Cost & Types of Long Term Care Ins.

What Factors Determine The Cost Of A Long-Term Care Insurance Policy?

The most significant factor in determining the cost of a long-term care insurance policy is the applicant’s age at the time the policy is purchased. Generally, anyone 18 years and older may buy a long-term care insurance policy. While the upper age limit varies by insurance company, people can typically purchase LTCI into their early 80s. Since long-term care insurance is medically underwritten, the younger the applicant, the greater the chance their health will be good and they will be insurable.

An applicant’s current health and past health history will also influence the premium cost for long-term care coverage. Life insurance and long-term care insurance are both medically underwritten, but that is where the similarity ends. Life insurance underwriting is concerned with how long someone is expected live. Long-term care insurance underwriting, on the other hand, isn’t concerned with how long the insured is going to live, but rather how long the insured may live in a disabled state.

If you are advising a client to consider long-term care insurance, it is important to be aware of medical conditions that will make your client uninsurable. Underwriting guidelines vary among insurance companies. Consequently, it is important for any CSAs who sells long-term care insurance to become familiar with the medical underwriting requirements of the company or companies they represent. IN the past, long-term care insurance underwriting guidelines varied widely from company to company. One company’s “decline” may be another carrier’s “standard risk”. Many insurance companies’ applications ask if the applicant has ever been declined for long-term care insurance coverage. Once one insurance carrier declines an applicant for coverage, most other companies will not consider the applicant for coverage. Because of this practice, it is all the more important for CSAs to be familiar with various company underwriting guidelines and encourage applicants to consider coverage where they believe applicants have the best first chance of receiving coverage. There may not be a second chance to apply elsewhere.

The following is a partial list of conditions generally deemed uninsurable for long-term care insurance.

  • Malignant, inoperable, incurable, recurrent, and metastatic cancers
  • Alzheimer’s disease or other permanent cognitive impairment
  • Parkinson’s disease
  • HIV or AIDS
  • Arthritis-rheumatoid and osteoarthritis when degenerative or with functional limitations
  • ALS (Lou Gehrig’s disease)
  • Strokes and TIAs (transiet ischemic attacks or “mini strokes”)
  • Diabetes with significant insulin use or complications (retinopathy, amputations, etc.)
  • Multiple sclerosis
  • Certain eating disorders and severe psychiatric conditions
  • Current use of assistive devices – canes, walkers, wheelchairs
  • Already receiving care at home, in assisted living or in a nursing facility

Other factors influencing the insurability of an applicant include pending or recommended surgery, smoking (especially when combined with other questionable health conditions), uncontrolled high blood pressure, and obesity. Most carriers maintain height and weight tables to determine an individual’s rate class. An otherwise healthy individual will be charged a higher premium or even declined if their height and weight are not within the guidelines. Insurance companies generally publish detailed underwriting guides for those who sell their products. These guides normally include details of conditions that are insurable and those that are not. Additionally, these publications include lists of medications that will result in an accepted or declined application.

The Cost of Waiting

A primary reason why individuals don’t buy long-term care insurance is that they don’t understand the need to plan their long-term care needs. However, waiting to purchase long-term care insurance could result in not being insurable, due to health reasons at the time of application. Some people believe planning for long-term care needs is an “old person’s” problem. All we need is the reminder of Michael J. Fox, diagnosed at age 37 with Parkinson’s disease, to remind us that the need for LTC can occur at any age.

Since long-term care insurance policies are medically underwritten, and health conditions such as Alzheimer’s disease, Parkinson’s, or uncontrolled diabetes can prevent insurability, waiting to purchase long-term care insurance can be an expensive mistake. Ideally, consumers would choose to buy long-term care insurance the day before they needed it. Unfortunately, we never know when our health condition will change or if we will be involved in a serious accident or medical situation that will make us uninsurable. Deciding to buy flood insurance the day after the flood is too late; we need to anticipate the risk and insure ourselves ahead of time.

Types of Long-Term Care Insurance Policies

Long-term care insurance is available as a standalone product or on a group insurance basis through an employer. The majority of long-term care insurance policies are sold by agents or brokers to individuals or couples. However, many employers are offering long-term care insurance to their employees and their families at a group discount.

