WA LTC INITIAL 8 HOUR COURSE

Chapter 3: State and Federal Regulations/Requirements

State and Federal Regulations and Requirements

Medicaid Benefits

Even though the states have general control of their Medicaid funds, they must also follow federal laws. Federal law requires states to provide a minimum level of services to Medicaid beneficiaries. Those services include such things as inpatient and outpatient hospital care, laboratory and X-ray services, skilled nursing home care and home health services for those aged 21 and older, examination and treatment for children under the age of 21, family planning and rural health clinics. About half of Medicaid spending goes for federally mandated services. States pay health care providers directly for patient services and almost invariably require doctors to accept the state fees as full payment. Doctors and other medical suppliers are legally required to accept the amount paid by Medicaid, which means they cannot bill their patients for any additional amount. Therefore, some medical providers may not accept Medicaid patients.

Medicaid funding, as well as Medicare funding, has become a real concern. As the baby boom generation reaches retirement, adequate funding may not be available under current funding procedures. About 45 cents out of every dollar goes to pay for nursing home care to only about 8 percent of the beneficiaries. That means that approximately 8 people out of every 100 Medicaid enrollees use nearly half of the Medicaid funds. Funds under Aid for Dependent Children and their parents make up about 70 percent of Medicaid's caseload, but they only receive about 30 percent of the total funding. Many argue that the largest amount of money should be spent on the younger Americans rather than the older, less productive retired group. While we might like to do that, where would that leave the older generation? They must be cared for. This has brought about much debate but it has also brought about alternative development, such as assisted living facilities and community-based care programs that prevent institutionalization (which is the most expensive type of care). It is likely that the future will bring even newer developments as we try to sort out the financial aspects of a graying nation.

All aspects of government have faced budget problems. Medicare and Medicaid perhaps face the greatest challenge since they must deal with the increasing elderly population. Rising medical costs also play a role. It is common to spend the most money on the last three months of our lives. Many of the medical procedures do nothing more than delay death. However, medical professionals are reluctant to do less that everything possible since lawsuits have become pervasive in the United States.

Nearly every state has faced severe budget deficits in their Medicaid funding. Some states have actually put a ban on building additional nursing homes in an attempt to curb the rising costs. The federal and state governments have attempted to control the rising costs in some way.

Fraud and abuse in the medical field has played a major role in the rising cost associated with Medicaid and Medicare. While Medicare has a single administrator (the federal government), Medicaid has 50 separate administrators, because each state is in charge of their own program. This makes it difficult to curb fraud and abuse of the Medicaid system. There is no doubt that part of the funds end up in the pockets of dishonest medical providers.

Many elderly consumers believe the military will, in some way, provide for their nursing home needs. Due to a shortage of beds, even when the veteran might qualify, the chances of actually getting such coverage are small. It only takes a call to the military agency for them to confirm this.

Comparing Qualified and Non-Qualified Plans

HIPAA

At one time there was little said about needing institutional care. It was assumed that family and friends would do whatever was necessary for ailing members of their family and community. Today even the federal government has recognized the need for funding long-term medical care. Funding the cost of institutionalization can be achieved through other means besides long-term care insurance, but for most individuals that is the most sensible avenue. In 1996, the U.S. Congress enacted the Health Insurance Portability and Accountability Act, generally referred to as HIPAA. It may also be known as the Kennedy-Kassebaum Bill. President Bill Clinton signed this act into law in August of 1996.

There is still some question as to whether or not benefits from long-term care policies are taxable. An earlier House Resolution 3101 declared long-term care insurance the same as health and accident insurance with respect to its tax status. Until then, long-term care insurance was in a sort of tax limbo. No one was quite sure if the premiums and benefits were tax-favored like those of regular health and accident policies. Although HIPAA answered that question to some extent, there are still many disagreements regarding the taxation of premiums and benefits.

Existing LTC Policies

Tax-qualified long-term care contracts will not see their benefits taxed regardless of how the debates end. HIPAA legislation created the tax qualified plans. If a long-term care insurance contract meets the Act's requirements it will receive specific tax advantages. All other policies are considered to be non-tax qualified. There was an exception made for all long-term care policies issued before HIPAA had been state approved. These policies were "grandfathered" in. Therefore, they are considered to be tax-qualified even though they did not meet the requirements that were spelled out in the legislation. This was done to prevent mass replacement of policies for those who had favorable health, leaving only the sick on existing policies. That would, of course, create an adverse situation for companies that had issued these policies. If, however, the existing policies are altered, then the grandfathered tax-qualified status is lost.

Benefits Triggers

One might assume that all insureds would want to purchase only tax-qualified policies if they are to receive favorable tax treatment. In fact, this is not necessarily true. When the Act was passed, it set specific terms regarding tax-qualified benefits, benefit triggers, provisions and so forth. Perhaps the most dramatic difference between the qualified and non-qualified plans is the benefit triggers. A benefit trigger is the circumstance (typically medical in nature) that "triggers" the start of insurance benefits. For most types of insurance, the circumstance triggering benefit payment from the insurance company is fairly easy to understand. For example, in life insurance, when the insured dies, benefits are paid. While there may be variations that allow cash to be withdrawn, as a benefit trigger, this is pretty easy to understand. In health insurance, if the insured breaks a leg, benefits are paid by the insurance company after a deductible is met. When it comes to nursing home policies, however, benefit payments are not necessarily so easily understood.

The non-qualified plans and the pre-qualified plans paid benefits when it was determined that it was medically necessary for the insured to receive a type of care that was covered under their policy. If the insured's doctor felt that it was necessary for his patient to be in a nursing home, his written statement was all that was required to trigger benefit payments. Some policies might also require an inability to perform some type of activity (called activity of daily living or ADL) such as bathing oneself without assistance. Another formal benefit trigger was cognitive impairment, the inability to reason or a loss of mental capacity due to some organic disorder such as Alzheimer's disease.

Activities of Daily Living (ADL)

Before anyone had ever heard of tax-qualified long-term care plans, insurance policies could require the inability to perform a certain number of activities of daily living (ADLs), which were spelled out in the policy. The actual number of ADLs sometimes varied since not all companies included the same amount. Typically, there were between five and seven listed. The number of ADLs, which could no longer be performed by the insured, could vary. Some policies required only one, while others required more than one. If a policy listed 7 ADLs and only required an inadequacy in performance of one, benefits were easier to obtain than one which listed 5 ADLs with an inadequacy in performance of one (1 out of 7 are better odds than 1 out of 5). Few consumers recognized the importance of this. In fact, agents often did not recognize it either.

Today, most non-tax qualified plans list seven activities of daily living, while tax-qualified plans list six. It is possible for some plans to have a different number of ADLs, unless the state has regulated them (and many have). This alone gives benefit triggers a better chance with the non-qualified plans since they include an additional ADL. The benefit trigger that has been eliminated in the qualified plans is ambulating. Ambulating is the ability to get around adequately without assistance.

Definitions for the activities of daily living are important since they affect how benefits will be paid. The non-qualified plans will typically list seven. These include:

1. Eating, which means adequately reaching for, picking up and grasping a utensil or cup and getting the food or drink to the mouth. Some definitions also include the ability to clean one's face and hands afterwards.

2. Bathing: cleaning oneself using a tub, shower or sponge bath. This would include filling the sink or tub with water, managing faucets, getting in and out safely and raising one's arms to wash and dry their hair.

3. Continence, which means the ability to control bowel and bladder functions. This can also include the use of ostomy or catheter receptacles and the use of diapers or disposable barrier pads.

4. Dressing, which means putting on and taking off clothing, which is appropriate for the current season. Some definitions include the use of special devices such as back or leg braces, corsets, elastic stockings or artificial limbs and splints.

5. Toileting, which means getting on and off a toilet or commode safely. If a commode or bedpan is used, it also means emptying it. Toileting includes the ability to properly clean oneself afterwards.

6. Transferring, which means moving from one sitting or lying position to another. This would include getting out of bed in the morning and sitting down in a chair or getting up out of a chair. Some definitions include repositioning to promote circulation and prevent skin breakdowns.

7. Ambulating: walking or moving around inside or outside of the home, regardless of the use of a cane, crutches or braces. This is the ADL that has been eliminated from the tax-qualified plans.

The elimination of ambulating is a serious change. This is especially true for some medical conditions that drain physical strength and affect the persons ability to move without assistance. The inability to move around means the person may not be able to fix meals, get to the bathroom, or even get up to answer a ringing telephone.

The six ADLs that are included under HIPAAs federal guidelines include:

1. Eating, which means feeding oneself by getting food in the body from a receptacle (such as a plate, cup or table) or by a feeding tube or intravenously.

2. Bathing, which means washing oneself by sponge bath or in either a tub or shower, including the act of getting into or out of a tub or shower.

3. Continence, which means the ability to maintain control of bowel and bladder function; or when unable to maintain control of bowel or bladder function, the ability to perform associated personal hygiene (including caring for a catheter or colostomy bag).

4. Dressing, which means putting on and taking off all items of clothing and any necessary braces, fasteners or artificial limbs.

5. Toileting, which means getting to and from the toilet, getting on or off the toilet, and performing associated personal hygiene.

6. Transferring, which means the ability to move into or out of a bed, a chair or wheelchair.

The definitions, you'll notice, are somewhat different although the meanings remain very close.

The removal of ambulation from the federal tax-qualified guidelines may especially affect benefits for home care. The loss of ambulation is almost always part of the need for care in the home. Even so, the qualified plans do offer consumer protection requirements. As a result, there is a great deal of disagreement about which plan, qualified or non-qualified, should be sold.

Understanding the Difference in Benefit Triggers

Few policyholders purchased their long-term care policy to receive a tax deduction. They purchased their policy for health care protection. Therefore, if the ability to use the policy is limited when health care is needed, was it really worth having a tax benefit? Agents must be very careful about explaining the benefit trigger difference when presenting policies. Some of the states initially resisted approval of tax-qualified plans because they felt the benefit triggers were more restrictive than their state requirements. Such was the case in California, for example.

