The question, "How much does a Long-term Care Insurance policy cost?" is one of the most difficult insurance questions to answer in general terms. While all types of insurance policies are subject to price variations because of insurer differences, optional features and variables such as age and health, LTCI coverages and options span an extremely wide range. Various combinations of the following factors can result in significant price differences:
While all variables must be considered together in order to determine the cost of any individual LTC Insurance policy, some general guidelines determine whether a policy will cost more or less.
Additionally, there will be premium differences between two or more insurers who offer identical benefits and features. Sometimes the differences are negligible, other times they may be significant. In either case, making a direct price comparison can be difficult because a more costly policy might appear to be similar to another lower cost policy, but a careful reading of the entire policy can show that the more expensive policy actually offers additional benefits that are not immediately apparent. For this reason, it is important to compare policies provision‑by-provision, rather than looking only at the obvious features such as elimination and benefit periods, daily benefit amounts and care-settings covered.
Studies by HIAA revealed price differences for the same policy issued for people of different ages. This policy included a 20‑day elimination period, a four‑year benefit period and a daily benefit of $80.
More Expensive
Less Expensive
The premiums for some LTCI policies are based on the insured's attained age. This means that the premium increases periodically as the insured grows older, regardless of the state of the individual's health. Attained age pricing of LTCI policies is similar to pricing for renewable term life insurance. LTCI policies with this feature offer annual premiums that are likely to be much smaller in the early years of the policy than other LTC Insurance policy premiums. However, prices will jump dramatically as the individual ages.
Most consumer advocates recommend avoiding attained age policies unless the purchaser is very young and can expect significantly higher income in the years ahead. Most older people live on fixed income and many will find it more and more difficult to pay policy premiums that increase each year or so.
One of the reasons – if not the main reason – that fewer LTCI policies are sold in recent months, according to many students of the business and the consumer advocates, is that premiums have increased more than expected by the consumers. These increases have ranged as high as 25%. It is very difficult to explain to an insured why their premiums have increased – after all, the insured (that is complaining) has never had a claim (usually), so why should their premium jump up?
For an insurance professional, the answer is obviously that claims overall are higher than expected. This is difficult to explain in many cases, so this subject deserves some discussion.
Most insureds are not sophisticated enough to differentiate between pricing of a life insurance policy and that of a LTCI policy. The difference is, obviously, that life insurance pricing is based upon mortality tables, whereas LTCI and other health insurance products are priced based upon morbidity tables. Life insurance premiums are relatively stable because everyone will die sooner or later, whereas in health insurance not everyone will make a claim – particularly with an LTCI.
With most LTCI policies, the premium is based upon the age of the insured when the policy is purchased – “buy it now and lock the price in forever” has been a common selling point for years. Few agents will draw attention to the fact that the premium may increase if a rate increase is approved for everyone in that state that has the same classification. Therefore, a premium is not really “level.”
But the principal reason that there are premium increases is simply that it is a relatively new product and insurers do not have sufficient underwriting data to predict the number of claims that may arise at some point in the future. LTCI policies have what is known in P&C insurance as a “long tail.” This means that it takes a long time for a claim to become known in many cases and a claim may be separated from the circumstances that caused it by as many as 25 years or more.
In a 1998 Insurance Underwriter magazine, an expert wondered what would happen if it turned out that all (or nearly all) LTCI policies turned out to be drastically underpriced once the aging population started using them. Face it, we as a nation are living longer, and since we are living longer, there will be more of us that will need long-term care. Many insurers have stayed out of the LTCI business because they fear the unpredictable potential exposure and the need for long-term care will increase. The insurance broker who wrote the article is afraid that the premiums might double or triple in the future, in addition to any cost-of-living adjustments.
Twenty years ago, in an interview with the “inventor” of long-term care insurance, a well known West Coast actuary, he emphasized that what was already starting was the liberalization of the policy benefits and underwriting and he warned that even with such little experience, all actuarial projections based upon other insurance products that were similar in some respect, plus common sense, premiums would soon be inadequate. Another important event that would cause the policies to be underpriced was the consumerism activists in the insurance departments – indeed; some insurance regulators have already put caps on any allowable premium increases. He warned that this would force rates upward on new business and would tighten claims procedures. (Interestingly, this was also the concern of the above-mentioned insurance broker 20 years later.)
