CHAPTER SIX — STANDARDS FOR THE PROTECTION OF THE CONSUMER

A Long Term Care Insurance policy is a legal contract between the insured and the insurer and as such, they must meet all requirements prescribed by law. As a legal contract, of necessity, it must be specific and precise and contain a number of clauses and provisions. Insurance Departments have made great strides in making all insurance contracts consumer friendly but still there can be some provisions that are open to interpretation. It is essential that the language be easily understood, clear and precise as much as possible and unambiguous.

Through the years, court decisions, legislative mandates and individual state governments have played important roles in shaping the language of insurance contracts.

Regulations require that LTCI policies may include various types of community coverage such as home care, home health care, adult day care, and so on, in addition to the nursing home coverage. This is of prime importance when an older-generation LTCI is being replaced.

When a policy is being replaced the agent must carefully and completely explain the advantages and disadvantages of a replacement, therefore the agent must know the provisions of both policies. For instance, a newer policy may cover gaps in coverage, but the premiums may be higher.

Honesty, Good Faith, Fair Dealing

With regard to long-term care insurance, all insurers, brokers, agents, and others engaged in the business of insurance owe a policyholder or a prospective policyholder a duty of honesty; and a duty of good faith and fair dealing. Conduct of an insurer, broker, or agent during the offer and sale of a policy previous to the purchase is relevant to any action alleging a breach of the duty of honesty, and a duty of good faith and fair dealing.¹²²

Agent Responsibilities

The California Insurance Code provides guidelines for insurance agents, brokers and companies in the marketing, solicitation and sale of LTCI, such regulation designed to protect the interest of the consumers.

The law specifies that any individual or entity that is engaged in the business of long-term care insurance, owes a policyholder the duties of honesty, good faith and fair dealing.

"The conduct of an agent or broker during the entire sales process of a policy is closely regulated, and any activities and conduct during this period of time can be relevant to an action that alleging a breach of these duties and can be subject to disciplinary actions. Regulations require that agents and brokers make reasonable efforts to determine the appropriateness of a recommended long-term care policy purchase or replacement and to personalize the recommended policy so that the consumer can relate his ability to utilize the benefits of such policy. Any breach of these duties can be used in an Insurance Department administrative hearing, or in a private cause of action of suit by the policyowner."¹²³

There are situations when an LTCI policy may not be an appropriate solution to the needs of the individual and in such a case, the agent/broker should be familiar with alternatives to LTCI so that the consumer can make an intelligent determination as to the best solution in his particular situation.

Producers (agents. brokers and companies) owe the consumer a duty of honesty, good faith and fair dealing to all consumers as exemplified by giving the clients a fair and accurate comparison of all policies they are considering and to help them determine if an LTCI policy is suitable for their particular needs. They must not sell inappropriate or excessive amounts of coverage. Also, the consumer must be well informed as to how claims are handled and how benefits are determined.

MARKETING GUIDELINES

California has established specific standards in the sale and solicitation of LTCI policies in order to protect the best interests of the consumers. These requirements for the insurers make it mandatory for an insurer to:

Establish marketing procedures to ensure that any comparison of policies by its agents or other producers is fair and accurate;
Establish marketing procedures to ensure that excessive amounts of insurance are not sold or issued;
Submit to the Department of Insurance a list, updated at least semiannually, of all agents and representatives authorized to solicit individual long-term care sales;
Provide long-term care insurance training and require that each of its authorized LTCI agents and representatives satisfactorily complete the continuing education requirements (as shown in "Agents Training & Continuing Education Requirements" below);
Establish auditable procedures for verifying the insurer’s compliance with these rules;
Make every reasonable effort to determine whether a prospective long-term care applicant or enrollee has an existing health insurance or LTCI policy and the type and amount;
Before presenting an application or enrollment form, provide the prospective applicant with a copy of the LTC Insurance Consumer’s Guide published by the California Department of Aging;
Display prominently on the first page of the policy or certificate and on the Outline Of Coverage the following statement:

Provide all LTCI applicants with the name, address and phone number of the local HICAP program in addition to the hot-line telephone number, (800) 927-HELP.
Prominently disclose in any advertisement designed to produce leads that “an insurance agent will contact you” if that is the case.
Be sure that all agents, brokers, or other persons who contacts a consumer as a result of receiving information generated by a cold lead device, immediately disclose the fact to the consumer.

Advertising Guidelines and Marketing Practices

Before any Long Term Care or nursing home insurance policy can be advertised, marketed or offered for sale in California it must be in compliance with all the provisions of the state code and regulations. Any insurer offering Long Term Care Insurance must submit the following to the Department of Insurance:

• Specimen individual policy form or group master policy and certificate forms;

• The corresponding Outline Of Coverage (described below); and

• Representative advertising materials that will be used in California.

These materials will be conveyed by the Department of Insurance to the Department of Aging (HICAP).¹²⁴

Filing of Advertisements

Every insurer providing long-term care coverage in California shall provide a copy of any advertisement intended for use in California to the Commissioner for review at least 30 days before dissemination. The advertisement shall comply with all laws in California. In addition, the advertisement shall be retained by the insurer (according to the Insurance Code) for at least three years. An advertisement designed to produce leads must prominently disclose that “an insurance agent will contact you” if that is the case. An agent, broker, or other person who contacts a consumer as a result of receiving information generated by a cold lead device, shall immediately disclose that fact to the consumer. ¹²⁵

(Comment: Legislation has been approved whereby marketing and other LTCI information will be available in foreign languages, expected effective 1/1/06.)

UNFAIR TRADE PRACTICES

Misrepresentations, false advertising, and unfair discrimination is specifically identified and prohibited by the California Insurance Code, and which are classified as “unfair or deceptive acts or practices” of insurance. There are additional provisions pertaining specifically to LTCI insurance that prohibit certain marketing activities.

In addition to other unfair trade practices, the following acts and practices are prohibited:

Twisting. Knowingly making any misleading representation or incomplete or fraudulent comparison of any insurance policies or insurers for the purpose of inducing, or tending to induce, any person to lapse, forfeit, surrender, terminate, retain, pledge, assign, borrow on, or convert any insurance policy or to take out a policy of insurance with another insurer.
High-pressure tactics. Employing any method of marketing having the effect of or tending to induce the purchase of insurance through force, fright, threat, whether explicit or implied, or undue pressure to purchase or recommend the purchase of insurance.
Cold lead advertising. Making use directly or indirectly of any method of marketing which fails to disclose in a conspicuous manner that a purpose of the method of marketing is solicitation of insurance and that contact will be made by an insurance agent or insurance company.¹²⁶

AGENT TRAINING & CONTINUING EDUCATION REQUIREMENTS

As in other states, California requires that agents who sell LTCI policies must satisfy continuing education requirements in order to protect the consumers. Continuing education will provide for the professionalism of LTCI agents in their serving of the public so as provide general knowledge of the product and its features, and therefore, are in a better position to advise consumers about LTCI services and benefits.¹²⁷

Those holding agent licenses must complete the initial continuing education requirement prior to being authorized to solicit sales of long-term care insurance to individual consumers. Licensees selling long-term care coverage are subject to the following continuing education requirements:

For licensees issued a license before January 1, 1992, eight hours of education prior to each two-year license renewal.
For licensees issued a license after January 1, 1992, eight hours of education in each of the first four 12-month periods beginning from the date of original license issuance and thereafter and eight hours of education prior to each license renewal.

The education program must address topics related to long-term care services and insurance, including, long-term care facilities, changes or improvements in services or facilities, alternatives to the purchase of private LTC Insurance and California regulations and requirements.

In addition, the requirements include differences in eligibility for benefits and tax treatment between policies intended to be federally qualified; the effect of inflation in eroding the value of benefits and the importance of inflation protection; and NAIC consumer suitability standards and guidelines. The CE requirement for LTCI is part of, not in addition to, an agent’s or broker’s regular CE requirement.

In addition to the general LTCI continuing education requirement, any agent who wishes to sell certified policies approved by the California Partnership for Long-term Care, must complete 16 hours of approved education prior to marketing Partnership-approved policies. This special training must include eight hours of education on long-term care insurance in general, and eight hours of education specifically dedicated to the California LTC Partnership Program. They must take 8 hours of CE each license period thereafter.¹²⁸

Note: These requirements apply to ALL agents wishing to transact long-term care insurance in the state of California, even non-resident agents who are exempt from the requirements because of meeting the CE requirements in their state of residence and agents who are exempt because of attaining the age of 70 and being licensed for at least 30 consecutive years.

Agent Training& Continuing Education Requirements Summary

Continuing Education Requirements:

Agents licensed fewer than 4 years:

Regular LTCI - 8 hrs each year.

California Partnership for Long Term Care (CPLTC) - 8 hours each 2-year license period Agents licensed at least 4 years:

Regular LTCI and CPLTC - 8 hours each 2-year license period.

This is part of, not in addition to, the regular CE requirement.

As an example, if a license period runs from 1-31-02 to 1-31-04, and assumes the agent takes the original CPLTC course on the first of the month following licensing (2-1-02). They are not be required to take another CPLTC course until 1-31-04 at the earliest, and it could be later as the requirements are not that a course must be taken every two years, but once before each license renewal.

Insurer Reporting Requirements

Every insurer offering LTCI products in California is required to furnish the Insurance Commissioner with a list of all agents or other representatives who are authorized to solicit individual consumers for the sale of Long-Term Care Insurance and the list must be updated at least semiannually. Any solicitation by agents or other representatives whose names do not appear on an insurer’s authorization list is a violation of the Long-Term Care Insurance statutes.

If any licensee subject to these requirements does not satisfactorily complete any portion of the required LTCI education courses, that person’s name will be removed from the LTCI authorization list. Any solicitation of LTC Insurance by a person whose name has been removed from the list will be considered a violation of the law.

CHOOSING THE INSURER

There are as many as 20-30 insurance companies offering LTCI policies at any one time, often even more. Some are well known “name” companies, such as State Farm, Metropolitan, John Hancock, etc. Selecting the best policy for the specific needs of a consumer is only part of the solution as there will be a considerable period of time after the policy has been issued before a claim is filed, and the consumer must know that there will be an insurer in existence at time of claim. Further, some insurers who do not have the huge resources of other company’s are the most likely to have premium increases. Therefore selecting the right company can be difficult. There are rating services available to monitor company solvency, although highly rated companies have been known to fail. But the starting place should be the rating companies.

Agents should be well versed in the reputation and financial standing of the company(s) they represent. They must not only know the company’s financial stability, but also have a good knowledge of their customer service and claims payment history. To start, an agent must make sure that the company is approved in California and their products are approved by the Department of Insurance. A professional LTCI agent knows that insurer service and products must be the best available and the insurer should be around when claims need to be paid and services rendered.

INSURANCE COMPANY FINANCIAL AND CLAIM-PAYING RATINGS

There are several Rating companies for the insurance industry that rate insurance companies on the basis of their financial stability, length of time in the business, etc. The best known of these organizations is the A. M. Best Company that publishes Best’s Insurance Reports for both Life and Health insurance and Property & Casualty insurance. The data in their Reports are important to the insurance industry, but particularly so with Property and Casualty. It’s stated objective is to “evaluate the various factors affecting the overall performance of an insurance company in order to provide our opinion as to the company’s relative financial strength and stability to meet its contractual obligations.”

In making evaluations, the ratings firms consider such things as underwriting, reserves, their capital and unearned surplus, investments, and management practices. They report on the executives of the company with a brief description as to their insurance experience, and they also show reinsurance arrangements and the name of the reinsurers, and a 5-year history of the company. They also report as to whether, in their opinion, the company could absorb an unusual loss or other financial shock. This information should be valuable to an insurance agent who does not want to recommend policies issued by companies whose financial stability is questionable.

