Suitability of Long-Term Care Insurance

We have studied long-term care and the ways people expect to pay for it, and learned why, for many, long-term care insurance is the best funding method. Here is a review of why buying an LTCI policy is usually a better approach than paying out of pocket or relying on Medicaid:

By purchasing a partnership LTCI policy, an individual can also protect some of his assets in the event he needs care for a very long time, exhausts his insurance benefits, and is forced to apply for Medicaid.

However, long-term care insurance is not right for everybody. If a person has limited income such that paying premiums will be difficult, LTCI is not normally the best approach. Nor should those with very few assets buy an LTCI policy — such people will often have to rely on Medicaid, despite its drawbacks. But every situation is different, and each person must consider his own circumstances, concerns, preferences, and weigh the costs and benefits of a policy.

All states require insurance companies and agents to make a reasonable effort to determine the suitability of the sale of an LTCI product or the replacement of one policy by another. Specifically, an agent must:

• Make reasonable efforts to obtain information relevant to determining whether a policy is suitable for an individual
• Comply with the insurer’s suitability standards
• Comply with any specific state requirements, such as using a personal worksheet or educational materials issued by the state
• Maintain in client files written information demonstrating compliance with these standards

A suitability determination based solely on an income or asset threshold does not always provide a good indication of who should or should not buy. Sometimes people of very modest means have a strong motivation to buy insurance to protect their small but important assets. But looking at a person’s financial situation is a good place to begin. Here are some general rules:

• If a person cannot afford to pay the premium now or continue to do so in the future, she should not buy LTCI. A common rule of thumb: a person may not be able to afford coverage if the premium would be more than 7 percent of her income.
• If a person’s assets are less than $30,000, it may be appropriate to consider other options for financing long-term care.
• If a person is currently eligible for Medicaid, she probably should not buy LTCI.

Each insurance company must establish its own market and suitability standards that agents must follow. These standards vary by company. As an example, one company considers a sale not suitable if any of the following conditions apply:

• The applicant has an annual income under $20,000
• The applicant will fund premiums solely from income, and premiums will amount to more than 10 percent of that income
• Premiums will be paid solely from income, the applicant expects income to decrease as she ages, and the premium today represents more than 7 percent of income
• The applicant’s assets (savings and investments other than a home) total less than $30,000

Such standards are not the only important considerations. If an applicant has a terminal illness, investing in LTCI may not be wise even if she meets the standards. And if someone is already eligible for or could easily become eligible for Medicaid, buying insurance is probably not appropriate.

A company is not required to prohibit a sale if standards are not met. A company’s obligation is to establish standards, make agents and clients aware of them, report annually the percentage of sales that do not meet standards, and ensure agents educate clients about when a purchase might not be suitable. As long as the agent has clearly discussed suitability issues with the client and the client indicates she is making the decision to buy in full consideration of these issues, the client will not be denied the opportunity to apply for coverage.

The agent interviews the client and learns about his needs and reasons for wanting coverage. While the agent has an obligation to help clients think through whether buying coverage is appropriate, she cannot make this decision for them. Her responsibility is to review the company’s market and suitability standards with clients and discuss whether or not they meet these standards.

Agents are required to provide documentation showing that suitability considerations have been addressed. Many states require agents to give clients a “Things You Should Know Before You Buy Long-Term Care Insurance” form and have them complete an LTCI personal worksheet to submit with the application. There is a specific personal worksheet for each state.

The worksheet asks the prospective buyer to specify the monthly and annual premium for the coverage being considered, then asks a series of questions about how premiums will be paid (income, savings, or family members) and about current and future income and assets.

A few people are wealthy enough to pay out of their own pockets for all the long-term care they are likely to need and still have plenty of money left. Is LTCI suitable for them? Every situation is different, but there are good reasons for wealthy persons to buy an LTCI policy:

• Converting an uncapped liability — when a person decides to pay for his own care, he is taking on an unpredictable and potentially very large financial obligation. By buying insurance, he converts that uncertain expense into a regular, budgetable premium payment, making financial planning easier.
• Asset preservation — a wealthy person may be able to pay a large amount for care and still have substantial resources, but he will have spent assets that could have been left to others. When insurance is paying for most of a person’s care, he does not have to worry about depleting assets he might have passed on to heirs or charities — and family harmony is better maintained when expected inheritances are not steadily dwindling.

Of course, a person can also purchase a policy designed to cover a significant portion — but not all — of potential long-term care expenses, and plan to pay the rest from income and assets.