To take this one step further, long-term care expenditures are exploding as shown in the government studies illustrated earlier in this text. Medicaid benefits for long-term care are growing rapidly as a percentage of other benefits. This leaves the federal and state governments with a problem as to how to finance the long-term care of its Medicaid beneficiaries. The state of Florida, with its huge population of senior citizens, has a disproportionate share of nursing home patients that are Medicaid beneficiaries. Very recently, the state is looking at its entire Medicaid program. And if the states are suffering, then the federal government must be suffering also.
Don’t ever forget that the largest contiguous block of voters in the country is the senior citizens (read AARP, for instance). Their concern for affordable long-term care is powerful and something will happen, sooner or later, to accommodate them in some fashion. With the financing of the War on Terror plus unusual catastrophes, the federal funds are getting thinner for added coverages to the uninsured masses. This leaves the private sector as the savior of this problem – ala LTCI. It will be most interesting to see future developments. Once should conclude that the future of LTCI is almost guaranteed, but what form and what price is still not really known.
Another answer is to convince 45 to 60 year old persons to buy long-term care policies. This is, of course, easier said than done as, for example, nursing home care is just not imminent! Group LTCI makes it easier to approach this age group.
Agents and state regulators seem to have agreed that another answer might be to provide asset accumulation, much like the cash value in a life insurance policy, hoping to attract younger persons. Nonforfeiture values for this type of insurance are available with some policies and some states are requiring at least a return of premium rider to be available as a form of nonforfeiture value.
When premiums are increased significantly, LTCI policyholders find themselves in an untenable position – they are probably reaching the point where long-term care is closer to a reality (they are getting older, if for no other reason). Since the premium is based upon age at issue, it is difficult to switch companies – even if the person was able to successfully pass the underwriting requirements – as the premium would be higher than the company that has just raised its rates. If one company raised its rates, there is a very good chance that all companies will also raise their rates on these policies as any increase in premium has to be approved by the state Department of Insurance. Therefore the first company to get an increase just greases the way for all over companies to get their rates increased.
This instability of premiums causes problems for insurance departments, insurers and agents. Many actuaries, particularly those that work for an insurance department, feel that rate stabilization should be the top priority during the design of an LTCI product, if for no other reason that many seniors are on fixed incomes and cannot afford rate increases. While this may sound good to the consumers, in actuality the fact still remains that there is not an awful lot of experience upon which to base rates. With the increasing longevity and the growing number of seniors in the population, theoretically it could be a long pull before there is continuity and stability in LTCI premiums.
Some states have laws and regulations to ensure rate stabilization. In Wisconsin, for instance, the premium cannot be increased during the first three years of the policy and later increases must be guaranteed for at least 2 years. Further, for insureds age 75 or older and for whom coverage has been in effect for at least 10 years, the rate cannot be raised by more than ten percent. Another approach is that of Indiana, where increases cannot be approved unless the loss ratio is at least 60%.
One other thing needs to be mentioned – there have been and continue to be rate hikes. In the early days of LTCI, such increases were, as indicated, due mostly to lack of experience in LTCI. However, there are still rate increases – in 2003 CNA Financial who markets group LTCI policies, asked state commissioners for increases of up to 50% on some older policies, with at least half of the states granting the increase and most of them approving the full 50% increase, indicating that they evidently had high loss ratios in this field.
There are many assumptions that go into the calculation of a premium, much of which is too detailed for this discussion. To start with, the premium is based upon either issue age (the age of the insured at issue) or attained age (age of insured at each annual renewal date). Premiums that are based upon attained age increase automatically as the insured gets older. Generally, LTCI policies are based upon the issue age so the premium amount is based upon the age of the insured when the policy is issued. Obviously, younger people pay less, older people pay more.
Premiums are based also upon the rate classification at the time of purchase. Theoretically, the premiums will not increase and the rates also depend upon the geographical area in which the insured lives and most importantly, the health of the insured at time of issue. As with most other health policies, premiums for nonsmokers are lower than for smokers. Once the rate class is determined, it will not change even if the health deteriorates.