It cannot be stressed enough how important is the financial strength of the insurers. In recent history, two or three of the companies who issued the largest number of LTCI policies were rated rather low (C or lower by Best’s, for instance), principally because of their financial strength. In order for them to compete, these companies would accept risks that larger companies would decline or rate.

Eventually this caught up to them, resulting in some activity in mergers and the remaining companies found that it was necessary to increase their premiums. Insurance Departments restricted their sales and at least one of the companies survived. Considering the fact that regardless of the lower premiums or the more liberal underwriting, and in some cases, higher commissions, LTCI is a “long term” risk and companies who are not financially strong and cannot bear the fluctuations in profit will probably not be around to pay claims in the future, or if they are, they will have raised their premium to where it is a hardship on many of their elderly clientele.

Insurance Rating Organizations

The rating firms occasionally differ in their opinions on the financial strength of a particular company as they use different criteria in their rating system, so it is important to obtain more than one opinion.

F Rating companies are not omnipotent, their ratings are opinions only as illustrated by the fact that in recent years there have been highly rated insurers that have gone into receivership.

The companies that are best known in this field are:

• A.M. Best Company (900) 420-0400

• Fitch Investors Service, Inc. (212) 908-0500

• Moody’s Investor Service (212) 553-1653

• Standard & Poors (212) 208-1527

• Weiss Research, Inc. (800) 289-9222

Further, an agent should be able to explain the ratings, particularly if there is more than one company involved. The purpose of discussing the company’s rating is not to see which company can sell a policy cheaper or offer better coverage, but is only a measure as to the financial stability of the company. Who would want to buy a policy (or sell a policy) from a company who may not be around to pay the claim?

Insurance Company Ratings Guide

A.M. Best Company

A++, A+ Superior, very strong ability to meet obligations

A, A- Excellent, strong ability to meet obligations

B++; B+ Very good, strong ability to meet obligations

B, B- Good, adequate ability to meet obligations

C++, C+ Fair, reasonable ability to meet obligations

C, C- Marginal, currently has ability to meet obligations

D Below minimum standards

E Under state supervision

F In liquidation

Various modifiers are added to assigned Best’s ratings, to qualify the status of a rating. Caution is signaled by a “w” —which means watch list. For example: B+w (very good, but watch).

Standard & Poors

AAA Superior, highest safety

AA Excellent financial security

A Good Financial security

BBB Adequate financial security

BB Adequate financial security; ability to meet obligations, may not be adequate for
long-term policies

B Currently able to meet obligations, but highly vulnerable to adverse conditions

CCC Questionable ability to meet obligations

CC May not be meeting obligations; vulnerable to liquidation

D Under an order of liquidation

Moody’s

Aaa Exceptional security

Aa Excellent security .

A Good security

Baa Adequate security

Ba Questionable security, moderate ability to meet obligations

B Poor security

Caa Very poor security; elements of danger regarding payment of obligations C Lowest security

These different rating systems can be confusing, but to make it even more confusing, one should known where a rating fits among the rating firm’s categories. For instance, one would probably think that an A+ rating would be the best, and for Weis Ratings, this is so. But when one looks at Best’s, it is the second best after A++, for Fitch it would be fifth class, (after AAA, AA+, AA, AA-) and S&P also shows that as 5^th. Best’s has 15 ratings, Fitch has 22, Moody’s has 21, S&P has 19 and Weiss has 16.

As of Aug. 1. 2003, for example, Best’s had assigned ratings to 1,209 life-health companies, Fitch had rated 279, Moody’s 179, S&P 462 and Weiss 1,025. Using these figures, it would appear that Best’s and Weiss should be consulted. Best’s will provide ratings without charge on their website—to make it more confusing they will provide two ratings, one for companies that have consulted with Best’s plus an analysis of several years of financial data provided by the company, and an evaluation of the company’s balance sheet and operating performances. The other rating is a “pd” rating, signifying that the rating is based upon public information but with no consultation with Best’s.

A private publication -The Insurance Forum- rates companies in depth and uses all of the rating services for their recommendations. They suggest that a company that has a high rating from at least 3 of the 5 firms be considered as “Extremely Conservative,” and as of Sept. 2003, 55 companies were in this category. “Very Conservative” was suggested for 142 companies, and “Conservative” for 196 (which includes those in the “Extremely” and “Very” conservative categories). This publication also has a “watch” list of life-heath insurance companies that has a low rating from at least one of the rating services, plus other information that would indicate that there could be financial problems in the future.

Claims Paying Ability

Moody’s and S&P are the primary rating systems that rate claims-paying abilities.

Moody’s rating system consists of Aaa as the highest quality of claims-paying, down to class C. There are also numerical qualifies (1, 2, 3—such as Aa2, Baa1, et.) These indicate whether a company is in the higher (1), middle (2), or lower (3) end.

Standard & Poor’s ratings are similar, with categories ranging from AAA to BBB and speculative grade ratings from BB down to D. “D” is used only for those companies that are placed under a court liquidation order.

California Life And Health Insurance Guarantee Association

California insurance Code states that the purpose of the California Life and Health Guarantee Association is to protect persons covered under life and health insurance policies, including annuities, against loss due to insolvency of the insurance company. All life and health insurers authorized to do business in California are required to join this association.¹²⁹

If a member company is impaired and is not paying claims in a timely fashion, then the association may, with approval of the Commissioner:

Guarantee, assume or reinsure the impaired insurer’s policies or contracts;
Provide moneys, pledges, notes, guarantees or other means to ensure payment of an impaired insurers obligations; or

Loan money to the impaired insurer.

To provide funds to carry out the association’s duties, the association may assess the member insurers for the amounts necessary. Any insurer that fails to pay an assessment when due is subject to suspension or revocation of its Certificate of Authority by the Insurance Commissioner.

Association Limits

The association may be liable for the lesser of the following amounts:

For Life Insurance & Annuities:

80% of contractual obligations (subject to certain limitations),

$250,000 in death benefits for any one life,

$100,000 in cash value or annuity value.

For Health insurance the maximum liability is $200,000 lifetime benefits per insured.

The limits as stated above apply only to claims that have been reported and are in progress at the time of insolvency and do not include claims that are due but not reported—which can be a very substantial sum as it includes all future claims! There are no guarantees for payment of claims in the future. Practically, in case of company insolvency, the Department of Insurance will appoint a Receiver who will then attempt to sell or reinsure the business for the protection of the policyholders. However, this does not guarantee that the policyholders will receive back the value of their policies. In the 1970’s, an insurer specializing in Annuities went into receivership. The Receiver was able to get other insurers to assume the business but only if there were no interest payments for a period of time. This meant that the annuity owners did not lose their annuity, but did not receive any interest income for a period of time, and for those seniors who were depending upon income from the annuities, this created a hardship. This could happen to an LTCI company, so the only guarantee of solvency is to pick a company that is financially strong. .

DISCLOSURE REQUIREMENTS

The issuing insurer must provide certain information to the applicant according to both federal and state laws. The Agent is required to provide the client with instructive information before the original solicitation or before any application for insurance can be taken. The California Insurance Code requires that the Agent use a checklist that would be signed by both the applicant and the agent, with the original returned to the insurer with the application. The applicant must be given a copy of this information for his personal records.¹³⁰

Application Checklist

The insurance code requires that every application for Long-Term Care Insurance must include a checklist that enumerates each of the specific documents which the law requires be given to the applicant at the time of solicitation. The documents and notices to be listed in the checklist include, but are not limited to (an insurer may add other items) the following:

The Outline of Coverage

The HICAP notice
The long-term care insurance shoppers guide (“Taking Care of Tomorrow”)
The “Long-Term Care Insurance Personal Worksheet”
The “Notice to Applicant Regarding Replacement of Accident and Sickness or Long-Term Care Insurance.” (if replacement is involved)
If applicable, a Tax Qualified Comparison Chart may be given to the consumer at time of solicitation. ^105A

Unless the solicitation was made by a direct response method, the agent and applicant shall both sign at the bottom of the checklist to indicate the required documents were delivered and received.

OUTLINE OF COVERAGE (OOC)

The Mandatory Outline of Coverage form¹³¹ is an extremely useful documents used with solicitations for LTCI. The Outline of Coverage provides a summary of information regarding the insurer and the insurance product (LTCI). The language is presecribed by the Department of insurance but it also allows minor changes. Benefits to be provided, limitations and exclusions, renewal and termination provisions, whether the plan is individual or group, and the premium, must be inserted for the particular policy being proposed. The Code stipulates that the Outline Of Coverage must be a freestanding document, the information must be presented in no smaller than 10-point type, and it must not contain any material of an advertising nature.

An Outline Of Coverage must be delivered at the time of initial solicitation to a prospective applicant for Long Term Care Insurance. If the agent is soliciting a prospect, the agent must deliver the Outline Of Coverage prior to presentation of an application or enrollment form. If the sales interview is the result of direct-response solicitations, the Outline Of Coverage must be delivered with—and at the same time—as any application or enrollment form.

In addition to other requirements, each Outline Of Coverage must include the following information and statements:

The name, address and phone number of the insurance company.
The type of policy and title of the coverage being outlined.
Purpose of the outline—a statement that the outline provides a brief description of the important policy features, is only a summary of coverage and not an insurance contract, and that if the coverage is purchased the insured should “Read Your Policy or Certificate Carefully!”
A brief description of an insured’s right to return a new policy within 30 days and receive a full refund of premium (this is known as a 30-day free look provision).
A statement that the policy either does or does not provide for a refund or partial refund of premium if the insured dies or surrenders the policy in mid-term.
A statement that the policy is not Medicare supplement insurance, and that neither the insurer nor its agents represent Medicare or the federal or state government.
A statement that long-term care coverage is designed to provide benefits for one or more necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services provided in a setting other than an acute care unit of a hospital, such as in a nursing home, in the community, or in the insured’s home.
If the policy is an indemnity contract, a statement that coverage is provided in the form of a fixed dollar indemnity benefit, subject to any policy limitations, waiting periods and coinsurance requirements. (This statement must be modified if the policy is not an indemnity contract, i.e., an expense incurred contract.)
A summary of covered services and any related deductibles, waiting periods, elimination periods, and benefit maximums; institutional benefits provided, by skill level; and non-institutional benefits provided, by skill level.
A description of limitations, exceptions and exclusions, including preexisting conditions, non-eligible facilities or providers, and non-eligible levels of care such as care provided by other family members
A statement that the policy may not cover all LTC needs and that because costs for services will likely increase overtime, the applicant should consider whether and how benefits may be adjusted
The outline must indicate whether the policy is not subject to benefit increases, whether automatic benefit adjustments are provided, whether a guaranteed option to buy future benefit increases is provided and, if so, the frequency and amounts of the upgrade options
A summary of terms under which the coverage may be continued or terminated, including renewability provisions, continuation and conversion provisions for group coverage, waiver of premium provisions, and whether the insurer has a right to change the premium (if so, the circumstances under which premium may be changed must be stated)
A statement that the policy provides coverage for insureds clinically diagnosed as having Alzheimer’s Disease or related degenerative and cementing illnesses.
The total annual premium for the policy and, if the premium varies with choices among benefit options, the portion of the premium that corresponds to each benefit option.
A summary of any additional important policy features, such as whether medical underwriting is used
A notice that information and counseling is available through the Department of Insurance and HICAP (the Department’s toll free hot-line number must be included in this notice)_.

TAKING CARE OF TOMORROW

“Taking Care of Tomorrow” is a brochure resembling the illustration below (the original is in color) printed by the Department of Aging and is available through the local HICAP office or through insurance companies.

