Chapter 2

Policy Provisions

 

 

 

Penalties

 

  Although an insurance agent is not necessarily the bad guy, enough agents have acted inappropriately causing specific legislation to be enacted.  CIC 10234.3 states:

 

  (a) 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.  The penalty for committing a subsequent or a knowing violation of this chapter shall be not less than $1,000 and not more than $25,000 for each violation.  The penalty for inappropriate replacement of long-term care coverage shall be not more than $5,000 for each violation.

 

  Any penalties levied are paid to the Insurance Fund.

 

Terms and Conditions

 

  As every agent knows, an insurance contract is a legal document.  As such, every term and condition stated in it is important.  California requires long-term care policies (contracts) to use the terms set forth in their requirements.  Each term used in the policy must also be defined in the contract using the following definitions, which apply to all LTC policies issued or delivered on or after January 1, 1990:

 

1.    Medicare must be defined as the Health Insurance for the Aged Act, Title XVIII of the Social Security Amendments of 1965 as then constituted or later amended, or Title I, Part I of Public Law 89-97, as enacted by the 89^th Congress of the United States of America and popularly known as the Health Insurance for the Aged Act, as then constituted and any later amendments or substitutes thereof, or words of similar import.  The official government handbook (Medicare and You 2004) defines Medicare as: Medicare is a health insurance program for people age 65 or older, people under age 65 with certain disabilities, and people with End-Stage Renal Disease (permanent kidney failure requiring dialysis or a kidney transplant).  Medicare has two parts: Part A and Part B.[1]  This is a simplistic definition but it is the one senior Americans are most likely to be familiar with.

 

2.    Skilled nursing care, intermediate care, home health care, and other services must be defined in relation to the level of skill required to perform the service, the nature of the care, and the setting in which the care is required to be delivered.

 

3.    All service providers of services must be defined in relation to the services and facilities required to be available and the licensure or degree status of those providing or supervising the services.  This includes, but may not be limited to, skilled nursing facilities, intermediate care facilities, and home health agencies.  The definition may require that the provider be appropriately licensed or certified. 10235.2

 

Applicant, Policy, and Certificate Defined

 

  Contract are designed for specific parameters.  In long-term care contracts the policy is designed for some form of long-term care.  Those benefits are designed for the applicant who is defined as:

 

1.    In the case of an individual long-term care insurance policy, the person who seeks to contract for the policy benefits.

 

2.    In the case of a group long-term care insurance policy, the proposed certificate holder (typically the company or company owner). 10231.4

 

  The certificate means any certificate issued under a group long-term care insurance contract that has been delivered or issued for delivery in California.  10231.5

 

  Policy means any policy, contract, subscriber agreement, rider or endorsement delivered or issued for delivery in California by an insurer, fraternal benefit society, nonprofit hospital service plan, or any similar organization that is regulated by the commissioner.  Policies are generally issued to individuals rather than groups.  10231.8

 

Group Long-Term Care Policies

 

  Group long-term care insurance means a long-term care insurance policy that has been delivered or issued to any of the following:

1.    One or more employers, labor organizations, trust or trustees of a fund established by one or more employers or labor organizations (or any combination thereof) for members or former members (or any combination thereof) of the labor organization.

 

2.    Any professional, trade, or occupational association for its current, former or retired members (or any combination thereof) if that association is composed of individuals all of whom are or were actively engaged in the same profession, trade or occupation or has been maintained in good faith for purposes other than obtaining insurance.

 

3.    An association, trust, or trustees of a fund established, created, or maintained for the benefit of members of one or more associations.  Prior to advertising, marketing, or offering the policy within California the association must file evidence with the commissioner that it has at the outset a minimum of 100 members and has been organized and maintained in good faith for a primary purpose other than that of obtaining insurance, has been in active existence for at least one year, has a constitution and bylaws that meet state requirements and consistently hold regular meetings at least annually for the benefit of the members, collect dues or solicit contributions from its members (except for credit unions), and provide members with voting privileges and representation on the governing board and committees.  Thirty days after that filing the association must be deemed to satisfy these organizations requirements, unless the commissioner makes a finding that the association does not satisfy those organizational requirements.

 

4.    A group other than as described in the previous descriptions that are subject to the issuance of the group policy or certificate is not contrary to the best interest of the public, the issuance of the policy will result in economies of acquisition or administration, the benefits are reasonable in relation to the premiums charged, the use of the true or fictitious name of the group, group master policyholder, group policy, certificate, or any trust created and used for the marketing of the group policy is not deceptive or misleading with regard to the status, character, or proprietary or representative capacity of the insurer, group, trust or other entity.  The groups main revenue source must not be related to the marketing of insurance.  The groups outreach method to obtain new members must not relate to the solicitation of insurance.  The group must provide benefits or services (other than insurance) of significant value to its members.  The commissioner will investigate the percentage of members using the other services and the monetary value of them.

 

5.    A life care contract provider that has received a certificate of authority in accordance with Californias statutes.  A life care contract provider who has not received the certificate of authority from the State Department of Social Services will be subject to these requirements.  10231.6

 

  Group policies received protection from the Health Insurance Portability and Accountability Act of 1996, signed into law on August 21^st, 1996 by President Clinton.  This law protects an estimated 25 million Americans (about 1 in 10) who move from one job to another, who are self-employed, or who have pre-existing medical conditions.  The desire of this legislation is to improve the availability of health insurance to working families and their children.

 

  Some of the key provisions include guaranteed access for small businesses with 50 or fewer employees, guaranteed renewal of insurance regardless of the members health conditions, guaranteed access for individuals who may have lost their job or changed employment, limits the length of time a worker can be excluded from coverage due to a pre-existing medical condition, places enforcement responsibility on the states (should a state fail to enforce the requirements, the Secretary of Health and Human Services can impose civil monetary penalties on insurers), provides a gradual increase in the tax deduction for self-employed people, and offers medical savings accounts for firms with 50 or fewer employees.  It also created a new health care fraud and abuse control program, to be coordinated by the HHS Office of the Inspector General and the department of Justice.  Funds were appropriated from the Medicare hospital Insurance (HI) trust fund.

 

  A key provision of HIPAA, as it relates to this course, are the minimum federal consumer protection and marketing requirements that were established for tax-qualified long-term care insurance policies, including a requirement that insurers start benefit payments when a policyholder cannot perform at least two activities of daily living.  While it is subject to certain limitations, it clarifies that long-term care insurance premium payments and un-reimbursed long-term care service costs are tax deductible as a medical expense, and benefits received under a long-term care insurance contract are excludable from taxable income.  Employer sponsored long-term care insurance is to receive the same tax treatment as health insurance.

 

  Medigap insurance policies saw the revision of the notice requirement for health insurance policies that pay benefits without regard to Medicare coverage or other insurance coverage.  Long-term care policies are permitted to coordinate with Medicare and other coverage and must disclose any duplication of benefits.

 

  All health care providers and health plans that engage in electronic administrative and financial transactions must use a single set of national standards and identifiers.  Electronic health information systems must also meet security standards.  The desire is a more cost-effective system of electronic claims processing and coordination of benefits.

 

  Viatical insurance settlements also were included in HIPAA.  A person who is within 24 months of death can have a portion of their death benefit of a life insurance policy prepaid by the issuing insurance company tax-free.  Such a person also is allowed to sell his or her life insurance to a viatical settlement company tax-free.  A chronically ill person can sell their life insurance and any long-term care insurance rider tax-free.  The proceeds of the sale must be spent on long-term care.[2]

 

A Consumers Right to Appeal

 

  Every policy and certificate must include a provision giving the policyholder or certificate holder the right to appeal decisions regarding benefit eligibility, care plans, services and provisions, and reimbursement payments.  10235.94

 

Renewal of Existing Policies

 

  All individual long-term care policies issued in California must contain a renewability provision.  This provision in the policy must be appropriately captioned, appear on the first page of the policy, and clearly disclose the term of coverage for which the policy was issued, the terms and conditions under which it will be renewed, and whether or not the issuer has the right to change the premium.  If the premium rate can be changed, the policy provisions must clearly describe each circumstance under which the premium may change.  10235.14 (a)

 

Guaranteed Renewable Policies

  Every individual and group long-term care policy or certificate under a group LTC contract must be either guaranteed renewable or non-cancelable.  So what does that mean?  Guaranteed renewable means that the insured has the right to keep their LTC coverage in force as long as premiums have been paid on time.  The insurer may not unilaterally change the terms of coverage or decline to renew, except that the insurer may, if the policy provisions allow, change the premium rates for all policyholders in the same class.  So, the cost of the policy could increase (decreases would be unlikely) but the policy must be renewed as long as the policyholder has paid the premiums on a timely basis.