There is no doubt that it is very beneficial to buy the policy at a younger age as the insured will have the coverage for a longer time (assume he keeps the policy in force) but normally the insured still will pay less in premium over their lifetime. In addition, if the individual waits too long to buy LTCI, their health may have deteriorated to the point to where they cannot purchase a policy at any cost. According to surveys on LTCI products, an individual will pay anywhere from three to four times as much for the same policy if purchased at age 75 instead of age 55.
The Health Insurance Association of America (HIAA) press release in 1996 studied LTCI policies with $100 a day nursing home benefit and $50 a day home health benefit. The average annual premium was $247 ($589) at age 40; $364 ($802) at age 50; $980 ($1829) at age 65; and $3907 ($5592) at age 79. This is the last survey conducted by this organization and it was taken just at a time when LTCI was becoming very competitive and premiums were dropping in some cases.
The Consumer Reports article quoted earlier, considered only three plans as “acceptable” in California, according to their guidelines. The premiums under these requirements for age 65 would be $3,520; $3,906; and $5,486. For age 70, these premiums would be $5,414; $5,742 and $7,279. Note the wide disparities in premium. The policies are very similar, and company size according to Weiss rating for the same 3 companies are A, B+ and A- (the higher premiums were from an A- rated company). These policies all included the inflation guard of 5%, with elimination periods of 30 days and with a 4-year benefit period. Therefore, Consumer Reports report did not reflect what is actually available and being sold.
It is very difficult to compare the HIAA premiums with present premiums, however Life Insurance Selling does an annual study on these policies and the difference between 2003 and 2004 were particularly interesting. They studied the LTCI plans of the major players at ages 60-70 and 75, so a direct comparison to the HIAA studies would be different. However, there are certain interesting differences using $100 per day with a 90 day elimination period and 4 year benefit.
As with any policy, prices for similar coverage differ from company to company. One of the difficulties in comparing LTCI premiums is that there are so many benefits and they vary so greatly, it is extremely difficult to compare apples-to-apples. For instance, the inflation factor is highly recommended by consumer groups and state insurance departments, so the rates can fluctuate from company to company, plus whether the increase is compounded or simple.
Home health care can make a big difference in premium also. For instance some policies will pay 50% of the daily benefit for home health care; others pay 80% or 100% for home health care. Other types of care included in the policy have some influence on the premium such as adult day care, alternate informal care, durable medical equipment, home modification, homemaker services, hospice care, joint waiver of premium, respite care, shared benefits, survivorship rider, cash benefit or other nonforfeiture benefit, double home and community care for the first 30 days, etc. Some of these additional coverages actually have little effect on the premium and are offered strictly for sales appeal; however, some of the benefits can be quite costly.
One other point in discussing premiums – several writers of LTCI policies have departed from the scene in recent months and the reason is usually the unacceptable loss ratio. For the uninitiated in premium construction and its relationship to marketing, simply put, the only way to lower a loss ratio is to increase premiums or tighten underwriting. Premium is based upon the experience of a large group of risks and when the risks change, i.e. more insured needing long-term care for a longer period of time, and then the premium is inadequate. Then comes the conundrum – if the premium is increased, then the healthy risks will leave as they can get comparative coverage at a lower price elsewhere, leaving the body of insureds upon which the experience and premium, therefore, are based, comprised of those who are most likely to use the policies – worse risks than originally assumed. It is easy to see where this leads – and this is one reason why companies quit writing LTCI and other forms of health insurance.
Also, an integral part of any premium is the return on investments, especially on a level premium plan. The assumptions on the premium include an assumption as to the rate of return on the premiums paid and invested by the company. If the investment income falls – guess what? they did fall – then the reserves for future claims must be increased by additional premiums.
Insurance is and always has been a long-term business venture. This is why there are claim reserves established by the insurer (present value of future claims) from the premiums and also, why there is reinsurance (spreading the risk among companies). Where the loss statistics covers a rather short (for the industry) period of time, a fluctuation in claims may signal disastrous future claims experience unless there is a sufficient body of experience to indicate that it is just an acceptable fluctuation in claims. LTCI is still a relatively new product and after it has been on the market for another 20 years or so, then actuaries can feel confident that they can forecast future experience.