“Taking Care of Tomorrow” was developed and published by the California Department of Aging, which also administers the Health Insurance Counseling and Advocacy Program (HICAP) that provides free long-term care counseling to California senior citizens. This brochure must be provided to all consumers at or before the time an application is completed and is, in itself, an excellent sales tool. Agents should become familiar with it and use it throughout their presentation.

A similar brochure is produced by the National Association of Insurance Commissioners (NAIC). These brochures may be mistaken for each other, and therefore some insurers require their agents to provide both brochures.

NOTE: The NAIC Guide to Long-Term Care cannot be used instead of the California brochure (Taking Care of Tomorrow) but there are no restrictions in respect to furnishing an applicant with both brochures. The NAIC guide is used in other states and some of the information in it is different than what is prescribed by California law. Therefore, if both brochures are to be used, care must be taken to avoid any confusion and to make sure that the applicant understands that the California brochure takes precedence.

Department of Insurance LTC Buyers Guide

The Insurance Department has also prepared an excellent Consumer Guide to Long-term Care Insurance, which may be obtained by calling the Department’s toll free hot-line number-1-800-927-HELP, or downloaded from their website www.insurance.ca.gov. The insurance code does not require that this be distributed to applicants.

Health Insurance Counseling and Advocacy Program—HICAP

Any person or organization soliciting LTC Insurance must provide the prospect, in writing, information regarding HICAP program, including the name, address, and telephone number of the prospect’s local HICAP office, or, if unable to provide the address or telephone number, they must provide the California Department of Aging’s toll-free telephone number: (800) 510-2020.

The Health Insurance Counseling and Advocacy Program (HICAP) is a not-for-profit, volunteer-based program that assists senior with Medicare, Medicare supplement insurance, Long Term Care Insurance, and other health insurance needs. HICAP offers free counseling services at local sites throughout California and provides community education. HICAP serves Medicare beneficiaries (aged 65+

For a list of HICAP offices, please see Appendix C

REPLACEMENTS

(Above information required at 10-point type)

All long Term Care Insurance application forms must include a question designed to gather information whether the proposed policy is to replace another other LTCI policy that the applicant presently has in force with any company. These questions may be included in the actual application—which is the general practice—or the Replacement Coverage Information may be used, signed by the applicant and attached to the application. A supplementary application or other form to be signed by the applicant containing such a question may be used.

If the sale will involve replacing another policy, the insurer is required to furnish to the applicant a “Notice to Applicant Regarding Replacement of Accident and Sickness or Long Term Care Insurance” prior to the replacement policy being issued or delivered. The applicant keeps one copy and another copy, signed by the Applicant, must be returned to the insurer and kept by them. The wording of this notice is stated in the insurance code.¹³²

Replacement Notice

Once it has been determined that the sale will involve a replacement, the insurance company is then required to furnish the applicant with a Notice to Applicant Regarding Replacement of Accident and Sickness or Long Term Care Insurance. Insurers that use agents must furnish this notice to the applicant before the policy is issued or delivered. The applicant must retain one copy, and an additional copy signed by the applicant must be returned to, and retained by, the insurer. The Insurance Department prescribes the wording of the notice.

The applicant must be:

advised that the information furnished indicates the intent to lapse or otherwise terminate existing insurance and to replace it with a new policy,
informed of their right to a 30-day “free look” period during which they may elect to keep the coverage or reject it with refund of all premiums paid. (For group coverage not subject to the 30-day free look requirement, the notice must be modified to specify whatever period is allowed for returning the policy and receiving a full refund),
cautioned that present health conditions, or preexisting conditions, may not be immediately or fully covered under the new policy, but under their existing policy, they may have coverage for these situations,
informed that he or she has the right to seek the advice of their present insurer or agent concerning the proposed replacement, and that it may be in the applicant’s best interest to do so and in any event, read the policy fully and completely.
warned to truthfully and completely answer all health questions on the application for replacement coverage, and
warned that failure to include all material information could result in denial of a future claim and to refund your premium as if his coverage had never been in force (rescission).

Excluding group coverage, in cases of replacement of existing individual coverage where an agent is involved, the replacement notice must also include a disclaimer statement signed by the agent documenting that the agent has reviewed the current coverage and, to the best of the agent’s knowledge, the replacement coverage materially improves the insured’s position. The reasons thereof must be listed in the spaces provided on the disclaimer statement. Reasons could include such reasons as additional benefits being provided under the replacement policy, or the same benefits being provided at a lower premium.

The Appropriateness of a Replacement

There are no hard-and-fast rules suitable for every situation in respect to whether a replacement is proper and appropriate, as each situation is different and will depend upon the types of coverages, the length of time the existing policy has been in force, any reason for dissatisfaction with the current policy (or agent or insurer), and certainly, cost and affordability.

Insurers and agents must make reasonable efforts to determine the appropriateness of a recommended purchase or replacement.¹³³ Suitable replacement of existing long-term care insurance policies merits special attention. The California Insurance Code forbids the unnecessary replacement of an LTCI policy, in particular if it results in a decrease in benefits and an increase in premium. In addition, if there is three or more policies sold to a policyholder in any 12-month period, it is automatically presumed that the policy is unnecessary—except in those instances where policies are sold solely for the purpose of consolidating policies within the same insurer.²⁴⁸

Inappropriate Replacement

For purposes of this chapter, the Commissioner shall define inappropriate replacement of long-term care insurance in consultation with other interested parties.¹³⁴

Adding or Replacing Coverage

In some situations, it may be better to add a contract rather than replacing it. If a grandfathered contract is involved (LTCI dated prior to 1-1-97) there may be more favorable benefits that are no longer available, there may be more—or more liberal—triggers, or other features that are not available under the proposed policy. Sometimes the individual may have an older nursing home only policy, for instance, with a lower cost than presently available, and it may be better for the applicant to keep what he has and add a newer policy. For instance, the

previous policy may have a daily benefit of, for example, $50 a day at a competitive premium. There could be a legitimate reason to add another policy in some situations, to increase the daily benefit, if, for instance, it would be less expensive for the insured to keep the older policy than substitute a newer policy.

FAN AGENT SHOULD NEVER, EVER, ENCOURAGE A PERSON INSURED UNDER ANOTHER PLAN TO CANCEL THE OLD PLAN BEFORE THE NEW PLAN IS ISSUED AND APPROVED BY THE APPLICANT/INSURED!

If the insured cancels the old coverage and then does not qualify for a new policy, they would then be “uncovered” and the agent can be liable. Rarely happens, but it has, usually when the applicant insists that they cannot afford a present-due premium and a deposit premium on the new applied-for policy.

Material Improvement

To justify a replacement, agents must certify that the policy they are selling is a material improvement over the one the client is replacing. Basically, a policy may not be replaced or exchanged unless there is a Material Improvement.¹³⁵Agents must be well versed in what is considered as a material improvement by the insurance company. Basically, the requirement is simply that the insured must be substantially better off after the transaction than they were before. This is simple enough and practical—if this is not the case, then the agent should not be replacing the policy, which would then not be ethical, much less legal.

Agents should also direct applicants to get tax advice in the event that a premium increase results in the loss of qualified status for a grandfathered contract, whether or not the contract is being replaced. The IRS has recently ruled that a premium increase does result in a material change to the contract and the loss of favorable tax treatment. The Treasury Department has received a lot of “static” on that point, so it could change in the future, but until it does, the rule is the rule…

Replacement shall be contingent upon the insurer’s declaration that the replacement policy materially improves the position of the insured. The fact that a Partnership policy or group certificate provides Medi-Cal exemption, shall not in itself, without otherwise determining the appropriateness, be deemed as a transaction that materially improves the individual’s position, within the meaning of the Insurance Code.¹³⁶

Premium Credits for Replacement Policies

Current policyholders can obtain replacement credit for conversion of older to newer policies with the same insurer. The premium on the new policy will be reduced by 5% for each year that the previous policy was in force, not to exceed 50% of the new premium. No credit will be allowed if the new premium is not higher than the previous premium.

For example:

Policy converted from $50 daily benefit nursing home policy with annual premium of $750, policy had been in force for 11 years.

New policy with $200 daily benefit — annual premium of $1500.

Premium of new policy will be 5% of $1500 (new premium) times 11 = $825

$825 is more than 50% of previous premium ($750)

New premium will be $750 (50% of new premium)

The law also states that the credits allowed need not reduce the premium for the replacement policy or certificate to less than the premium of the original policy or certificate so the premium will be $750 which just happens (in this example) to be the same as the original premium. This is a continuing credit so each annual premium will be $750.¹³⁷

Note: This section shall not apply to life insurance policies that accelerate benefits for long-term care.

Using the system of premium credits is very consumer friendly as the replacement policy would cost more even if the coverage was the same as the insured is older and premiums increase by age, plus there are more benefits (otherwise there would be no “material improvement.”). And premium credits recognize that there is an existing relationship between the insurer and insured. For the insurer, this allows him to retain business that he would otherwise lose, and other than issuing a new form, there really is little expense. Premium credits also can dissuade insurers and agents from recommending replacement policies just so that the additional premium can be obtained.

Permitted Replacement Commissions

For an agent learning about the premium credit one of the first questions would regard the commission an agent gets on a replacement, especially since with a lower premium through premium credits, this would be an “easy” sale. The California Code eliminates the possibility of unethical agents unnecessarily replacing policies just for the commission by limiting commissions payable on replacement LTCI policies.

When a LTCI policy is replaced, the sales commission that is paid by the insurer on the new policy must be calculated based on the differences between the premium of the new coverage and that of the original coverage. If the premium on the replacement product is less than or equal to the premium for the product being replaced, the sales commission must be limited to the percentage of sale normally paid for renewal of long-term care policies of certificates. In other words, the most commission an agent can receive on a replaced policy is just the renewal commission. That REALLY takes the financial incentive out of the transaction and serves the purpose of dissuading insurers and agents from recommending replacement policies simply for the sake of replacement premiums.¹³⁸

Replacement must be contingent upon the insurer’s declaration that the replacement policy materially improves the position of the insured. This provision does not apply to replacement of group insurance

For purposes of this section, “commission or other compensation” includes pecuniary or non-pecuniary remuneration of any kind relating to the sale or renewal of the policy or certificate including, but not limited to, bonuses, gifts, prizes, awards, and finder’s fees.¹³⁹

Every Long Term Care Insurance carrier must file with the Department of Insurance its commission structure or an explanation of the insurer’s compensation plan. Any amendments to the commission structure must be filed with the Department before implementation. This article applies to all long-term care insurance policies delivered or issued for delivery in this state on or after January 1, 1990.

Example:

The premium on the replaced policy was $1,000 annually, premium on the new replacement policy is $1500. Assume for discussion that the agent commission is 50% first year, and 7% renewal.

The agent would not get the $750 first year commission from the new policy sale, however he will receive renewal commission of $105, instead of the $70 from the old policy. If, however, premium credits were involved and the new premium was the same as the premium on the replaced policy, the agent would find no change in his commissions. However, he has “saved” the business, as otherwise the insured could possibly have dropped the old policy and bought a new one from another company.

Annual Replacement & Lapse Reports

Policy replacement is closely monitored by law, and violators can face stiff penalties. Every insurer marketing LTCI policies must maintain records for each agent of that agent’s amount of replacement sales calculated as a percent of the agent’s total annual sales. In addition, they must also keep records of the amount of lapses of LTCI policies sold by the agent calculated as a percent of the agent’s total annual sales.

Every insurer must report annually by June 30, the 10 percent of its agents in the state with the greatest percentage of lapses and replacements.

Every insurer must file a report annually by June 30, showing the number of lapsed policies as a percent of its total annual sales in the state, as a percent of its total number of policies in force in the state, and as a total number of each policy form in the state—as of the end of the preceding calendar year.