It is vital that agents fully explain the differences between HIPAAs tax-qualified plans and their states non-tax qualified plans. By fully explaining the difference at the point of sale, the agent is allowing the consumer to do several things:

Decide whether the tax benefit of the premium deduction will benefit them personally;

Decide whether the loss of the ambulating ADL could affect them personally (especially if home care benefits are important to them); and

Fully understand the circumstances that will allow benefits to be paid under their policy. Most policyholders want to understand this and it is in the agent's best interest to be sure that they do.

Federal Criteria

The federally qualified (tax-qualified) plans do provide worthwhile benefits, even though ambulating is not an ADL. Federally qualified plans that provide coverage for long-term care services (nursing facility, home care, and comprehensive) must base payment benefits on the following criteria:

1. A licensed health practitioner independent of the insurance company must prescribe all services under a plan of care. The licensed health care practitioner does not necessarily have to be a doctor. It can also be a registered professional nurse or a licensed social worker.

2. The insured must be chronically ill by virtue of either:

a. Being unable to perform 2 out of the 6 ADLs, or

b. Having a severe impairment in cognitive ability.

3. The licensed health care practitioner must certify that either:

a. The policyholder is unable to perform at least two of the six activities of daily living, without substantial assistance from another person, due to a loss of functional capacity for no less than 90 days or more, or

b. The insured requires substantial supervision to protect themselves from threats to their health or safety due to a severe cognitive impairment, such as Alzheimer's disease.

4. The licensed health care practitioner must recertify that these requirements have been met every 12 months. The insurance company may not deduct the cost of the recertification from the policy benefit maximums.

Although currently the insured must be either chronically ill by virtue of the ADLs or due to cognitive impairment, it is possible that the federal government could expand these requirements at some point. If that were to happen, each state would have to adopt the new triggers as well.

Definitions are extremely important in policies and tax-qualified plans are no exception. Because certain phrases were used for specific meanings, IRS Notice 97-31 has established guidance for many of these terms, including:

Substantial Assistance in the ADLs means hands on assistance and standby assistance.

Hands-On Assistance means the physical assistance of another person without which the individual would be unable to perform the activity of daily living (ADL).

Standby Assistance means the presence of another person within arms reach of the individual that is necessary to prevent, by physical intervention, injury to the individual while the individual is performing the activity of daily living. The IRS Notice gives the examples of being ready to catch the person if they fall, or seemed to be ready to fall, while getting into or out of the bathtub or shower or being ready to remove food from the person's throat if the individual chokes while eating. Overall, standby assistance is just what it indicates: being near to help when necessary.

Severe Cognitive Impairment means a loss or deterioration in intellectual capacity that is comparable to Alzheimer's disease and similar forms of irreversible dementia and measured by clinical evidence and standardized tests that reliably measure such impairment. The impairment may be in either their short-term or long-term memory. It would include the ability to know people, places, or time. It would include their deductive or abstract reasoning, as well.

Substantial Supervision is used in reference to cognitive impairment. It means continual supervision, including verbal cueing, by another person that is necessary to protect the severely cognitively impaired person from threats to their health or safety. Such impaired people are prone, for example, to wander away. Substantial supervision is needed to prevent this.

It is not possible to use the activities of daily living to measure severe cognitive impairment. Individuals with such impairment are often able to perform all of the ADLs without difficulty. Even so, they are unable to care for themselves due to their cognitive impairment. Therefore, the ADLs are not used when assessing this.

State laws are not necessarily the same as federal requirements. In fact, it would be surprising if they were the same. Non-qualified plans will meet the state's requirements while qualified plans will meet the federal requirements. Because states do differ, it is not always easy to state the differences between qualified and non-qualified long-term care policies. Generally speaking, however, it is safe to say that federally qualified plans are harder to receive benefits under than are the state's non-tax qualified plans.

Agents Responsibility to Know the Laws

Of course, any agent selling long-term care policies must know and understand their own state's policy requirements. This is true of any type of policy, not just long-term care contracts. Most insurance companies marketing LTC policies have printed guidelines for their agents. For example, it may look similar to this:

Non-Tax Qualified	Tax-Qualified
1. Medical necessity CAN be a benefit trigger.	1. Medical necessity CANNOT be a benefit trigger.
2. Activities of daily living: a. 2 of 5 ADL's trigger benefits b. Defined as needing regular human assistance or supervision.	2. Activities of daily living: a. 2 of 6 trigger benefits b. Defined as "unable to perform (without substantial assistance from another individual)" c. Licensed health care practitioner must certify expected inability to perform ADL's for at least 90 days or more.
3. Cognitive impairment: a. Not described as "severe" b. Definition does not apply "substantial supervision" test.	3. Cognitive impairment a. Described as "severe" b. Definition applies substantial supervision test.

Policy Conversions Were Offered

Most insurers who had previously issued non-tax qualified plans offered their policyholders the option of converting to qualified contracts. While there are differing opinions on this, many professionals felt that switching to a tax-qualified contract was a good idea since:

1. Some industry experts believe that benefits received under the current non-tax qualified policies may be taxed as ordinary income. The tax qualified LTC policies would not be.

2. If the insured qualifies, their premiums for tax-qualified long-term care insurance can be deducted up to certain limits. To do this, the insured must itemize their deductions.

There are two separate tax issues involved in the tax qualified long-term care policies. The first involves the ability to deduct part or all of the premiums paid. This is possible only under specific conditions. The possibility of the deduction began with the 1997 tax year premiums for tax qualified long-term care plans. The premiums can be itemized as deductions for medical expenses the same as one does for other health care premiums. Of course, if the taxpayer does not itemize their returns, this does them little good. Even so, this is an important change in the tax code because it gives recognition to the importance of protecting oneself against the possibility of long-term nursing home confinements.

For those who do itemize, they can deduct their regular medical expenses (including LTC premiums) if they exceed 7.5 percent of their adjusted gross income (AGI). For long-term care insurance, the maximum deduction a taxpayer can take for their premiums depends upon their age. The amounts that may be deducted are based on specific age brackets: age 40 and below, age 41-50, age 51-60, age 61-70, and age 71 and older. The specific dollar figures that may be deducted change periodically so we have chosen not to list the amounts in this course. Each advancing age bracket may deduct more than the previous one. The deduction is based on an individual, so a married couple would each be able to claim the deduction (if they itemize their year end federal taxes) applicable to their age.

How will this affect those that do itemize their tax returns? It depends upon their tax rate. It is very important that agents not try to act as an accountant or tax advisor unless he or she definitely has the schooling or experience to do so. It is wiser, in the absence of schooling or experience to suggest the individual contact their personal tax consultant.

Only those who itemize their federal taxes at the end of the year and whose medical expenses exceed 7.5 percent of their AGI will be able to take advantage of this premium deduction. Those who do not itemize or who do not have enough medical expenses (including the LTC premiums) will not benefit even though they bought a qualified LTC policy.

Who Will Benefit from Tax-Qualified Plans?

Obviously not every senior taxpayer will benefit from the allowed maximum deductions allowed for qualified long-term care premiums. First of all, they are maximum deductions. Some may qualify for only partial deductions rather than the maximum, depending upon their personal situation. To deduct the premiums, several conditions must exist. First of all, the taxpayer must itemize their deductions on their federal tax returns. Because qualified plans are based on federal legislation, deductions also apply only to federal tax returns. Many senior policyholders do not itemize because they do not have enough deductions to allow it. Nationally, less than 30 percent of all federal taxpayers itemize according to "Statistics of Income", Department of Treasury. This 30 percent reflects all taxpayers; even less itemize that are age 65 and older.

Secondly, the amount of total medical expenses (counting the premium) must exceed 7.5% of the taxpayer's adjusted gross income (AGI). Since many of these taxpayers pay very little of their medical expenses, this is unlikely. Reimbursed expenses will not count towards this percentage amount.

In the past, benefits from health care policies have not been reported as income, but it appears that the Internal Revenue Service would like to change this. If it does change, those with qualified long-term care policies will not be taxed on the benefits they receive. Those with non-tax qualified plans may have to declare the payment they received for qualified care as income. Of course, then they would also be able to declare the expenses they paid. Whether or not this will balance out will depend upon multiple individual factors.

Defining Chronically Ill

It is necessary to understand the definition of "chronically ill." A chronically ill person is one who has been certified within the previous year by a licensed health care practitioner as unable to perform at least two activities of daily living for a period of no less than 90 days due to a loss of functional capacity, or requiring substantial supervision to protect the person from threats to health and safety due to severe cognitive impairment.

Qualifying Contracts for Tax-Favored Status

To benefit from the tax-favored status, the contract must meet certain provisions. It must provide only coverage for qualified long-term care services and meet the following requirements:

1. The contract must be guaranteed renewable;

2. The contract can not provide for a cash-surrender value or other money that can be paid, assigned or pledged as collateral for a loan or be borrowed;

3. Refunds and dividends under the contract may be used only to reduce future premiums or to increase future benefits;

4. The contract must meet consumer protection provisions;

5. The contract generally does not pay or reimburse expenses reimbursable under Medicare.

The deduction and benefit exclusions generally apply to contracts issued after December 31st, 1996. A grandfather rule provided that contracts issued earlier and that met the long-term care insurance requirements of the state where issued, would be treated as a qualified long-term care contract.

Purchasing Contracts for Financial Protection

Whether or not to purchase a long-term care insurance policy should never be made upon the tax implications of the purchase. Such a policy is intended to protect against the catastrophic losses of confinement to a nursing home or for losses due to prolonged illness at home. It would be hard to imagine anyone buying such a policy purely for the tax favorable status that might be available. Unfortunately, some agents have focused more on the tax benefits than on the desired financial protection such policies offer. The primary considerations are always the benefits offered or the overall protection available. Even so, tax status issues will be part of the discussion between the consumer and agent. At no time should an agent attempt to give advice on tax issues unless they have specific training in tax issues (such as a CPA would possess).