 

Non-cancelable Policies

  Every individual or group long-term care policy and certificate must be, as we stated, either guaranteed renewable or non-cancelable.  Non-cancelable means the insured has the right to continue the coverage in force as long as premiums have been paid on time.  The insurer may not unilaterally change the terms of coverage, decline to renew, or change the premium rate.

 

  It is important to note a major difference between guaranteed renewable and non-cancelable policies: the first can increase premium rates while the second cannot.

 

  The type of renewal provision contained in the policy (guaranteed renewable or non-cancelable) must be appropriately captioned on page one.  It must clearly describe the initial term of coverage, the conditions for renewal, and, if guaranteed renewable, a description of the class and of each circumstance under which the insurer might change the premium rate.  10236.

 

  Premium rate schedules must follow the guidelines set down by the state where the contract is sought.  In California, premium rate schedules for all individual and group long-term care insurance polices must be filed with the state, and receive the commissioners approval before the policy can be offered, sold, issued, or delivered to a resident of California.  Before approval is received, the actuary performing the review for the commissioner must certify that the initial premium rate desired is sufficient to cover anticipated costs under moderately adverse experience and that the premium rate may be reasonably expected to be sustainable over the life of the form with no future premium increases anticipated.  The insurer will, of course, submit actuarial data to support this.  This data will include premium and claim experience from similar types of policy forms, adjusted for any premium or benefit differences that are relevant, and creditable data from other studies, or both.

 

  The insurer will submit statements that they believe their actuarial assumptions are based on sound information and statistics.  The statement will include such things as morbidity assumptions, voluntary lapse rates, mortality assumptions, asset investment yield rates, a description of all expense components, and plan and option mix assumptions.  Also included will be the anticipated lifetime loss ratio and projections of yearly earned premiums, incurred claims, incurred claim loss ratios, and changes in contract reserves.  10236.11.

 

  All actuaries used by the commissioner to review rate applications submitted by insurers must be members of the American Academy of Actuaries with at least five years relevant experience in long-term care insurance industry pricing.  They are not required to be employees of the state, however.  They may be paid by contract if the state feels that is appropriate.  When outside actuaries are used, confidentiality of rate filings and proprietary insurer information must be maintained and any conflicts of interest must be avoided.  10236.12.

 

  As every agent knows, premium increases can occur on guaranteed renewable products.  However, an insurer may not increase the premium for an individual or group long-term care policy or certificate unless the insurer has received prior approval from the commissioner for the rate increase.  To receive approval, the insurer must submit the following information:

        Certification by an actuary, who is a member in good standing of the American Society of Actuaries, that if the requested premium rate schedule increase is implemented and the underlying assumptions are realized, no further premium rate schedule increases are anticipated.

        An actuarial memorandum justifying the rate schedule change request with lifetime projections of earned premiums and incurred claims based on the filed premium rate schedule increase.  The method that was used to arrive at these assumptions must be included.

        A statement that the renewal premium rate schedules are not greater than new business premium rate schedules except for differences that are due to benefits provided.

        Sufficient information for approval of the premium rate schedule increase by the commissioner.

 

  These requirements would be applicable to all individual and group policies issued in California on or after July 1^st, 2002.  10236.13

 

Permitted Exclusions and Limitations

 

  No policy is required to cover everything and this is also true of long-term care plans.  While the California long-term care policies may not limit or exclude coverage by type of illness, treatment, medical condition, or accident, they may limit or exclude the following:

 

        Pre-existing conditions or diseases (may be excluded for the first six months following policy issue)

        Alcoholism and drug addiction

        Illness, treatment, or a medical condition arising out of any of the following:

      War or an act of war, whether declared or undeclared

      Participation in a felony, riot, or insurrection

      Service in the armed forces or units auxiliary thereto

      Suicide, whether sane or insane, attempted suicide, or intentionally self-inflicted injury

      Aviation in the capacity of a non-fare-paying passenger.

        Treatment provided in a government facility, unless otherwise required by law, services for which benefits are available under Medicare or other governmental programs (except Medi-Cal or Medicaid), any state or federal workers compensation, employers liability or occupational disease law, or any motor vehicle no fault law, services provided by a member of the covered persons immediate family, and services for which no charge is normally made in the absence of insurance.  This would not prohibit exclusions and limitations by type of provider or territorial limitations.  10235.8

 

  Each insurer must report annually (by June 30^th) the total number of claims denied by each class of business in the state and the number of these claims denied for failure to meet the waiting period or because of a pre-existing condition as of the end of the preceding calendar year.  The insurer must give each policy or certificate holder whose claim is denied a written notice within 40 days of the date of denial of the reason or reasons for the denial and all information directly related to the denial.  Insurers must annually report to the department the number of denied claims.  Any person may obtain this information from the insurance department by making a request for it.  10235.9

 

Termination of Long-Term Care Insurance

 

  If an insurer terminates a policy type for long-term care insurance benefits, anyone who is already receiving benefits must continue to receive them.  Obviously, it would not be possible to purchase another policy if benefits are already being received.  Specifically, California Insurance Code states: Termination of long-term care insurance shall be without prejudice to any benefits payable for institutionalization if that institutionalization began while the long-term care insurance was in force and continues without interruption after termination.  Payment of benefits, even if the policy were terminated, would be applicable to all policy provisions, including the duration of the benefit period if any, or to payment of the maximum benefits allowed under the policy.  Waiting periods would also apply.  10235.10

 

Reduced Benefits

Coverage Elimination Require Signed Acceptance

 

  All riders or endorsements that are added to an individual long-term care policy after its date of issue or at reinstatement or at policy renewal, which reduces or eliminates benefits or coverage must acquire a signed acceptance by the insured person.  This would not include riders and endorsements that are requested by the insured individual. 

 

  After the date of policy issue, any rider or endorsement that increases benefits or coverage with a concomitant increase in premium (both increase in benefits and increase in premium occur simultaneously) during the policy term must be agreed to in writing and signed by the insured, unless the increase is required by law.  If a separate additional premium is charged for the benefits provided in connection with riders or endorsements, that premium charge must be stated in the policy, rider, or endorsement.  10235.14 (b)

 

Policy Pre-existing Condition Limitations

 

  All California long-term care policies must clearly state pre-existing limitations in the policy for pre-existing medical conditions.  The limitations must appear as a separate paragraph of the policy or certificate.  It must be labeled preexisting condition limitations.

 

  In a separate paragraph, long-term care insurance policy limitations for eligibility must provide a description of those limitations or conditions, including any required number of days of confinement.  The paragraph must be labeled Limitations or Conditions on Eligibility for Benefits.  10235.14 (c) (d)

 

Replacement Notice

 

  CIC 10235.16 (a) requires long-term care insurance application forms to include a question specifically asking if the policy being sold will replace a policy previously purchased.  If policy replacement is taking place, the selling agent has certain responsibilities, including giving the consumer a notice regarding replacement.  This is called a replacement notice.  One copy must be retained by the applicant and an additional copy must be signed by the applicant and retained by the insurer.  This statement reads:

 

Notice to applicant regarding replacement of accident and sickness

Or long-term care insurance

 

  According to (your application) (information you have furnished), you intend to lapse or other wise terminate existing accident and sickness or long-term care insurance and replace it with long-term care insurance coverage to be issued by (company name) Insurance Company.  Your new coverage provides thirty (30) days within which you may decide, without cost, whether you desire to keep the coverage.  For your own information and protection, you should be aware of and seriously consider certain factors which may affect the insurance protection available to you under the new coverage.

1.      Health conditions which you may presently have (pre-existing conditions), may not be immediately or fully covered under the new coverage.  This could result in denial or delay in payment of benefits under the new coverage, whereas a similar claim might have been payable under your present coverage.

2.      You may wish to secure the advice of your present insurer or its agent regarding the proposed replacement of your present coverage.  This is not only your right, but it is also in your best interest to make sure you understand all the relevant factors involved in replacing your present coverage.

