Private Long-Term Care Insurance

Background

Individuals can purchase coverage for nursing facility, assisted living, and home-care services through a private long-term care (LTC) insurance policy. Policies have become more comprehensive; most insurers now cover home health care, respite care, adult day services, assisted living, personal care, and hospice care. Some companies offer policy innovations that include reimbursement of family caregivers, payments for caregiver training, and the option to receive a cash benefit that consumers can use for any purpose. Despite some improvements in LTC insurance products, they are not an option for everyone. LTC insurance, especially the more comprehensive policies that provide meaningful coverage and consumer protections, is relatively expensive and thus, for many people, unaffordable. Moreover, some people cannot qualify due to preexisting conditions and medical underwriting.

Due to economic conditions and shrinking policyholder lapse rates, many insurance carriers have decided to stop selling LTC products. Others are raising premiums, tightening medical underwriting, and eliminating or reducing policy discounts. Insurance carrier profitability is suffering due to extremely low interest rates on investments and the failure of policyholders to drop coverage as often as the industry predicted. These trends are putting pressure on insurance carriers to address profitability by raising rates and reducing policy incentives and product features. These actions, in turn, make LTC insurance less attractive to new purchasers.

One option to address this trend is to require stricter standardization of LTC insurance policies. If sales were limited to a select number of product designs, consumers could more easily compare products and insurers could more accurately project realistic premiums. Also, standard LTC insurance products could dovetail with new social insurance approaches to financing long-term services and supports (LTSS).

Some companies have begun to offer hybrid insurance products that combine life and LTC insurance or LTC insurance and an annuity. These products are very complex and generally require a substantial up-front premium, making them attractive more to people with substantial resources.

Premium rate stability—an important issue for consumers is whether LTC insurance premiums will increase beyond what they can afford. When policyholders drop their coverage because they can no longer afford it, they can lose their entire premium investment. Insurers are not required to return any portion of it no matter how large the payments were. Some policies do provide some return, in cash or benefits, on the value of premiums invested. This is known as a “non-forfeiture” benefit. Non-forfeiture provides a reduced level of benefits after an insurance policy lapses or has been canceled. However, because it is so small—often covering no more than three months of nursing facility care—nonforfeiture is a last resort for consumers who no longer can afford their premiums. One consumer protection alternative is to give policyholders a contractual right to reduce the amount or duration of benefits, in any combination.

Consumer information needs—because of the high cost and complexity of LTC insurance, prospective purchasers need objective information to help them determine whether to buy it based on their financial circumstances, age, living situation, and health status. Such information would help ensure that consumers purchase appropriate coverage.

It is critical that agents who sell LTC insurance have adequate training to explain how differences in policy terms affect future benefits. For example, differences in inflation protection or waiting periods might make one policy appear less expensive because the consumer does not understand that future out-of-pocket costs would be considerably higher. It is also important to standardize policy definitions and describe benefit triggers in a clear, uniform format to help consumers compare policies, benefits, and costs.

Federal and state efforts to encourage the purchase of LTC insurance—a number of federal and state efforts have programs to educate consumers on their chances of needing LTSS and on options for financing services, such as LTC insurance. These include the federal-state Own Your Future Awareness Campaign and the National Clearinghouse for Long-Term Care Information.

Nearly all LTC policies sold today meet federal standards for favorable tax treatment specified by the Health Insurance Portability and Accountability Act (HIPAA) of 1996. Premiums are treated as medical expenses, which can be deducted to the extent they exceed a certain portion of adjusted gross income. People with qualified LTC insurance policies can add their premiums to medical expenses up to a maximum limit that increases with age. In addition, benefits received under an LTC insurance policy are not subject to federal taxes. Employers may also offer LTC insurance as a tax-free benefit.

A drawback to tax incentives is that they disproportionately benefit people with higher incomes, since these people face a higher tax rate and, thus, benefit more from each dollar spent on LTC insurance. Moreover, many people have incomes too low to owe taxes or have insufficient expenses to meet the medical deduction threshold.

Private Long-Term Care Insurance: Policy

Role of private-sector long-term care (LTC) insurance

In this policy: FederalState

Private-sector approaches should be considered partial solutions to the problem of financing long-term services and supports (LTSS).

A public social insurance system could be supplemented by private insurance to cover extra services.

Tax incentives for LTC insurance

In this policy: FederalState

In evaluating proposed tax incentives to encourage the purchase of private LTC insurance, policymakers should consider both the impact on tax revenues and the beneficiaries of the incentives.

Tax incentives should be provided only in conjunction with strong consumer protection standards.

Consumer education

In this policy: FederalState

The public and private sectors should educate consumers about private LTC insurance and other private financing methods so that consumers can understand their options, make informed choices, and avoid the potential risk of purchasing products that are ill-suited to their needs or for which there are limited consumer protections.

Consumer information needs

In this policy: FederalState

Federal and state governments should implement new reporting requirements for LTC insurers so that consumers have access to information in a standardized format that lets them compare insurance companies, policies, and benefits.

