Private Long-Term Care Insurance

Background

Long-term care insurance (LTCI) can be purchased privately. Many policies cover a range of services in several settings, including homes, adult day service centers, assisted living, and nursing facilities. However, some people may not be able to buy a policy because they have a pre-existing condition or because they cannot afford one. For others, such as people who would become quickly eligible for Medicaid if they needed long-term services and supports, such insurance is not necessarily appropriate. A variety of factors have made the business model for LTCI more problematic over the years, and many insurance carriers have decided to stop selling long-term care products. Others are raising premiums, tightening medical underwriting, and eliminating or reducing policy discounts.

New product options may be available in some states to purchase more affordable short-term care insurance which offers benefits for up to one year. Short-term care insurance (also known as short duration LTCI, limited LTCI, and recovery care insurance) may offer home health, assisted living, nursing home, adult day services, and in some plans, prescription drug benefits. However, benefits may be limited and may not cover all levels of care.

Some companies also offer LTCI 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.

Some companies have begun to offer hybrid insurance products that combine life and LTCI or LTCI and an annuity. These products are very complex and generally require a substantial up-front premium, making them attractive more to people with significant resources. LTCI can also be very difficult to understand. Potential buyers need to understand many new terms—such as non-forfeiture protection and benefit triggers—and the importance of optional features such as inflation protection.

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 LTCI less attractive to new purchasers.

Premium rate stability—an important issue for consumers is whether LTCI premiums will increase beyond what they can afford and become unaffordable. 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 the benefit is very 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 LTCI, 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 LTCI have adequate training to explain how differences in a policy’s terms can 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 LTCI—there are some federal and state efforts to educate consumers about their risk for needing LTSS and on options for financing services including LTCI. These include the federal-state Own Your Future Awareness Campaign and the National Clearinghouse for Long-Term Care Information.

Nearly all LTCI 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 LTCI policies can add the cost of their premiums to medical expenses up to a maximum limit that increases with age. In addition, benefits received under an LTCI policy are not subject to federal taxes. Employers may also offer LTCI 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 LTCI. 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

Ensuring that long-term care insurance plays a role in financing long-term services and supports

In this policy: FederalState

If a public social long-term services and supports (LTSS) insurance system is enacted, private long-term care insurance (LTCI) should be designed to supplement its benefits. Without such a public system, tax incentives should be provided for the purchase of LTCI, but only for comprehensive policies (i.e., LTCI policies that do not limit benefits to only one or two types of LTSS care such as nursing home care). A comprehensive policy covers care in the home, adult day services, assisted living, and nursing home care with strong consumer protections.

Ensuring consumer protections

In this policy: FederalState

Federal and state governments should improve the quality of LTCI by enacting the strongest possible consumer protection standards and ensuring strong regulatory oversight to protect LTCI purchasers from inadequate policies, overly restrictive benefit triggers, and abusive sales practices.

Congress should enact minimum national consumer standards for LTCI policies that are stronger than those required in the 1996 Health Insurance Portability and Accountability Act (HIPAA). Congress should also require states to ensure that all federally qualified LTCI policies sold in the state 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 monitor the marketplace, ensure adherence to regulatory standards by insurers and agents, and vigorously enforce these standards.

Federal and state governments should ensure that hybrid LTCI products—such as life insurance and annuity products with an LTCI rider—and short-term care insurance products that provide benefits for up to one year are required to comply with the same consumer protection standards that other LTCI products must meet.

Meeting consumers' information needs

In this policy: FederalState

The public and private sectors should educate consumers about private LTCI and other methods for private financing of long-term services and supports (LTSS), so they understand their options, make informed choices, and avoid purchasing products that will not meet their needs or that have limited consumer protections. Insurance companies should be required to clearly inform consumers that rates quoted are not guaranteed for the life of the policy and that rates may be increased for the entire class of policyholders based on actuarial projections.

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 insurance model, the benefit packages should allow consumers to compare the prices of products with identical benefits and provisions and the quality of the insurance provider.

In the absence of standardized benefit packages, federal and state governments should require LTC insurers to provide information in a standardized format that enables consumers to compare insurance companies, policies, and benefits.

Insurance agents should inform potential LTCI purchaser of the difference between the coverage their policy offers (e.g., $150 per day) and the current rates for covered services in their geographic area, such as daily nursing facility rates.

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 LTCI, 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 information about the LTSS available in their state, and comparative information about insurers and their policies, including which services and supports each LTCI policy covers, and historical information about premium increases.

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

Ensuring meaningful long-term services and supports coverage

In this policy: FederalState

LTCI companies should be required to cover both nursing facility care and a wide range of home- and community-based services so that people can receive services in the most appropriate and least restrictive setting. Policies should have an option to receive cash benefits so that beneficiaries can direct their own services, thereby maximizing the LTCI benefit.

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 LTCI across all geographic areas.

Sales practices

In this policy: FederalState

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

Ensure affordability

In this policy: FederalState

States should set strong standards and a transparent process for approving requests for premium rate increases. All requests should be thoroughly reviewed by a qualified actuary.

States should require LTC insurers to provide a non-forfeiture benefit if premiums increase beyond a certain level.

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.

Maintaining reserves

In this policy: State

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

Encouraging the purchase of LTCI

In this policy: FederalState

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

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

Employers (or other sponsors) who provide health insurance should offer enrollees the option of voluntarily purchasing an LTCI policy at the time when they are purchasing their health insurance.

Pension funds

In this policy: FederalState

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