3.      If, after due consideration, you still wish to terminate your present coverage and replace it with new coverage, be certain to truthfully and completely answer all questions on the application concerning your medical health history.  Failure to include all material medical information on an application may provide a basis for the company to deny any future claims and to refund your premium as though your coverage had never been in force.  After the application has been completed and before you sign it, reread it carefully to be certain that all the information has been properly recorded.

 

  The above Notice to Applicant was delivered to me on:

 

  _______________________________     _____________________________________

                     Date                                              Applicants Signature

 

 

  The California commissioner defines inappropriate replacement of long-term care insurance in consultation with other interested parties.  (10235.17)

 

  For group coverage not subject to the 30-day return provision of Section 10232.7, the notice must be modified to reflect the appropriate time period in which the policy may be returned and premium refunded.

 

Material Improvement Required

  Except for replacement of group insurance, the replacement notice must include the following statement:

 

Comparison to Your Current Coverage:

 

I have reviewed your current long-term care coverage.  To the best of my knowledge, the replacement of insurance involved in this transaction materially improves your position for the following reasons:

___ Additional or ___ different benefits.

___ No change in benefits, but lower premiums.

___ Fewer benefits and lower premiums.

___ Other (please specify): _________________________.

 

Signature of Agent and Name of Insurer ____________________

Signature of Applicant __________________________________

Date: ____________

10235.16 (d)

 

Direct Response Solicitation

 

  Some policies are solicited and sold through the mail.  They must still comply with specific requirements of California.  Insurers using direct response solicitation must deliver a notice regarding replacement of accident and sickness or long-term care contracts when the policy or certificate is issued.  The required notice must state:

 

Notice to Applicant Regarding Replacement

of Accident and Sickness or Long-Term Care Insurance

 

  According to (your application) (information you have furnished), you intend to lapse or otherwise terminate existing accident and sickness or long-term care insurance and replace it with the (company name) Insurance Company.  Your new coverage provides 30 days within which you may decide, without cost, whether you desire to keep the policy or certificate.  For your own information and protection, you should be aware of and seriously consider certain factors, which may affect the insurance protection available to you under the new coverage.

1.      Health conditions which you may presently have (pre-existing conditions), may not be immediately or fully covered under the new coverage.  This could result in denial or delay in payment of benefits under the new coverage, whereas a similar claim might have been payable under your present coverage.

2.      You may wish to secure the advice of your present insurer or its agent regarding the proposed replacement of your present policy coverage.  This is not only your right, but it is also in your best interest to make sure you understand all the relevant factors involved in replacing your present coverage.

3.      (To be included only if the application is attached to the policy or certificate).  If, after due consideration, you still wish to terminate your present coverage, and replace it with new coverage, read the copy of the application attached to your new coverage and be sure that all questions are answered fully and correctly.  Omissions or misstatements in the application could cause an otherwise valid claim to be denied.  Carefully check the application and write to (company name and address) within 30 days if any information is not correct and complete, or if any past medical history has been left out of the application.

 

Company Name: ____________________________________________

 

  Group coverage that is not subject to the 30-day return provision of section 10232.7 may modify this form to reflect the appropriate time period in which the policy may be returned and premium refunded.  10235.18(a)(b)

 

Commissioner Can Waive Specific Provisions

 

  Californias insurance commissioner can waive specific provisions regarding long-term care policies if written investigations conclude:

1.    The waiver would be in the best interest of the states policyholders.

2.    The underlying purposes of Californias requirements could not be effectively or efficiently achieved without the waiver.

3.    The waiver is necessary to the development of an innovative and reasonable approach for insuring long-term care.

4.    The policy or certificate is to be issued to residents of a life care or continuing care retirement community or some other residential community for the elderly and the waiver is related to the specific needs or nature of the community.

5.    The waiver is necessary to permit long-term care insurance to be sold as part of, or in conjunction with, another type of insurance product.

 

  The commissioner may condition any waiver upon compliance with alternative requirements to achieve the required purpose.  10235.20

 

Designating a Third Party to Receive Lapse Notices

 

  No individual long-term care policy or certificate may be issued until the applicant has been given the right to designate at least one person, in addition to the applicant, to receive notice of lapse or termination of a policy or certificate for nonpayment of premium.  The insurer must receive from each applicant one of the following:

 

1.    A written designation listing the name, address, and telephone number of at least one person, in addition to the applicant, who is to receive notice of lapse or termination of the policy or certificate for nonpayment of premium.

 

2.    A waiver signed and dated by the applicant electing not to designate additional individuals to receive the notice.  The required waiver shall read as follows: Protection Against Unintended Lapse.  I understand that I have the right to designate at least one person other than myself to receive notice of lapse or termination of this long-term care insurance policy for nonpayment of premium. I understand that notice will not be given until 30 days after a premium is due and unpaid. I elect not to designate any person to receive the notice.  This form must be signed by the applicant.  10235.40 (a)

 

  The insurance company must offer the insured the right to change the person designated to be notified of a lapse no less often than once every two years.  10235.40 (b)

 

  In policies that utilize payroll or pension deduction plans, the third party designation requirement is not required to be met until 60 days after the policyholder or certificate holder is no longer on that deduction payment plan.  Since premiums are automatically deducted through the payroll or pension plans, there is not the danger of a lapse that would exist otherwise.  Therefore, this requirement would not exist unless that automatic payment plan ceased.  10235.40 (c)

 

  If payment does cease, whether from an automatic payment plan or on a billing plan, the insurer must notify the insured at least 30 days prior to the actual lapse of the policy.  Notice must be given to both the insured and their third party designation.  Notice must be sent to the addresses supplied by the insured through first-class United States mail. 10235.40 (d)

 

Benefit Reinstatement Due to a Policy Lapse

  Every long-term care policy and certificate must include a provision that provides for reinstatement of coverage in the event of a lapse.  The policy or certificate holder must provide the insurer proof that cognitive impairment or loss of functional capacity existed, which caused the lapse.  This option is available for five months following policy or certificate termination.  The insured would have to pay the premiums that are owed for the back time.  The proof of cognitive impairment or loss of functional capacity cannot be more stringent than the benefit eligibility criteria in the policy.  10235.40 (e)

 

 

 

 

Non-forfeiture Benefit

 

  California requires that every long-term care insurer offer a non-forfeiture benefit at the time of sale.  Please note that it must be offered; the consumer has the choice of purchasing it or not.  The shortened benefit period non-forfeiture benefit must have the following features:

        Eligibility must begin no later than after ten years of premium payments.

        The lifetime maximum benefit is no less than the dollar equivalent of three months of care at the nursing facility per diem benefit contained in the policy or the amount of the premiums paid, whichever is greater.

        The same benefits covered in the policy and any riders when eligibility begins are payable for a qualifying claim.

        The lifetime maximum benefit may be reduced by the amount of any claims already paid out.

        Cash back, extended term, and reduced paid-up forms of non-forfeiture benefits are not allowed.

        The lifetime maximum benefit amount increases proportionally with the number of years of premium payment.

 

  The non-forfeiture benefit requirements do not apply to life insurance policies that accelerate benefits for long-term care. 10235.30

 

Reducing Coverage in Order to Reduce Premium Costs

 

  California requires every policy issued include a provision that gives the policyholder or certificate holder the right to reduce their coverage in order to lower the cost of their policy.  This is often necessary if the policy is to stay in effect.  Otherwise, the insured could be financially forced to let the policy lapse entirely.  This may be accomplished during the first year in one of the following ways:

 

1.    By reducing the lifetime maximum benefit.

 

2.    By reducing the nursing facility per diem and reducing the home- and community-based service benefits of a home care only policy and of a comprehensive long-term care policy.

 

3.    By converting a comprehensive long-term care policy or certificate to a Nursing Facility Only or a Home Care Only policy, if the insurer issues those types of policies or certificates in California.

 

  The premium for the policy or certificate that is reduced in coverage will be based on the age of the insured at the issue age and the premium rate applicable to the amount of reduced coverage at the original issue date.  This allows the insured to still take advantage of the age they were at the time of the original application.  Any anticipated benefit increase adjustments contained in the original policy would still apply, although they would be based upon the decreased benefits.