How can companies increase their premiums? First they have to present proof to their state insurance department that their claims experience substantiates such an increase – and usually a company never gets the increase that they have requested. Remember that most LTCI policies today are guaranteed renewable as long as the insured pays the premiums, no matter how old or ill the insured becomes. The policy guarantees that the premiums will not increase for any one individual. However, the insurer is permitted to increase premiums for everyone within a certain class, assuming state insurance departments approve the increases where the insurer requests the increases. A class, for example, might be every policyholder in a particular state; every policyholder within a certain age range in the state; every policyholder holding the policy type designated "XGB‑157" in that state, or some other legitimate classification.
Underwriting and related claims practices have been focal points of Long-term Care Insurance consumer protection issues. Many of the original underwriting problems arose because insurers offering this new product had no broad base of experience from which to establish probabilities of loss ‑ a factor that is imperative to the "spread of risk" concept underlying all insurance. Added to the lack of statistical data were the inherent risks in the targeted insureds: older people who generally experience more medical problems than the population as a whole.
Even with the earliest policies, insurers generally were willing to cover insureds with certain medical conditions that might eliminate people as prospects for other types of insurance. Insurer's recognized that, considering the age of the targeted population, there simply would be no prospect pool for this type of coverage if medical underwriting guidelines were too restrictive. However, attempting to offset or balance their own risk, insurers also built into their policies stringent limitations and exclusions, some of which effectively denied coverage for many insureds when they finally needed to use the insurance benefits.
The resulting complaints led to many of the newer policy features discussed in this course and to consumer protection enhancements. Some of these have been implemented, others proposed, including a NAIC model policy regulations.
Underwriting techniques and procedures of Long-term Care Insurance policies somewhat resemble that of Major Medical Insurance underwriting. When LTC Insurance policies were introduced by an insurance company, invariably a Major Medical Underwriter would become a LTC Insurance underwriter. At the present time, through the process of underwriter training underwriter, the companies writing LTC Insurance will in almost all cases, have a trained underwriter with LTC Insurance underwriting experience.
While Major Medical underwriting covers the physical condition of the applicant, a LTC Insurance underwriter is also concerned with the mental status of the applicant, and is very sensitive to senility, dementia, Alzheimer’s disease and chronic disabilities. The principal underwriting tool to determine the mental status of an applicant, is a “Cognitive Interview,” either by telephone, or face-to-face.
“Cognitive impairment” usually is defined as the lack of adequate awareness and perception, as well as the ability to understand and reason that will allow an individual to function independently. This is a legal description and is often used as a trigger for LTCI benefits. An insured may be able to bath, dress, eat and otherwise take care of themselves physically, but if they have a cognitive impairment as defined by the law (HIPAA) and attested to by a licensed health care practitioner, they are entitled to benefits under the tax-qualified plan (and under most all LTCI plans).
This test is almost always required for applicants age 75 or older, or younger if there is some underwriting reason to suspect a cognitive impairment. While underwriters tend to discount any situation where a person who is otherwise able to take care of themselves, become flustered at the interview and fail the test, it has happened.
For insurance purposes, cognitive impairment is often defined as a deficiency in a person’s short or long-term memory; orientation as to person, place and time; deductive or abstract reasoning; or judgment as it related to safe awareness (as defined in the NALC Shoppers Guide to Long-Term Care Insurance).
It must be understood that a cognitive impairment does not always mean that the person is suffering from Alzheimer’s disease, although the test is designed to alert the underwriters that a person may have this disease. Alzheimer’s symptoms include forgetfulness, confusion about where one is, and other signs, such as forgetting one’s own name. Further, these patients may experience mood swings, poor judgment and other changes in behavior. Often, these indications of Alzheimer have become apparent.
While insurance companies produce statistics about the frequency of Alzheimer’s, it actually is less common that one would be led to believe. But if an underwriter thinks that the applicant has any early signs of Alzheimer’s, the applicant will be refused coverage. Of course, once a person is insured, if they then develop Alzheimer’s, they are covered.
