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by Phyllis Shelton

Having monitored long-term care insurance products since 1988 as an agent  then as a national trainer and publisher of the oldest LTC product comparison in the nation, I am seeing a dramatic shift in product design. To date, LTC products have followed a similar path as health insurance. Early health  insurance policies covered inpatient services only (i.e. the "Baylor Plan" in Texas that covered hospital services for fifty cents a month per member), then later added inpatient physician and related services as an optional, separate  component. Finally, "major medical" entered the scene in the 1950's with  outpatient services, again an optional and separate piece.

Now compare LTC insurance. Originally an inpatient only product that covered nursing home services, the 1990's saw the development of optional home health  care/adult day care, first at 50% then 100% by the mid-90s. Usually products  offered separate "buckets of money" that didn't mix and match - three years  nursing home and three years home care, for example. The John Hancock product that did allow crossover only remained in the marketplace a short time.

The latter part of the 90s has seen an explosion in assisted living benefits,  largely as a reaction to the escalating building boom of assisted living  facilities. Some products covered assisted living under the nursing home  component and others under the home health component with payment percentages varying accordingly. Today a policy without assisted living is deemed inadequate.

Due to the complexity of the multiple pieces, many products today have evolved into the "major medical" style with all of the components covered by a  single pool of money. Many bells and whistles revolve around the core products  of home health care, assisted living, adult day care and nursing home care such as:

  • hospice*
  • caregiver training, even to the point of paying for someone other than an  immediate family member to receive certification training to be a home health aide
  • alternate plan of care (never to be substituted for specific home care benefits)
  • bed reservation that includes assisted living
  • medical equipment*
  • respite care provided inpatient or at home not subject to the waiting period
  • medical alert system
  • ambulance*
  • care coordination that doesn't reduce the benefit maximum
  • prescription drug and/or miscellaneous charges outside of room and board are starting to surface as consumers and policy design experts understand the real  world of LTC charges

(The starred items are covered somewhat by Medicare and most policies  coordinate with Medicare.)

Benefit features that are frequently incorporated include:

  • restoration of benefits (frequently abused by leading people to buy shorter  benefit periods with the false security of believing it will restore benefits after long periods of LTC, when in reality few patients will ever get better after much more than a year)
  • cognitive or physical reinstatement
  • coverage for mental and nervous disorders
  • option for informal care (family and friends) for additional premium
  • third party designation
  • optional non-forfeiture, mostly in the form of a shortened benefit period as a cash back return of premium means a taxable event for any portion of premium that was tax deducted.

Most policies today are reimbursement, not indemnity, which means they don't pay more than the actual charge and most sales today (about 85%) are tax-qualified products due to the uncertainty of benefit taxation. The bigger  picture is that certain product trends exist due to the intense need for rate  stability such as:

  • not paying more than the actual charge - most policies are reimbursement,  not indemnity
  • not paying for short-term conditions - most sales are tax-qualified which  requires a 90-day certification of need for physical help or the long-term prognosis of a cognitive impairment
  • non-duplication of Medicare benefits in keeping with the intent to conserve  benefit dollars - a few policies are beginning to coordinate with any other health coverage, including other LTC policies.

Americans are still not accepting the deal for LTC insurance, however, with only about 6 million policies sold vs. a population of 70 million over age 50 and 115 million over age 40. Hence, more product innovation is in the works,  particularly in two areas:

  • worksite LTC products with some underwriting concessions, with emphasis on small group products as 2/3 of the employer-sponsored plans today are companies with 100 or less employees
  • combination products for long-term care and other coverages such as life insurance or annuities. These products strive to overcome the "use it or lose  it" objection to a standalone LTC policy.

Tying the LTC benefits to life insurance or annuities with a single fund makes inflation coverage tricky and can disappoint as utilization of LTC benefits reduces the death benefit or the annuity balance. It's also easy to lull the policyholder into a false security with small deposits, such as $30,000 or so, when larger amounts are needed if LTC is to be meaningfully addressed for  the future; i.e. about $100,000 for a 60-year-old couple. The newest innovation is to offer LTC insurance with a variable annuity, yet keep the accounts  separate so that utilization of either side doesn't reduce the other side; i.e. annuity withdrawals don't lower the LTC benefit and an LTC claim doesn't drain the annuity side. Since it involves separate accounts, the IRS is debating the  tax qualification status. LTC benefits are tax-free, as the LTC side is presented as a disability benefit. If death occurs in the early years of the  policy, a death benefit kicks in to supplement the annuity balance in order to return the original investment to the estate.

This LTC/VA combo is intended for clients with incomes above $75,000 and assets above $300,000, which holds promise for financial professionals that market investments, as this market segment may find it easier to understand and digest as part of an overall investment portfolio.

In summary, one product does not fit all and this is America. Expect much product innovation and variety in the early next century as our country struggles to find a way to prevent unprecedented taxation - the inevitable result if the baby boomers wind up on any kind of public assistance for long-term care.

Phyllis Shelton  is President of LTC Consultants, a Nashville, Tennessee based firm that provides live and correspondence training with continuing education credits and marketing and sales aids to the insurance industry. Call 1-800-844-4893 for her 2000 training schedule, a free materials catalogue, and  information on private training classes.

1999 Shelton Marketing  Systems, Inc.

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