Ethical Considerations

The great majority of those selling long-term care insurance strive to always conduct themselves with honesty, integrity, fairness, and professionalism, and with a sense of duty to those they serve. In doing so they are guided by their own sense of right and wrong.

But LTCI products are complex, and many different situations and circumstances may arise. Consequently, as important as a strong moral compass is, it is not always sufficient to ensure that one acts in every instance in accordance with established rules of ethical conduct — these rules must be learned. In addition, each state has laws and regulations that govern the sale of LTCI products, both partnership and nonpartnership policies, and insurance agents and brokers must be familiar with these requirements.

In this chapter we will explore some general ethical principles and how they apply to LTCI sales, review the main regulatory requirements that must be complied with during the sales process, and conclude with a detailed exploration of the suitability of partnership and nonpartnership LTCI policies.

An LTCI sales professional must disclose to her clients the information they need to make informed decisions. She must tell them about the disadvantages as well as the advantages of the products she recommends, and she must inform them of all costs. She should also disclose her own interest in any transaction — for instance, if she will receive a commission for the sale of an LTCI policy, the purchaser should know this.

An LTCI professional must maintain the confidentiality of personal and financial information provided by a client. She may not share this information with others unless two conditions are met:

• The person receiving information needs it to perform a legitimate and appropriate business function (as when data is passed to an insurance company underwriter).
• The client gives his informed consent in writing — the salesperson explains how the information will be used, and the client agrees to this use.

A salesperson must also make a reasonable effort to ensure that personal and financial information is not accidentally revealed to others. She should not leave applications, correspondence, and similar documents in open view, and she should take precautions to prevent sensitive conversations from being overheard. She must also comply with all state and federal privacy regulations.

An LTCI professional has the responsibility to serve her clients with competence. Competence requires knowledge — a salesperson must be familiar with a broad range of LTCI products and have a thorough understanding of the features, provisions, benefits, costs, advantages, and disadvantages of each.

An LTCI professional must also have some knowledge of other means of financing long-term care, and she should understand the implications LTCI has for taxation, financial planning, retirement planning, and estate planning. But she has an ethical obligation not to go beyond the bounds of her competence. A salesperson who is not also an attorney, accountant, tax expert, financial advisor, or estate planner must always bear in mind her lack of credentials in these fields. While she can alert clients to issues they may want to explore with other professionals, it would be inappropriate for her to offer specific advice in these areas.

An LTCI professional must exercise diligence in serving her clients. She must take all reasonable steps to meet their needs and obtain necessary information and explore potential solutions.

An LTCI professional has the obligation to recommend a product that is suitable for her client. Suitability means that the policy design, benefit amounts, selected options, and costs match the circumstances, needs, goals, and financial resources of the purchaser.

To ensure suitability, a salesperson must make a systematic effort to obtain all pertinent information about a client’s personal and financial situation and his concerns and goals. She must then use her knowledge of LTCI products and other approaches to find the best solution. A salesperson must not simply get a general sense of a client’s situation and recommend a product that “seems about right.”

A salesperson must not knowingly and deliberately recommend a product that does not meet a client’s needs. She must not sell long-term care insurance to a person for whom it is not appropriate, and she must not recommend a policy with more or fewer benefits than the purchaser needs. She must also not engage in churning or twisting — selling a new policy to someone who already has perfectly suitable coverage simply to earn a commission. Suitability is discussed in greater detail later in this chapter.

Certain activities violate one or more of the ethical principles discussed above and are legally prohibited in the sale of long-term care insurance:

• Misrepresentation — an agent must not misrepresent any material fact (a fact the consumer will likely take into account in making her decision).
• Cold lead advertising — occurs when an insurer’s advertising or sales method initially conceals that its purpose is to sell insurance. Any marketing method must disclose in a conspicuous manner that its aim is the sale of insurance and that contact will be made by an insurance agent or company.
• High-pressure tactics — actions having the effect of inducing the purchase of insurance through force, fright, threat (whether explicit or implied), or undue pressure.
• Churning and twisting — selling a new policy to someone who already has perfectly suitable coverage simply to earn a commission.