 

  In the event that the policy or certificate is about to lapse, the insurer must provide written notice to the insured of the options available to decrease the cost of the policy.  In the event of a premium increase, the insured must be offered the option to lower premiums by reducing coverage.  10235.50. 

 

Increasing Long-Term Care Policy Benefits

 

  Every policy or certificate must include a provision under 10235.51 that gives the insured the option to elect, at least each anniversary date of their policy, to pay an extra premium for one or more riders that increase coverage in any of the following ways:

1.    Increase the amount of the per diem benefits.

2.    Increase the lifetime maximum benefit.

3.    Increase the amount of both the nursing facility per diem benefit and the home- and community-based care benefits of a comprehensive long-term care insurance policy or certificate.

 

  The premium for the riders, which will increase the coverage, may be based on the attained age of the insured.  The premium for the original policy will not be changed and will continue to be based on the insureds application age when the policy was originally issued.

 

  The insurance company does not have to grant the additional coverage without underwriting.  They are allowed to underwrite any additional coverage and charge any additional premium required.   The insurer may restrict the age for issuance of additional coverage and restrict the aggregate amount of additional coverage an insured may acquire to the maximum age and coverage the insurer allows when issuing a new policy or certificate.  This means that some new benefits may not be available to existing policyholders due to their current age.  New benefits also may not be available due to existing health conditions that prohibit acceptance.

 

  All rate increases must be approved by the Californias Insurance Commissioner.

 

Inflation Protection Benefits

 

  It is no secret that the costs of health care continue to climb often faster than any other consumer index.  Inflation protection attempts to offset these rising costs by increasing the benefit each year by a set percentage amount.

 

  In California no insurer is allowed to deliver or issue for delivery any long-term care product unless the insurer offers to each policyholder the chance to add inflation protection to their policy.  This has been required since January 1991, so policies issued previously to that date might not have inflation protection since it may not have been offered.  10237. 

 

  It is important to note that it must be offered; that does not always mean that the consumer has recognized the benefit or had the financial means to purchase it.  Inflation protection is typically a policy option.  This option is offered at the time of purchase.  10237.1

 

  The inflation protection option or feature must be no less favorable than one that does one or more of the following:

        Increases benefit levels annually in a manner that compounds annually at a rate of not less than 5 percent.

        Guarantees the insured individual the right to periodically increase benefit levels without providing evidence of insurability or health status and without regard to claim status or history as long as the option for the previous period has not been declined.  The amount of the additional benefit must be no less than the difference between the existing policy benefit and that benefit compounded annually at a rate of at least 5 percent for the period beginning with the purchase of the existing benefit and extending until the year in which the offer is made.

        Covers a specified percentage of actual or reasonable charges and does not include a maximum specified indemnity amount limit.

        The insurer of a group long-term care insurance contract must offer the holder of the group policy the opportunity to have the inflation protection extended to the existing certificate holders, but the insurer is relieved of the obligations imposed if the holder of the group policy declines the insurers offer. 10237.1(a)(b)(c)(d)

 

  If the policy is issued to a group, the inflation protection is offered to the group policyholder, typically the employer.  10237.2

 

  Some policies are not obligated to extend inflation protection options.  Life insurance policies and riders that contain accelerated long-term care benefits are not required to offer an inflation protection rider or benefit; nor must expense incurred policies.    Expense incurred policies do not specify certain percentages of charges up to a specified, indemnity-type maximum. Under this type of policy the actual expense is paid so it is not necessary to include an inflation protection rider.  10237.3

 

  In those polices that do benefit from an inflation protection rider, the benefit increases without regard to the insureds age, claim status and history, or the length of time the person has been insured under the policy.  An inflation protection benefit that provides for automatic benefit increases must include an offer of a premium that the insurer expects to remain constant.  Obviously, if premiums climbed too rapidly, most consumers would not feel they could afford to purchase the option.  The contract must disclose in a conspicuous manner that the premium can change in the future, unless it happens to be a guaranteed element of the policy.  Payment of claims will not reduce how the inflation protection rider increases the policy benefits.  10237.4 (a)(b)(c)

 

  The policy will contain an inflation protection provision unless the insured specifically rejects it.  The rate of increase must be at least 5 percent compounded annually. 

10237.5 (a)

 

Inflation Protection Rejection Form

  If the applicant rejects the inflation protection rider, there is a specific form that must be used.  It states:

 

  I have reviewed the outline of coverage and the graphs that compare the benefits and premiums of this policy with and without inflation protection.  Specifically, I have reviewed the plan, and I reject 5 percent annual compound inflation protection.

 

  The form must be signed and dated by the applicant.  10237.5(b)

 

Inflation Protection Information Contained in the OOC

  Each insurer must include the following information in or with the outline of coverage (OOC) regarding inflation protection benefits:

1.    A graphic comparison of the benefit levels of a policy that increases benefits at a compounded annual rate of not less than 5 percent over the policy period with a contract that does not increase benefits.  The graphic comparison must show benefit levels over at least a 20-year time period.

 

2.    Any expected premium increases or additional premiums to pay for automatic or optional benefit increases.  The insurer may use a reasonable hypothetical or graphic demonstration for purposes of this disclosure.  10237.6(a)(b)

 

  How does a 5% annually compounded increase work?  Five percent doesnt sound like a large increase, but over time, it does make a difference.  The five percent level was established by SB 870 as a means for the consumer to protect themselves over time from rising medical costs.  A $100 per day nursing home benefit would grow to $252 per day in twenty years.  Therefore, if Mildred had purchased a policy at age 60 and didnt need the coverage until age 80 she would have received $252 per day on the $100 per day benefit she originally purchased.  Obviously, if no inflation protection were purchased, the benefit would remain at a level $100 per day.  If she needed to use the policy at age 70, it would pay a benefit of $155 on the original $100 per day benefit that she purchased. 

 

 

Lets look at it in graph form:

 

Compounded benefits over twenty years
$300				$252
$250			$155
$200		$121
$150	$100
$100
Years:	1	5	10	20

Graph based on a $100 per day benefit purchase compounded at 5% each year.

A policy without Inflation Protection would remain at $100 per day each year.

 

  According to the Administration on Aging annual increases in nursing home costs in California is low when compared to the rest of the country, coming in at just 3.5 percent between 1999 and 2000.[3]  Even so, costs are rising and it makes sense to purchase inflation protection to offset those increases. 

 

  What can we expect for future costs?  The California Office of Statewide Health Planning and Development, 2000, estimates that by 2010 we can expect costs between $65,000 and $81,000 per year to stay in a nursing home.  By 2030 that figure will be between $118,000 and $215,000.

 

Annual Increases in California Nursing Home Rates

OSHPD, 2000

 

  From all we see in the news we would expect a state such as Florida to have the highest concentration of elderly.  In fact, Florida is second to California, according to the California Advocates for Nursing Home Reform.  If their statistics are correct, the state must promote such features to avoid being buried in Medi-Cal payments for the elderly in nursing homes and other facilities.

 

New Benefits Not Previously Available

 

  If an insurer develops new benefits that were not previously available to the consumer, the insurance company must grant current policyholders and certificate holders who are not in a benefit period or within the elimination period the following rights:

1.    The policyholder will be notified of the availability of the new benefits, benefit eligibility, or new policy within 12 months.  The insurers notice must be filed with the department at the same time as the new policy or rider.

2.    The insurer must offer the policyholders the new benefits or benefit eligibility in one of the following ways:

(a)    By adding a rider to the existing policy.  The insured would pay a separate premium for the new benefit based on the insureds attained age.  The rider would not affect the existing policys premium.

(b)   By replacing the existing policy with one that contains the new benefit.  In this case, they would have to follow the guidelines in 1234.87, which states that the insurer must recognize past insured status by granting premium credits towards the premiums for the replacement (new) policy.  The premium credits must equal five percent of the annual premium of the prior policy or certificate for each full year the prior policy or certificate was in force. The premium credit must be applied toward all future premium payments for the replacement policy, but the cumulative credit allowed need not exceed 50 percent.  No credit need be provided if a claim has been filed under the original policy or certificate.  The cumulative credits allowed do not reduce the premium for the replacement policy to less than the premium of the original policy.

(c)    By replacing the existing policy or certificate with a new policy in which case consideration for past insured status must be recognized by setting the premium for the replacement policy at the issue age of the one being replaced.