The Code specifically states that reported replacement and lapse rates do not alone constitute a violation of insurance laws or necessarily imply wrongdoing. The reports are for the purpose of reviewing agent activities regarding the sale of LTC Insurance more closely.¹⁴⁰

Replacement of Tax Qualified vs. Non-tax Qualified Plans

The issue date of replaced LTCI policies can affect their tax-qualified status and must be considered in replacement situations. Policies issued prior to January 1, 1997 are “grandfathered” for tax purposes (automatically granted tax-qualified status), and they may have more or more liberal benefit triggers than tax-qualified policies issued after that date. Therefore, there is a possibility that such a policy being replaced with a non-tax qualified policy, or with material modifications, may jeopardize the favorable tax status.

Policies issued in California on or after January 1, 1997 (prior to tax-qualified policies being available), did not qualify for favorable tax treatment unless they were later exchanged for policies that are specifically designed to comply with state and federal laws for tax-qualified policies. Many insurers issuing non-tax qualified policies during this transition period offered insureds the option to convert to tax qualified policies when they become available.

"Every insurer that offers policies or certificates that are intended to be federally qualified long-term care insurance contracts, including riders to life insurance policies providing long-term care coverage, shall fairly and affirmatively concurrently offer and market long-term care insurance policies or certificates that are not intended to be federally qualified, (as described previously).¹⁴¹ (Further) All long-term care insurance contracts, including riders to life insurance contracts providing long-term care coverage, approved after the effective date of this section shall meet all of the requirements of this chapter. (Further) Until January 1, 1999, or 90 days after approval of contracts submitted for approval …, whichever comes first, may continue to offer and market previously approved long-term care insurance contracts. (Further) Group policies issued prior to January 1, 1997, shall be allowed to remain in force and not be required to meet the requirements of this chapter, as amended during the 1997 portion of the 1997-98 Regular Session, unless those polices cease to be treated as federally qualified long-term care insurance contracts. If such a policy or certificate issued on such a group policy ceases to be a federally qualified long-term care insurance contract under the grandfather rules issued by the United States Department of the Treasury pursuant to Section 7702B(f)(2) of the Internal Revenue Code, the insurer shall offer the policy and certificate holders the option to convert, on a guaranteed-issue basis, to a policy or certificate that is federally tax qualified if the insurer sells tax-qualified policies."¹⁴²

HIPAA Grandfather Rules for Certain Pre-1997 Insurance Contracts

The above California Insurance Code was designed to work with the Health Insurance Portability and Accountability Act that “grandfathered” LTCI policies, including group policies, issued prior to January 1, 1997 that met state requirements at the time of their issuance. Such policies are considered qualified and are eligible for the same tax advantages given to qualified policies issued on January 1, 1997 or later. However, the Act also provides that any “material change” in the contract will be considered as the issuance of a new contract. If this “new contract” does not meet the qualification requirements that must be met by all qualified LTCI policies issued beginning January 1, 1997, it will lose its qualified status.¹⁴³

Material Modifications

When a policy or certificate holder of an insurance contract issued prior to December 31, 1996, requests a material modification to the contract as defined by federal law or regulations, the insurer, prior to approving such a request, shall provide written notice to the policy or certificate holder that the contract change requested may constitute a material modification that jeopardizes the federal tax status of the contract and appropriate tax advise should therefore be sought.

A more exact definition of what constitutes a “material change” was not provided in the law, however, the I.R.S. has provided some direction in Notice 97-31 after which it was recommended that certain common practices should not cause LTCI policies issued before January 1, 1997, to lose their grandfathered status. The rules were changed in response to the criticisms, and the proposed regulations provide additional exceptions to the general rule that a material change in a LTCI contract issued prior to January 1, 1997, will be considered the issuance of a new contract.

The proposed regulations will provide that (a) the exercise of any right provided to a policyholder such as any right that can be exercised without the consent of the insurer or other such conditions, or by the addition of any right that is required by state law to be provided by the policyholder, will not be considered as a material change to a LTCI policy.¹⁴⁴

In addition, the proposed regulations provide that the following practices will not be treated as material changes for purposes of this section:

any change in the mode of premium payment, such as a change from paying premiums monthly to quarterly;
any class-wide increase or decrease in premiums for contracts that have been issued on a guaranteed renewable basis;
a reduction in premiums due to the purchase of a long-term care insurance policy by a member of the policyholder’s family;
any reduction in coverage (with correspondingly lower premiums) made at the request of a policyholder;
the addition, without an increase in premiums, of alternative forms of benefits that may be selected by policyholder;
the purchase of a rider to increase benefits under a pre-1997 contract if the rider would constitute a qualified long-term care insurance contract if it were a separate contract;
the deletion of a rider or provision of a contract (called HHS rider) that prohibited coordination of benefits with Medicare; and
the effectuation of a continuation or conversion of coverage right under a group contract following an individual’s ineligibility for continued coverage under the group contract.”

As emphasized earlier, the agent must be particularly careful when considering changes of any kind to an older long-term care policy that has been grandfathered into qualified status to make sure that it does not lose that status and the tax advantages adhering to it. In some situations, it may be preferable to leave a current policy in force and add another policy. In any event, when a potential tax problem arises, the advice of the insurer must be sought.

CONSUMER EXCHANGE PRIVILEGES

10232.23. (Sunsetted 7-1-01 - See Note At End Of Section)

A previous section of the California Insurance Code¹⁴⁵ stated that if a federal law or IRS decision declares that LTCI benefits that were not intended to be tax qualified, were either taxable or non-taxable, the LTCI owners would be given a one-time chance to exchange their LTCI policy. The mechanisms were set out in detail as to how this would be accomplished. However. this section became inoperative on July 1, 2001, and as of January 1, 2002, was repealed. As a result of the repeal, insurers are no longer required by law to offer NTQ policies to consumers nor are they required by law to allow consumers to switch from TQ to NTQ or vice versa, even if the IRS comes out with a statement that all benefits under NTQ policies will be taxable as income. Some insurers are allowing policyholders to make the change voluntarily. As far as can be determined, the IRS is hesitating to inform senior citizens who are disabled and collecting insurance benefits that their benefits will be taxable. Many tax experts believe that it will never happen, however the law does allow the taxation. An agent should keep in touch with the insurers in case it changes.

NAIC SUITABILITY STANDARDS

The 1996 NAIC Suitability Standards, as incorporated into the California Insurance Code¹⁴⁶, are required to be used by every insurer end other entity marketing LTC Insurance. Although it is the carrier’s responsibility to develop and use suitability standards and provide for the training of their agents and representatives in their use, agents and representatives should read and understand the NAIC requirements and the reasoning for such requirements. Understanding “why” will make it much easier to learn and retain these requirements.

It is difficult enough emotionally for a family to place a loved one or relative in a nursing home without the family having to also suffer the financial drain. A true professional can assist the family by providing advice on an alternate method of funding long-tem care.

LTCI policies are designed to alleviate the drain on the assets necessary fund care in a nursing home and the agent has the responsibility of comparing and explaining differences between the LTCI policies available as many have similar benefits and features that would avoid detection by one not well-versed in these plans. Even with the purchase of LTC Insurance, this does not automatically mean that the individual will avoid Medi-Cal when long-term care is needed. Each individual case is different so all known circumstances at the present time must be seriously considered.

In order to help consumers determine the need for protection against the costs of long-term care and to protect consumers in purchasing or replacing LTCI policies, every insurer or other entity marketing long-term care insurance contracts in California is required to:

Develop and use suitability standards to determine whether the purchase or replacement of long-term care insurance is appropriate for the needs of the applicant
Train its agents in the use of its suitability standards
Maintain a copy of its suitability standards and make then available for inspection upon request by the Commissioner

The agent and insurer must develop procedures that take into consideration, when determining whether the applicant meets the standards developed by the insurer, the following:

The ability to pay for the proposed coverage and other pertinent financial information related to the purchase of the coverage
The applicant’s goals or needs with respect to long-term care and the advantages and disadvantages of using insurance to meet these goals or needs
The value, benefits, and costs of the applicant’s existing insurance, if any, when compared to the values, benefits, and costs of the recommended purchase or replacement
The issuer and an agent (if involved) shall make reasonable efforts to obtain the information, including presentation to the applicant, at or prior to application, of the “Long-Term Care Insurance Personal Worksheet,” contained in the Long-Term Care Insurance Model Regulations of the National Association of Insurance Commissioners. (see Appendix D)

Personal Worksheet

The personal worksheet used by the insurer shall contain, at a minimum, the information in the NAIC worksheet in not less than 12-point type. The insurer may request the applicant to provide additional information to comply with its suitability standards. (see Appendix D)

In the premium section of the personal worksheet, the insurer shall disclose all rate increases and rate increase requests for any prior policies it has sold in the state.

A copy of the issuer’s personal worksheet shall be filed and approved by the Commissioner. A new personal worksheet shall be filed and approved by the Commissioner each time a rate is increased in California. The new personal worksheet shall disclose the amount of the rate increase in California and all prior rate increases in California as well as all prior rate increases and rate increase requests or filings in any other state. The insurer shall use the new personal worksheet within 60 days of approval by the Commissioner in place of the previously approved personal worksheet.¹⁴⁷

An agent who obtains information through the personal worksheet returns it to the issuer before the issuer considers the applicant for coverage. Neither the agent nor the insurer may sell or disclose the information in the worksheet outside the company or agency. The issuer then applies the information from the worksheet to its suitability standards to determine whether it should issue an LTC policy to the applicant. Life Insurance riders are exempt from this section.

RATE GUIDE - SUITABILITY STANDARDS

The California Insurance Code requires the premium section to include a statement that reads as follows: “A rate guide is available that compares the policies sold by different insurers, the benefits provided in those policies, and sample premiums. The rate guide also provides a history of the rate increases, if any, for the policies issued by different insurers in each state in which they do business, since January 1, 1990. You can obtain a copy of this rate guide by calling the Department of Insurance’s consumer toll-free telephone number (1-800-927-HELP), by calling the Health Insurance Counseling and Advocacy Program (HICAP) toll-free telephone number (1-800-434-0222), or by accessing the Department of Insurance’s Internet web site (www.insurance.ca.gov).” The issuer shall use the suitability standards it has developed pursuant to this section in determining whether issuing long-term care insurance coverage to an applicant is appropriate. Agents shall use the suitability standards developed by the insurer in marketing long-term care insurance. If the issuer determines that the applicant does not meet its financial suitability standards, or if the applicant has declined to provide the information, the issuer may reject the application.¹⁴⁸

Alternatively, the issuers shall send the applicant a letter similar to the “Long-Term Care Insurance Suitability Letter” contained in the Long-Term Care Model Regulations of the National Association of Insurance Commissioners. However, if the applicant has declined to provide financial information, the issuer may use some other method to verify the applicant’s intent. Either the applicant’s returned letter or a record of the alternative method of verification shall be made part of the applicant’s file. The insurer shall report annually to the Commissioner the total number of applications received from residents of this state, the number of those who declined to provide information on the personal worksheet, the number of applicants who did not meet the suitability standards, and the number who chose to conform after receiving a suitability letter. This section shall not apply to life insurance policies that accelerate benefits for long-term care.¹⁴⁹

IS LONG TERM CARE INSURANCE APPROPRIATE?

The following guide helps to determine if LTCI is right for an applicant:

You should NOT buy Long Term Care Insurance if:

You can’t afford the premiums.
You have limited assets.
Your only source of income is a Social Security benefit or Supplemental Security Income (SSI).
You often have trouble paying for utilities food medicine or other important needs.