Determining Tax Treatment

Many companies have put out bulletins to their agents regarding tax issues. A single statement in a bulletin dated 05/20/97 from an insurer when tax debates first began is typical of most: "It is not known how non-qualified policies will be treated for tax purposes." Of course, we know that non-qualified policies cannot deduct the premiums from their itemized tax forms, but the questions go beyond that. What is not known is how the IRS will handle benefits received. Since insurers are required to issue 1099 forms to both the recipient of the benefits and the IRS, questions on taxation will continue. The 1099 form is specific to long-term care policies and will be labeled 1099-LTC. Both qualified and non-qualified policyholders will receive this form. The form states: "Amounts paid under a qualified long-term care insurance contract are excluded from your income." This statement would suggest that non-tax qualified contracts would have to claim such benefits. Even though the statement suggests this, however, it may not be true. Certified Public Accountants or tax attorneys should answer tax related questions never the agent. Recently these taxation debates seem to be on hold as primarily qualified plans are sold, but it is likely that the IRS will eventually come back to it and make specific determinations.

Agents who were worrying about which plan to offer (qualified or non-tax qualified) just a few years ago now seem to be primarily marketing tax qualified plans. As a result, these tax worries seem to be forgotten for now. Apparently many agents felt that the possibility of taxation of benefits was strong enough to move in favor of tax-qualified policies. One insurer called the tax qualified plans a "safe harbor" providing protection if benefit taxation becomes a reality. On the other hand, the elimination of ambulation as an activity of daily living in tax-qualified plans is a definite disadvantage. This is especially true when it comes to home care benefits.

It comes down to each person deciding for him or herself. It is probably best for agents to present both qualified and nonqualified options so that the consumer can make the choice. In that way, if the final choice is not satisfactory, the agent will not be at fault. It would probably be wise for each agent to document the products shown.

Pre-1997 Long-Term Care Policies

Pre-1997 policies were grandfathered in as tax qualified. Even though these pre-1997 policies were granted tax-favorable status, any material change revokes this status. It is the definition of "material change" that raises questions. Initially, even a premium change could have constituted a material change in the policy. If this were the case, insurance companies could have caused a material change simply by raising the premium rate.

Consumers had the impression that they were guaranteed tax-favored status when their pre-1997 policies were grandfathered in as tax qualified plans. That was not actually the case since insureds still had to file an itemized statement and meet the 7.5 percent AGI requirement.

The Kansas Insurance Department said in comments that if it was possible to lose the tax-favored status by virtually any change implemented it would have a serious impact on the long-term care market in their state. The federal law did not in any way indicate that a change in the contract language would result in a pre-1997 policy becoming non-qualified, the Kansas department said. The IRS stance is contrary to the intent of HIPAA, Kansas felt. This was not the only state to question the taxation status of long-term care policies.

Actually HIPAA did not specify the circumstances in which changes to a contract would be so significant that they would cause a new policy to be issued. Insurance companies have historically decided which changes indicated a new policy rather than a modification to an existing policy. State law also provided guidelines. The aim is generally to preserve the pre-1997 grandfathered policy.

Since consumers are not likely to be aware of these issues, they may make changes that would allow them to lose their tax-favored status. The American Council of Life Insurance, which said its member companies represent 80 percent of the long-term care insurance market, was extremely troubled by the very narrow interpretation of the grandfather rule contained in the IRS Notice 97-31. The group called it inconsistent with statutory changes and would lead to the inappropriate loss of grandfathering of many policy contracts.

The Treasury Responds with Exceptions

Enough groups were concerned about the material modification issue that clarifications had to be made by the Treasury. They clarified what a material modification represented by applying "exceptions." This meant that specific changes were not considered grand enough to require a new policy; rather they were considered endorsements to the existing policy. These exceptions included:

1. Premium mode changes;

2. Class wide premium increases or decreases;

3. After issue application of a spousal discount;

4. Benefit reductions, with corresponding premium reduction, requested by the insured; and

5. Continuation or conversion of coverage following an individual's ineligibility for continued coverage under a group contract.

It was also necessary to address the issues of alternate plans of care and benefit increases. An addition that does not increase premiums for alternate forms of care selected by the insured is not considered a material change. Therefore, the benefits paid for services included in an Alternate Plan of Care, but not specifically covered under the policy, would not be considered a material change to the policy.

It also is not a material change if the insured purchases a rider increasing benefits of the grandfathered policy if the rider alone would be considered a qualified long-term care contract. Such riders would have to meet all of the requirements of HIPAA on its own, including the benefit triggers and any applicable Consumer Protection requirements. Some companies will be looking at the possibility of developing such riders to provide benefit increases for the grandfathered policies. If the policies are quite old, however, it is unlikely that such riders would be offered.

All questions have not been addressed. Where specific questions apply, insurance industry professionals will be working with the Treasury for clarifications.

Most of the tax questions raised, however, reflect concerns regarding non-qualified plans and how they could potentially be taxed when benefits are received. Some states have considered requiring insurance agents to present both qualified and non-qualified plans. California has passed such legislation. If agents are presenting both plans, they must be able to give some kind of explanation of taxation differences. At this time, that is impossible to do since we simply do not have a tax clarification from the IRS.

Addressing Consumer Concerns

Although taxation falls outside the realm of insurance regulation, state insurance departments and the senior counseling programs need to know how such policies will be taxed. They are often the agencies that people turn to for advice. The National Association of Insurance Commissioners (NAIC) has requested clarification from the Internal Revenue Service, but they have been no more successful than others who have requested it.

Beginning in the tax year 1997, every insurance carrier is required to report to the Internal Revenue Service on Form 1099 any benefit paid under any contract that was sold, marketed or issued as a long-term care insurance contract. The insurer is not required to determine whether the benefits are taxable or not; they must simply report the benefits paid.

Ironically, there are no instructions for the taxpayers themselves about their use of these 1099 forms. No one, not Certified Public Accountants, not the insurance legal departments, not the state insurance departments can tell the taxpayers if they need to do something with these issued forms.

Basically, the HIPAA specifically addressed tax qualified long-term care contracts but totally ignored non-qualified. Therein lays the problem. Since non-qualified insurance contracts were not addressed, tax status is left up to anyone's guess. There are some possibilities:

1. The Treasury could rule that all health and accident benefits, which would include the non-tax qualified long-term care policies, are taxable as income. In such an event, only the tax-qualified plans would be exempt from benefit taxation.

2. The Treasury and the Congress can simply continue to ignore the entire issue. In this case, tax treatment would continue to be undetermined. To date, this is the avenue that has been taken.

3. Congress could clarify which benefits are excluded from income and which ones are included. In such a case, it is likely that the non-qualified plans would find their benefits taxed.

4. The Treasury could make a compromise ruling that requires some portion of the benefit payments of the non-qualified plans to be taxable, while allowing other portions to be nontaxable.

All four suggestions are only conjecture. There is no way to know for sure what will happen. Therefore, it is important to read all industry bulletins that are received from insurance companies. Anything to do with taxation may see changes. It is vital that agents follow the most current information.

Federal Tax-Qualified versus

State Non-Tax (Non-Partnership) Qualified Policies

For individuals who desire asset protection, there would be no consideration of non-tax qualified policies since all Partnership plans have tax-qualified status. The only reason an individual would be seeking a non-tax qualified plan would be for the additional ease of collecting benefits, based on use of additional ADLs in the policy.

One might easily assume that everyone would want a tax-qualified plan, but that is not necessarily the best choice for every individual. Of course, if asset protection is the goal, there is no choice available it must be tax qualified. The major difference has to do with benefit triggers. Benefit triggers are the conditions that "trigger" benefit payment from the insurance company. If a person needs to enter a nursing home, but his or her policy will not pay because the policyholder has not met the criterion for collecting benefits, he or she will not be able to access their policys benefits. The difference directly relates to the activities of daily living (ADL). In the non-tax qualifies policy forms, ambulation tends to be the primary difference. Ambulation is the ability to move around without help from another individual. This daily activity is often the first to deteriorate as we age.

Tax-qualified plans come under federal legislation. Federally qualified long-term care policies providing coverage for long-term care services must base payment of benefits on certain criteria requirements:

1. All services must be prescribed under a plan of care by a licensed health care practitioner independent of the insurance company.

2. The insured must be chronically ill by virtue of either one of the two following conditions:

a. Being unable to perform two of the following activities of daily living (ADL): eating, toileting, transferring in and out of beds or chairs, bathing, dressing, and continence, or

b. Having a severe impairment in cognitive ability.

There are differences in the tax-qualified and non-tax-qualified long-term care plan ADLS. These differences are important because they relate to the benefit triggers. Tax-qualified plans have eliminated the ADL of ambulation (the ability to move around independently of others).

Section 6021:

Expansion of State LTC Partnership Program

The Deficit Reduction Act of 2005 (effective in 2006) provided some statutory Requirements that are important to the expansion of long-term care Partnership policies. This would include:

Dollar-for-Dollar Asset Protection	In order to provide asset protection, states must make necessary statute amendments that provide for the disregard of assets when applying for Medicaid benefits. An individual applying for benefits must be a resident of the state when the coverage first became effective under the policy. The Partnership policy will be a tax-qualified plan that was issued no earlier than the effective date of the state plan amendment allowing use of such LTC policies. They must meet the October 2000 NAIC model regulations and requirements for consumer protections.
Inflation Protection	Since most people will not use their long-term care benefits for many years after purchase, it is important to include inflation protection. Partnership plans have specific inflation protection requirements. The requirements were previously outlined in this course.
Plan Reporting Requirements	Partnership plan insurers must provide regular reports to the HHS Secretary and include specific information, including: Notification of when benefits have been paid and the amount of benefits paid. Notification of policy termination. Any other information requested by HHS. The state may not impose any requirements affecting the terms or benefits on Partnership policies that were not also imposed on traditional non-partnership plans. States may require issuers to report additional information beyond those listed and there may be differences among the states.
Consumer Education	It is the responsibility of each state to properly educate their consumers so they are aware of their asset-protection options.
Agent Education	Most states will be imposing some type of continuing education requirements for those agents wanting to market Partnership plans. While these agent requirements will vary, many states are adopting an initial requirement of 8 hours, with 4 hours required each license renewal period thereafter.
State Amendments Where Required	Policies are deemed to meet required standards of the model regulation or the model Act if the state plan amendment is certified by the state insurance commissioner in a manner satisfactory to the Secretary.
Reciprocity	States with Partnership contracts must develop standards for uniform reciprocal recognition of Partnership policies between participating states. This would include benefits paid under the policies (being treated equally by all states) and opt out provisions where states could notify the Secretary in writing if they do not want to participate in a reciprocity program.
State Effective Dates	Qualified state long-term care Partnership policies issued on the first calendar quarter in which the plan amendment was submitted to the Secretary.