 

  The insured can be required to undergo new underwriting, but the underwriting can be no more restrictive than if the policyholder were applying for a new policy.  10235.52(b)

 

  Group policies must offer their members the opportunity to have the new benefits and provisions extended to existing members, but the insurer is relieved of the obligations imposed if the holder of the group policy declines the issuers offer.  10235.52(c)

 

  The requirement to notify members of new benefits or new policies that did not previously exist may be extended from 12 months to 18 months if all of the following conditions are met:

1.    The insurer elects to offer their insureds with policies that contain an upgrade right approved prior to January 1^st, 2000, the opportunity to exchange their policies for a new policy that was filed and approved under the guidelines of California.

 

2.    The notification and offer to policyholders is made within 18 months after approval of the insurers policy filed to comply with the requirements of Chapter 947 of the Statutes of 1999.

 

What If A New Government LTC Option Is Developed?

 

  In the event some type of national or state long-term care program is created (which is not part of Medi-Cal) through public funding that would substantially duplicate benefits covered under the policy or certificate previously purchased, the policyholder would have the right to select either a reduction in future premiums or an increase in future benefits.  An actuarial method for determining the premium reductions and increases must be mutually agreed upon by the insurance department and insurers.  The amount of premium reductions and future benefit increases would be based on the extent of the duplication of covered benefits, the amount of past premium payments, and claims experience.  Each  insurers premium reduction and benefit increase plans would be filed and approved by the insurance department.  10235.91

 

Continuation or Conversion of Group Coverage

 

Continuation coverage means the maintenance of coverage under an existing group policy when that coverage would be or has been terminated and which is subject only to continued timely payment of premium.  10236.5(b)

 

Conversion coverage means an individual policy of long-term care insurance, issued by the insurer of the terminating group coverage, without considering insurability, containing benefits which are identical, or that have been determined by the commissioner to be at least substantially equivalent, to the group coverage that would be or has been terminated for any reason.  10236.5(c)

 

Maintaining Coverage Following a Divorce or Death

  These are important terms for group coverage.  Any insured individual whose eligibility for group coverage is based on his or her relationship to another person must be entitled to continuation coverage under the group policy if the qualifying relationship terminates by dissolution of marriage or death.  This means that a child or divorcing spouse will still be eligible for coverage under the group despite the divorce.  The insurer may not increase the premium charged based upon the divorce from the primary member.  Of course, it would be necessary to continue the paying the premiums in order to maintain the coverage.  10233.2 (e)

 

  When determining whether benefits are substantially equivalent, the commissioner will consider many elements including the relative advantages of managed care plans which use restricted provider networks, service availability, benefit levels, and administrative complexity.

 

  The premium for the converted policy is calculated on the insureds age at the time the group certificate was issued.  If the terminating group coverage replaced previous group coverage, the premium for the converted policy will be calculated on the insureds age at the time the previous group certificate was issued.  Before issuing conversion coverage the insurer may require, if adequate notice is provided to certificate holders, that:

 

1.    The individual must have been continuously insured under the group policy that is being replaced for at least six months immediately prior to termination in order to be entitled to conversion coverage.

 

2.    The insured must submit written application for a conversion policy within a reasonable period of time after termination of the previous group plan.  Premium must be paid as required so that the conversion policy is effective on the day following termination of the previous group coverage.

 

3.    The conversion policy contains a provision for a reduction of benefits if the insured has existing long-term care insurance, payable on an expense-incurred basis, which, together with the conversion policy, would result in payment of more than 100% of incurred expenses.  This provision cannot be included in the conversion policy unless the reduction in benefits is reflected in a premium decrease or a refund.

 

4.    The conversion policy contains a provision limiting the payment for a single claim, spell of illness, or benefit period occurring at the time of conversion, to the amount that would have been payable had the group coverage remained n effect.  10236.5(c)

 

  Each group insurance certificate issued in California must provide continuation or conversion coverage for the certificate holders if the group plan terminates.  There are some exceptions to this, however.  They are:

 

1.    The termination resulted from the failure of the policyholder to make required payment when due.

 

2.    The terminating coverage is replaced not later than 31 days after termination by a new group plan effective on the day following the termination of the previous plan.  The replacement plan would have to meet two criteria: (a) the replacement coverage provides benefits identical to or better than the replaced contract, and (b) the premium for the new plan is calculated on the insureds age at the time of issue of the first plan.  If the terminating plan had itself been part of a previous replacement the premium for the newest replacement is calculated on the insureds age at the time the previous group certificates were issued.  10236.5(a)

 

  When a group long-term care policy is replaced by another to the same master policyholder issued, the replacing insurer must do all of the following:

 

1.    Provide benefits identical to the terminating coverage or benefits determined by the commissioner to be at least substantially the same.  Obviously greater benefits would not be a problem.  Lesser benefits may be provided if the commissioner determines the replacement coverage is the most advantageous available choice for the beneficiaries.

 

2.    Base the premium cost on the issue age of the original policy.  If the coverage being replaced has itself replaced previous coverage, the premium for newest replacement coverage must be calculated on the insureds age at the time the previous group certificate was issued.  If the replacement coverage adds new or increased benefits, the premium for the new or increased benefits may be calculated on the insureds age at the time of replacement.

 

3.    Offer coverage to all persons covered under the replaced group policy on its date of termination.

 

4.    Not exclude coverage for preexisting conditions if the terminating group coverage would provide benefits for those preexisting conditions.

 

5.    Not require new waiting periods, elimination periods, probationary periods, or similar preconditions related to preexisting conditions.  The insurer must waive any such time periods applicable to preexisting conditions to the extent that similar preconditions have been satisfied under the terminating group coverage.

 

6.    Not vary the benefits or the premium based on the insureds health, disability status, claims experience, or use of long-term care services.  10236.8

 

Outline of Coverage (OOC)

 

  An outline of coverage is a summary of the terms of a policy or certificate that can be used to compare different policies.[4]  All policies issued in California must contain an Outline of Coverage, which must be presented at the time of the initial solicitation.  The font must be no smaller than 10-point type.  It is not necessary to actually apply for a policy in order to get an Outline of Coverage (OOC).  Since it is used as a comparison tool, an individual should be able to get an OOC simply by requesting one.  10233.5

 

  When an agent is presenting a particular policy for sale, the Outline of Coverage must be prominently displayed by the selling agent so that the potential policyholder will be able to read it and ask questions.  In the case of mail solicitation, the OOC must be presented in conjunction with any application or enrollment form.

 

  Since the OOC is an explanation of the policy, it must be a freestanding document.  It will state whether the policy being solicited is a tax qualified federal plan or a non-tax qualified California plan.

 

  The Outline of Coverage may not contain any material that advertises the policy being solicited.  The text and sequence of that text is set by the state of California and must follow that format.  Text that is capitalized or underscored in the OOC may be emphasized by other means as long as they provide prominence equivalent to the capitalization or underscoring.  The document will state:

 

Company Name

Company Address

LONG-TERM CARE INSURANCE

OUTLINE OF COVERAGE

 

1.      This policy is (an individual policy of insurance) (a group policy) which was issued in the (indicate jurisdiction in which group policy was issued).

2.      PURPOSE OF OUTLINE OF COVERAGE. This outline of coverage provides a very brief description of the important features of the policy.  You should compare this outline of coverage to outlines of coverage for other polices available to you.  This is not an insurance contract, but only a summary of coverage.  Only the individual or group policy contains governing contractual provisions.

  This means that the policy or group policy sets forth in detail the rights and obligations of both you and the insurance company.  Therefore, if you purchase this coverage, or any other coverage, it is important that you READ YOUR POLICY (OR CERTIFICATE) CAREFULLY! 

3.      TERMS UNDER WHICH THE POLICY OR CERTIFICATE MAY BE RETURNED AND PREMIUMS REFUNDED.

a.      Provide a brief description of the right to return free look provision of the policy.

b.      Include a statement that the policy either does or does not contain provisions providing for a refund or partial refund of premium upon the death of an insured or surrender of the policy or certificate.  If the policy contains those provisions, include a description of them.