You should CONSIDER buying Long-Term Care Insurance if:

You have significant assets and income.
You want to protect some of your assets and income.
You want to pay for your own care.
You want to stay independent of the support of others.¹⁵⁰

FUNDING LONG TERM CARE

Statistics by the truckload indicate that every person should be aware that they have a good chance of needing long-term care of some type or other. Long Term Care Insurance has been developed to serve the very useful function of protecting a person from the ravages of long-term care expense. That does not mean, however, that a LTCI policy should be sold to someone who really does not need it or cannot afford to buy it as that is counter-productive, at the very least, and does not serve the best interest of the consumer. This could mean that the agent and/or the insurer can be subject to penalties.

Not everyone will require long-term care, and those that do may not need, want or afford care in a luxurious setting. It is not possible to determine with certainty that an individual will spend a considerable amount of their remaining days under long-term care. The temptation is there to overemphasize the necessity for LTC Insurance and to overstate the facts during their sales presentation. Ethics and regulations require that an individual be made aware of the availability of insurance protection for long-term care, but further than that, advice must be appropriate to the situation of the individual. Agents are often instructed to imagine the prospect as a parent, and what would they then recommend in the particular financial and physical condition of the prospect.

There are many people who are concerned about the need for eventual long-term care, but who can afford to pay for their expenses if they should occur. Using their personal assets may be appropriate to fund their care, but often those that have considerable assets will want LTCI so that their assets will not be depleted if they should need extended long-term care—and they can afford the premiums. This is pure insurance—the shifting of risk from an individual’s assets (or family’s assets) to an insurance company.

Some professionals feel that if an individual would be impoverished after a year or so of paying for long-term care, then that person should probably not be considered as someone who can afford an LTCI policy premium. On the other hand, their children or other family members, however, may want to purchase a policy for them—another good reason to have family input when discussing LTCI.

There are those that simply cannot afford LTCI, and sometimes they are too proud to admit it. In those cases, eventually using Medi-Cal or Medicare may be a method of funding long-term care. Medicare only covers skilled nursing facility care for 20 days and for the next 80 days, the individual must pay over $100 per day (adjusted each year). However, Home Health Care is available, as discussed elsewhere, so there is some relief from Medicare.

Medi-Cal, as discussed in this text, may be the solution for those of limited means, but if there are assets over a very limited amount, those assets will be used to pay for long-term care.

Long Term Care Insurance provides the individual the freedom of choice. As the Department of Health and Human Services states, “long-term care insurance is sold by private insurance companies and usually covers medical care, such as bathing, dressing, using the bathroom and eating. Generally, Medicare doesn’t pay for long-term care. It’s very important to think about long-term care before you may need care or before a crisis occurs. You will have more control over your decisions.”¹⁵¹(Our emphasis)

When Should No Attempt Be Made to Sell a LTCI Policy?

Sometimes it may seem appropriate to discourage an individual from purchasing a LTCI policy, but there should be a word of caution. Anyone who has ever worked with the senior population knows that often looks are deceiving and there are those who have survived the ‘Great Depression” who are miserly and even lead a lifestyle that belies their actual wealth. If an agent recommended to such a person that they not purchase Long Term Care Insurance, and that individual later ended up on a nursing home, and there were family members who found out that her estate would not have had to been depleted if she had bought the insurance upon the advice of her agent, guess whose Errors and Omissions policy may come into play?

The lowest-priced LTCI policy, even if it is only for one year (not easily available), this allows a certain amount of choice and freedom for an individual, and in the worse scenario, this would take care of nursing home care that is not necessarily “long-term.” Sometime even the lowest of premiums is financially prohibitive. Obviously, if the individual would have to do without necessities or medication because of the premium, the LTCI is not for them and they should not be solicited for LTCI and they should be referred to Medi-Cal or another state or community program if care is needed.

It is not appropriate to solicit LTCI insurance if it causes financial hardship. What the determining point is in whether they can afford such a policy depends upon the situation. If, for instance, a person has assets less than $30-40,000, or $60-70,000 for a couple excluding the value of their home, they normally would not be considered as prospects for LTCI. Sometimes a family member will pay for all or part of the premium (usually because of the hope that in case of disability, the family member will not have to be a caregiver –or – familial affection could be the sole consideration). In that case, LTCI may be exactly what they need.

Obviously, those who are disabled may not qualify for the coverage, but some insurers will accept those with certain disabilities, but usually at higher rates. Then it would be necessary to determine whether the applicant can afford the higher premiums in addition to the medical costs they have because of their disability.

The wealthy prospect has already been discussed. Sometimes they are good prospects because they do not want their estate depreciated because of long-term care costs, but on the other hand, they may be able to afford their long-term care needs and they may not have any family member who would suffer because of the costs.

The “Good” Prospects

Taking into consideration that every situation is different, as a general rule it is usually agreed that individuals with assets between $50,000 and $1 million (excluding home or autos) are the “best” prospects, financially, for LTCI.

For those with assets in excess of $1 million, self-insuring could be a viable option, but this then opens up other opportunities. For instance, combination life insurance and LTCI policies, or annuities and LTCI policies, can be interesting choices, particularly if they pay a single premium. The advantages to these combination plans is that they “can have their cake and eat it too” inasmuch as any money not used for long-term care will be passed on to their heirs or their favorite charity.

There are many people with assets of $500,000 who will feel comfortable with the possibility that they could pay for their own long-term care. However, even if only one spouse needs long-term care, they could go through their assets in as little as 7 years. Seems like a short period of time to spend what it has taken a lifetime to accumulate, but if both persons should need long-term care, then they would watch their hard-earned money dissipate in 3-4 years.

Regardless of the income of the individuals, assuming they are middle-income or upper-income, Long Term Care Insurance benefits may be the ultimate decider as to whether a person or persons spend their declining years with their family, or whether they go into a nursing home—and whether the nursing home, if it comes to that, is of the quality and offers the service that they would want and could expect.

Whether a particular class of person is a good prospect for LTCI still determines the individual’s own situation. For the middle and upper-income prospect, it is good to look for a balance between the cost of the insurance and the potential benefits. The middle-income persons are the ones that would suffer the most, or whose family suffers the most, if long-term care became a necessity. They do not want to face losing everything so that they can qualify for Medi-Cal as that would mean not only the loss of money, but also the loss of their lifestyle.

The purchase of a LTCI policy does not necessarily mean that the person can completely avoid Medi-Cal always. IF a LTCI policy does not pay sufficient benefits to meet all of the long-term care expenses, Medi-Cal will eventually have to assist financially, and all that that entails. It is possible that a person already is covered by a LTCI policy that is inadequate in today’s financial world, so they may not be a good choice for a LTCI policy, but if they can afford it and can qualify medically, they could expect Medi-Cal to be “standing by” if they need long-term care, unless they increase their benefits and bring their policy and benefits “up-to-date.” Still, expenses could be so high that Medi-Cal may be the only recourse. Agents should make this point clear to prospects and urge prospects to get outside advice from HICAP or other independent sources before making a decision on purchasing long-term care insurance.

CHOICES OF PLANS AND BENEFITS

Structuring Appropriate Benefits

Long Term Care Insurance differs from most other insurance because there are so many choices that need to be made in order for the insured to have the most complete coverage that meets both the financial needs of the insured and also the emotional need. Often coverage may not be what would be totally desirable as there is a need to restrict the financial cost in order to meet a certain budget or financial restraints. It often becomes a situation where the benefits will have to be restricted or the cost will be increased to meet the needs and desires of the prospect. While there are many choices to be made, California requires that all LTCI policies be structured with standardized features for the protection of the consumer so some of the necessary decisions has already been made. There still remain many important decisions to be made and the consumer relies heavily upon the advice and knowledge of the agent.

When the consumer has determined (or agreed) that Long Term Care Insurance is the right and appropriate solution to funding long-term care if needed, the duty of the professional agent is to assist the consumer in selecting the proper and most efficient benefits and options while still working within the financial means of the consumer. The place to start is for the agent to assist the client in determining certain relevant points, such as:

When an agent is proposing the purchase of a long-term care policy, he or she must help the client address these basic coverage issues:

Who should be covered?
What is the primary coverage desired—nursing home, home health care or caregiver service?
How long should the benefit period be (benefit period)?
When should benefits start (elimination period)?
How much should the benefits pay (benefit amount)?
Why will Long Term Care Insurance be of value?

There are other variables, of course, that can be determined by interview and discussion. For instance, if there are family members available and willing to become caregivers in the home if needed, then the need for home health care can be reduced. Conversely, if the person is alone and will need to rely upon professionals for all of the long-term care, then nursing homes, retirement communities, or Assisted Living Facilities become more important.

There will always be the imponderables, such as how long they may need care, exactly what kind of care they may need, or even if they need Long Term Care Insurance at all. Yet, decisions have to be made as to the daily benefits—whether they will want or need for the full nursing home daily charge to be paid, or whether only partial coverage is needed. The length of the benefit period must be considered as well as the length of the elimination period.

These decisions are often based upon comparing the costs of the various options as the prime consideration, but really what is being decided is whether the consumer wants more protection for a shorter period of time, or vice versa, and such protection must be within their financial means.

Many times, if not most of the time, the most important decision must be how much they can afford to spend for the coverage. Therefore, as early as possible in the interview if some financial guidelines can be established, it will help in making suggestions. Of course, the consumer usually has no idea as to the cost of the policy, so they will need the basic knowledge of the benefits available, and what they would perceive as what they would like and what they would need. Then the professional agent can suggest altering benefits, elimination period, and other options so that the final product will balance out the needs and desires of the consumer with the financial cost of the benefits.

There are certain elements in determining the cost of the benefits that must be considered, including:

The applicant’s age and health at the time of application,
The deductible or waiting period before the policy begins paying benefits,
The combination of benefits included in the policy, such as home health care, nursing home care, Assisted Living Facilities, other Community Care, etc.,
The daily or monthly benefit, and
The number of years the insured will receive benefits.

Insurance companies that offer LTCI plans have their own training program for agents to solicit their policies and a detailed interview is beyond the scope of this text, however, as a refresher, there are certain questions that should always be asked in addition to the ones just discussed. A professional agent will determine if the prospect wants to leave money or property to another person after death, i.e., are they concerned about diminishing their estate. They should also determine if the prospect is willing to pay some costs of care on their own—which will have a big impact on the amount of coverage.

Again, it is necessary to determine what the consumer can afford to pay, which is often be difficult as many people just do not want others to know how much money they have. This must be handled correctly and discreetly, but some knowledge is necessary to help the consumer determine if they should buy a daily benefit large enough to cover 100% of the estimated daily care cost or should they self-insure a portion? Many of the prospects will have some income that they can use to supplement the insurance benefits. Conversely, some will need their income to pay other expenses, particularly if there is a spouse or other dependant. The prospect should be aware that it is not necessary for LTCI benefits to cover all of the long-term care expenses, and longer elimination periods or lower benefit amounts can reduce the overall premium. The old adage of “half a loaf is better than none” holds particularly true in arranging for long-term care benefits.

To do the job properly, agents must inform the consumer that there will be ancillary costs for supplies and services that are not included in the daily room rate charges for nursing homes. Therefore, if they purchase only enough daily benefits to cover room and board, they should have some source of additional funds to pay for haircuts, special diets, laundry, telephone, drugs & medicine, etc. As a starting point, it is often suggested that in order to have meaningful coverage when they need it the most, they should insure at least 80% of the risk.

Applicants can lower their premium by applying for lower benefits, however if they want to increase it later, they may be able to do so but the insurance company will want to have “evidence of insurability,” which means that they will have to answer certain health questions satisfactorily. Therefore, if their health has deteriorated since the policy was issued, they may not be able to receive higher benefits. Since LTCI insurance is usually sold to mature and senior individuals, the possibility of poorer health is quite real.

