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Replacing a LTC Policy

There has been concern in the industry that agents might inappropriately encourage individuals who already have long-term care coverage to drop an existing policy and replace it with one the agent is selling. While a new policy can be an improvement over a client’s existing coverage, there are important considerations that both the agent and client must take into account.

It may not be in the client’s best interests to replace his existing coverage with another product, even if that product offers important advantages and attractive features. It is seldom appropriate for an agent to sell a policy with fewer benefits than a client’s current coverage. Some states significantly limit the amount of commissions that can be paid on a replacement sale in an effort to discourage agents from selling replacement coverage.

Key Questions Before Replacing Coverage

Here are three key questions consumers should consider before replacing an existing LTC policy:

How long ago did you buy the policy you now have?
LTCI policies have improved a great deal in recent years, so as a general rule, a relatively new policy is more likely than an older policy to provide good coverage. Older policies often have numerous exclusions and restrictions — prior hospitalization requirements, conditional renewability, or exclusions for Alzheimer’s disease — that seriously limit coverage. However, some existing policies may offer reasonable and fair protection for the premium paid, even if not the best available. It may not make sense to replace such coverage even if a new policy offers some advantages.
How much older are you today than when you bought your existing policy?
Since premium rates are based on the insured’s age at the time of purchase, there is an advantage to buying LTCI while young — the insured can “lock in” a low premium based on a young issue age. This advantage would be lost if the insured replaced coverage when much older, as the new premium would be based on a much older issue age. The consumer must consider whether the better coverage of a new policy is worth the significantly higher premium.
Are you still insurable?
A client who may not be insurable based on his current health should certainly retain his existing coverage, even if another policy offers improvements. If he would not be approved for the new coverage, he obviously will gain nothing in switching — and stands to lose quite a lot.

If a Consumer Decides to Replace

If a consumer decides that it is in his best interests to replace his existing coverage, he should be aware of the following:

Never drop existing coverage until notified that the application for the replacement policy is approved. Dropping coverage before approval could leave the insured with no coverage at all.
  • The agent will need to complete a state-required replacement form and submit it along with the application.
  • The client also receives a replacement notice that he completes and retains.
In the application for a federally tax-qualified LTCI policy, the insurer is required to obtain information about an applicant’s existing coverage and any plans to replace it. If the client answers “Yes” to the question “Do you intend to replace the above or any other long-term care, medical, or health insurance with this coverage?” he is provided with a replacement notice.
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