Long-Term Care Insurance

Long-term care (LTC) insurance is a way to pay privately for care in a nursing home, in one's own home, or in other community settings when chronic illness or disability leaves that person unable to care for himself or herself for an extended period of time. It is a relatively new product that was first seen on the market during the early 1980s. Prior to that time, LTC was viewed by the insurance industry as an uninsurable event because it involves a significant emphasis on custodial care. However, nursing home care and services designed to help people stay at home often can result in catastrophic costs that can impoverish families and leave state Medicaid programs with a difficult financial burden. Current national health account estimates from the Center for Medicare and Medicaid Services indicate that private insurance covers approximately 8% of all nursing home care and 21% of all home care. Estimates from the American Health Insurance Plans suggest that approximately 6 million of the 9 million LTC insurance policies sold are still in force.

LTC insurance is a hybrid product that merges features found in health, disability, and life insurance. [Page 339]Like health insurance, it helps the policyholder to prepare for medical expenses. Unlike health insurance, the benefits are not limited to medical skilled care. Benefits can extend to a wide range of supportive services, including assisted-living arrangements, visiting nurses, home health aides, chore services, adult day care, and respite services, all of which can allow family members to continue to participate in caregiving. Like disability insurance, the policy covers payments made to entities due to an inability to do normal daily activities because of physical or cognitive impairments. Typically, benefits are triggered if the policyholder needs help in two or more activities of daily living (ADLs) such as bathing, eating, and dressing. Supervision needs secondary to Alzheimer's disease are an example of coverage for mental health.

Similar to life insurance, policy premiums are structured to be paid over a long period of time on a level schedule that builds up reserves to help cover cost of care that typically occurs in the future, usually when people are in their 70s and 80s. Because it is possible that young or middle-aged persons might need LTC due to accidents or illness, the level premium rate, set at the age of purchase, becomes larger with age. Insurers recommend that people purchase this type of coverage during their working years to make sure they will qualify for coverage and have ample time to pre-fund the necessary reserves.

Typically, the policyholder specifies a fixed dollar payment to be received when care is needed. This, combined with the choice of how long benefits will be paid, sets the maximum amount of the total benefit available from the policy. Increasingly, daily benefit amounts are integrated so that they can be paid in a flexible way that meets the specific needs of the policyholder. This relatively new approach extends the time of coverage if the cost of services is less than the maximum allowed per day, week, or month. For example, a policy that pays up to $100 per day for 3 years of nursing home care will pay out a maximum of $109,500 in benefits. If the policy also allows for flexible use of home and community services that cost less than $100 per day and are needed less often than daily (e.g., three home visits per week at $60 per visit), the time of coverage can be extended when the benefits are integrated. This approach is a good example of the product evolution that is still occurring as the LTC insurance market matures. During the early 1980s, insurers were reluctant to move much beyond nursing home-only policies.

...