-form application covers many health conditions. May require physician reports, telephone interviews, and/or in-person assessments for older applicants or those flagged as high risk. Advantage: no minimum participation requirement, no benefit limits, and all employees may apply — including those not actively at work.

As a general rule, the smaller the employee group, the less likely an insurer is to offer guaranteed issue — and the more rigorous any underwriting will be. Within the same group, different approaches may be used: guaranteed issue during enrollment periods, underwriting at other times; limited benefits without underwriting, higher benefits with underwriting; lighter underwriting for employees, stricter underwriting for spouses, retirees, and family members.

A group discount normally applies to premiums paid under an employer-sponsored group policy. Some companies also offer discounts on individual policies purchased through worksite marketing. Discounts may be extended to employees’ spouses and other family members. Discounted coverage may also be offered to members of non-employee groups such as service clubs (Rotary, Lions), college alumni associations, or bank customers.

Many insurers offer a spousal discount of 20 to 40 percent when both spouses purchase an LTCI policy, based on the assumption that married people can care for each other and are less likely to file claims for paid services.

There is considerable variation by company and state:

• Some require both spouses to obtain coverage; others grant the discount if both apply, even if one is declined.
• Many grant a smaller discount to any married person, even if the spouse does not apply.
• Some states do not allow discounts for married couples; others allow them but do not require both spouses to be insured.
• Most companies maintain the spousal discount even if the couple divorces or one spouse dies.

Some insurers extend a spousal discount to same-sex couples, other committed couples not legally married, and siblings living together. Some offer family discounts when three or more family members purchase coverage — based on the savings from multiple simultaneous sales rather than on expectations of mutual caregiving.