One insurer’s statistics claims that 10 percent of those over age 65 will have Alzheimer’s, and the incidence increases with age. However, authorities on Alzheimer’s maintain that the vast number of people that are age 79 will not have the disease and that it totally true also for those in their early 80s. Therefore, Alzheimer’s is not inevitable. And short-term memory loss does not necessarily mean Alzheimer’s. For instance, in one Florida community of many retired citizens, it is maintained that if a citizen calls a doctors office in that town, the answering machine will say, “If you are calling about an appointment, press 1. If you are calling about a prescription refill, press 2. If you are calling about short-term memory loss, press 3. If you are calling about short-term memory loss, press 3. If you are calling about short-term memory loss…”
One of the major writers of LTCI rejects any applicant that has any form of aphasia, confusion or mental and nervous conditions that have caused hospitalization within the past 24 months. A benign brain tumor unoperated will cause a decline. Several companies specifically prohibit those with manic depression and many will impose a waiting period of up to 6 months for those who have had a mild depression.
In actuality, the screening for cognitive impairment may begin with the first visit of an agent with a prospective insured. An agent is required to ask certain questions that could disqualify an applicant, including treatment for neurological syndromes such as Parkinson’s – as well as physical history such as juvenile diabetes, etc. The applicant must fill out an application and their physician will also be provided with a form to be completed. Agents are usually required to notify the applicant that they may be subject to the telephone conversation with the insurer.
If the individual fumbles the telephone interview, then they will usually be required to have a face-to-face interview, particularly is they are over age 75. Interestingly, most of the fact-to-face interviews are with women applicants, usually widowed or divorced, and often are driven by the desires of their children. These interviews are rather expensive for the insurer so they are usually ordered only when the age requires it or medical records reflect a short-term memory concern. The additional hazard to an applicant other than being refused coverage due to a cognitive impairment is that during the interview an answer to another question might cause a rejection of the application by the home office underwriter.
While this is, indeed, a test, the insurance companies usually ask their agent to help prepare their clients for the fact-to-face interview. The agent, at the very least, should explain what questions to expect and what documents and lists to have convenient. They should be prepared for a meeting to last at least 30 minutes, unless the applicant has a long list of medical problems that need to be discussed, in which case it could hast as long as 45 minutes.
Insurers used to universally not allow another person present during the interview, for several reasons, including that they felt that without a witness, the examiner’s word could not be questioned. There were no “lifelines” allowed. Nor is there any written or recorded transcription of the interview. Surprisingly to some, very rarely does the applicant ask for a copy of the test. If they are asked, they generally just tell the applicant that they will hear from the agent.
The interviewers will leave their card with the applicant, and rather surprisingly, if there are telephone calls from the applicant after the exam, it almost always is to report or clarify additional medical information – usually because the applicant is afraid that they would be considered as cheating the company without a fully detailed medical history.
Companies have relaxed their prohibition against having another person in the room during the interview when the insurer feels that it will benefit them (the insurer). For instance in some cases, if there is a caregiver present, it will reduce the strain on the applicant and the caregiver can help if the applicant becomes disturbed at all of the questions being asked, particularly the recalling of the test “words.” Caregivers know their employers well enough in most cases so that they can keep a lid on situations that might get out of hand. Of course, if the caregiver speaks during the interview, that must be noted on the interview report.
Sometimes, having a caregiver can be beneficial in itself, as many companies much prefer applicants who have someone nearby in case of emergency and they also provide a means for the applicant to become more socially involved. However, while it may be easier for the caregiver – particularly if they are a relative – to describe medication and pronounce the names and explain its use better than the applicant, the insurance company still wants to hear it from the applicant, not someone else.
Companies usually offer a discount if they write to LTCI policies on a husband and wife – usually the policies must be the same as to amount, etc. In those cases, the insurers do allow both spouses to be present during the interview. However, when this occurs, the interviewer will use different words for the delayed word recall list. In any event, they cannot “help” each other remember the words.
