Long-Term Care Insurance
By Alfred C. Clapp, Jr.
Accepting and Preparing for Adverse Circumstances
Long-term care insurance (LTCI) is an emotionally charged but increasingly important insurance product that addresses the inevitabilities of infirmity and aging—a topic many individuals and families have difficulty coping with. Without oversimplification, the author lays out the basic facts for individuals, families, planners, the insurance and other industries, and our society. The general premise is that well-informed choices made now mean peace of mind and more control of resources and circumstances later.
The need to consider long-term care plans and long-term care insurance (LTCI) long before retirement is increasingly evident. The growing number of seniors in the United States face sobering threats to their financial survival, with potentially staggering medical costs and a greater-than-40% risk of serious incapacity.
LTCI coverage has improved since its introduction a quarter of a century ago, making policies increasingly difficult to analyze, compare, and buy or sell. In the current market environment, LTCI providers are reevaluating this coverage’s potential and profitability, offering better coverage while tightening underwriting and increasing premium prices. Companies that offer LTCI are consolidating, resulting in a few large, financially stronger companies that will probably have stronger positions in individual and group markets.
How LTCI Evolved
In the 1970s and 1980s, most insurers covered only licensed nursing-home care. Starting in the 1990s, nursing-home care and home-care coverage became integrated. In conformity with the nursing-home reimbursement model, the home-care coverage of most LTCI policies covers caregivers provided by licensed home-care agencies or independently hired certified home aides. Meanwhile, LTCI coverage added new features, generally integrated into policies at no cost or priced separately as a rider.
At the end of 2002, LIMRA International, an association that provides research, consulting, and other services to insurance and financial services companies, reported that there are 5.3 million individual and group LTCI policies and $6.9 billion of premiums in force, up 13% and 15%, respectively, over 2001 (see Exhibit 1 and Exhibit 2).
Although LTCI’s expected long-term growth is less assured now than in the 1990s, the growth outlook remains favorable, given that such policies have become even more valuable components of retirement plans. Younger people that can afford a higher level of coverage should consider slightly higher premiums as long as they remain eligible for LTCI.
The effectiveness and affordability of LTCI has been influenced by a number of recent trends:
Costs and Benefits
The costs of long-term custodial caregivers vary with care arrangements and location. Exhibit 3 summarizes representative costs for four different care plans in the New York City area.
Costs of the four main types of long-term care are assumed to grow 5% annually, from 2003, doubling by 2018, and doubling again by 2033, indicating the levels of annual LTCI coverage that should be adequate. With the shortage of caregivers, custodial caregiver costs are expected to increase at this same 5% annual rate. Therefore, care costs may exceed $500,000 for a few years of care. LTCI offers good value and may be the best way to finance LTC costs.
Changes Among Companies That Offer LTCI
According to a 2002 survey of individual and group policies, the market share of the top six LTCI companies, based on premiums in force, totaled 71%. GE led with 26%; John Hancock was next with 13%; and the other four companies—CNA, Bankers Life and Casualty, Conseco, and Aegon—had about 8% each. The companies with the next five largest market shares—Penn Treaty, Unum, IDS, Met Life, and Allianz Life—accounted for a total of 21% of the market.
According to Employee Benefits Journal, LTCI is maturing as a benefit. For a company’s group program to enroll a larger number of eligible employees, it is important to educate employees, offer payroll deductions, and provide attractive pricing.
The Federal Government Long-Term Care Program was jointly marketed and underwritten by John Hancock and Met Life. The program is available for more than 20 million possible enrollees, including active employees, retirees, spouses, parents, and other family members. During the initial enrollment period in the first quarter of 2003, the program enrolled only 265,000 persons.
Major continuing factors contributing to the leading companies’ revenue growth and underlying LTCI issues and concerns include the following:
Of particular concern to UnumProvident LTCI policyholders and prospective buyers were plans announced in February 2003 to raise prices on LTCI policies in force. Shortly thereafter, these plans were withdrawn, presumably because of the negative publicity generated by class action suits and customer reaction. Policy owners cannot rule out a submission to a state department of insurance to increase pricing on older policies. Like other LTCI companies, UnumProvident has announced plans to market a higher-priced policy after approval.
Many LTCI companies have raised premium prices on new policies to pay for new features and to make up for lower profitability on older policies. Factors that have seriously affected profitability are the decline in investment income, the decline in interest rates, the comparatively small number of policy owners that have let their policies lapse, and high marketing and other costs.
To cope with these challenges and remain competitive, companies have had to file, state by state, requests for permission to increase prices and upgrade policies. Companies also have considered selling other products to seniors, including annuities and Medicare supplementary policies. So far their LTCI diversification successes have been only modest.