4.    THIS IS NOT A MEDICARE SUPPLEMENT COVERAGE.  If you are eligible for Medicare, review the Medicare Supplement Buyers Guide available from the insurance company.  The agents form will state: Neither (company name) nor its agents represent Medicare, the federal government or any state government.  Direct response companys form will state: (Company name) is not representing Medicare, the federal government or any state government.

5.      LONG-TERM CARE COVERAGE.  Policies of this category are designed to provide coverage for one or more necessary or medically 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 home.

  This policy provides coverage in the form of a fixed dollar indemnity benefit for covered long-term care expenses, subject to policy (limitations) (waiting periods) and (coinsurance) requirements.  (This would be modified if not an indemnity policy).

6.      BENEFITS PROVIDED BY THIS POLICY.

a.      Covered services, related deductibles, waiting periods, elimination periods, and benefit maximums will be stated here in the Outline of Coverage.

b.      Institutional benefits, by skill level, will be stated.

c.      Non-institutional benefits, by skill level, will be stated.

d.      Any benefit screens must be explained in this section.  If these differ for different benefits, explanations of the screens must accompany each benefit description.  If an attending physician or other specified person must certify a certain level of functional dependency in order to be eligible for benefits, this too must be specified.  If activities of daily living, called ADLs, are used to measure an insureds need for long-term care, then these qualifying criteria or screens must be explained.

7.      LIMITATIONS AND EXCLUSIONS.

a.      This section will describe preexisting conditions, non-eligible facilities and providers, non-eligible levels of care, such as unlicensed providers, care or treatments provided by family members, any exclusions or exceptions, and limitations.

b.      Also stated here will be the following: THIS POLICY MAY NOT COVER ALL THE EXPENSES ASSOCIATED WITH YOUR LONG-TERM CARE NEEDS.

8.      RELATIONSHIP OF COST OF CARE AND BENEFITS.  Because the costs of long-term care services will likely increase over time, you should consider whether and how the benefits of this plan may be adjusted.  (As applicable, the following would be included in the OOC:

a.      That the benefit level will NOT increase over time.

b.      Any automatic benefit adjustment provisions.

c.      Whether the insured will be guaranteed the option to buy additional benefits and the basis upon which benefits will be increased over time if not by a specified amount or percentage.

d.      If there is a guarantee, include whether or not additional underwriting or health screening will be required, the frequency and amounts of the upgrade options, and any significant restrictions or limitations.

e.      Finally, there will be a description of any additional premium charge imposed and how that is to be calculated.

9.      TERMS UNDER WHICH THE POLICY (OR CERTIFICATE) MAY BE CONTINUED IN FORCE OR DISCONTINUED.

a.      The policy renewability provisions will be described here.

b.      For group coverage, there will be specific descriptions of continuation/ conversion provisions applicable to the certificate and group policy.

c.      Waiver of premium provisions will be described if there are any.  If none exist, it will so state.

d.      How the company can change premiums will be stated.  Each available circumstance of premium change will be described.

10.  ALZHEIMERS DISEASE, ORGANIC DISORDERS, AND RELATED MENTAL DISEASES.  It will state that the policy provides coverage for insureds clinically diagnosed as having Alzheimers Disease, organic disorder, or related degenerative and dementing illnesses. It will specifically describe each benefit screen or other policy provision that provides preconditions to the availability of policy benefits for that insured.

11.  PREMIUM.  It will state the total annual premium charged for the policy.  If the premium varies with an applicants choice of benefit options, premium will indicate the cost for each option available.

12.  ADDITIONAL FEATURES.  It will indicate if medical underwriting is used and other important features will be described.

13.  INFORMATION AND COUNSELING.  The California Department of Insurance has prepared a Consumer Guide to Long-term Care Insurance.  This guide can be obtained by calling the Department of Insurance toll-free at 1-800-927-HELP.  Additionally, the Health Insurance Counseling and Advocacy Program (HICAP) administered by the California Department of Aging, provides long-term care insurance counseling to California senior citizens. Call the HICAP toll-free number at 1-800-434-0222 for a referral to your local HICAP office.

 

Consumer Protection

 

  Every agent has specific responsibilities when selling or replacing a long-term care insurance policy.  In our example, Mildred did not purchase or own an insurance policy.  Had she done so, some or all of her costs would have been transferred to the insurer.  This is known as transference of risk.  The desire by consumers to transfer risk is the reason they purchase car insurance, fire insurance, major medical health insurance, disability insurance, and life insurance.

 

  In all kinds of industries, including insurance, it has been legally ruled that the actions of some professions can adversely affect consumers.  In the interest of consumer protection, laws are passed.

 

  Every agent has a legal duty to deal honestly and fairly when selling or replacing a policy for long-term care (or any policy, for that matter).  Insurance companies, agents, brokers, and others engaged in insurance transactions have a duty of good faith and fair dealing when it comes to the consumer and the industry.  There are some specific requirements relating to the sale of long-term care products.  The California Insurance Code states that all insurers, brokers, agents, and others engaged in the business of insurance owe a policyholder or a prospective policyholder a duty of honesty, good faith, and fair dealing.  All conduct of the person selling the product both during the offer of the policy and previous to the purchase is relevant to any action alleging a breach of the duty of honesty and the duty of good faith and fair dealing.  10234.8

 

  No agent, broker, insurer, or other person is allowed to cause a policyholder to replace a long-term care product unnecessarily.  It is not legal to decrease a persons coverage while increasing their premium cost.  California automatically assumes that any third or greater policy that is sold to a consumer within a 12-month period is unnecessary.  This would not apply to cases of consolidating policies with a single insurer for a policyholder. 10234.85

 

Maintaining Agent Records

 

  Each insurer must maintain records for each agent licensed with them regarding the amount of replacement sales as a percent of the agents overall annual long-term care production.  This would also include lapses.  The top 10 percent of its agents in the state with the greatest percentage of lapses and replacements must be reported annually (by June 30^th) by each insurer.

 

  In addition, each insurer must report annually by June 30^th, 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 same must be done for replacement sales.

 

  The number of replacement and lapsed policies do not alone constitute a violation of insurance laws or even necessarily imply wrongdoing.  The reports are for the purpose of reviewing more closely agent activities regarding the sale of long-term care insurance.  10234.86

 

When a policy is replaced the premium credits

must equal 5% of the annual premium of the prior policy

for each full year the policy had been in force.

 

  If an insurer replaces a policy or certificate that it has previously issued, the insurer must recognize the past-insured status by granting premium credits toward the premiums for the new policy.  The premium credits must equal five percent of the annual premium of the prior policy or certificate for each full year the prior policy or certificate was in force.  The premium credit must be applied toward all future premium payments for the replacement policy, but the cumulative credit allowed need not exceed 50 percent.  No credit need be provided if a claim has been filed under the original policy or certificate.  The cumulative credits allowed need not reduce the premium for the replacement policy to less than the premium of the original policy.  This does not apply to life insurance policies that accelerate benefits for long-term care.  10234.87

 

  Lets consider these examples:

 

 

Example 1

  Ralph carried a long-term care policy for five years.  As new policies emerged offering greater benefits, Ralph decided to upgrade his policy with the same insurance company.  Ralph was, of course, five years older now.  This, along with the additional benefits, made the new policy more expensive.  Because he had carried a previous policy with the same insurer, he was allowed a premium credit of 5% per year of his previous annual premium.  Ralph paid $1,000 each year towards the first issued policy.  Fiver percent of that equals $50.  His new annual premium is $2,500.  His insurer will credit $250 towards the new policy, making his first year premium $2,250.

 

Example 2

  Janice maintained a long-term care policy from the time she retired paying $2000 each year in premium.  Fifteen years later her agent showed her the advantages now offered in current contracts.  Her premium credit would amount to $100 for each year she held the original contract, which were fifteeen years.  Therefore, her premium credit ($100 X 15 years) equaled $1,500.  The replacement policy cost $2,500.  Since the cumulative credit allowed does not have to be credited for more than fifty percent of the replacement premium, Janice will receive credit for $1,250 rather than the full $1,500 that accrued.

 

Marketing Procedures

 

  Marketing procedures have been established in California as a means of consumer protection.  Under these requirements, every insurer of long-term care in California must:

 

1.    Establish marketing procedures to assure that any comparison of policies by its agents or other producers will be fair and accurate.

