For many types of insurance, policies are relatively standardized. For long-term care insurance the opposite is true. Significant variations (and therefore differences in cost) exist from one insurance company to another. A policyowner also has numerous options with respect to policy provisions.

The discussion in this section of the chapter focuses on issue age, benefits, renewability, and cost. The provisions and practices described represent the norm in that most policies fit within the extremes that are described. However, the norm covers a wide spectrum.

Significant variations exist among insurance companies with respect to the age at which they will issue policies. At a minimum, a healthy person between the ages of 55 and 75 will be eligible for coverage from most insurance companies. Most companies also have an upper age of 80 or 85, beyond which coverage will not be issued. Coverage written at age 85 or older, if available, is often accompanied by restrictive policy provisions and very high premiums.

Considerably more variation exists with respect to the youngest age at which coverage will be written. Some companies have no minimum age. Other companies sell policies to persons as young as age 20. Still other companies have minimum ages in the 40-to-50 age range. One reason for not issuing policies to persons under age 40 is the fear of the high number of potential claims resulting from AIDS.

Benefits under long-term care policies can be categorized by type, amounts, duration, the ability to restore benefits, and the degree of inflation protection.

There are several levels of care that are frequently provided by long-term care policies:

Most policies cover at least the first three levels of care, and many cover all five. Some policies also provide benefits for respite care, which allows occasional full-time care at home for a person who is receiving home health care. Respite-care benefits enable family members who are providing much of the home care to take a needed break.

It is becoming increasingly common for policies to contain a bed reservation benefit. This benefit continues payments to a long-term care facility for a limited time (such as 20 days) if a patient must temporarily leave because of hospitalization. Without a continuation of payments, the bed may be rented to someone else and unavailable upon the patient�s release from the hospital.

Some newer policies provide assisted-living benefits. These benefits are for facilities that provide care for the frail elderly who are no longer able to care for themselves but do not need the level of care provided in a nursing home.

Benefits are usually limited to a specified amount per day that is independent of the actual charge for long-term care. The insured purchases the level of benefit he or she desires up to the maximum level the insurance company will provide. Benefits are often sold in increments of $10 per day up to frequently found limits of $100 or $150 or in a few cases as much as $300 per day. Most insurance companies will not offer a daily benefit below $30 or $50.

The same level of benefits is usually provided for all levels of institutional care. A high proportion of policies that provide home health care limit the benefit to one-half the benefit amount payable for institutional stays. However, some insurers have introduced home health care limits that are as high as
80 percent to 100 percent of the benefit for nursing homes.

Some policies are written on an indemnity basis and pay the cost of covered services up to a maximum dollar amount. For example, a policy may pay
80 percent to 100 percent of charges up to a maximum dollar amount per day.

Long-term care policies contain both an elimination (waiting) period and a maximum benefit period. Under an elimination period, benefit payments do not begin until a specified time period after long-term care has begun. While a few insurance companies have a set period (such as 60 days), most allow the policyowner to select from three or four optional elimination periods. For example, one insurance company allows the choice of 30, 90, or 180 days. Choices may occasionally be as low as 30 days or as high as 365 days.

The policyowner is also usually given a choice regarding the maximum period for which benefits will be paid. For example, one insurer offers durations of 2, 3, or 4 years; another makes 3, 6, and 12-year coverage available. At the extremes, options of one year or lifetime may be available. However, a policy with a lifetime benefit will be more expensive than one with a shorter maximum benefit limit. In some cases, the duration applies to all benefits; in other cases, the duration specified is for nursing home benefits, with home health care benefits covered for a shorter time.

A few insurers extend the maximum period (if it is less than a lifetime limit) by a specified number of days (such as 30 days) for each year the insured does not collect any benefit payments. Such an extension is usually subject to an aggregate limit, such as one or 2 years.

A few policies (usually written on an indemnity basis) specify the maximum benefit as a stated dollar amount, such as $50,000 or $100,000.

A few policies provide for restoration of full benefits if the insured has been out of a nursing home for a certain time period, often 180 days. However, most policies do not have this provision, and maximum benefits for a subsequent claim will be reduced by the benefits previously paid.

Most states require long-term care policies to offer some type of inflation protection that the policyowner can purchase. In some cases, the inflation protection is elected (for a higher premium) at the time of purchase; future increases in benefits are automatic. In other cases, the policyowner is allowed to purchase additional benefits each year without evidence of insurability.