One significant advantage to buying LTC coverage through an employer is that employees may be able to purchase coverage with little or no underwriting when the insurance is first offered.

The type and plan design of the long-term care insurance policy will also affect the premium charged for the coverage. Long-term care insurance policies come in a variety of packages or configurations. Today’s policies can be designed to pay benefits when the insured is in a facility (a facility-only policy – new policies now include both nursing homes and assisted-living facilities) or receiving care at home (a home and community-based care only policy). Comprehensive or integrated policies pay benefits regardless of where the care is provided. Once an applicant has determined where they believe they would most likely receive long-term care services, and who will be taking care of them, they can decide what type of policy would best meet their needs and begin making plan design decisions based on the following questions.

  • Where do I plan on spending the final years of my life? Will I move?
  • What are the costs of long-term care services in the area where I plan to live? (Costs vary widely across the country; knowing local charges is vital.)
  • How much of the cost do I want the policy to pay (benefit amount)? How much am I willing to spend (coinsure) from income or assets for my long-term care service costs?
  • With the costs of care rising significantly, how will my benefits keep up with inflation?
  • How long or for what period of time do I want the policy to pay (benefit period)?
  • How many days of my long-term care services am I willing to pay before the policy begins to pay benefits (elimination or waiting period)?
  • What extras do I want the policy to include (benefit riders)?

 General Policy Features of Long-Term Care Insurance

The Benefit Amount

The first factor to consider in designing long-term care insurance coverage is the benefit amount. This is the amount of money a policy pays – a daily, weekly, or monthly maximum. Some carriers refer to it as the daily benefit (DB) or maximum daily benefit (MDB).

The DB or MDB is usually based on the amount the policy would pay for a daily benefit in a nursing home or assisted care facility, called the nursing facility daily benefit. Home care benefits are then expressed as an equal percentage or a reduced percentage of this base.

Most policies are reimbursement policies, meaning the insurance pay back the actual cost of care up to the maximum daily benefit covered by the policy. A few companies offer an indemnity policy that pays a full benefit amount, even if the actual expenses incurred are less. A policy may also offer a strictly cash benefit (with a higher premium cost) to allow the insured to receive the maximum daily or monthly benefit without providing care occurred on a specific day.

Daily, Weekly, and Monthly Home Care Benefits

Long-term care insurance policies that reimburse actual expenses can pay for home health care using a variety of different formulas. The way a policy covers home care can be of key importance and it may provide valuable flexibility for clients.

Daily benefit policies generally have the lowest premiums but are also the least flexible for covering care at home. Basically, these policies will never reimburse more than the daily limit for care in any day, even if actual care giving expenses are higher. And a weekly or monthly home care policy can provide additional flexibility when little or no care is received on some days and lots of care is needed on other.

For example, a daily limit policy with a benefit amount of $ 200 per day. But using this example, a weekly policy provides a maximum of seven times the daily benefit amount - $ 1,400 per week, to be used in any fashion during each week. A monthly policy provides a maximum of 30 times the daily benefit amount (in this example, $ 6,000) to be used for any combination of approved services during each month.

Let’s assume a client purchased a policy with a $200 daily benefit amount that includes monthly home care reimbursements. On weekends and two other days a week, he only needs a short bathing assistance visit or brief care to allow his wife or another family care giver to go shopping or have a respite. But three days a week he needs 10 hours of care so his family care giver can continue to work. On the three care days, the family is charged more than $ 200 per day. A daily policy would only reimburse up to $ 200 for each day. But a monthly policy would reimburse all expenses, including the three care days that cost more than $ 200 each, until the monthly maximum of $ 6,000 is reached, thus lowering the potential out-of-pocket costs. These options allow a client to borrow from days when little or no care is needed to help pay for days when a lot of care may be necessary.

The Elimination Period

In long-term care insurance policies, there is an elimination period – also called a waiting period – similar to a deductible found in auto or homeowners insurance. However, a deductible is generally an amount of money that the insured must pay first before the insurance policy begins to pay benefits to the insured. In contrast, an elimination period in a long-term care insurance policy is determined by the number of days the insured must pay for covered services before the policy begins to pay benefits. The elimination period selected is a key factor in determining the premium cost of a long-term care insurance policy.