 

2.    Establish marketing procedures to assure excessive insurance is not sold or issued.

 

3.    Submit to the commissioner a list of all agents or other insurer representatives authorized to solicit or sell long-term care insurance products.  This list must be updated at least every six months.

 

4.    Provide the following training (education) and require that each agent or other insurer representative authorized to solicit individual consumers for the sale of long-term care insurance complete the following continuing education (CE) requirements.  These LTC requirements are part of, not in addition to, the normal CE requirements that must be completed by California agents:

a.    For licensees issued a license after January 1^st, 1992, eight hours of education in each of the first four 12-month periods beginning from the date of the original licensing, and thereafter.  From the fifth year on, eight hours of LTC education is required within each licensing period.

b.    For licensees issued a license before January 1^st, 1992, eight hours of education prior to each license renewal.  Again, those eight hours are part of, not in addition to, the normal CE requirements.

c.     Nonresident licensees who plan to sell long-term care products must complete the LTC requirement in California prior to selling the products.

 

5.    Display prominently on page one of the policy or certificate and on the outline of coverage: Notice to buyer: This policy may not cover all of the costs associated with long-term care incurred by the buyer during the period of coverage.  The buyer is advised to review carefully all policy limitations.

 

6.    Specifically ask and make every reasonable effort to identify whether a prospective applicant or enrollee for long-term care insurance already has coverage of this type.

 

7.    Every insurer or entity marketing long-term care insurance must establish auditable procedures for verifying compliance with all requirements of California.

 

8.    Every insurer must provide to a prospective applicant, at the time of solicitation, written notice that the Health Insurance Counseling and Advocacy Program (HICAP) provides health insurance counseling to senior California residents free of charge.  Every agent must provide the name, address, and telephone number of the local HICAP program and the statewide HICAP telephone number (1-800-434-0222).

 

9.    Provide a copy of the long-term care insurance shoppers guide developed by the California Department of Aging to each prospective applicant prior to the presentation of an application or enrollment form for insurance.  10234.93

 

Unfair Trade Practices

 

  While most field agents are honest hard working people there are always a few that give the industry a black eye.  In an attempt to protect the consumer states pass legislation outlawing specific behavior.  Three specific behaviors are prohibited in California: twisting, high-pressure sales tactics, and cold lead advertising that does not openly disclose its purpose. 

 

Twisting:

  Twisting is the act of knowingly making misleading representations or incomplete comparisons of insurance or insurers for the purpose of inducing a consumer to lapse, forfeit, surrender, terminate, retain, pledge, assign, borrow on, or convert any existing insurance policy or to take out a new policy.  In short, twisting is the act of changing or omitting facts for the agents personal benefit.

 

High Pressure Tactics

  Insurance agents are taught to go through five nos to get to the yes during the selling presentation.  In the process of doing so, agents must always avoid the use of high-pressure tactics.  High pressure is considered to be employing any method of marketing that has the effect of or tending to induce the purchase of insurance through force, fright, threat, whether explicit or implied, or undue pressure to purchase the product.

 

Cold Lead Advertising

  Advertising is not forbidden in California, but it is forbidden to use directly or indirectly any method of marketing which fails to disclose in a conspicuous manner that the sale of insurance is the goal of the ad.  The ad must further disclose if an agent will call as a result of the advertisement.  10234.9

 

Advertising/Lead Cards

 

  Each long-term care insurer must provide a copy of any advertising piece that will be used in California to the commissioner for review at least 30 days prior to use.  The advertising must comply with all California laws. 

 

  An advertisement intended to produce leads must prominently disclose that an insurance agent will contact you if that is the case.  Any agent, broker, or other person who contacts a consumer as a result of receiving information generated by a cold lead device must immediately disclose that fact to the consumer (Good evening, Mr. Ward.  My name is Joe Agent with ABC Insurance Company and I am calling in response to the post card you returned to us.).  10234.9

 

Suitability Standards

 

  Every insurer marketing long-term care products must develop and use suitability standards to determine whether the purchase or replacement of a long-term care product is appropriate for the applicant.  The insurers must also train the agents in the use of its suitability standards to ensure that they are properly used.  The standards must be maintained in written form and available for viewing by the commissioner.

 

  The suitability standards include the following:

        Can the applicant afford the premiums?  There is little point in issuing a policy that the consumer will not be able to continue due to the cost of the protection.

        What are the goals of the applicant?  Does the proposed policy meet those goals?  If not, the policy may not be appropriate and might need additional consideration.

        Is there already a policy in force that meets the requirements of the applicant?  The agent must weight the value, benefits, and costs of the existing policy and compare it to the value, benefits, and costs of the policy he or she is proposing.  10234.95(a)

 

  As stated previously, both the issuer and, where applicable, the agent must make reasonable efforts to obtain the information needed to determine the suitability of the proposed coverage for the applicant.  This must include the Long-Term Care Insurance Personal Worksheet, which must be presented at or prior to the policy application. This worksheet must contain, at the minimum, the information in the NAIC worksheet in no smaller than 12-point type.  The insurer may request the applicant to provide additional information to comply with its suitability standards, but not less information.  10234.95(c)(1)

 

  In the premium section of the Long-Term Care Insurance Personal Worksheet, the insurer must disclose all rate increases and rate increase requests for all policies, whether issued by the insurer or purchased or acquired from another insurer, in the United States on or after January 1^st, 1990.  10234.95(c)(2)

 

  There must also be a statement in the premium section that states: 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 Insurances 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 Insurances internet website at http://www.insurance.ca.gov/.  10234.95(c)(3)

 

  Each insurers personal worksheet must be approved by the commissioners office.  A new personal worksheet must be filed and approved by the commissioner each time a rate is increased in California and also each time a new policy is filed for approval.  The new worksheet must be used within 60 days of its approval.  10234.95(c)(4)

 

  A completed personal worksheet must be returned to the issuer prior to the issuers consideration of the application for coverage.  Agents must use the worksheet developed by the insurer when marketing long-term care insurance.  A personal worksheet is not needed for employer group long-term care insurance for employees and their families.  10234.95(d)

 

  It is important to note that any information gathered for use in determining suitability may not be shared with or sold to anyone or any entity.  It may only be used to determine policy suitability.  10234.95(e)

 

Neither the insurer nor their agents

may share the information gathered for

the suitability standards with any other person or entity.

 

  If the insurer determines that the applicant does not meet its financial suitability standards, or if the applicant has declined to provide the information to make this determination, the issuer may reject the application.  The issuer may 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 applicants intent.  Either the applicants returned letter or a record of the alternative method of verification must be made a part of the applicants file.  10234.95(h)

 

  Each year the insurer reports to the commissioner the total number of applications received from residents of California, 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 would not apply to life insurance policies that accelerate benefits for long-term care.  10234.95(i)(j)

 

Premium Rate Stability

 

  There is no issue more important to the consumer than premium rate stability.  Long-term care insurance is purchased for an event that may be more than twenty years away.  Once retirement comes, income becomes constant with few fluctuations.  There is no more ability to work overtime for extra income, no more ability to count on raises or promotions at work.  The need for long-term care comes at the end of ones life and buying a policy is the way many Americans plan for that final episode.

 

  Since income becomes fixed at retirement, these individuals must be able to budget in their premium costs for long-term care.  Traditionally we have thought that premiums would not rise dramatically since the industrys risk seemed fixed: so much per day regardless of what the care actually costs.  Currently we are finding that this is not necessarily the case.  In 2004 CNA doubled the cost of existing policies in some states.  When consumers have been paying on a policy for many years this kind of increase seems like a double-cross.  The policyholders have no way to get any of their premium refunded, yet they are forced to abandon the policy just as they are at the threshold of needing the benefits.  Few states restrict this type of premium increase.  If the company can merely show that the price is reasonable in relation to costs the premium increase is approved.

 

  The National Association of Insurance Commissioners (NAIC) has set down model regulations for rate stability, but no state has enlarged on it to the degree that California has.  While the NAIC Model does place certain restrictions on rate increases, the provisions of SB 898 have extended these to include additional requirements and sanctions when insurers exceed specific benchmark amounts.  Most states have done little to address this issue, which makes California an industry leader.

 

  Senate Bill 898 was introduced by Senator Dunn in 1999.  It addressed long-term care premiums.  Existing law permitted the commissioner to adopt regulations establishing loss ratios for long-term care policies.  This bill required policies issued on or after January 1, 2000 to have the commissioners approval prior to any rate increases.