Based on the current industry trends, as well as internal factors, some carriers will attempt to sell their LTCI businesses, spin off blocks of business, or at least discontinue offering new LTCI coverage.
Older LTCI policies often offered only 50% coverage for home care, in contrast to a 100% nursing home benefit. About 80% of elders requiring long-term care services reside at home or in assisted-living facilities or continuing care retirement communities (CCRC).
With most LTCI reimbursement policies, home-care coverage requires an insured who remains at home to hire a caregiver from a licensed agency or to directly hire an independent certified aide. Policy owners with older home-care coverage policies probably do not understand that reimbursement of LTCI costs under their policies has probably been limited to care obtained through agencies, which supply about 10% of home-caregivers in the U.S. Later-generation policies added the option of the insured directly employing a certified home health aide, but policy owners usually do not understand how home aides are certified, recruited, and trained, nor know that the demand for such aides exceeds the supply.
A licensed agency home-caregiver is often a valuable and appropriate care option. The advantages of using an agency include: arranging care backup on relatively short notice; management responsibility; bonding; payroll disbursement; minimal abuse or criminal problems; and recruiting good caregivers.
Misunderstandings about home-care coverage are perpetuated by LTCI companies that do not adequately disclose that they will not reimburse for home care that was not purchased from a licensed agency or a certified home-health aide. Although many LTCI policies accept alternative care arrangements, they are out of contract, and when a company’s claims department interprets policy contracts literally, negotiating reimbursement becomes difficult.
Home care is usually more expensive than nursing-home care unless reliable part-time or informal family care is also available. Costs associated with living at home, or the need for a full-time live-in caregiver or two shifts of care, may be overlooked. The principal types of home-care coverage, from least to most flexible, are as follows:
Home-care coverage and related features have been gradually improved in LTCI policies by offering limited care management consultation; care training for caregivers and family members; respite care for an insured to relieve a caregiver; reimbursement of adult day-care programs; homemaker services; and even (in some policies) home medical equipment not paid for by Medicare, or minor home improvements. But actuaries and LTCI companies are reluctant to offer more generous coverage that would increase claim payments.
Essentially, most current LTCI policies include home-care provisions that are too inflexible to meet the needs of future seniors, given the growing shortages of caregivers, expected higher costs, and the preference for private caregivers.
Because agencies usually compensate home-caregivers $6 to $7 hourly (only slightly more than minimum wage) and provide few, if any, benefits, they do not attract and keep the best caregivers. Agencies usually charge for their services on an hourly basis. Excluding an LTCI company discount arrangement, typical national fees for home health aides are: $17 hourly, $408 daily, or $148,920 annually. These outlays may be reduced if fewer hours of care are needed or if rates are lower. Family members, friends, and neighbors are a primary source of care-giving for many elders, especially those with lower income. With the seriousness of LTCI incapacity, however, to assume that an informal caregiver, such as under family care plans, will be effective may be unrealistic.
Many home-caregivers prefer to be privately hired and better compensated, as well as to have more flexible work schedules and work outside of a licensed agency. Most individuals prefer private caregivers and therefore want their LTCI policies to permit their hiring, as well as that of a supervising care manager as supervisor.
Ratings, Guaranteed Renewable Policies and Prices, and the NAIC
Less than 25% of the approximately 100 U.S. insurance companies that offer LTCI coverage receive acceptable ratings. Companies should be assigned one of the top three ratings (A++, A+, or A) by A.M. Best, the most widely followed ratings firm for the insurance industry. The ratings of the companies’ equity and bond issues, issued by Moody’s and Standard & Poor’s, as well as recent industry and company reports published by these rating agencies, should be examined. Brokers make such information available to customers.
LTCI coverage and prices are not guaranteed. A state insurance department requires standard coverage terms and approves an LTCI policy issued in that state. State regulators can grant or deny rate increases on in-force and new policies. While a weaker company may need to increase premium prices on older policies, a stronger company may instead increase prices on new policies. Should an insurance company become bankrupt, state insurance departments attempt to help arrange the sale of the company and policies in force, and then may permit the acquiring company a large premium increase to maintain coverage funding.
The National Association of Insurance Commissioners (NAIC) has developed and proposed model state regulations that would minimize in-force premium price increases and protect policy owners. The NAIC has also developed affordability and suitability requirements, but these are merely recommendations, without sanctions for violators. A recent NAIC LTCI model regulation would require an LTCI company’s actuaries to certify that proposed premiums on new policies are adequate and may be maintained for the life of a policy, in order to help stabilize future in-force LTCI premium prices.
Underwriting, Benefit Triggers, and Claims
Most companies have gradually tightened underwriting guidelines. Underwriters focus more on conditions that may lead to years of incapacity, such as diabetes and strokes. LTCI companies may offer an applicant a preferred health discount as long as an applicant is a nonsmoker and has no serious health history problems. Individuals with health problems may receive a lower rating and be required to pay higher premiums, or may be declined coverage for chronic conditions such as congestive heart disease, severe arthritis, or osteoporosis.