Partnership plans, while preserving assets also have many other components. Just like a non-partnership policy, the applicant must make decisions regarding the type and quantity of benefits they wish to purchase. Just like traditional LTC policies the applicant must medically qualify for the Partnership plans. Since insurers underwrite the policies, even asset protection models must be an acceptable risk.

Not every person will feel they need the same policy benefits in their long-term care insurance policy. While most states mandate some types of coverage, such as equality among the levels of care, there are other options that may be purchased or declined. A trained and caring agent can help the consumer understand those options and make wise choices.

Making Benefit Choices

Some choices are made for consumers by the insurers, such as the minimum daily benefit available. Other choices fall on the applicant, such as whether to purchase a $150 per day benefit or a $200 per day nursing home benefit. Regardless of the choices consumers make, all policies must follow federal and state guidelines. In fact, insurers will not offer a policy that does not meet minimum state and federal standards. For example, in some states insurers must offer no less than a $100 per day nursing home benefit and all three levels of care must be covered equally (skilled, intermediate and custodial, also called personal care). Policies following federal guidelines will be tax-qualified. Non-partnership polices following state guidelines might be non-tax qualified plans. Many states mandate specific agent education prior to being able to market or sell non-partnership LTC policies. Agents selling Partnership policies must certainly acquire additional education in order to market partnership plans. In both cases, the goal is to have educated field staff relaying correct information to consumers.

All policies offer some options, which may be purchased for additional premium. Of course, consumers may also refuse the optional coverage. When refusing some types of options, a rejection form must be signed and dated by the applicant. In some states, an existing policy may be modified; in others an entirely new policy would be required when changes are desired.

When a consumer decides to purchase an LTC policy, several buying decisions must be made. These could include:

1. Daily benefit amounts: this is the daily benefit that will be paid by the insurer if confinement in a nursing home occurs.

2. The length of time the policy will pay benefits: this could range from one year to the insureds lifetime. Of course, the longer the length of policy benefits, the more expensive the policy will be.

3. Inclusion of an inflation guard: Non-partnership plans will not require this, while Partnership plans have inflation protection guidelines that must be followed. An inflation protection guards against the rising costs of long-term care by providing an increasing benefit according to contract terms. Partnership plans have two types: an increase based on a predetermined percentage and an offer at specific intervals allowing the insured to increase benefits without proof of insurability.

4. The waiting period, also called an elimination period, must be selected. This is the period of time that must pass while receiving care before the policy will pay for anything. It is a deductible expressed as days not covered. The option can range from zero days to 100 days. A few policies may have a choice of a longer time period.

5. Dollar-for-Dollar Partnership asset protection or Total Asset protection, if both are available. A Hybrid model may also be available. Not all states offer all options since DRA specifies all new LTC Partnership plans to offer only dollar-for-dollar models, in the hope of keeping premiums affordable for lower and medium income individuals.

As every field agent knows, clients often prefer to have the agent make selections for them, but this is not wise. Although the agent will be valued for the advice he or she gives, the actual benefit decisions need to be made by the consumer. This means the agent must fully explain each option so that the consumer can make informed choices. In a way, it is similar to the cafeteria insurance plans where employees have an array of choices in benefits. The difference is that the long-term care policies have no limits on the choices that the consumer can make. If he or she is willing to pay the price, absolutely everything available can be selected. Typically an agent will go from available benefit to available benefit, explaining each option, and getting a decision from the applicant before moving on to the next decision.

Benefit choices are primarily the same as for non-Partnership policies in that there is a daily or monthly benefit, elimination or waiting periods, a home health care and adult day care benefit level, an inflation feature, and a benefit period with a lifetime maximum generally offered. Those who choose the lifetime Partnership benefit have apparently decided that they never want to use Medicaid funding. This is not surprising since people often believe Medicaid funding leads to inferior care, although statistically that has not been validated.

There is something else about Partnership policies that mirror non-partnership contracts: underwriting. Just as insurers underwrite traditional long-term care policies, they also underwrite Partnership contracts. Therefore, the applicant must medically qualify in order to purchase such a plan. Perhaps that explains the younger ages that seem to be applying for and buying Partnership long-term care plans.

Daily Benefit Options

While there are many policy options, the daily benefit amount is usually the first policy decision, with the second one being the length of time the benefits will continue. Both of these strongly affect the cost of the policy, but they also affect something else that is very important: the amount of assets that will be protected from Medicaid spend-down requirements. The total benefit amount (daily benefit multiplied by the length of benefit payouts) determines the amount of assets protected in dollar-for-dollar Partnership plans.

The type of policy being purchased will affect how the daily benefit works; for example a non-partnership policy may be purchased that covers home health care only (not institutionalized care). The daily benefit is based upon the type of policy selected. Policies that cover institutional care in a nursing home will have options that may vary from policies that cover only home care benefits. Integrated policies will vary from those that pay a daily indemnity amount. Many states have mandatory minimum limitations ($100 per day benefits for example). Insurance companies will determine the upper possibilities. Obviously, the consumer cannot select a figure higher than that offered by the issuing company. Nor can an insurer offer a daily indemnity amount that is lower than those set by the state where issued. At one time insurers offered as low as a $40 per day benefit in the nursing home. By todays standards, that would be extremely inadequate for nursing home care.

This daily benefit can have variations. Some policies will specify an amount (not to exceed actual cost) for each nursing home confinement day. Other policies (called integrated plans) offer a more relaxed benefit formula. These policies have a "pool" of money, which may be used however the policyholder sees fit, within the terms of the contract. As a result this pool of money could be spent for home care rather than a nursing home confinement, as long as the care met the contract requirements. Benefits will be paid as long as this maximum amount lasts regardless of the time period. The danger in having a pool of money, however, is that the funds may be used up by the time a nursing home confinement actually occurs. If the funds have been previously used up, there will be no more benefits payable. Since people prefer to stay at home, this may work out well, but it can also quickly deplete funds in a wasteful manner.

The amounts paid will usually vary depending upon whether they are going towards a nursing home confinement, home health care, adult day care, and so forth. The "pool of money" type is gaining popularity where offered, since consumers see it as a way to make health care choices more freely. Integrated policies are generally more expensive than indemnity contracts. As in all policy contacts, integrated plans have benefit qualification requirements, exclusions, and limitations; they do not simply hand the insured money to be used in any manner desired.

While sales can and do vary from state to state, California reported that the average daily amount purchased in Partnership plans was $150 (2003 GAO figure) with a lifetime benefit period. Indiana reported an average daily figure purchased as $130 per day, which may reflect the difference in state costs. Californians can expect to pay about $230 per day in a nursing home while Indianans will pay around $170. New Yorkers were buying an average of $200 per day benefit, but they also have some of the nations highest nursing home rates.

Agents May Not . . .

Insurance agents (known as insurance producers as of July 1, 2009) have specific responsibilities regarding their profession. Certainly insurance producers are required to know and understand the federal and state requirements. Long-term care is complicated and it is important that anyone marketing them understand the contracts.

Some producer actions are actually prohibited. These include:

1. Completing the medical history of an applicant. Often it seems easier to write what the applicant relates to us, but this is not permitted on a long-term care application. Applicants must complete their own health history; this eliminates unintentional errors.

2. Knowingly selling a long-term care policy to any person on Medicaid. Obviously if the individual qualifies for Medicaid they do not have sufficient assets or income to purchase an insurance policy, especially when that policy would simply duplicate what Medicaid is already providing.

3. Using or engaging in unfair or deceptive acts in the advertising, sale or marketing of long-term care contracts.

This education is required, in part, to educate agents so they do not engage in activities that are illegal. Insurance producers must obtain education to understand what they may and may not do in the sales field.

Long-term care policies can be complicated. If the agent does not understand the long-term care insurance products how can we expect our citizens to understand them? Insurance producers must take this required education seriously not only to prevent engaging in prohibited practices but also to lend greater understanding to the products they are representing. By having a better understanding they will be better able to communicate their knowledge to long-term care insurance applicants.

Asset Protection in Partnership Policies

A primary reason for purchasing a Partnership long-term care policy is the asset protection it provides. There were initially two asset protection models, although a third variety developed:

1. Dollar-for-Dollar: Assets are protected up to the amount of the private insurance benefit purchased. If policy benefits equal $100,000, then $100,000 of private assets are protected from the required Medicaid spend-down once policy benefits are exhausted and Medicaid assistance is requested.

2. Total Asset Protection: All assets are protected when a state-defined minimum benefit package is purchased by the consumer. In this case, as long as the individual buys the minimum required benefits under the state plan, all his or her assets are protected from Medicaid spend-down requirements even if the assets exceed the total policy benefits purchased. Only New York and Indiana have this option. Total asset protection will not be offered in any of the new Partnership plans.

3. Hybrid: This Partnership program offers both dollar-for-dollar and total asset protection. The type of asset protection depends on the initial amount of coverage purchased. Total asset protection is available for policies with initial coverage amounts greater than or equal to a coverage level defined by the state.

Indiana introduced a hybrid model in 1998. Consumers have purchased more long-term care insurance coverage to get total asset protection than they have the less expensive coverage for the dollar-to-dollar program. This would indicate that consumers are willing to pay a higher premium for the better asset protection offered by the Total Asset model. To trigger total asset protection in 2005 policyholders had to buy a policy benefit valued at $196,994 or greater. Prior to 1998, only 29 percent of the policies purchased had total coverage amounts large enough to trigger total asset protection. When compared with just the first quarter of 2005, 87 percent of policies purchased had total coverage amounts large enough to trigger total asset protection.

As you know, under the Partnership program the state will disregard the policyholders personal assets equal to amounts paid out under a qualifying dollar-for-dollar model insurance policy or it will disregard all assets under the Total Asset Model.