F Not all insurers use the same tests, some have their own versions. Others may accept other company’s format, but they are essentially the same in most respects, and variations are usually not significant.
The steps taken by the examiner may vary by company, but basically the following steps are included in all such interviews.
The interviewer collects and verifies name, address, telephone number, social security numbers, and other such information.
During the interview, the interview is making observations of their own as to the living conditions, the grooming and demeanor of the client, etc. Of course they also look for such items as wheelchairs, walkers, canes or crutches, or any other indication that the applicant needs assistance in their daily living.
Other questions will be asked, such as asking for a driver’s license (if they cannot drive, why not?), in case of an emergency, who will take care of you?
In asking medical questions, sometimes applicants get upset as they had supplied such information to the agent and feel that any further questions is questioning their honesty. However, it is very important that the applicant be able to answer questions about hearing loss, disabling headache, etc., as anyone who cannot answer questions about such conditions is simply not a good risk.
One other word about medication – an agent should asks the applicant to make sure that they have all of their medication bottles (containers) present when the interviewer arrives as that will speed up the interview and what better proof of an individual being able to take care of themselves than managing a complex arrangement of medications efficiently?
STUDY QUESTIONS
1. Long-Term Care Insurance policies may vary as to price, even within the same company, because
A. it is illegal for two policies to have the same exact premiums.
B. various combinations of age, medical condition, plus benefits chosen, create wide
risk exposures.
C. LTCI policies are offered as part of a cafeteria plan, so everyone can “build” their
own policy.
D. commissions vary widely and that really is what determines price.
2. When comparing policies, a policy could be more expensive because
A. the insured has no medical conditions that would increase the risk.
B. of a shorter benefit period.
C. of a longer elimination period.
D. of a high daily benefit amount.
3. Some LTCI policies use attained age pricing for the premiums, which means
A. that the longer the benefit period, the older the insured will be when they make
claims usually.
B. premiums increases periodically as the insured grows older, regardless of health.
C. premiums remain level during the life of the policy.
D. premiums may not be increased for any reason, whether individually or as part of
a group of policies.
4. Life insurance premiums are based upon mortality tables; LTCI premiums are based upon
A. wild guesses by the actuaries.
B. mortality tables.
C. fluctuating interest tables.
D. morbidity tables.
5. One of the reasons given by some business and consumer advocates for the drop-off in sales of LTCI policies is
A. commissions are not high enough.
B. there are too many companies writing LTCI so consumers are confused.
C. the federal government intends to cover nursing home expenses fully soon.
D. that premiums have increased more than anticipated by the consumers.
6. Long-term care expenditures are “exploding” recently because
A. Medicaid benefits for long-term care are growing rapidly as a percentage of other
benefits.
B. insurance companies are paying too much commissions to its agents.
C. it no longer is against the law to try to defraud Medicaid in transferring assets.
D. the Republicans control congress.
7. Several insurance companies have recently quit selling LTCI and the reason is usually because
A. of an unacceptable loss ratio.
B. companies are writing so much business that reinsurers cannot handle the excess.
C. they are having to pay too much in commissions.
D. the market is saturated.
8. Underwriting techniques and procedures of LTCI policies somewhat resemble that of
A. life insurance underwriting.
B. automobile insurance underwriting.
C. major medical insurance underwriting.
D. cancer insurance underwriting.
9. A deficiency in a person’s short or long-term memory; orientation as to person, place and time; deductive or abstract reasoning; of judgment as it relates to safe awareness, is the definition of
A. cognitive impairment.
B. medically necessary impairment.
C. aging.
D. psychosomatic attitudes.
10. What medication an applicant for LTCI is presently taking is of utmost importance to underwriters, therefore an agent should
A. tell the applicants to make sure that they have all of their medical bottles and
containers present when the interviewer arrives.
B. tell the applicants to make the insurance examiner get medication information
from doctors to avoid misunderstanding.
C. not to mention any medications that they cannot spell.
D. give a list of medications that may create suspicion with the underwriters and
make sure the applicant does not admit to taking any of those medications.
ANSWERS TO STUDY QUESTIONS
1B 2D 3B 4D 5D 6A 7A 8C 9A 10A