Insurance agents should advise purchasers of LTC insurance of the difference between the payment rates their policy offers (e.g., $150 per day) and the actual daily rates for nursing facility and home- and community-based care in their area.

Federal and state regulations should require that insurance agents are adequately trained to explain how differences in policy characteristics affect the future benefit that the purchaser may receive.

Federal and state agencies should make available to consumers the information regulators have collected on all aspects of the sale, use, and cost of LTC insurance, as well as on insurers’ marketing practices. The data should include uniform information about denied claims, lapse rates, and premium increases, and should be insurer and state specific.

States should provide consumers with a range of comparative information about insurers and their policies, including what LTSS are available in their state and which services and supports are covered by each LTC insurance policy in the state, as well as historical information about premium increases.

Each state should make the information it collects on LTC insurance available to consumers in marketing materials and through the state regulator’s website in a timely manner (e.g., within 30 days).

Consumer protection

In this policy: FederalState

Federal and state governments should adopt strong consumer protection standards and regulatory oversight to protect LTC insurance purchasers from inadequate policies, overly restrictive benefit triggers, and abusive sales practices.

Federal and state governments should improve the quality of LTC insurance by enacting the strongest possible consumer protection standards.

Federal and state governments should monitor the marketplace, ensure adherence to regulatory standards by insurers and agents, and vigorously enforce these standards, including through monetary penalties, should infractions or abuses occur.

Congress should enact minimum national consumer standards for LTC insurance policies. The standards should be stronger than those required in the 1996 Health Insurance Portability and Accountability Act (HIPAA).

State insurance departments should be required to approve all federally qualified LTC insurance policies sold in the state, to ensure that they meet HIPAA’s consumer protection requirements.

States should implement consumer protection standards that are at least equivalent to the most current version of the Long-Term Care Model Act and Regulation adopted by the National Association of Insurance Commissioners.

Federal and state governments should ensure that hybrid LTC insurance products contain consumer protection standards that are as strong as those required of other LTC insurance products.

Inflation protection

In this policy: FederalState

Insurers and agents should be required to educate prospective purchasers about the importance of inflation protection.

Insurance purchasers should have the opportunity to select inflation protection when they purchase a policy and periodically thereafter.

Coverage of home- and community-based care (HCBC)

In this policy: FederalState

LTC insurance companies should be required to cover both nursing facility care and a wide range of HCBC services, including participant-directed services, so that people can receive care in the most appropriate, least restrictive setting and can maximize the LTC insurance benefit.

Coverage options

In this policy: FederalState

Federal and state governments should establish standardized benefit packages that insurers would be required to offer and limit the number of packages so consumers have a manageable choice among products. Building on the Medigap model, the packages should allow consumers to compare the prices of products with identical provisions and the quality of the insurance provider.

Federal and state governments should explore regulatory reforms of private insurance products that provide coverage for a limited period of time, as a complement to a public social insurance system.

Insurers should be required to offer policyholders the opportunity to upgrade their policies in a fair and timely manner.

Portability

In this policy: FederalState

Insurers should be required to cover a full range of LTSS options, such as personal care or homemaker services, which are portable across all LTSS settings, including assisted living.

Policymakers should encourage the portability of LTC insurance across all geographic areas.

Sales practices

In this policy: FederalState

Federal and state governments should monitor the marketing of LTC insurance policies to ensure that they are not sold to individuals who cannot afford the premiums, and to prohibit false advertising.

Premium rates

In this policy: FederalState

Federal and state governments should require that insurers permit reductions in the amount, type, and duration of benefits for a reduced premium to people who can no longer afford the full premium.

Consumers should receive notice of reduction clauses when they receive a policy and with each rate increase.

States should adopt a rate-stability standard that provides incentives for insurers to set initial rates at actuarially correct levels and minimizes the probability of insurer requests to increase premiums in the future.

Strong standards for premium rate increases should be established by state regulation. States should require requests for premium rate increases to be thoroughly reviewed by a qualified actuary and be transparent to policyholders and the public. Rate increases should be approved only when established standards are met.

Non-forfeiture benefits

In this policy: FederalState

Policyholders should be ensured a nonforfeiture benefit if their premiums increase beyond a certain level.

Maintaining reserves

In this policy: State

States should ensure the solvency of insurance companies that offer LTC policies by establishing appropriate reserve requirements and monitoring companies’ financial performance.

Encouraging the purchase of LTC insurance

In this policy: FederalState

Private employers should receive incentives to offer LTC insurance coverage to employees and pay a part of the premium.

States should expand the availability of affordable LTC insurance products to private- and public-sector employees, retirees, and their families.

Sponsors of health insurance should offer enrollees the option of voluntarily purchasing an LTC insurance policy at the time they are purchasing their health insurance.

Pension funds

In this policy: FederalState

LTC insurance should not be paid for through pension funds, because many pension funds are already inadequate to provide economic security in retirement.