Policy Structure

We have seen much legislation by the states directed at long-term care policies. Even the federal government has been involved in this with the tax-qualified plans. It is important to note that tax-qualified plans always come under federal legislation whereas non-tax qualified plans come under state legislation. Each state will have specific policy requirements. Partnership plans come under federal requirements and will be tax-qualified. The states will assign descriptive names in an effort to identify policies in a way that consumers can comprehend. Such terms as Nursing Facility Only policy, Comprehensive policy or Home Care Only policy will be used. Each state will have their specific way of labeling policies. Long-term care policies often do not pay benefits for years after purchase. An error on the part of the agent can have devastating consequences.

Home Care Options

While it is very important to cover the catastrophic costs of institutionalization in a nursing home, most Americans would prefer to remain at home. It is often possible to obtain both nursing home benefits and home care benefits in the same policy. In such a case, home care is typically covered at 50 percent of the nursing home rate. Therefore, if the nursing home benefit is $100, the home care rate will be $50. This may not be adequate funding for home care. If home care is a primary concern, it may be best to purchase a separate policy for this if financially possible. Some home care policies carry additional benefits such as coverage for adult day care.

Inflation Protection

Industry professionals generally recommend inflation protection, but the cost can be high. Those who purchase at younger ages are especially encouraged to add this feature since the cost of long-term care is certain to increase over time. The cost of providing long-term care has been increasing faster than inflation. At older ages, the consumer will need to weigh the cost of the additional premium option with the amount of increase in benefits that will be produced.

The rising costs of institutional care surpass the increase in the Consumer Price Index. As of 2006 figures, a year of nursing home care in New York City costs approximately $146,000 on the high end (Washington also ranks above the national average for LTC care). Indiana residents pay around $62,000 per year. There is little doubt that costs are rising. Few retired people can afford to pay such high costs, so they turn to nursing home policies. Since such policies can be expensive, consumers may not purchase features that are designed to keep the coverage adequate. While traditional policies still give the applicant the choice of having or not having inflation protection, Partnership policies are structured differently.

Partnership policies have specific inflation protection requirements under the Deficit Reduction Act of 2005:

Applicants under 61 years old must be given compound annual inflation protection,

Applicants 61 to 76 years old must be given some level of inflation protection, and

Applicants 76 years old or more must be offered inflation protection, but they do not have to accept it.

Traditional long-term care plans continue to make inflation protection an option, which may be rejected by the applicant. Many in the health care field state that the amount of increase offered is not adequate, but it will help to offset the rising costs of long-term care. The inflation protection, usually a 5 percent compound yearly increase, may eventually become part of all policies, but currently it is most likely to be just an option that the consumer must accept or reject. Some states require the consumer to sign a rejection form as proof that the agent offered the option.

Simple and Compound Protection

Inflation protection based on percentages is offered in one of two ways: simple increases in benefits or compound increases in benefits. Like interest earnings, the benefits increase based on only the original daily indemnity amount or on the total indemnity amount (base plus previous increases). Some states mandate that all inflation protection options offered must be compound protection; others allow the insurers to offer both types. Under a simple inflation benefit, a $100 daily benefit would increase by $5 each year. Under a compound inflation benefit the protection increases by 5 percent of the total daily benefit payment. This is called a compound inflation benefit because it uses the previous year's amount rather than the original daily benefit amount. This is the same basis used with interest earnings on investments. Compound interest earnings are always better than simple interest earnings. The following graph more clearly illustrates how compounding works with the inflation protection riders:

	Year 1	Year 5	Year 10	Year 15	Year 20
Base Policy	$100	$100	$100	$100	$100
Simple	$100	$120	$145	$170	$195
Compound	$100	$121	$155	$197	$252

Required Rejection Forms

The individual state insurance departments generally recommend inflation protection riders to their citizens. Inflation protection plans must continue even if the insured is confined to a nursing home or similar institution. Many states are now requiring a signed rejection form if the insured does not accept the inflation protection option. Although this is intended to be consumer protection, it is also agent protection. It assures that the family of the insured will not later try to sue the agent for failing to sell the inflation protection.

Elimination Periods in LTC Policies

In auto insurance and homeowners insurance, higher deductibles are recommended as a way of reducing premium cost. The point is catastrophic coverage not coverage of the small day-to-day losses. The same is true when it comes to health insurance. In long-term care contracts, there are a variety of waiting or elimination periods available in policies. Basically, a waiting or elimination period is simply a deductible expressed as days not covered. The choice is made at the time of application. Policies that have no waiting period (called zero elimination days) will be more expensive than those that have a 100-day wait. Fifteen to thirty elimination days are most commonly seen, although the zero day elimination periods have gained popularity.

As one might expect, the longer the elimination period, the less expensive the policy; the shorter the elimination period, the more expensive it is. Therefore:

Zero day elimination = higher cost.

100 day elimination = lower cost.

All the variables between the two extremes will have varying amounts of premium; 30 day elimination period will cost less than a 15 day elimination time period, and so on.

When considering which elimination period is appropriate, one should consider the consumer's ability to pay the initial confinement. For example, if thirty-day elimination is being considered at $100 per day benefit, by multiplying $100 by 30 days, it is possible to see what the consumer would first pay: $3,000 before his or her policy began. If this is something the consumer is comfortable with, then it may be appropriate to choose a 30-day elimination period. Again, a larger elimination (deductible) period will mean lower yearly premium costs.

Policy Type

The specific type of policy to be purchased can be a harder question. Many of the nursing home policies are basically the same, with differences being hard to distinguish. It is very important that the agent fully understand what those differences are before presenting a policy. Some policies will offer coverage only in the nursing home while others offer a combination of possibilities. The insurer will mark their policy types in some specific way. The agent is responsible for understanding the differences.

Many policies offer extra benefits, which agents often refer to as "bells and whistles" since they give additional features, but those features are not vital to the effectiveness of the policy. Even so, consumers may find value in them.

Restoration of Policy Benefits

Some policies have a restoration benefit in their policy. This means that part or all of used benefits renew after a specific length of time and under specific circumstances. During this period of time, the policyholder must be claim free.

Preexisting Periods in Policies

Obviously as we age it is more likely that our health will not be perfect. High blood pressure, arthritis, or other ailments are likely to develop. It is possible that conditions existing at the time of application could present claims soon after the policy is issued. Because of this, companies have what is called a preexisting condition period.

A preexisting condition is one for which the policyholder received treatment or medical advice within a specified time period prior to policy issue. Under federal law, that period of time prior to application is six months. Failure to disclose conditions that were known to the applicant can result in claims being denied when benefits are applied for or result from that condition. Medication, it should be noted, constitutes treatment. In some cases, the insurance company will even rescind the policy due to failure to disclose all requested medical history. Some policies will cover all conditions that were disclosed but apply the preexisting period to any that were not listed as a means of encouraging full disclosure.

When the preexisting period has passed, all medical conditions are then covered. Not all policies will impose a preexisting period; as long as the condition was disclosed at the time of application, all claims will be honored in such policies. Other policies do impose preexisting periods, but usually no more than six months from the time of policy issue (which may be mandated by state statute). Policies tend to specifically list preexisting conditions in a separate paragraph in the policy.

Prior Hospitalization Requirements for Skilled Care

Under Medicare, hospitalization must have occurred for the same or related condition in order to receive Medicares skilled care benefits (additional criteria for skilled care also exists). With traditional LTC policies, sometimes prior hospitalization is required to collect nursing home benefits and sometimes it is not. Washington does not allow a prior hospitalization requirement in LTC polices. In states that allow prior hospitalization, policies may still offer a non-hospitalization option for extra premium.

When prior hospitalization is required in a policy, typically the patient must have been there for three or more days. They must also have been admitted to the nursing home for the same or related condition for which they were hospitalized. The nursing home admittance may have to be anywhere from 15 to 30 days following discharge from the hospital.

Nonforfeiture Values

State regulators are giving nonforfeiture values a hard look. With rising premiums, many long term clients are finding they can no longer afford to keep their policy. When a consumer has held a long-term care policy for many years, never claiming any benefits, a lapse of the policy means wasted premium dollars, which have been paid out over several years. It obviously means that insurers have benefited while consumers have merely wasted premium dollars. If they are forced, through rising costs, to abandon their policies as they approach the age of needing the benefits insurers have benefited unfairly. Federal law requires that companies at least offer a nonforfeiture provision to the prospective policyholder in tax-qualified plans. Non-tax qualified plans do not need to offer this additional benefit, unless state law requires it. The importance of Nonforfeiture values are often overlooked by consumers in favor of lower policy premiums. Even agents often fail to realize the importance of nonforfeiture values.

Waiver of Premium

Waiver of premium is offered in most policies. Some make this benefit part of the policy for no added premium while others view it as an option that must be purchased. Waiver of premiums occurs when the policyholder is in the nursing facility or other contractually covered facility, as a patient. At a given point, he or she no longer needs to pay premiums, but policy benefits continue. The point of time when the waiver kicks in will depend upon policy language. Some policies specify that the waiver starts counting only from the time the insured actually qualifies for policy benefits; other policies let it begin from the first day of confinement. This is an important point unless the policyholder has selected a zero elimination period. If a zero elimination period were selected there would be no difference between the two types.

If the policy waiver of premium begins from the day the policyholder actually qualifies for benefits and the policy contains a 30-day elimination period, it would look like this:

30 elimination days + benefit days = waiver of premium satisfaction.

While the period of time can vary, it is common to begin after 90 benefit days. Therefore, it would be 30 days plus an additional 90 benefit days before the waiver actually became effective. If the confinement stops, the premiums are reinstated, but the policyholder would not have to pay premiums for the previously waived time period.

If the policyholder is paid ahead, most companies will not refund premium, even though the waiver of premium has kicked in. The policyholder would have to wait until premiums were actually due to utilize this feature. Some of the newer policies will, however, make refunds on a quarterly basis for paid-ahead premiums during qualified waiver of premium periods.

Unintentional Lapse of Policy

As people age forgetfulness is common. Many states now have provisions for unintentional lapses of policies. Both regulators and insurers have realized that this may especially be a problem in the older ages and especially when illness has developed. A long-time policyholder, without meaning to, can allow a policy to lapse for nonpayment of premiums. It can happen when coverage is most needed because illness or cognitive impairment has developed. Therefore, many states have provisions that allow the policyholder to reinstate without having to go through new underwriting. Of course, past premiums will need to be paid.

