It is common for insurance coverages to evolve over time. However, the evolution of long-term care products has been dramatic with respect to the magnitude of the changes and the speed with which they have occurred.

The long-term care policies in existence in the early 1980s were primarily designed to provide care during the recovery period following an acute illness. They seldom met the needs of persons who needed long-term care for chronic conditions. The following provisions were characteristic of many of these policies:

The earliest long-term care policies were very expensive for the coverage provided. To some extent this was to be expected. Anytime a new coverage is written, considerable uncertainty exists about future costs�there simply is little or no actuarial data on which to base rates. As a result, pricing was subjective and conservative.

Unfortunately the sale of early long-term care policies was often accompanied by improper sales practices. Consumers were led to believe that policies were much more comprehensive than they actually were. In effect, consumers felt that they were purchasing "nursing home" insurance that would cover them anytime nursing home care was needed. Only when such care was needed did many of these consumers realize that their coverage was very limited. Even if they realized the policy�s limitations soon after purchase, few of these early policies contained a free-look provision that allowed the return of the initial premium within the first 10 to 30 days of the policy.

For many years, there was no favorable tax treatment given to long-term care insurance. Premiums for coverage were not deductible, and benefits and employer-paid premiums under group plans resulted in taxation to employees.

Criticism of the early long-term care policies created considerable pressure for change. Consumer groups argued for more government regulation. The federal government conducted studies and held hearings, with the results painting a less than flattering picture of long-term care policies. Change itself, however, resulted primarily from the actions of insurance companies themselves and from the state regulators of insurance. But the threat of federal regulation was always present. The negative publicity about early policies had a dampening effect on the public�s perception of long-term care insurance. This led many insurance companies to modify their policies and companies entering the business to offer more comprehensive policies. At the same time the National Association of Insurance Commissioners (NAIC) began to take a very active interest in long-term care insurance. This culminated in the adoption of the Long-term Care Insurance Model Act in 1987. In 1988 model regulations were issued to enable the states to implement the model act. The act and the regulations have been amended almost every year since. Sometimes these amendments changed previous act provisions; at other times, new issues were addressed. The model act, which is discussed in more detail later, has been adopted by the majority of states. However, the version in force in a given state is not always the latest NAIC version. A few states still have little regulation of long-term care policies, and other states have adopted legislation different from the model act, although it may be similar to that recommended by the NAIC.

Considerable changes have also taken place at the federal level with passage of the Health Insurance Portability and Accountability Act in 1966. This law, referred to as HIPAA, provides favorable tax treatment to long-term care insurance contracts that meet certain standards. These contracts are referred to as qualified policies. HIPAA is also discussed later in this chapter.

The long-term care policies of many insurance companies have gone through 10 or more revisions. While coverage is still not always complete, there is little comparison between the early policies and most of what is marketed today. Not only have policies become more comprehensive over the last few years, but premiums have also tended to drop as more credible statistics about long-term claims have become available. However, many of the latest enhancements to policies are accompanied by an increased charge.

Most companies now issue only the qualified contracts prescribed by HIPAA. Some companies issue both qualified contracts and nonqualified contracts, and a few companies issue only nonqualified contracts. While purchasers of these contracts do not receive the new tax advantages, the contracts may provide broader benefits and have provisions that make it easier to qualify for benefits.

As policies have evolved, insurance companies have been faced with the decision of how to treat existing policyowners. Until recently many long-term care policy upgrades were accompanied by reduced premiums. At one extreme, companies made no effort to let existing policyowners know of these changes. If the policyowner found out, he or she might be allowed to exchange an old policy for the newer form. However, the premium may or may not be based on the original age of issue. If the conversion was based on the current attained-age rates, a higher premium might result. In some cases, the policyowner could get the new policy only if current underwriting rules were satisfied. Finally, for some insurers the policy provisions of the new policy, such as any preexisting-conditions provisions, were again applicable for conversions.

At the other extreme, many insurance companies took a more consumer-oriented approach. Existing policyowners were automatically given the enhanced coverage at the original-age cost and without any policy restrictions.

Current enhancements to long-term care products usually result in an increased premium. Again, insurance company practices vary. Some companies allow the policyowner to add the enhanced benefits by paying the new premium based on the policyowner�s original age of issue. Other companies may require evidence of insurability and use attained-age rates.