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Donald Grimes
Donald Grimes
Long-Term Care Insurance

How you can help bring less chaos, confusion and little bit of normalcy and hope to your clients.

September 17, 2009
by Donald Grimes

Two weeks ago I was presenting at a major financial institution in New York on Long-Term Care Insurance (LTCI) and wanted to pass along some concerns about LTCI that were raised because I am sure that many of your clients have similar concerns: rate stability, "Obamacare" and does size matter.

Rate Stability

Insurance is typically a safe haven people sail toward in unsure times (and these times certainly qualify) with LTCI, are your clients concerned about the negative articles that appear regularly describing unfortunate consumers who are seeing double-digit increases in their LTCI premiums (The Wall Street Journal had a nasty front-page article recently)?

Here's a reality check of modern LTCI policies issued in last seven years. There are generally three types of insurance pricing schemes:

  1. Auto and health Insurance. This type of insurance usually increases in cost on a regular basis. Another type of life insurance that goes up in cost regularly but is less common is annual renewable term.
  2. Non-cancellable disability income and guaranteed renewable disability income coverage. Non-cancelable coverage provides premiums that are guaranteed and is priced accordingly. Guaranteed Renewable Disability coverage provides a guarantee to renew your coverage, however rates are not guaranteed. Thus, guaranteed renewable is priced considerably less. Long Term Care pricing is analogous to guaranteed renewable disability coverage, and both coverages are protecting against a morbidity loss (not mortality like whole life). Also, there are versions of long-term care that allow for 10-year payments or to age 65 payment schedules. As can be expected, the premium structure is significantly higher.
  3. Term Insurance. This is when insurance stays the same for a certain time period as in the case of individual level premium term insurance policies.

There is actually a profound social policy reason why your client's LTCI premium stays level. While you may have heard many tales from your clients of their friends spending huge sums of on a loved one's LTC costs, the fact is that he largest payor of LTC costs in the U.S. is government, specifically the ever-growing welfare program called Medicaid. Medicaid pays for almost half of all LTC costs.

LTCI provides a potential private-sector alternative to pay for LTC costs for state governments. With that in mind, rate stability is important to state governments as it provides consumers with peace of mind that they will be able to afford the future costs of the plan they buy now and also prevents insurance companies from raising rates to force business. Approximately 25 states have passed the so-called "rate stabilization act" allowing LTCI policies to be sold in their states. These laws are based on the National Association of Insurance Commissioners (NAIC) model legislation that was originally passed in 2003.

California's Rate Stability Act

The California Rate Stability Act called for a "do over" of the rates and policies of those carriers selling LTCI in California. The carriers had to re-file their plans and rates with the state having the actuarial assumptions the rates were based on reviews by actuaries that did not work for the State. Once the new rates and their underlying pricing/loss assumptions were approved then those new rates and policies were proclaimed to be "Rate Stabilized!"

Sounds awesome but why should a consumer feel any more confident that these shiny new "stabilized" rates would be more likely to remain stable or level over their lifetimes? Well, these "stabilized policies" had a scary new sword hanging over the carrier's head — if they ever requested a rate increase on LTCI policies that were "stabilized" and were approved, the carrier would not be able to sell new LTCI policies in California for five years. Being forced to withdraw from new business in Rhode Island would be unfortunate, but to have to stop selling in California, the world's seventh largest economy would be a huge blow to a carrier that expected to have a profitable LTCI block of business. However, the NAIC model rate stabilization provisions only calls for a five-year withdrawal from the market if a carrier consistently files new products at inadequate rates. A single rate increase would not trigger the withdrawal. California may have adopted a variation of the NAIC model.

There are two interesting side effects of rate stabilization here in California:

  1. A number of insurance companies have chosen to cease business in California rather than submit to the upfront expense of complying with the new law requirements; and
  2. The carriers that have stayed in California and raised their rates — in some cases considerably — to give themselves breathing room in case their new rates do not generate adequate premiums.

Federal 'Health Reform' and LTC

How should you advise your clients on LTCI regarding the current maelstrom about federal legislation? First, you need to know the basic difference between what is covered in health insurance and LTCI. The line is a narrow one but a deep one. Health insurance covers skilled care, which technically refers to cure that is provided by someone with a license, such as a physician, RN, LVN, therapist etc. LTCI, on the other hand refers to keeping individuals alive with whatever conditions or limitations they have.

Health insurance does not cover or apply to long-term care. In fact, if there are exclusions under client's group or individual health insurance policy for "personal care," "unskilled" and "custodial care." It can get sticky when client's health policies have wording that describes coverage for "skilled nursing home care" or "skilled home care." This wording seems to imply coverage for LTC, but a closer look at the fine print reveals that coverage for "skilled nursing home" care is limited to when the patient is in a nursing home and is receiving curative care and improving. If a person in a nursing home is not receiving curative care or they are not getting better then the care is "custodial" and would not be covered. It is similar to the supposition of your client staying at a beautiful resort and not being on vacation because you are attending a conference and putting in 18-hour workdays!

Does Size Matter?

While conducting classes on LTCI for groups a student said: "A LTCI insurance agent told me that the policy I needed would have to be big enough to cover five years of home care and three years in a nursing home, but the premium was bigger than my house payment so I did not buy it."

Hmm … do you agree that many Americans aren't saving enough to adequately prepare for their retirement years? If you agree, would you suggest those people stop saving altogether? Similarly, when people don't have adequate life insurance, personal financial specialists do not advise their clients to cancel all their coverage. The same holds true for LTCI.

Yes, it would be ideal to have a LTCI policy that covered all your client's claims when and as needed. However, that's not the case. But at the same time, a policy that provides at least 10 years of coverage that someone does not buy because they can't afford it, is far inferior to the small policy that someone has in place when they need care or when a client's health changes and they can no longer healthy enough to purchase a new policy.

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Don Grimes is the founder of Long Term Care Education Specialists. In 2002, Grimes was selected to serve as one of 16 presenters nationwide to conduct the educational presentations for the Federal Long-Term Care Insurance Program (FLTCIP). Some of the federal agencies he presented at included NASA, General Services Administration (GSA), IRS, EPA and U.S. Postal Service among others.