Generally, if the question arises, it is in the best interest of the applicant to apply for the maximum benefits that they anticipate and can afford, as they can later reduce benefits and therefore reduce the premium if they want, and there are no medical questions to answer.

Benefit Period/Benefit Maximum

IF (“big” IF) the applicant insists on always having long-term care coverage, then they should purchase a lifetime LTCI policy with no dollar limit. Like a Mercedes—nice, if you can afford it. Most people can’t. The other way may take more expertise than what the agent can provide, and that would be purchase a shorter-term policy that is presently affordable, and combine it with additional financial planning strategies as appropriate. This may be attractive to people such as up-and-coming professionals or business owners,

Applicants are going to want some figures—even if they cannot afford what is presented it will at least give them some guidelines. Consider that a simple one-year LTCI policy can provide benefits of $40,150 at the rate of $110 per day, in a RCF or nursing home. With inflation protection this amount will grow to $80,300 in 14 years and $160,600 in 30 years, but will cost an average premium of less than $100 per month for a 60 year old. This has been recommended by others as a “good starting point” when trying to solve the difficult problem of maximum benefits as it is reasonable considering that the insured would be 74 in 14 years, and more likely to need long-term care. By all means, this is not a recommendation for all prospects, but this reasoning is appropriate. With a modest (to many) premium, the insured has independence and protection.

When Premium is the Main or Only Consideration

Sometimes, premiums are without a doubt, the prerequisite for purchasing LTCI or going without insurance coverage. Therefore, there are some “rules of thumb” that may apply. For instance, a reasonable starting point could be a policy that covers nursing home care and residential care facilities (facility-only type of policy), with a 30 day waiting period and a benefit period of one or two years (there are those that absolutely will not recommend a one-year coverage—for a variety of reasons) and with the appropriate inflation coverage for their age.

Cover the Wife

While it is best to cover both spouses, there are times when they can only afford to cover just one. If such is the case, generally the wife should be insured as the majority of the caregivers and the majority of those receiving long-term care are women. There are exceptions, of course, where, for instance, the wife is not insurable. Studies indicate that 75 percent of nursing home residents over age 65 are women.¹⁵²

Older women are at much higher risk of chronic diseases and disabling conditions as they age and ultimately are more likely to require costly long-term care and Long-Term Care Insurance.¹⁵³

Different Coverages

If a couple cannot afford the same coverages on both spouses, insurers will usually allow differing amounts between the wife and husband. Care should be taken if there is a spousal discount if both are covered, as usually the discount applies only if both parties have the same coverage. Otherwise, the husband will usually choose a shorter benefit period than for the wife, as the wife is usually the caregiver for the other spouse. Also, home health care might be more important for the husband as the wife would fill the role of caregiver.

Consider also that when the husband purchases a LTCI policy covering him alone, the wife will still receive the greatest benefit because it pays for support that she needs to take care of her husband at home as long as she is able. After his death, the widow may be forced to enter a long-term care facility if there is no other family member to take care of her. It may be good to suggest that the wife purchase a strictly facility-care policy unless she can afford a comprehensive policy. If there is a sizeable life insurance policy on the husband, the proceeds should be taken into consideration also. Perhaps she does not need a policy if the life insurance is sufficient to take care of her and there are no other heirs. Depends again upon the situation, but in any event, it is not out-of-line to ask about life insurance.

AFFORDABILITY

Often “affordability” is synonymous with “suitability,” i.e., the ability of the applicant to pay, so, again, the conundrum of protection in the future based upon the availability of funds today. Premiums are in direct relationship with the benefit amount and duration of coverage purchased. Often there is the assumption that retired people on “fixed” income just do not have the necessary funds to purchase LTCI protection. This, of course, is speaking in generalities, but regardless, the growth of the income of retirees is quite considerable.

This chart ¹⁵⁴indicates that the elderly retirees have the highest growth of income of all age groups for the period 1980 – 2000. This does not mean, of course, that every senior citizen can afford the LTCI premiums, but it means that many can and that the amount of assets that they are trying to protect is growing also.

If the income of the retirees has grown, it is interesting to note the net worth growth of retirees during the same period of time (1980-2000)

As this chart¹⁵⁵ indicates, the older citizens also have experienced the highest growth in net worth of all age groups, indicative of the fact that they have more assets to protect. The elderly control 70% of the wealth in the U.S. and one might properly deduce that since net worth has grown, the size of the estates have risen, so adult children may help to pay LTCI premium so as to protect their inheritance.

STABILITY OF PREMIUMS

One of the most often asked questions is in respect to whether the premiums are guaranteed, or if the company can raise premiums—and if so, how often and on what basis. It would be great if the consumer was assured that there will never be a premium increase, but unfortunately, that it not the case. Long Term Care Insurance is a relatively new product and claims experience and other expenses are not sufficient to guarantee adequate premiums, with the result that some companies have had to increase their premiums, leading to concern among state Insurance Departments.

Those insurers that price, or have priced, their plans considerably lower than competition pose a potential problem for insureds inasmuch that the rates may have a significant increase because of claims. Some companies were more liberal with their underwriting, and if they also have lower rates, they either have vanished, been reinsured by another company, or have had large premium increases. These types of companies will probably not be around long enough to pay benefits in future years.

If a company marketed LTCI products at a price considerably lower than their competitors, it is fair to say that there is a great likelihood of substantial premium increases in the future. The reasons that some companies offer coverage at a lower price can range anywhere from a company trying to build a big block of business before they merge with another company (their worth would increase with more business), to a simple lack of knowledge and experience as to claims ratios and expenses of these products. Probably, however, premiums that are inadequate and that have to be increased are more often a function of poor underwriting prior to policy issuance than rising long-term care costs. The California Insurance Code recognizes the impact of poor or inadequate underwriting, and they require insurers to engage in proper underwriting before issuing LTCI policies.

Some (it used to be “many”) insurers have not had to raise their premiums and actually have suffered through losing market share because they were not competitive, but they “stuck it out” and have amassed experience in underwriting, rating, morbidity and other claims experience, and in administration. They are now in a position to where they can charge premiums that are adequate and the fact that they have not had to raise premium is a good sales point. There still may be increases in the future, but it is doubtful that the increases would be prohibitive, particularly since the Department of Insurance must approve of premium increases, and the companies are subject to the rate stabilization law.

To step back a few years—insurance companies who sell Long Term Care Insurance for the first time and as a new product, must acquire additional capital and surplus in order to build the distribution channels and other marketing activities, administrative staffs and claim Departments. Some of these companies that have entered the field have done so as LTCI companies, wherein the company only sells LTCI and long-term care related products, in essence, being a “specialty” company. Most of these companies are no longer in business, having sold or reinsured their business with other companies. Some of these companies have reported underwriting losses on their LTCI business for a considerable period of time. Within the past 3 years, 8 major producers have left the market or are making plans to leave.

Long Term Care Insurance is not a field for small, under-capitalized companies, or for those who cannot wait out several years of underwriting losses in order to build a large, profitable block of business. Those taking the middle ground also will usually exit the market because of high overhead and adverse selection because of the acquisition of business that would not be acceptable by the larger, more experienced companies.

PREMIUM PROVISIONS

Long Term Care Insurance premiums are based upon age, health and the product. The younger the buyer, the lower the premium—principally because of the lower morbidity charge at that age. The younger the applicant, the lower the risk of health problems. Rates do change by company (otherwise there would be anti-trust problems), but as a rough example, a person who is 50-years old will pay $X, a 60-year old with all things being the same, would pay $2X; a 70-year-old would pay 4X, and an 80-year old would pay about $4.3X (OK, it can be said that a 60-year old would pay about twice as much as a 50-year-old, etc.) In most cases, regardless of the insured’s age at the time of purchase, the premiums charged remain level for the life of the policy, although the premium for entire class may be increased if the policy is guaranteed renewable and the increase is approved by the Department of Insurance.

LTCI insurers use “Class Rates”—a process whereby an average price is applied to a particular pool of insureds that can be similar—there is considerable variance in how insurers define a “class.” For Guaranteed Renewable policies, the premiums for the entire class may be adjusted (up or down), but such adjustments must be on the entire class. No single policy (i.e., insuring a particular individual) can be rated differently than the others in the class based on an insurer’s claims experience on the entire block of business, or the individual’s age, health status, or claims experience. If the policy is non-cancelable and guaranteed renewable (rarely happens), the insurer cannot increase the premium.

Premiums will be different among insurers on the same plans and are based on the age and health condition of the applicant and the benefits chosen. As mentioned earlier, there are differences for the same basic coverage among companies. The following four companies are all rated by Best’s as A+ or higher, based upon $100 per day, 90-day elimination period, 4 year benefit and the first premium shown is with no inflation factor, 2d figure with inflation at 5% compounded.¹⁵⁶

Age 60 Age 70 Age 75

Company A $487 -1165 $1315- 2378 $2258- 3569

Company B $555 -1050 $1275- 2145 $2310- 3570

Company C $790- 1624 $1861- 3130 $3243- 5180

Company D $461- 969 $1428- 2339 $2419- 3552

Premium Collection Regulations

For all LTCI or Medicare Supplement policies sold in California, the insurer shall not require an amount greater than one month’s premium to be submitted with an application for the policy of insurance if interim coverage is not provided. If interim coverage is provided, the insurer shall not require an amount greater than two months premium for that purpose. No further premiums may be collected until the policy is delivered to the applicant.¹⁵⁷

The insurer must notify the applicant within 60 days from the date the insurer or producer receives the application as to whether or not the applicant will be issued a policy of insurance. If the applicant is not notified as required, the insurer or producer shall pay interest to the applicant on the fund that the applicant submitted with the application, at the legal rate of interest on judgments as provided in the Code of Civil Procedure, from the date the insurer or producer received those funds until they are refunded to the applicant or are applied toward the premium.¹⁵⁸

Family Premiums

Most insurers offer a premium discount—usually 10-15%—if both spouses purchase a LTCI policy from the same company at the same time, and most companies require that the benefits be the same (mirror image policy). The discount usually applies to both policies, but some may apply the discount only to one policy—the youngest or the oldest (varies). Recently, as a “spin-off” of group LTCI policies, the discount may be offered to other family members or resident of the same household, as long as the policies otherwise qualify for the discount.

STATUTORY RATE STABILIZATION

The National Association of Insurance Commissioners (NAIC) created and has proposed model regulations for the purpose of stabilizing the premiums for LTCI. The NAIC Model does suggest some restrictions on rate increase. In California, the provisions of SB-898 expanded these restrictions to include other requirements and sanctions when insurers exceed the stated “benchmark” amounts.¹⁵⁹ California, through these regulations, has taken the lead among states in addressing the thorny issue of consumer protection in stabilizing premiums.

Consumer Rate Guide

Referring again to the previous comparison of premiums among like-insurers for basically the same product, these companies use similar underwriting guidelines and benefits and benefit triggers and amounts are basically the same. While there is not that much difference among three of the companies, one company is considerably higher. It would be difficult to find that much disparity among other types of insurance. The only plausible reason for the differences in LTCI premiums is the actuarial assumptions upon which rates are based. While other lines of insurance have huge statistical bases upon which assumptions will nearly always approach actuality, this is not true in LTCI because it is so new and there has been so much difference in benefits, rates, underwriting and profits since its inception. Actuaries use “assumptions” which is their best, educated guess in relation to future experience, such as return on investments, morbidity rates, government regulations, general expenses, etc.

