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Rethinking Long Term Care Policy Design

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What if the assumptions insurance companies are using in the design of todays long term care policies are not only wrong, but wrong in a way you might not expect?

If the pricing is wrong, the industry already has seen that new versions of the policies are created, which have significantly higher premiums than the previous versions. Occasionally, the unmentionable happensa company will raise premiums on existing in-force policies.

LTC professionals have grown somewhat accustomed to those types of pricing adjustments. For LTC agents, it is uncomfortable, but this discomfort is minimal compared to the discomfort created for retired clients.

That is todays problem. But how about thinking longer term? Why not start looking at this product and market from a claims point of view, anticipating the LTC environment 20 and 30 years from now? What would it be likethe people, the problems and the solutions? And what might that suggest about what todays LTC industry is doing? Here are some thoughts:

The people issues. The companies may be making a different kind of mistake than what they are wrestling with now.

What if todays carriers are underestimating the level of claims? In 20 years, those claims will come from card-carrying members of the “me” generation. What if the carriers estimates turn out to be nowhere close to reality, especially if the then-elderly boomers demand the very best in LTC amenities for themselves, as is a distinct possibility.

How likely are such underestimates? They seem entirely probable, in view of the dramatic differences between the WWII “Greatest Generation,” with its “make do on less and save more” lifestyle, and their children, the Dr. Spock-raised “I want more-better-quicker generation.” The WWII-generation parents became the wealthiest generation in history, but the boomers may not even have saved enough for a comfortable retirement. If those boomers begin buying LTC insurance and then live long enough to retire and later use their LTC policies, the industry could be in for a tremendous expansion of claims. It also could be in for a complete re-definition of what LTC is all about.

This recasting of outcomes and definitions has happened with almost every other aspect of life the boomers have marched through, from diapers to day-planners, and from weekend activities to working in virtual offices, so there is no reason to expect this to change in their senior years.

The problem. Now imagine yourself the unwitting manager of a major insurers LTC insurance claims department. A flood of claims starts rolling in and your department begins paying, and paying, and paying. It does not take a great stretch of the imagination to anticipate the problems that will result, nor the kind of language that will be hurled from corporate Mt. Olympus.

How will those claims people fix this? Well, let me be a little ridiculous for a minute. Every claim that is filed is reviewed for appropriate guidelines. Is the facility licensed? Are the providers properly certified? Those are good questions. But, the problem is, todays policies say very little about what “properly licensed and certified” really means. So, when the claims crunch comes in, one has to ask: Is it possible the claims department may decide to stiffen up the rules of certification? That is just one area in which insurers have complete control over definitions that arent even in the policy.

Isnt it a real possibility that the entire claims paying process may grind down into a very slow and painful procedure? And, since clients need to be current with payments to their providers, they may become caught in this processand its their retirement money that gets tied up. This is the very money their advisor told them would be more readily available if they would only pay the required premiums to buy the policys benefits.

Of course, we all know who gets the phone calls and complaints when the clients claims get hung up, dont we?

A solution. One solution to this potential future problem is the so-called “cash benefit.” This is an LTC policy featureoffered as a rider or element of the plan designthat pays cash directly to the insured when the insured triggers 2 or more activities of daily living.

There is a significant charge for this feature, meaning it probably wont be affordable to all clientsparticularly those purchasing in their 70s and later. Still, the cash benefit has many attributes, the key ones being these:

No claims are ever submitted, so the insured cannot be “stonewalled” by a reluctant claims department;

Cash is paid directly to the insured so the policyholder or family can negotiate and manage their own provider arrangements; and,

Because the cash benefit is typically so loosely defined, most, if not all, of the exclusions found in traditional “reimbursement-type plans” do not apply or are contractually eliminated.

For an illustration, see Chart 1. This shows the cash flow for an LTC situation using each of 3 cash benefit payout formats: daily, monthly aggregate and cash. As you can see, with total LTC expenses of $2,400 (in column 1), the client will receive $3,000 a month as cash benefit (in a 30-day month). By contrast, under a traditional reimbursement plan, the client will receive only $2,400 a month, if a monthly aggregate arrangement, and only $1,600 if its a traditional daily benefit.

Obviously, the client will be much happier with a monthly aggregate benefit that would pay all the expenses. But the client will be ecstatic with an extra $600 a month with which to do whatever he or she wants under the cash benefit plan.

Relatively few companies offer cash benefit features right now, but this is an approach that can improve dramatically the client claims experience.

In conclusion, traditional LTC policies are driven by the definitions they contain. The LTC care benefits paid from those policies will be significantly affected by those definitions, their later interpretation, or the lack of other specific definitions. A better way is for the advisor to offer contracts that release the coverage from definitions in a way that gives flexibility and control over how money is paid once the triggers have been pulled.

Thomas M. Borchert, CLU, ChFC, AEP, CLTC, LUTCF, is an LTC specialist with Professional Insurance & Financial Alternatives, Sioux City, Iowa. His e-mail is [email protected].

Reproduced from National Underwriter Edition, January 20, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.