Insurance companies offer a wide variety of elimination period choices: from zero-day (first-day) benefits, to 30, 60, 90, 100, 180, or 365 days. In most cases, the elimination period must be satisfied only once in a lifetime.

Agents will often advise clients to purchase an elimination period of 60-100 days because applicants will most likely have Medicare or a health plan paying for the first few weeks of skilled care. Medicare will pay for hospitalization but pays for very few long-term care days in a nursing home. Medicare pays only for skilled care, and long-term care is considered custodial care, not skilled care. Today, most admissions to nursing homes follow hospitalization, especially for Medicare patients. These are typically short-termstays for rehabilitation until a patient has recovered enough to be sent home to complete his or her recovery. Medicare benefits cover only 23 days of care in nursing homes, on average (Aging and Eldercare, Nursing Home Checklist 2008).

While a longer elimination period may reduce premium costs, it also increase the total amount of money the insured must pay before the policy begins paying benefits. For example, let’s assume today’s cost of nursing home care is $ 7,000 per month. If the applicant selects a 90-day elimination period, he could pay up to $ 21,000 out-of-pocket (90 days = 3 months x $7,000 per month = $21,000) before the policy begins to pay benefits. Imagine the impact of inflation on a 90-day elimination period over the next 20 years – some experts estimate health care costs will triple in that time. With today’s ever-increasing life expectancy, today’s $21, 000 elimination period dollars might well reach $ 63,000 in 20 years. CSAs working with seniors would be well advised to consider the long-term financial impact of longer elimination periods. For the more affluent client, however, longer elimination periods can reduce premium costs. Generally, the longer the elimination period – the higher the deductible – the lower the premium.

Benefit Period

Another factor that determines cost is the amount of time the insured receives benefits once a claim begins. While policies are available with an unlimited or lifetime benefit that can never run out, policies with limited benefit periods are also available for lower premiums. The insurance industry calls the limited benefit period a “pool of money.” Options range from a benefit period as short as 2 years up to as much as 10 years. While these limited benefit periods are expressed as a period of time, most policies today use the benefit period as a multiplier.

The total amount of benefits in a policy is determined this way: daily benefit amount x 365 days x number of years in the benefit period = total lifetime benefit. For example, $ 200 per day x 365 days per year = $73,000 x 5 year benefit period = $ 365,000 total lifetime benefit (pool of money). If the insured received $ 200 in long-term care services every day, their policy maximum would be exhausted in five years. However, how long would the policy pay if the insured incurred just $ 100 in long-term care services per day? Ten years. And what if services weren’t provided every day? The policy could last even longer.

Before determining the length of a policy’s benefit period, remember that, while most nursing home stays are relatively short in duration, there may be longer periods where long-term care services are provided prior to entering a nursing home, for example at home or in assisted living. Your clients should consider their health, finances, family situation, and the health of their relatives when selecting the appropriate benefit periods in long-term care insurance.

Inflation Protection

The cost of health care and long-term care services will continue to rise. Selecting an inflation rider will raise the policyholder’s benefit amount to keep up with the increased costs for long-term care services. There are generally three types of inflation options: simple inflation, automatic compound inflation, and guaranteed purchase option.

Simple Inflation

The annual increase of the daily or monthly benefit maximum and the lifetime benefit maximum (pool of money) – typically 5 percent – is based on the daily benefit amount originally purchased. Using a 5 percent factor, simple inflation will double the daily benefit (and the maximum total benefit) every 20 years.

Compound Inflation

The annual increase starting one year from the effective date of the policy – typically 5 percent – is based on the daily or monthly benefit amount and the pool of money compounded annually. Using a 5 percent factor, compound inflation will double the daily benefit (and the maximum total benefit) every 15 years. Some insurance carriers offer a 3 percent or 5 percent automatic inflation protection option based on the Consumer Price Index (CPI) and as the CPI fluctuates, so will the inflation protection.