The California Department of Insurance and other regulators in the state, appreciate the confusion among their constituents and consumers because of the difference in rates. In addition to regulations dictating the calculation of premiums, the Insurance Department has created a consumer rate guide for Long Term Care Insurance that is very comprehensive and effective. It also helps the insurance industry by providing a mechanism for agents to compare policy coverages and price to other carriers, which in turn greatly assists the consumer in making decisions.

Regulations state that the Commissioner shall, by June 1 of each year, jointly design the format and content of a consumer rate guide for long-term care insurance with a working group that includes representatives of the Health Insurance Counseling and Advocacy Program, the insurance industry; and insurance agents. The Commissioner shall annually prepare the consumer rate guide for long-term care insurance that shall include, but not be limited to, the following information: (1) A comparison of the different types of long-term care insurance and coverages available to California consumers, and (2) A premium history of each insurer that writes long-term care policies for all the types of long-term care insurance and coverages issued by the insurer in each state.¹⁶⁰ "The consumer rate guide to be prepared by the Commissioner shall consist of two parts: a history of the rates for all policies issued in the United States on or after January 1, 1990, and a comparison of the policies, benefits, and sample premiums for all policies currently being issued for delivery in California.

(1) For the rate history portion of the rate guide required by this section, the Department shall collect, and each insurer shall provide to the Department, all of the following information for each long-term care policy, including all policies, whether issued by the insurer or purchased or acquired from another insurer, issued in the United States on or after January 1, 1990: (A) Company name. (B) Policy type. (C) Policy Form identification. (D) Dates sold. (E) Date acquired (if applicable) (F) Premium rate increases requested. (G) Premium rate increases approved. (H) Dates of premium rate increase approvals. (I) Any other information requested by the Department.¹⁶¹

(2) For the policy comparison portion of the rate guide required by this section, the Department shall collect, and each insurer shall provide to the Department, the information needed to complete the following form, along with any other information requested by the Department, for each long-term care policy currently issued for delivery in California, including all policies, whether issued by the insurer or purchased or acquired from another insurer: If an insurer does not offer a policy for sale that fits the criteria set forth in the sample premium portion of the policy comparison section of the rate guide, the Department shall include in that section of the form for that policy a statement explaining that a policy fitting that criteria is not offered by the insurer and that the consumer may seek, from an agent, sample premium information for the insurer’s policy that most closely resembles the policy in the sample.

The Department shall use the format set forth in this section for the policy comparison portion of the rate guide, unless the working group convened pursuant to subdivision (a) designs an alternative format and agrees that it should be used instead. In compiling the policy comparison portion of the rate guide, the Department shall separate the group policies from the individual policies available for sale so that group policies for all insurers appear together in the guide and individual policies for all insurers appear together in the guide. The policy comparison portion of the rate guide shall contain a cross reference for each policy form listed indicating the page in the rate guide where rate information on the policy form can be found. (c) Insurers shall provide the information required pursuant to subdivision (b) no later than July 31 of each year, commencing in 2000.^162"

The above is the Rate Guide required by SB 475 and SB 2111. It is available in print and an interactive version is available on the California Department of Insurance website: http://www.insurance.ca.gov There are three sections:

“buying insurance,”
“premium comparisons” and
“Long-Term Care.”

Consumer Rate Guide Distribution

The consumer rate guide shall be published no later than December 1^st of each year commencing in 2000, and shall be distributed using all of the following methods: (1) Through Health Insurance Counseling and Advocacy Program (HICAP) offices. (2) By telephone using the Department’s consumer toll-free telephone number. (3) On the Department’s Internet web site. (4) A notice in the Long-Term Care Insurance Personal Worksheet required by Section 10234.95. (e) Notwithstanding any other provision of law, the data submitted by insurers to the Department pursuant to this section are public records, and shall be open to inspection by members of the public pursuant to the procedures of the California Public Records Act. However, a trade secret, as defined in subdivision (d) of Section 3426.1 of the Civil Code, is not subject to this subdivision.¹⁶³

Actuarial Review of LTCI Policies

All LTCI policy premiums are now subject to actuarial reviews required under SB 898

REASONABILITY OF BENEFITS

"Benefits under individual long-term care insurance policies issued before new premium rate schedules are approved …shall be deemed reasonable in relation to premiums if the expected loss ratio is at least 60 percent, calculated in a manner that provides for adequate reserving of the long-term care insurance risk. In evaluating the expected loss ratio, due consideration shall be given to all relevant factors, including the following: (a) Statistical credibility of incurred claims experience and earned premiums. (b) The period for which rates are computed to provide coverage. (c) Experienced and projected trends. (d) Concentration of experience within early policy duration. (e) Expected claim fluctuation. (f) Experience refunds, adjustments, or dividends. (g) Renewability features. (h) All appropriate expense factors. (i) Interest. (j) Experimental nature of the coverage. (k) Policy reserves. (l) Mix of business by risk classification. (m) Product features, such as long elimination periods, high deductibles, and high maximum limits."¹⁶⁴

Filings of Premium Rate Schedules

The premium rate schedules for all individual and group long-term care insurance policies issued in this state shall be filed with and receive the prior approval of the Commissioner before the policy may be offered, sold, issued, or delivered to a resident of this state. All initial rate filings shall be subject to the following:

(a) No approval for an initial premium schedule shall be granted unless the actuary performing the review for the Commissioner certifies that the initial premium rate schedule is sufficient to cover anticipated costs under moderately adverse experience and that the premium rate schedule is reasonably expected to be sustainable over the life of the form with no future premium increases anticipated. The certification may rely on supporting data in the filing. The actuary performing the review may request an actuarial demonstration that the assumptions the insurer has used are reasonable. The actuarial demonstration shall include either premium and claim experience on similar policy forms, adjusted for any premium or benefit differences, relevant and creditable data from other studies, or both.

(b) The insurer shall submit to the Commissioner for approval a rate filing for each policy form that includes at least all of the following information: (1) An actuarial memorandum that describes the assumptions the insurer used to develop the premium rate schedule. The actuarial assumptions shall include, but not be limited to, a sufficiently detailed description of morbidity assumptions, voluntary lapse rates, mortality assumptions, asset investment yield rates, a description of all expense components, and plan and option mix assumptions. The memorandum shall also include the expected lifetime loss ratio and projections of yearly earned premiums, incurred claims, incurred claim loss ratios, and changes in contract reserves. (2) An actuarial certification consisting of at least all of the following:

(A) A statement that the initial premium rate schedule is sufficient to cover anticipated costs under moderately adverse experience and that the premium rate schedule is reasonably expected to be sustainable over the life of the form with no future premium increases anticipated.

(B) A statement that the policy design and coverage provided have been reviewed and taken into consideration.

(D) A complete description of the basis for contract reserves that are anticipated to be held under the form, to include all of the following:

Sufficient detail or sample calculations provided so as to have a complete depiction of the reserve amounts to be held.
A statement that the assumptions used for reserves contain reasonable margins for adverse experience.
A statement that the net valuation premium for renewal years does not increase (except for attained-age rating where permitted).
A statement that the difference between the gross premium and the net valuation premium for renewal years is sufficient to cover expected renewal expenses, or if that statement cannot be made, a complete description of the situations in which this does not occur and the type and level of change in the reserve assumptions that would be necessary for the difference to be sufficient. An aggregate distribution of anticipated issues may be used as long as the underlying gross premiums maintain a reasonably consistent relationship. If the gross premiums for certain age groups appear to be inconsistent with this requirement, the Commissioner may request a demonstration under subdivision (a) based on a standard age distribution.

(E) A statement that the premium rate schedule is not less than the premium rate schedule for existing similar policy forms also available from the insurer except for reasonable differences attributable to benefits or a comparison of the premium schedules for similar policy forms that are currently available from the insurer with an explanation of the differences.

(c)Premium rate schedules and new policy forms shall be filed by January 1, 2002, for all group long-term care insurance policies that an insurer will offer, sell, issue, or deliver on or after January 1, 2003, and for all previously approved individual long-term care insurance policies that an insurer will offer, sell, issue, or deliver on or after January 1, 2003, unless the January 1, 2002, deadline is extended by the Commissioner. Insurers may continue to offer and market long-term care insurance policies approved prior to January 1, 2002, until the earlier of (1) 90 days after approval of both the premium rate schedules and new policy forms filed pursuant to this section or (2) January 1, 2003. Insurers that have filed premium rate schedules and new policy forms by March 1, 2002, may continue to offer and market long-term care insurance policies approved prior to January 1, 2002, until the earlier of (1) 90 days after approval of both the premium rate schedules and new policy forms filed pursuant to this section or (2) June 30, 2003.

(d) Nothing in this section shall be construed as prohibiting an insurer from filing new group and individual policy forms, or from relieving an insurer of the obligation to file these forms, with the Commissioner after January 1, 2003, if the policy form meets all the requirements of this chapter."¹⁶⁵

Qualification of Insurance Department Actuaries

All actuaries used by the Commissioner to review rate applications submitted by insurers pursuant to this chapter, whether employed by the Department or secured by contract, shall be members of the American Academy of Actuaries with at least five years’ relevant experience in long-term care insurance industry pricing. If the Department does not have actuaries with the experience required by this section, the Commissioner shall contract with actuaries to review all rate applications submitted by insurers pursuant to this chapter. If the Department has actuaries that have the experience required by this section, but not enough of those experienced actuaries to perform the volume of work required by this chapter, the Commissioner may contract with independent actuaries, as necessary. If the Commissioner contracts with independent actuaries, the Commissioner shall promulgate regulations no later than January 1, 2002, to maintain the confidentiality of rate filings and proprietary insurer information and to avoid conflicts of interest.¹⁶⁶

Approval for Premium Increases

"No insurer may increase the premium for an individual or group long-term care insurance policy or certificate approved for sale under this chapter unless the insurer has received prior approval for the increase from the Commissioner. The insurer shall submit to the Commissioner for approval all proposed premium rate schedule increases, including at least all of the following information:

(a) Certification by an actuary, who is a member of the American Society of Actuaries and who is in good standing with that society, that: (1) If the requested premium rate schedule increase is implemented and the underlying assumptions, which reflect moderately adverse conditions, are realized, no further premium rate schedule increases are anticipated. (2) The premium rate filing is incompliance with the provisions of this section.

(b) An actuarial memorandum justifying the rate schedule change request that includes all of the following: (1) Lifetime projections of earned premiums and incurred claims based on the filed premium rate schedule increase, and the method and assumptions used in determining the projected values, including reflection of any assumptions that deviate from those used for pricing other forms currently available for sale. (A) Annual values for the five years preceding and the three years following the valuation date shall be provided separately. (B) The projections shall include the development of the lifetime loss ratio. (C) For policies issued with premium rate schedules approved under Section 10236.11, the projections shall demonstrate compliance with subdivision (a) of Section 10236.14. For all other implemented and the underlying assumptions, which reflect moderately adverse conditions, are realized, no further premium rate schedule increases are anticipated. The certification may rely on supporting data in the filing.

(f) The provisions of this section are applicable to all individual and group policies issued in this state on or after July 1, 2002. (1) The accumulated value of the initial earned premium times 58 percent. (2) Eighty-five percent of the accumulated value of prior premium rate schedule increases on an earned basis. (3) The present value of future projected initial earned premiums times 58 percent. (4) Eighty-five percent of the present value of future projected premiums not in paragraph (3) on an earned basis."¹⁶⁷

Approved Premium Rate Schedule Increases

Premium rate schedule increases that have been approved shall be subject to the following:

(a) For each rate increase that is implemented, the insurer shall file for approval by the commissioner updated projections, as defined in paragraph (1) of subdivision (b) of Section 10236.13, annually for the next three years and include a comparison of actual results to projected values. The commissioner may extend the period to greater than three years.