In a sales interview with a client, an agent has four main ethical obligations:

• Educate the client — explain what long-term care is, when it is needed, the various services and settings, the likelihood of needing care, the cost of services, and projected future costs. Discuss the ways people pay for long-term care (savings and assets, Medicare, Medicaid, and LTCI), making clear the limitations and advantages of each.
• Determine suitability — after ascertaining the client is not uninsurable for LTCI, determine whether LTCI is suitable and help the client decide whether buying a policy is truly the best course of action. This involves fact finding — obtaining information needed to do a rough analysis of the client’s current and projected income, expenses, assets, circumstances, needs, goals, and preferences. The agent normally completes a standard fact-finding form issued by the insurer.
• Tailor the policy — if LTCI is suitable and the client wants it, work with her to select a policy that best meets her needs. Help her understand choices regarding daily or monthly benefit amount, lifetime maximum, elimination period, inflation protection, and optional features — and make clear the advantages, disadvantages, and premium impact of various choices.
• Review policy mechanics — once the client is ready to apply, make sure she understands how the policy will work, including what must occur for the insured to be eligible for benefits, how long she will wait for benefits to begin, how benefits will be paid, when benefits will run out, and in what circumstances the premium might be increased.

During the interview, the agent should also provide information about the insurance company offering the policy, including its financial strength and stability as reported by rating agencies such as A.M. Best, Standard & Poor’s, Moody’s, and Weiss; any past premium rate increases; and the experience of the agent’s other clients in filing claims.

An application for insurance is a legal document — it is the prospect’s offer to enter into a contractual arrangement with the insurer, and the statements she attests to become part of the insurance contract. The agent generally assists the client in filling it out and must ensure it is fully and accurately completed. He must not coach or influence the applicant to supply “right answers” that will lead to acceptance and a commission, and must not include any false or misleading information.

Along with the application, a salesperson generally submits an agent’s report, providing any pertinent information about the client not included in the application. It is unethical for an agent to purposefully fail to disclose or distort information in this report.

At the time of application, the agent is required to give the prospect an outline of coverage and a copy of the NAIC Shopper’s Guide to Long-Term Care Insurance (or a similar state-issued guide). Some states require additional disclosures and receipts.

The laws and regulations governing the sale of insurance vary from state to state. But as discussed in Chapter 3, the NAIC Long-Term Care Insurance Model Law and Model Regulation have been adopted in whole or in part by most states. The main market conduct provisions include:

• A salesperson must give a prospect an outline of coverage and a shopper’s guide to long-term care insurance.
• The application must be clear and understandable by the consumer.
• The application must disclose the insurer’s right to contest the policy if the applicant makes false statements.
• The policy must include a 30-day free look provision.
• The insurer must have procedures ensuring fair and accurate policy comparisons (to prevent churning and twisting) and prohibiting the sale of excessive coverage.

Many states also have regulations intended to prevent misleading advertising in the sale of LTCI. Advertising materials are defined broadly to include letters to prospective clients, sales presentations, and information published in any form (newspapers, internet, radio or TV commercials, direct mail, point-of-sale brochures, lead generation dialog, etc.). Many states require that such materials be reviewed and approved by the state insurance department before use. Some states also require all salespeople to complete training in ethical market conduct.

An insurance salesperson should maintain a file for each client containing:

• The fact-finding forms completed with the client
• A record of the decisions made by the client during the tailoring of the policy, along with the reasons for those decisions
• A record of any recommendations made that the client declined, along with the client’s reasons
• The rate quotes shown to the client
• A copy of the application and cover letters to the underwriters
• Any notes on the client’s needs and concerns
• Copies of correspondence with the client
• Notes on telephone conversations with the client or the client’s family or other advisors (including date, time, participants, and content)

If a client’s application is accepted but he decides not to take the policy, detailed notes on his reasons should be in the file. If a client allows his policy to lapse, his reasons and any efforts on the part of the salesperson to maintain coverage should be documented.

The great majority of insurance agents do their best to act ethically and comply with all requirements. But it can occur that a client or a client’s family members accuse an agent of negligence or improper conduct, and in some cases may file a complaint or bring a lawsuit. A person’s career, business, and personal assets can be put at risk.

Errors and omissions (E&O) coverage addresses this risk. It can provide an agent with access to experienced legal counsel to fight charges, and if an adverse legal decision is made, can provide funds to pay claims. Agents can obtain E&O coverage through the insurer they represent or a professional association. All agents should keep in mind:

• E&O coverage is essential for the protection of an agent’s business and assets.
• For E&O coverage to apply, an agent must comply with certain rules — he must be familiar with these rules and adhere to them.
• An agent should periodically review coverage amounts and make sure they have not been outpaced by inflation.