The length of time that may pass while still allowing reinstatement varies. Typically, insurance companies allow a 30-day grace period anyway, but some reinstatement periods can be as long as 180 days (again, past due premiums must be paid). It is the waiver of new underwriting that is most important since illness or cognitive impairment may be a factor in the lapse. Obviously, having to underwrite a new policy could mean rejection for the insured. The existing policy is simply reinstated as it was before the lapse.

Policy Renewal Features

It is now common for nursing home policies to be either guaranteed renewable or non-cancelable.

Guaranteed renewable means the insured has the right to continue coverage as long as they pay their premiums in a timely manner. The insurer may not unilaterally change the terms of the coverage or decline to renew. The premium rates can be changed.

Non-cancelable means the insured has the right to continue the coverage as long as they pay their premiums in a timely manner. Again, the insurer may not unilaterally change the terms of coverage, decline to renew, or change the premium rates. Please note non-cancelable policies may not change premium rates. Such LTC policies would be rare, if available at all.

Washington Limitations and Exclusions: WAC 284-83-020(2)

Long-term care policies and certificates may not be issued if they limit or exclude coverage by type of illness, treatment, medical condition or accident, except for the following permitted exclusions:

1. Preexisting conditions and diseases;
2. Alcoholism and drug addiction;
3. Illness, treatment or medical conditions resulting from war or an act of war;
4. Participation in a felony, riot or insurrection;
5. Service in the armed forces or units auxiliary to them;
6. Suicide, whether judged sane or insane; this includes attempts at suicide or intentionally self-inflicted injuries;
7. Aviation in a non-fare-paying capacity;
8. Treatment in a government facility (unless required by law), services available under Medicare, or other government program;
9. Expenses paid for by another insurance policy;
10. In qualified LTC insurance policies, expenses for services and items that will be reimbursed under Title XVIII of the Social Security Act or would be reimbursable if not for a deductible or coinsurance amount.

Insurers may not prohibit, exclude, or limit services based on the type of provider or limit coverage if services are provided in another state except:

1. When the other state does not have the provider licensing, certification, or registration required in the policy. The policy may have requirements that must be satisfied in lieu of licensure certification or registration.
2. When the other state issues licenses, certifications or registrations under another name than the one used in Washington.

Issuers may exclude or limit payment for services provided outside the United States or permit or limit benefit levels to reflect legitimate variations or differences in provider rates. Issuers must still cover services that would be covered in the state of issue irrespective of any licensing, registration or certification requirements for providers in the other state. If the claim would be approved were it not for the licensing issue, the claim must be approved for payment.

Extension of Benefits

If an insured is receiving benefits and for some reason the policy cancels, most states have provisions that require benefits to continue. This is called Extension of Benefits. It does not cover an individual whose benefits under the policy simply run out or are exhausted.

Standardized Definitions

As is so often the case, definitions need to be standardized to avoid misunderstandings. No policy may be advertised, solicited or issued for delivery as a long-term care Partnership contract which uses definitions more restrictive or less favorable for the policyholder than that allowed by the state where issued.

Minimum Partnership Requirements

Long-term care Partnership policies do, of course, have minimum standards, which must be met. Standards are based on the state where issued. Since each state may have different state requirements, plans may vary from state to state. In all states, an agent would be acting illegally if he or she told a prospective client that the policy he or she was demonstrating for sale was a Partnership policy when, in fact, it did not meet partnership criteria.

The minimum standards set down by each state are just that: minimums. They do not prevent the inclusion of other provisions or benefits that are consumer favorable, as long as they are not inconsistent with the required standards of the state where issued.

Benefit Duplication

It is the responsibility of every insurance company and every agent to make reasonable efforts to determine whether the issuance of a long-term care Partnership policy might duplicate benefits being received under another long-term care policy, another policy paying similar benefits, or duplicate other sources of coverage such as a Medicare supplemental policy. The insurance company or agent must take reasonable steps to determine that the purchase of the coverage being applied for is suitable for the consumer's needs based on the financial circumstances of the applicant or insured.

Partnership Publication

Every applicant must be provided with a copy of the long-term care Partnership publication (which was developed jointly by the commissioner and the department of social and health services) no later than when the long-term care Partnership application is signed by the applicant.

On the first page of every Partnership contract, it must state that the plan is designed to qualify the owner for Medicaid asset protection. A similar statement must be included on every Partnership LTC application and on any outline or summary of coverage provided to applicants or insured.

Partnership Versus Traditional Policies

It appears that those who buy Partnership plans are first-time long-term care insurance buyers. Partnership policies are most likely to be purchased for their asset protection qualities, which traditional policies do not provide and never will provide. It is not the insurers that provide asset protection. Insurers provide the benefits within the policies; the states provide asset protection, which is why insurers cannot charge additional premium when issuing Partnership plans.

A report to Congressional Requesters by the United States Government Accountability Office (GAO) in May, 2007 came to many conclusions regarding the effectiveness of the Partnership plans and if and how they might save the states money by preventing use of Medicaid funds. According to their report, Partnership Programs include benefits that protect policyholders but are not likely to provide substantial Medicaid savings.

Partnership programs allow individuals who purchase Partnership long-term care insurance policies to exempt at least some of their personal assets from Medicaid eligibility requirements. In response to a congressional request, GAO examined three things:

1. The benefits and premium requirements of Partnership policies as compared with those of traditional long-term care insurance policies;

2. The demographics of Partnership policyholders, traditional long-term care insurance policyholders, and people without long-term care insurance; and

3. Whether the Partnership programs are likely to result in savings for Medicaid.

To examine benefits, premiums, and demographics, GAO used 2002 through 2005 data from the four states with Partnership programsCalifornia, Connecticut, Indiana, and New Yorkand other data sources. To assess the likely impact on Medicaid savings, GAO (1) used data from surveys of Partnership policyholders to estimate how they would have financed their long-term care without the Partnership program, (2) constructed three scenarios illustrative of the options for financing long-term care to compare how long it would take for an individual to spend his or her assets on long-term care and become eligible for Medicaid, and (3) estimated the likelihood that Partnership policyholders would become eligible for Medicaid based on their wealth and insurance benefits.

California, Connecticut, Indiana, and New York require Partnership programs to include certain benefits, such as inflation protection and minimum daily benefit amounts. Traditional long-term care insurance policies are generally not required to include these benefits. From 2002 through 2005, Partnership policyholders purchased policies with more extensive coverage than traditional policyholders. According to state officials, insurance companies must charge traditional and Partnership policyholders the same premiums for comparable benefits, and they are not permitted to charge policyholders higher premiums for asset protection. Since it is the states rather than the insurers who provide this asset protection, there would be no reason for an insurer to charge higher rates for Partnership plans.

Partnership and traditional long-term care insurance policyholders tend to have higher incomes and more assets at the time they purchase their insurance, compared with those without insurance. In two of the four states, more than half of Partnership policyholders over 55 have a monthly income of at least $5,000 and more than half of all households have assets of at least $350,000 at the time they purchase a Partnership policy.

Available survey data and illustrative financing scenarios suggest that the Partnership programs are unlikely to result in savings for Medicaid, and may increase spending. The impact, however, is likely to be small. About 80 percent of surveyed Partnership policyholders would have purchased traditional long-term care insurance policies if Partnership policies were not available, representing a potential cost to Medicaid. About 20 percent of surveyed Partnership policyholders indicate they would have self-financed their care in the absence of the Partnership program, and data are not yet available to directly measure when or if those individuals will access Medicaid had they not purchased a Partnership policy. However, illustrative financing scenarios suggest that an individual could self-finance care, thus delaying Medicaid eligibility, for about the same amount of time as he or she would have using a Partnership policy, although the GAO identified some circumstances that could delay or accelerate Medicaid eligibility. While the majority of policyholders have the potential to increase spending, the impact on Medicaid is likely to be small, reported the GOA, because few policyholders are likely to exhaust their benefits and become eligible for Medicaid due to their wealth and having policies that will cover most of their long-term care needs.

Information from the four states may prove useful to other states considering Partnership programs. States may want to consider the benefits to policyholders, the likely impact on Medicaid expenditures, and the income and assets of those likely to afford long-term care insurance.

HHS disagreed with the Government Accountability Offices (GAO) report; they commented that the study results should not be considered conclusive because they do not adequately account for the effects of estate planning efforts, such as asset transfers with the goal of Medicaid qualification. While some Medicaid savings could result from people who purchased Partnership policies rather than transferring their assets to others, they are unlikely to offset the costs associated with those who would have otherwise purchased traditional policies.

Abbreviations

As the student reads this course, he or she will see many abbreviations. To fully understand the long-term care program, it is necessary to understand the abbreviations commonly used:

ADL = Activities of daily living

ACS = American Community Survey

CBO = Congressional Budget Office

CMS = Centers for Medicare & Medicaid Services

DOI = Department of Insurance

DRA = Deficit Reduction Act of 2005

GAO = The United States Government Accountability Office

HHS = Department of Health and Human Services

HIPAA = Health Insurance Portability and Accountability Act of 1996

HRS = Health and Retirement Study

IADL = Instrumental activities of daily living

LTC = Long Term Care

NAIC = National Association of Insurance Commissioners

OBRA 93 = Omnibus Budget Reconciliation Act of 1993

RWJF = The Robert Wood Johnson Foundation

UDS = Uniform Data Set

NAIC 2000 Model Act

No one has argued against purchasing a long-term care policy to protect against the costs of receiving care for an extended period of time. However, like so many things, these early policies had many initial flaws that were not consumer friendly or, in some cases, even ethical.

Regulation is often necessary to correct industry flaws that were not corrected by the industry itself. The long-term care insurance market needed consumer protection to protect against product flaws, some intentional and some merely a result of issuing products in a new market place with little statistical data to guide the underwriters. The regulation reflected many issues, including consumer expectations, insurer pricing, and any number of other circumstances. The focus brought about recommendations by the National Association of Insurance Commissioners (NAIC), called the model laws and regulations.