Selecting either the automatic simple inflation or the automatic compound inflation options will result in initially higher premiums, but they will also provide an automatic yearly increase in the benefits without a scheduled increase in the premiums. The following table illustrates the impact of 5 percent simple inflation versus 5 percent compound inflation, using a $ 100 daily benefit

Daily Benefit Amount Increases at Simple and Compound Rates (5 %)

Year

Simple

Compound

Difference

0

$100

$100

$   0

10

$ 150

$ 163

$ 13

15

$175

$208

$ 33

25

$ 225

$339

$114

30

$250

$432

$182

 

Guaranteed Purchase Option

This option provides a third way to allow a policyholder to keep benefits growing with the rising cost of care. The premium starts much lower than with an automatic inflation option, but the insurance company then offers a guaranteed option to periodically buy more coverage in the future, typically every year or every three years. Premiums increase with each benefit increase purchased, and the new coverage added is priced at the policyholder’s current age. Over time this will cost more than an automatic inflation option, and once the insured goes on claim and starts collection benefits, the options stop just when inflation increases might be needed most.

Inflation protection is so important that it must be offered to LTCI applicants. In most states in an inflation option is not chosen, the applicant must explicitly sign off on the refusal to add an inflation feature. The younger the applicant, the more important the need for inflation protection, because it may be 15, 20, or 40 years before benefits are needed.

There are no hard and fast rules about what type of inflation protection a person should purchase. Generally, compound inflation is most appropriate for applicants under the age of 70 because the benefit grows the fastest over time. Simple inflation should be considered for applicants over the age of 70, especially if their family history includes relatives who have lived very long lives.

Since the enactment of the Deficit Reduction Act of 2005 (DRA05), many states have developed Partnership Programs, which require that specific inflation protections be included in new LTCI policies. These allow the insured to protect an amount of assets from Medicaid spend-down. State programs may be different. Information about Partnership Programs can be found in this AARP report: www.aarp.org/research/longtermcare/insurance. (See Partnership Policies below.)

Guaranteed Renewable

Today’s long-term care insurance policies must be guaranteed renewable. This means an insurance company cannot cancel the policy or change the benefits as long as premiums are paid. However, this does not mean that the premiums are guaranteed to remain level or fixed. LTC insurers can raise rates if they are needed to pay claims and are approved by regulators. Although long-term care insurance premiums are designed to be level, insurance companies may file a request with state departments of insurance for rate increases on an entire series or class of policies in the future. Unlike car insurance, long-term care insurance companies cannot raise premiums on an individual’s policy because of personal claims experience.

There are ways that purchasers can guarantee that premiums will not increase. Some of today’s policies allow for the policy to be contractually paid up after a certain period of time, most commonly after 10 years, although a few companies offer a 20-pay option, or for younger applicants a pay-to-age-65 option. While carriers reserve the right to raise rates during the premium pay period, after the period has expired, no more premiums are due. These options cost more in premium – often doubling or tripling the purchase. This means the insurance company cannot raise the premium rates during that specific period of time. However, after that period of time, the carrier may, once again, raise the premiums on an entire block or series of policies. There are consumer protections included in long-term care insurance policies should the premiums rise too high, based on age and a percentage increase table, which allow the insured to continue with the policy.

Partnership Policies

Partnership policies are a combined effort among the federal Center for Medicare & Medicaid Services (CMS), state Medicaid programs, and private insurance companies. Individuals who are insured under these special policies do not have to expose all of their assets to the usual spend-down process that is required to qualify for Medicaid. They can protect some or all of their assets and still remain eligible for Medicaid benefits. Since the DRA05, all states can develop their own partnership plans, and many have already done so.

The Federal Long-Term Care Insurance Program

The Federal Long-Term Insurance Program, sponsored by the United States Office of Personnel Management and administered by one or more private insurance companies, is a voluntary, group long-term care insurance program. It is offered to federal employees and annuitants (retirees), including the Postal Service and active and retired members of the uniformed services, as well as their spouses and other qualified relatives. It was created by the Long-Term Care Security Act of 2000 to benefit federal employees and their families as well as to provide a model for other employers to provide LTC insurance as an employee benefit.

The creation of this new benefit by the federal government for its personnel sends a strong signal that other programs (e.g., Medicare and Medicaid) will likely not dramatically expand to provide for LTC needs. Therefore, private insurance should be considered a primary funding source for care.

The information above is reprinted from Working with Seniors: Health, Financial and Social Issues with permission from Society of Certified Senior Advisors® . Copyright © 2009. All rights reserved. www.csa.us