(b) (1) If the commissioner has determined that the actual experience following a rate increase does not adequately match the projected experience and that the current projections under moderately adverse conditions demonstrate that incurred claims will not exceed proportions of premiums specified in subdivision (a), the commissioner may require the insurer to implement any of the following:

(A) Premium rate schedule adjustments.

(B) Other measures to reduce the difference between the projected and actual experience.

(2) In determining whether the actual experience adequately matches the projected experience, consideration should be given to paragraph (5) of subdivision (b) of Section 10236.13, if applicable:

(c) If the Commissioner demonstrates, based upon credible evidence, that an insurer has engaged in a persistent practice of filing inadequate premium schedules, the Commissioner may, in addition to any other authority of the Commissioner under this chapter, and after the insurer is afforded proper notice and due process, prohibit the insurer from filing and marketing comparable coverage for a period of up to five years or from offering all other similar coverages, and may limit marketing of new applications to the products subject to recent premium rate schedule increases.

(d)This section shall not apply to life insurance policies and certificates that accelerate benefits for long-term care.

(e) The provisions of this section are applicable to all individual and group policies issued in this state on or after July 1, 2002.¹⁶⁸

COMMISSIONER’S ANNUAL REPORT TO THE LEGISLATURE

The Commissioner is required to file an annual report on long-term care insurance with the legislature. The report shall be compiled in consultation with a task force designated by the Commissioner for this purpose, which shall include insurance industry representatives, other individuals deemed appropriate by the Commissioner, and one or more representatives from each of the following:

• The Health Insurance Counseling and Advocacy Program.

• The California Health Policy and Data Advisory Commission

The Commissioner shall have the responsibility, in consultation with the task force, to develop analytic methods and to select indicators for evaluation of the impact of long-term care insurance on the public share of costs for long-term care.¹⁶⁹

Commissioner’s Authority

The Insurance Commissioner has the administrative authority to issue new regulations, and to assess various penalties against insurers, agents, brokers and others engaged in the insurance business for violation of any of the statutory provisions concerning long-term insurance. Upon showing that a violation has occurred in any civil action, the court may also assess penalties, including an award of reasonable attorney’s fees and costs to a prevailing plaintiff who establishes that a violation has occurred.

Actions for injunctive relief, penalties prescribed in this article, damages, restitution, and all other remedies in law or equity, may be brought in Superior court by the Attorney General, a district attorney, or city attorney on behalf of the people of the State of California for violation of any provision in this chapter. The court shall award reasonable attorney’s fee and costs to a prevailing plaintiff who establishes a violation of this chapter.¹⁷⁰

Administration and Enforcement

The Commissioner shall, as required by this chapter, or from time to time as conditions warrant, pursuant to Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code, adopt reasonable regulations, and amendments and additions thereto, as are necessary to administer this chapter. ¹⁷¹

Penalty Assessment for Violation of Regulations

In order to enforce the state’s laws and regulations regarding long-term care insurance, the Commissioner of Insurance has the authority to assess prescribed penalties for any violation.

In addition to all other powers and remedies vested in the Commissioner by law, the Commissioner shall have administrative authority to assess the penalties prescribed in this article for violation of any provision in this chapter against insurers, brokers, agents, and other entities which have been determined by the Commissioner to be engaged in the business of insurance. Upon a showing of a violation of this chapter in any civil action, a court may also assess the penalties prescribed in this article. The court shall award reasonable attorney’s fees and costs to a prevailing plaintiff who establishes a violation of this chapter. Actions for injunctive relief, penalties prescribed in this article, damages, restitution, and all other remedies in law or equity, may be brought in superior court by the Attorney General, a district attorney, or city attorney on behalf of the people of the State of California for violation of any provision in this chapter. The court shall award reasonable attorney’s fees and costs to a prevailing plaintiff who establishes a violation of this chapter."¹⁷²

This applies to insurers, agents, brokers and any other entity engaged in the business of insurance. These penalties are as follows:

Agent Penalties

Any broker, agent or other entity determined by the Commissioner to engage in the business of insurance, other than an insurer, who violates this chapter is liable for an administrative penalty of not less than $250 for each first violation.
If there is a subsequent or knowing violation of this chapter, the penalty will be not less than $1,000 and not more than $2,500 for each violation.
If there is an inappropriate replacement of Long-Term Care Insurance coverage, the penalty shall not be for more than $5,000 for each violation.
An insurer that violates this chapter is liable for an administrative penalty of not less than $5,000 for each first violation, and not less than $10,000 for each subsequent or knowing violation.
The penalty for violating this chapter in a manner indicating a general business practice, shall reflect the magnitude of violation against the public interest and shall not be less than $10,0000 and not more than $500,000.

All monetary penalties charged against agents, brokers, insurers or other entities must be paid to the Insurance Fund of the state of California.¹⁷³

Additional and Other Penalties

In addition to other penalties and remedies, the Insurance Commissioner may take any of the following actions upon determining that a violation of the long-term care insurance laws has occurred:

Suspend or revoke the license of any agent, broker, or other producer involved in the violation,
Suspend the Certificate of Authority to transact disability insurance of any insurer involved in the violation,
Order any agent, broker, insurer or other entity engaged in the insurance business to cease marketing a particular LTCI policy form or all LTC Insurance in California.
Any other necessary and reasonable action in order enforce and comply with the Insurance Code

Alternatively, the Commissioner may allow the insurer to choose to pay an additional penalty of up to $55,000 in lieu of suspension. If the insurer does not pay within a specified time, the Commissioner will proceed with the suspension.¹⁷⁴

Notice and Hearing

Any broker, agent, insurer, or other entity within the jurisdiction of the Department who is charged with a violation of this chapter shall be afforded due process, and be given the opportunity for a hearing, if requested, before any penalty is imposed.

When it appears that a violation has occurred, written notice will be served upon the person by registered mail. The notice will include:

A summary of the facts establishing reasonable cause that a violation as occurred.
Citation of the code section or other standard allegedly violated.
A statement of the Commissioner’s intent to assess a penalty including the amount of the penalty, or to seek another remedy.
A statement of the respondent’s right to elect any of the following:
To accept assessment of the penalty or other remedy as stated in the notice.
To respond to the charge in writing, after which the Commissioner may issue a final order or set a hearing.
To request, within 10 days of receipt of the notice, a public hearing.
If an ALB hearing is set by the Insurance Commissioner or requested by the respondent, notice of the hearing will be given and it will be held within 30 days.

At the hearing, all parties will have an opportunity to present evidence and testify.

After conclusion of the hearing, the administrative law judge will issue findings of fact and a proposed order. The Insurance Commissioner may allow the proposed order to become final or may issue his or her own final order. The Commissioner’s order may include any penalties or other actions permitted by law.

The proceedings must be conducted in accordance with the California Administrative Procedures Act, and the Department reserves the right to an APA hearing.

The final order of the Commissioner may contain one or more of the remedies set forth in this article. The amount of any penalty assessed need not be limited to the amount stated in the notice to the respondent.

In addition to the penalties set forth in this section and any other penalties provided by law, the Commissioner may suspend an insurer’s certificate of authority under Section 704 or assess a penalty under Section 704.7 if the Commissioner finds, after notice and hearing, that the insurer has violated this chapter or regulations adopted pursuant to his chapter of that the insurer has knowingly permitted any person or entity to do so.

If timely requested by the respondent or ordered by the Commissioner, a public hearing before the Administrative Law Bureau of the Department shall be held within 30 days after the notice is served. Within 20 days after the hearing, the administrative law judge shall issue findings of fact and a proposed order.

The Commissioner shall issue his or her final order or the proposed order shall become the final order of the Commissioner within 30 working days after the hearing unless reconsideration is granted for good cause by the administrative law judge. If the notice issued to the respondent assessed a penalty of one hundred thousand dollars ($100,000) or more and the respondent has timely requested, the hearing shall be conducted in accordance with Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code, and the Commissioner shall have all the powers granted therein. The final order of the Commissioner may contain one or more of the remedies set forth in this article. The amount of any penalty assessed need not be limited to the amount stated in the notice to the respondent.¹⁷⁵

The Right of the Commissioner to Waive Provisions

The Commissioner may waive any provision of these statutes regulating individual or group LTCI policies if he or she finds that:

The waiver is in the best interest of the insureds;
The fundamental purposes of these statutes could not be effectively or efficiently achieved without the waiver; and
The waiver is needed to develop an innovative and reasonable approach for insuring LTC, or
The policy or certificate is to be issued to residents of a life care community, continuing care retirement community or some other residential community for the elderly, and the waiver is reasonably related to the needs of the community; or
The waiver is needed to permit LTC Insurance to be sold as part of, or with, another insurance product.

The Commissioner may condition any waiver upon compliance with alternative requirements to achieve the purposes of this article.¹⁷⁶

STUDY QUESTIONS

1. All insurers, brokers, agents and others engaged in the business of insurance, owe a policyholder or prospective policyholder,

A. adequate information on which to base an opinion.

B. competitive rates on competitive products.

C. the latest in benefits and technology.

D. a duty of honesty and a duty of good faith and fair dealing.

2. California has certain marketing guidelines for LTCI policies, which includes

A. the premium to be charged for an insurance product.

B. establishing marketing procedures to ensure that excessive amounts of insurance are not sold or issued.

C. the amount of commissions that must be paid for first-year sales.

D. the amount of television or radio time that can be used to advertise a product.

3. Unfair trade practices include

A. comparing insurance products, even if accurately.

B. paying higher commissions to brokers than to agents.

C. providing ratings of insurance companies to prospective insureds.

D. marketing in a manner that does not disclose that the purpose of the method of marketing is to

solicit insurance or that an agent will be in contact with the prospect.

4. In order to market Long Term Care Insurance, a new agent must

A. post a $5,000 bond with the Department of Insurance.

B. be accompanied by another agent with at least 4 years experience.

C. complete Continuing Education of 8 hours each year.

D. forgo any commission during the first 6 months or 12 policies, whichever is greater.

5. Insurers who do not have the financial resources of top-rate companies

A. are the most likely to have premium increases.

B. are the ones that last the longest in marketing LTCI.

C. have the highest premiums.

D. will have the strictest underwriting requirements and the fewest benefits.

6. Ratings of insurance companies by the major rating bureaus

A. have always been able to tell when an insurer is in financial difficulty.

B. all use the same methods.

C. are opinions only.

D. are used by Departments of Insurance instead of examinations.

7. A form that provides summary information about the insurer and the product being offered is

A. the Shopper’s Guide to Long Term Care Insurance.

B. Summary of Information Form.

C. the pamphlet, “Why Should I Buy LTCI.”

D. the Outline of Coverage.

8. HICAP is

A. an agency of the State of California that provides financial details of insurers of LTCI through unscheduled financial examinations.

B. a non-profit program that assists seniors with help in Medicare, Medicare Supplement insurance, Long Term Care Insurance and other health insurance needs.

C. a branch of the U.S. Treasury Department that oversees any organizations that markets products primarily to senior citizens.

D. an insurance company based in Maryland that specializes in LTCI.

9. Long Term Care Insurance premiums are based upon

A. what the market will bear, more so than any other product except Homeowners.

B. age, health and the product.

C. the decisions of the various Board of Directors.

D. regulations of the Department of Insurance that dictate uniform premiums for LTCI.

10. All Long Term Care Insurance Products are subject to actuarial review as required by law

A. before new premium rate schedules are approved.

B. which determines the point at which premiums are permanently frozen for each product.

C. so that no insurance company makes more money than any other company.

D. so as to comply with HIPAA and OBRA ’93.

ANSWERS TO STUDY QUESTIONS

1A 2B 3D 4C 5A 6C 7D 8B 9B 10A