The National Association of Insurance Commissioners is a non-profit organization made up of the insurance regulators from the 50 states, the District of Columbian and the four United States territories. They have worked with regulators, legislators, the insurance industry, and consumers to create a comprehensive uniform model law, often referred to as the NAIC Act, and related regulations for long-term care insurance.

State laws can vary widely, but the Model Act and Related Regulations are generally adopted in some form (the state either adopts them as they are or includes language from the model).

Initially, it was the premiums that brought about the attention to this new market of long-term care insurance policies. Health insurance policies had many years of trial and error to smooth out the pricing so it was fair to both the consumers and the insurance companies covering the risks. Health insurance can be adjusted yearly as the insurers see the claims come in. Long-term care policies are issued without immediate access to claims experience. Usually these policies are not accessed for ten to twenty years after issuance. Initially, they were priced to remain constant for many years. Unfortunately, some agents actually marketed them as never increasing in price. Since one in three purchasers of long-term care insurance is under the age of 65, long-term pricing becomes necessary.[1] While most policies did not increase with increasing age, they do contain a clause allowing for premium increases if all similar policies are increased (they may not be increased individually due to advancing age or deteriorating health).

Premiums in Partnership plans may not increase individually or due to the characteristics of an individual policyholder (due to claims, for example), but policies may be increased if all such policies are increased. It was difficult for underwriters to accurately price long-term care policies since so little data existed. Additionally, a larger number of policyholders maintained the coverage than was expected. Why is this important? Because it meant that premiums companies expected to keep, without paying out claims, did not materialize. Since the policyholders kept their policies they could be expected to eventually collect benefits.

Any new insurance market may experience premium rating difficulties, but the long-term market was especially prone to this, due to the length of time between purchase and benefit submissions. In August of 2000 the NAIC adopted new regulatory requirements intended to encourage stronger state legal protections for the long-term care policyholder. The NAIC worked with various groups, including consumer groups and the insurers to develop regulation that would serve as a model for everyone. It was called the NAIC Long-Term Care Insurance Model Act and Regulation.

A major goal of the NAIC model act was premium stability. As amended in August of 2000, the NAIC model act and regulation financially penalizes companies that intentionally under-price policies (often called low-balling) and, furthermore, allow state regulators to prohibit insurers that repeatedly engage in such behavior from selling policies in their state. The new model required greater disclosure of premium increases and provided policyholders with more options when premiums did increase.

We might assume that an insurance company would not want to under price their policies, but in fact that can be a competitive strategy to lure in customers with relaxed underwriting and low premiums. At some point, the insurers know they will raise their premium rates. Since long-term care benefits are not accessed quickly (as major medical plans are, for example) insurers can low-ball policy issuances without fear of being hit financially. This is extremely bad for those who buy the policies since they pay in premiums for a policy they may have to lapse when premiums rise beyond their means.

Level Premium Does Not Mean Unchanging Rates

Many states have addressed the term level premium since this can mislead the consumer into believing that policy rates will never change. Rates can and do change in long-term care policies. This term means that rates will not be increased due to advancing age or increased claim submission.

Financial Requirements for Rate Increases

The NAIC model provided measures that would discourage under-pricing of policies, which would inevitably increase in premium at some point. Rules were established regarding the loss ratio (the share of premium the insurer expected to pay in claims). These were based on estimates of future revenues and future claims over the life of the policy for all those who purchased this particular policy form. Under the NAIC model, projected claims must account for at least the sum of:

(a) 58 percent of the revenues that would be generated by the existing premium, and

(b) 85 percent of the revenue generated by the premium increase.

Setting a higher loss ratio requirement for the premium increase than applies to the initial premium creates what is essentially a penalty for increasing rates. It is hoped it will discourage under-pricing from the beginning of the policy.

Rate Certification from the Insurers Actuary

The Model Act requires insurers to obtain certification from an actuary that initial premiums are reasonable. When an insurer requests a premium hike the model also requires the actuary to certify that no further premium rate schedule increases are anticipated. Reliance on this actuarial certification must assume, of course, that the actuary will use acceptable actuarial practices when evaluating the available data. It must further assume that unethical companies cannot find an actuary willing to make a certification that was inaccurate.

Consumer Disclosure

The NAIC model requires insurers to disclose rate increase histories for the past ten years for long-term care policies of similar type. Since this has been such a forward-moving industry it is unlikely that the exact policy will have been issued for a steady ten years. There may be some cases where this is not required, as in the case of insurer mergers. It is hoped that this disclosure will help consumers select the policy they wish to purchase as well as the company they wish to deal with. The purchaser must also sign a form stating that he or she understands that premiums may increase in the future (this should prevent agents from stating that premiums will remain the same).

LTC Personal Worksheet

Insurers use a long-term care worksheet called the Long-Term Care Insurance Personal Worksheet. This is provided to applicants during the solicitation of a long-term care policy. The worksheet and rate information are provided to the Insurance Departments Office for review in most cases.

Is the Policy Suitable for the Buyer?

A policy that is purchased and then lapsed a year or two later has benefited no one not even the insurer in some cases since underwriting has costs associated with it. The selling agent is in the best position to determine whether or not the buyer is financially suitable for the policy they are buying. In other words, if the buyer has no assets to protect (income cannot be protected by Partnership policies or any other type of policy) it may not be wise to purchase a long-term care policy in the first place.

Agents must attempt to document whether or not an individual should purchase a long-term care insurance policy, whether that happens to be a traditional long-term care contract or a Partnership contract. Washington requires companies to develop suitability standards (which agents must follow) to determine if the sale of long-term care insurance is appropriate. These standards must be available for inspection upon request by the Insurance Commissioner.

How does an agent know if a policy is suitable? Simple questions can determine that: Is insurance appropriate for this individual? Can the applicant afford the premiums year after year, especially if the rates increase? Does the policy actually address the applicants potential needs and desires?

Insurance companies are required to develop and use suitability standards. Furthermore they must train their agents in their use. Copies of the suitability forms must be maintained and available for inspection.

Consumer Publications

There are consumer publications that enable the buyer to determine themselves if a long-term care purchase is wise for their particular circumstances. Things You Should Know before You Buy Long-Term Care Insurance is a consumer publication. Also available is the Long-Term Care Insurance Suitability Letter for consumers.

The agent must provide a Long-Term Care Shoppers Guide to all prospective buyers of long-term care insurance, whether a traditional long-term care policy or a Partnership long-term care policy. This publication or a similar publication will have been developed by either the individual state or by the National Association of Insurance Commissioners for prospective applicants.

Post Claim Underwriting

Most policies underwrite the applicant at the time of application. The long-term care industry has not always done so. At one time some companies quickly issued the long-term care policy and delayed underwriting until a claim was submitted. Obviously, this was not good for the insured. No one wants to find out their policy is useless when a claim has been presented.

Most states prohibit post-claim underwriting since it is anti-consumer and encourages insurers to find a reason to invalidate the policy (since a claim has been submitted). Especially in long-term care policies it is important that the contract be underwritten at the time of application. In this way, the applicant can be sure that his or her policy is valid and will pay covered claims when they occur.

Additionally, many states mandate that applications contain clear and unambiguous questions on the application regarding the applicants health status. Of course, the consumer must honestly answer the insurers questions. A question that could be misunderstood puts the applicant in the position of possibly having their policy rescinded or an otherwise valid claim denied due to misrepresentation if the health questions are not worded in a manner that is easily understood.

Tax-Qualified Policy Statement

If it is a Partnership plan, then it is tax-qualified. If the insured files long-form for their federal taxes he or she may deduct the premiums of his or her long-term care policy. Policies must include a statement regarding the tax consequences of the contract so that the insureds do not have to guess whether or not the policy meets the tax requirements. The statement must be included in the policy and in the corresponding outline of coverage.

The Outline of Coverage is a freestanding document that provides a brief description of the important policy features. Usually the statement would read similar to:

This policy is intended to be a federally tax-qualified long-term care insurance contract under section 7702(b) of the Internal Revenue Code of 1986, as amended. Benefits received under the policy may be taxable as income.

Replacement Notices

When an application is taken for long-term care insurance, the agent must determine whether or not it will replace an existing long-term care contract. The method of determination is very specific. A list of replacement questions must be on the application forms and replacement notices. If replacement will take place, there is a specific format for the replacement process.

When a policy is replaced by another, the replacing insurer must waive the time period applicable to preexisting conditions and probational periods to the extent similar exclusions have been satisfied under the original policy. In other words, once a probational or preexisting medical period has been met under one policy, any subsequent contracts that replace the original must recognize the previous satisfaction of these conditional periods.

Policy Conversion

It may be possible to convert a recently issued tax-qualified policy over to a Partnership policy if the issuing company offers Partnership policies. If this is the case, it is likely that there will be specified time limits for doing so. The insurer will mail out notices to their policyholders notifying them of this possibility. Some insurers may allow any tax-qualified policyholder to convert to a Partnership plan; benefits will remain the same since only asset protection will be added by the conversion.

When a policy is converted from one form to another states nearly always have conversion rules that apply. Typically the insurer may not impose new or additional underwriting, nor may they impose a new or extended preexisting period for claims.

An Overview

The Model Act provides guidelines for qualified long-term care policies, including:

Policies may not limit or exclude coverage by type of illness, such as Alzheimers disease.

Policies cannot increase premiums due to advancing age. In other words, premiums may not increase when a policyholder has a birthday. Premiums may increase simultaneously for all who hold similar policies.

Policies cannot be cancelled because of advancing age or deteriorating health.

Policies must offer a nonforfeiture benefit that, if purchased, ensures the consumer that a lapsed or cancelled policy means some benefits would still be available for a specified period of time.

Policies must offer an inflation protection that, if purchased, ensures benefits keep pace with inflation. This is especially important for those purchasing their policies at younger ages.

The Model Act Applies to All

All 50 states and DC have adopted the NAIC Model Act. The states have adopted the NAIC Model Regulation in some form, although they have not necessarily adopted all of the provisions.

The Model Act applies to all long-term care insurance policies and even to life insurance policies that have an acceleration benefit that may be used for long-term care services prior to the insureds death.[2] Any policy or rider that is advertised, marketed, or designed to provide coverage for no less than 12 consecutive months on an expense incurred, indemnity, prepaid or other basis is considered a long-term care policy if it is providing for one or more necessary long-term care services in a non-hospitalization setting.