 

  For policies issued in the year 2000 or later, premium cannot be increased unless the commissioner determines that the loss ratio for the issuing insurance company would cause that company to become insolvent without the increase in premium.  For purposes of SB 898, long-term care insurance includes any insurance policy, certificate, or rider advertised, marketed, offered, solicited, or designed to provide coverage for diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services which are provided in a setting other than an acute care unit of a hospital.  SB 898 recognizes as long-term care insurance any product that covers institutional care, convalescent care, extended care, custodial care, skilled care, or personal care.  Also included is home care coverage including home health care, personal care, homemaker services, hospice, or respite care.  It does not include hospital insurance, Medicare supplemental insurance, or major medical coverage.  10231.2

 

  Benefits under individual long-term care insurance products issued before new premium rate schedules are approved must 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, consideration must be given to all relevant factors including:

 

1.              Statistical credibility of incurred claims experience and earned premiums.

2.              The period for which rates are computed to provide the coverage.

3.              Experienced and projected trends.

4.              Concentration of experience within early policy duration.

5.              Expected claim fluctuation.

6.              Experience refunds, adjustments, or dividends.

7.              Renewability features.

8.              All appropriate expense factors.

9.              Interest.

10.         Experimental nature of the coverage.

11.         Policy reserves.

12.         Mix of business by risk classification.

13.         Product features, such as long elimination periods, high deductibles, and high maximum limits.  10236.1

 

  Rate increases can happen in most types of policies.  Consumers know this and are not surprised at increases that seem reasonable and expected.  What they cannot be expected to anticipate are increases so sizable that they make the policy outside of their financial ability.  It would seem that the individual states would want these policies to remain in force.  After all, each state must contribute half of the Medicaid or Medi-Cal funds for those who end up in a nursing home without adequate funds of their own to cover the cost.  If the states enact legislation that keeps long-term care policies affordable it can only help as taxpayers are relieved of the burden to pay for those who cannot pay for themselves.

 

Commissions on Replacement Policies

  When a long-term care policy is replaced with a different contract, the sales commission normally paid for first year sale of long-term care policies or certificates must be calculated based on the difference between the annual premium of the two policies (new and replaced).  If the premium on the replacement contract 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 rather than that paid for a new sale.  Replacement must be contingent upon the insurers declaration that the replacement policy materially improves the position of the insured.  This provision would not apply to replacement coverage for group insurance.

 

  As it applies to 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 necessarily limited to, bonuses, gifts, prizes, awards, and finders fees.  Every long-term care insurer must file with the commissioner of California its structure or an explanation of the insurers compensation plan.  Any amendments to the commission structure must be filed with the commissioner of California prior to implementation.  10234.97

 

Group Long-Term Care Policies

 

  In California both tax qualified and non-tax qualified products must be shown fairly and appropriately at the same time to allow the consumers to make a logical decision between the two options.  All products for long-term care, including riders to life insurance contracts, must meet all the requirements of California regarding this type of product.

 

  Group policies that originate outside of California must still comply with this states requirements.  At least 30 days in advance of advertising, marketing, or offering coverage within California, the insurer issuing the policy to a specified group must complete an informational filing with the commissioner that consists of the following:

        A specimen master policy and certificate.

        The corresponding outline of coverage (OOC).

        Representative advertising materials to be used in California.  10232 (b)

 

  If the commissioner finds it acceptable, the insurer may submit any documentation that it believes will provide information sufficient to allow the commissioner to determine product suitability for California.  10232.

 

Group Policies Issued Prior to January 1^st, 1997

 

  Group policies issued prior to January 1^st, 1997 must be allowed to remain in force and not be required to meet the requirements, as amended during the 1997 portion of the 1997-1998 Regular Session, unless those policies cease to be treated as federally qualified long-term care insurance policies. In that case, the insurer must 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 such tax-qualified policies.  10232.2 (d)

 

Pre-existing Medical Conditions

 

  Individual LTC contracts cannot use a definition of pre-existing condition that are more restrictive than: a condition for which medical advice or treatment was recommended by, or received from a provider of health care services within six months prior to the effective date of the policy.  All long-term care plans must cover pre-existing conditions that are disclosed on the application no later than six months following the effective date of the policy regardless of the date the loss or confinement actually begins.

 

  To restate this, the six months prior to the policy issuance establishes the medical conditions for which benefits may be denied during the first six months following the effective date of the policy.  Once the six months has passed covered conditions must receive policy benefits even if the claim began during the first six months of the policy.  This would not necessarily apply to group contracts. 10232.4 (a)

 

  The definition of pre-existing condition does not prohibit an insurer from using an application form designed to elicit the complete health history of an applicant.  On the basis of the information obtained on the application, the insurer may complete medical underwriting to determine whether or not a policy or certificate will be issued.  Long-term care policies in California may not use waivers or riders to exclude, limit, or reduce coverage or benefits for specifically named or described pre-existing diseases or physical conditions beyond the waiting period of six months.  10232.4 (c)

 

Consumer Notification

 

  Since there are two options in California when considering a long-term care plan, a Consumer Notification must be given at the time of solicitation.  It states:

 

Important Notice

 

This company offers two types of long-term care policies in California.

 

(1) Long-term care policies (or certificates) intended to qualify for federal and state of California tax benefits.

and

(2) Long-term care policies (or certificates) that meet California standards and are not intended to qualify for federal or state of California tax benefits but which may make it easier to qualify for home care benefits.

 

  This notice cannot be any smaller than 12-point type.  It must be signed and dated by both the applicant and the agent or insurer and a copy must be provided to the applicant.  If it is a group plan, the employer must make this notice available to both their employees and dependents of their employees who are offered a choice between the two types of policies.

 

Bed Reservation Benefit

 

  Patients in nursing homes will sometimes be hospitalized.  The bed reservation benefit holds their bed in the nursing home during this period of time because the policy continues to pay the cost even thought the patient is not there.  Policies generally have limitations on the amount of time the bed will be held.  This benefit may cost additional premium.

 

Home Modifications

 

  Home modification benefits allow for modifications to the insureds home if this will provide increased independence or safety and delay or prevent institutionalization.  Modifications may include such things as wheelchair ramps, grab bars in showers or hallways, widening doorways, or modifying bathrooms.

 

Caregiver Training

 

  In order to keep a physically or mentally impaired person home, a caregiver must be available.  The caregiver can be a spouse, child, or other relative.  Even though a caregiver is required, their wage is likely to be substantially less than the cost of institutional care.  Therefore, it makes sense to provide necessary training for family members or others to keep the patient at home.

 

Return of Premium

 

  Return of premium is a non-forfeiture clause or value.  When long-term care policies have been held for a long time lapse without having paid out benefits, insurance companies can end up with a lot of premium dollars.  Although non-forfeiture values are not required to be in policies, both state and federal law requires that the provision at least be offered to prospective consumers.

 

Long-Term Care Policy and Certificate Restrictions

 

  California has established some consumer protections.  CIC 10233.2 states:

1.    Long-term care products may not be canceled, non-renewed, or otherwise terminated on the grounds of age, or the deterioration of the mental or physical health of the insured.

 

2.    Long-term care products may not contain a provision establishing a new waiting period in the event existing coverage is converted to, or replaced by, a new or other form within the same company, except with respect to an increase in benefits voluntarily selected by the insured individual or group policyholder.

 

3.    Long-term care products may not cover one level of care disproportionately over another.  This means that the plan may not first require skilled care in a facility before other levels of care are covered, nor may they provide only for skilled care.  All levels of care must be covered equally.

 

4.    Long-term care products may not provide benefits based on a standard described in the contract as usual and customary or any other type of wording similar to that.

 

5.    Long-term care products may not terminate a policy, certificate, or rider, or contain a provision that allows the premium for an in-force policy, certificate, or rider to be increased due to the divorce of a policyholder or certificate holder.

 

6.    Long-term care products may not include an additional benefit for a service with a known market value other than the statutorily required home- and community-based service benefits, or a nursing facility benefit unless the additional benefit provides for the payment of at least five times the daily benefit and the dollar value of the additional benefit is disclosed in the schedule page of the policy.

 

 

End of Chapter Two