The 1996 Federal Health Insurance Portability and Accountability Act (HIPAA) covers all tax-qualified LTCI policies that have the two standard benefit triggers for an insured to qualify for benefits. To receive a benefit, an insured must be either—
While elders usually require the services of skilled medical personnel to diagnose and treat serious health conditions for which they are partially reimbursed by Medicare, they also have to pay personally for custodial care, often full-time, when suffering chronic health and aging problems. According to HIPAA, for a tax-qualified plan’s benefit to be tax favored, a claim must be diagnosed as chronic (i.e., require care for over 90 days). An initial claim and periodic claim update requests should be coordinated with an applicant’s broker, possibly with a geriatric caregiver, and reviewed with a primary or specialist doctor who understands the policy’s benefit triggers and may reasonably support any claim paid.
Selecting a Policy
When considering an LTCI policy and its specific configuration to determine its suitability, an important step is to review, with an independent LTCI broker specialist, the coverage in comparable specimen policies of a few recommended leading companies. Terminology tends to be fairly standard across policies, and policies usually provide definitions of widely used terms. An analysis of the policy’s benefits as compared to the premium costs (see Exhibit 4) can aid comparisons.
The following factors should be used to make substantive decisions about the policy:
The following features should be considered at a premium price:
The following features are generally of questionable value or high-priced:
The following standard policy coverage should be available at no extra cost:
The following items are generally excluded in most policies:
The HIPAA and IRS regulations provide two types of tax advantages, under certain circumstances, for “tax-qualified” policies: tax-free benefits and deductible premiums.
For a benefit to be tax-favored, a claim must be for a chronic medical problem. For example, a condition necessitating hip replacement is usually not chronic; an applicant must require care for over 90 days, whereas recovery from hip replacement is likely to be faster.
Some or all of an individual’s LTCI premiums may be deductible from taxable income. How much may be deducted depends on the maximum allowable deduction assigned to a person’s age group, the total of other deductible medical expenses, and gross adjusted income for the year:
Age at Year-End
|40 or younger||$ 250|
|41 to 50||$ 470|
|51 or older||$ 940|
|61 to 70||$2,510|
|71 or older||$3,130|
In accordance with IRS regulations, individuals can add LTCI premiums up to the maximum for their age bracket when totaling their deductible medical expenses. Depending on the amount by which their total medical expenses, including the LTCI premiums, exceed 7.5% of their adjusted gross, they may be able to deduct all or some of their LTCI premiums.
Self-employed individuals, LLC members, partners, and 2% shareholders of pass-through entities may be taxed on the amount of premiums paid on their behalf, but they can take deductions as indicated above. Clearly, HIPAA’s tax treatment limits favorable tax treatment to individuals whose gross adjusted income is low or whose deductible medical expenses are high.
While C corporations can pay and deduct the full amount of LTCI premiums paid without any eligibility limit, cafeteria plans cannot deduct premiums. Proposed legislation would permit a phased-in tax deduction of all premiums and permit employer cafeteria and flexible-spending accounts to cover LTCI.
'Long-term Care Insurance' (September 2003) stated that American Family Life Assurance Company of Columbus (AFLAC) has discontinued long-term care insurance coverage. AFLAC has brought to our attention that it has withdrawn its Qualified/Nonqualified Long-term Care Plan in nine states (Calif., Fla., Iowa, Ohio, Penna., R.I., Texas, Utah, and Va.), and that it does offer a long-term care plan in all but six states (Conn., Fla., Mass., Md., Penna., and Texas), and Puerto Rico.
Correction Note from Author (Published in May 2004 issue)
My article “Long-Term Care Insurance” (The CPA Journal, September 2003) incorrectly stated that Penn Treaty Network America Insurance Company (PTNA) went bankrupt in 2001. In fact, PTNA has never filed for bankruptcy. The article also states that New York State allowed PTNA to raise premiums more than 40% so it could continue to service its LTCI policies. This statement is also incorrect. According to information received from PTNA, the company is not licensed in New York and therefore does not sell insurance in the state of New York. American Independent Network Insurance Company of New York (AINIC), however, a PTNA affiliate, does market LTCI products in New York. AINIC has not filed for, nor has it ever received approval of, rate increases on its LTCI products in New York. PTNA and AINIC, along with American Network Insurance Company, are wholly owned direct and indirect subsidiaries of Penn Treaty American Corporation (NYSE: PTA).
I’m grateful for the opportunity to correct and clarify misstatements in my article, and to apologize for these errors.
Alfred C. Clapp, Jr.
President, Financial Strategies and Services Corp.
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