So, what is a qualified long-term care insurance contract? For our purposes, it would include any insurance contract if:

1. The only insurance protection provided under such contract is coverage of qualified long-term care services;
2. Such contract does not pay or reimburse expenses incurred for services or items to the extent that such expenses are reimbursable under title XVIII of the Social Security Act or would be so reimbursable but for the application of a deductible or coinsurance amount;
3. Such contract is guaranteed renewable;
4. Such contract does not provide for a cash surrender value or other money that can be paid, assigned, or pledged as collateral for a loan, or borrowed.
5. All refunds of premiums, and all policyholder dividends or similar amounts, under such contract are to be applied as a reduction in future premiums or to increase future benefits, and
6. Such contract meets the requirements of subsection (g).

Policy Renewable Provisions

These long-term care policies must have renewable provisions and include a statement of how they are renewed. If the policy contains a rider or endorsement, there must be a signed acceptance by the policy owner.

Payment Standards must be Defined

Standards that refer to the payment of benefits must be defined. Such terms as usual, customary, and reasonable must be defined in a clear, unambiguous manner. In this definition, for example, the policy must state how the usual, customary, and reasonable charge is determined. Is it based on the local areas? How often are the fees updated to reflect current costs?

Preexisting Standards

Preexisting conditions limitations will be in most of the long-term care policies, but there are restrictions as to how they limit benefits. For example, the preexisting period may be no more than 6 months following policy issue. There can be no exclusions or waivers, such as exclusion on a particular heart condition of the insured. The applicant must be accepted or denied for coverage.

Policy Type Must Be Identified

The policy must clearly state whether it is a tax-qualified or a non-tax qualified long-term care policy. All Partnership policies will be tax qualified.

ADLs

Policies must describe the ADLs in a clear unambiguous manner. Policies may not be no more restrictive that using three ADLs or cognitive impairment for benefit payments. Of course, policies may be more lenient in allowing payment of benefits, but they may not be more restrictive than that.

Benefit triggers, the conditions that begin the benefit payment process, must be explained in the policy and the policy must specify whether or not certification is required.

There must be a description of the appeals process should a claim be denied.

Life Insurance Policies with Accelerated Benefits

While many professionals feel it is best to keep benefits for death and benefits for long-term care separate, there are life insurance policies that will accelerate death benefits for use for long-term care services. When this is the case, disclosure of tax consequences of life proceeds payout must be in the policy.

How is one to know if the life policy has the option of accelerated benefits? Treatment of coverage provided as part of a life insurance contract, except as otherwise provided in state regulations, generally apply if the portion of the contract providing such coverage is a separate contract. While it is always necessary to refer to the actual policy, the term portion means only the terms and benefits under a life insurance contract that are in addition to the terms and benefits under the contract without regard to long-term care insurance coverage.

Nonforfeiture Provisions

Generally a nonforfeiture provision must meet specific requirements:

1. The nonforfeiture provision must be appropriately captioned.
2. The nonforfeiture provision must provide for a benefit available in the event of a default in the payment of any premiums and the amount of the benefit may be adjusted subsequent to being initially granted only as necessary to reflect changes in claims, persistency, and interest as reflected in changes in rates for premium paying contracts approved by the appropriate State regulatory agency for the same contract form.
3. The nonforfeiture provision must provide at least one of the following:
1. Reduced paid-up insurance.
2. Extended term insurance.
3. Shortened benefit period.
4. Other similar offerings approved by the appropriate State regulatory agency.

Extension of Benefits

When policies include extension of benefits, these must be available without prejudice regarding benefits that have already been paid for prior institutionalization or care.

Home Health & Community Care

Minimum standards and benefits must be established for home health and community care in long-term care insurance policies.

Additional Provisions for Group Policies

Many companies are curtailing insurance benefits in major medical coverage so it is doubtful that group long-term care coverage will be offered to any great extent. However, where it is, there must be provisions for individuals to continue their coverage when they leave the group plan. Individuals who are covered under a discontinued policy must be offered coverage under a replacement contract.

Outline of Coverage

In Washington an Outline of Coverage must be provided at the time of the initial solicitation. As it pertains to the agent, it must be presented during the completion of the application. There is a prescribed standard format for the Outline of Coverage in a long-term care policy. The content of the Outline of Coverage is also stipulated. Use of specific text and sequence is mandatory as is a list of categories that include:

Benefits and coverage;

Exclusions and limitations;

Continuance and discontinuance terms;

Change in premium terms;

Any policy return and refund rights;

The relationship of cost of care and benefits; and

Tax status.

There must also be consumer contacts within the Outline of Coverage.

Policy Delivery

Once the policy has been approved and issued, the buyer must receive it within 30 days of approval. The policy must also include a policy summary.

No Field Issued LTC Policies

There was a time when long-term care policies could be field issued by the agent because underwriting was completed when a claim was filed rather than at policy issuance. Field issued policies are not allowed under the Model Act and Regulation since it is not good for the consumer. Policies must be underwritten prior to policy issuance.

Policy Advertising and Marketing

Prior to advertising a policy for long-term care benefits, whether it will be viewed on television, heard over the radio, or read in print, it must be approved by the states insurance commissioners office.

Any company marketing long-term care policies have standards that must be followed. There must be marketing procedures established and state training requirements for agents must be followed. The NAIC is recommending that states adopt a Partnership training requirement of eight initial hours of continuing education, followed by four hours each licensing renewal period thereafter.

The point of training agents is to ensure that marketing activities will be fair and accurate. Training will hopefully prevent a single person from over-insuring as well.

No Policy Covers Everything

As we previously discussed in this text, no policy covers everything. LTC policies must prominently display a notice to buyers that the policy may not cover all the costs associated with long-term care services. Even when agents have discussed what will not be covered, most claims will occur ten or twenty years later. It would be unlikely that the buyers would remember what the agent said and it certainly makes sense to state this in the policy as well.

Prior to the Sale

Agents and insurers have pre-sale responsibilities. They must provide the applicant with copies of personal worksheets and potential rate increase disclosure forms. They must also identify whether or not the applicant has long-term care insurance or coverage elsewhere. If there is existing coverage, the agent must find out if the applicant intends to replace the existing LTC policy with the new coverage.

The insurer must establish procedures for verifying compliance with the requirements. Written notice must be given that senior insurance counseling programs are available and provide contact information.

Such terms as non-cancelable or level premium may be used only when the policy conforms. There must be an explanation of contingent benefits upon policy lapse.

Shoppers Guide

A Shoppers Guide must be given to the consumer prior to the application for long-term care coverage. If it is a direct solicitation, it must be provided at the time of application.

Its Just Plain Illegal

Some practices are just plain illegal. This would include what is referred to as twisting, which means using facts to suit the agents own needs rather than the consumers needs. A person who is twisting may be changing facts to suit themselves or providing some facts, but omitting others in order to complete the sale. It includes omitting information that should be disclosed, or stating facts in a way that will lead the consumer to wrongly assume something that is not true. Often twisting is used to make an existing policy appear unfavorable, when in fact the policy is appropriate for the consumer.

High pressure tactics are not new to the insurance industry, but it is illegal. Agents who pressure people into buying are not really helping themselves anyway, since these individuals are very likely to cancel the policy (which means lost commissions).

Of course, any misrepresentation of the policies, the insurers, or any aspect related to the sale of insurance is illegal.

Association Marketing

There are also requirements for those who market to association members. Marketers must provide objective information, disclosures, and compensation arrangements; certainly all brochures or advertisements must be truthful as well.

Following the Sale

The consumers rights continue after the sale has been made. They have the right to return the policy if it does not meet their needs or even if they just plain change their minds. No reason for returning the policy needs to be given by the insured. As long as it is returned within 30 days a full refund will be received.

If the applicant failed to provide full information an incontestability provision exists. For material misrepresentation, the time period for rescinding the policy is six months. For a misrepresentation pertaining to both material information and medical conditions the time period is two years for policy rescission. Information that was knowingly and intentionally misrepresented may cause a policy rescission for more than two years. When a policy is rescinded, previously paid benefits may not be recovered.

Failure to Pay Premiums

When a policy is in danger of lapsing due to nonpayment of premiums, the insurer has some obligations. It must notify the insured 30 days after the premium is due and unpaid. After 5 days of mailing the notice, it can be assumed that the insured has received it. Termination would be effective 30 days after the notice was given to the insured and the designated third party.

In Conclusion

Long-term care insurance has been closely observed by the NAIC since the products introduction. The NAIC developed its Long-Term Care Insurance Model Act and Regulation in the 1980s with the intent of promoting the availability of coverage, protecting applicants from unfair or deceptive sales or enrollment practices, facilitating public understanding and comparison of coverages, and facilitating flexibility and innovation in the development of long-term care insurance.

Generally, the NAIC Model Act and Regulation establish:

1. Policy requirements: (a) requiring a standard format outline of coverage; (b) requiring specific elements for application forms and replacement coverage; (c) preventing cancellation of coverage upon unintentional lapse in paying premiums; (d) prohibiting post-claims underwriting; (e) prohibiting preexisting conditions and probationary periods in replacement policies or certificates; and (f) establishing minimum standards for home health and community care benefits in long-term care insurance policies.
2. Benefit requirements: (a) requiring the offer of inflation protection; (b) requiring an offer of nonforfeiture benefits; (c) requiring contingent benefit upon lapse if the nonforfeiture benefit offer is rejected; and (d) establishing benefit triggers for nonqualified and qualified long-term care insurance contracts.
3. Suitability requirements: (a) explaining and reviewing a personal worksheet with applicants; and (b) requiring that insurers deliver a shoppers guide to buying long-term care insurance to applicants.
4. Insurer requirements: (a) reporting requirements; (b) licensing requirements; (c) reserve standards; (d) loss ratios standards where applicable; (e) filing and actuarial certification requirements; and (f) standards for marketing.
5. Penalties and disclosure requirements.

End of Chapter 3

United Insurance Educators, Inc.

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[1] Georgetown University March 2004 Issue Brief

[2] Act 2, Reg. 3