Inflation protection is generally in the form of a specified annual increase, often 5 percent. This percentage may be on a simple interest basis, which means that each annual increase is a percentage of the original benefit. In other cases, the increase is on a compound interest basis, which means that each increase is based on the existing benefit at the time the additional coverage is purchased. Some policies limit aggregate increases to a specified multiple of the original policy, such as two times. Other policies allow increases only to a maximum age, such as 85.

There are two approaches to pricing any additional coverage purchased. Some insurers base premiums on the insured�s attained age when the original policy was issued; other insurers use the insured�s age at the time each additional increment of coverage is purchased.

Inflation protection is usually less than adequate to offset actual inflation. The maximum annual increase in benefits is usually 5 percent. This is significantly below recent annual increases in the cost of long-term care, which has been in the double digits over the last decade.

Almost all insurance companies now use a criterion for benefit eligibility that is related to several so-called activities of daily living. While variations exist, most insurers use the six ADLs that are permissible in a qualified long-term care insurance contract. In order to receive benefits, there must be independent certification that a person is totally dependent on others to perform a certain number of these activities. For example, one insurer lists seven activities and requires total dependence for any three of them; another insurer requires dependence for two out of a list of six. Note that a policy with seven criteria cannot be a qualified long-term care insurance contract, nor can a policy that allows the inability to perform only one ADL to trigger benefits.

Newer policies contain a second criterion (which a qualified contract must contain) that, if satisfied, will result in the payment of benefits even if the activities of daily living can be performed. This criterion is based on cognitive impairment, which can be caused by Alzheimer�s disease, strokes, or other brain damage. Cognitive impairment is generally measured through tests performed by trained medical personnel. Because eligibility for benefits often depends on subjective evaluations, most insurance companies use some form of case management. Case management may be mandatory, with the case manager determining eligibility, working with the physician and family to decide on an appropriate type of care, and periodically reassessing the case. Case management may also be voluntary, with the case manager making recommendations about the type of care needed and providing information about the sources for care.

The most common preexisting conditions provision specifies that benefits will not be paid within the first 6 months for a condition for which treatment was recommended or received within 6 months prior to policy purchase. Less restrictive provisions, and perhaps no such provision, are sometimes found but usually only in policies that are very strictly underwritten.

Most long-term care policies contain the exclusions permitted under the NAIC model act. One source of controversy is the exclusion for mental and nervous disorders. This is an area that insurers frequently avoid because of the possibility of fraudulent claims and the controversies that often arise over claim settlements. The usual exclusion is stated as follows: "This policy does not provide benefits for the care or treatment of mental illness or emotional disorders without a demonstrable organic cause." Many policies also specifically stipulate that Alzheimer�s disease and senile dementia, as diagnosed by a physician, are considered as having demonstrable organic cause, even though state law frequently requires these disorders to be covered.

The underwriting of long-term care policies, like the underwriting of medical expense policies, is based on the health of the insured. However, underwriting for the long-term care risk focuses on situations that will cause claims far into the future. Most underwriting is done on the basis of questionnaires rather than on the use of actual physical examinations. Numerous questions are asked about the health of relatives. For example, if a parent or grandparent had Alzheimer�s disease, there is an increased likelihood that the applicant will get this disease in the future. In addition, the insurance company is very interested in medical events, such as temporary amnesia or fainting spells, that might be an indication of future incapacities.

Underwriting tends to become more restrictive as the age of an applicant increases. Not only is a future claim more likely to occur much sooner, but adverse selection can also be more severe.

Most insurers have a single classification for all acceptable applicants for long-term care insurance, but it is becoming more common to have three or four categories of insurable classifications, each with a different rate structure.

In the past, insurance companies were accused of "underwriting at the time of claims" by denying benefits because of restrictive policy provisions and supposed (or actual) misstatements in the distant past. The regulations of many states regarding preexisting conditions and the mandatory inclusion of an incontestability provision have caused this problem to become less severe over time. This, however, puts many insurance companies in the position of having to underwrite more carefully prior to policy issuance.

Long-term care policies currently being sold are guaranteed renewable, which means that an individual�s coverage cannot be canceled except for nonpayment of premiums. While premiums cannot be raised on the basis of a particular applicant�s claim, they can (and often are) raised by class.

The vast majority of long-term care policies have premiums that are payable for life and determined by the age of the insured at the time of issue. For example, a policy may have an annual cost of $800 at the time of purchase. Assuming the policy is guaranteed renewable, this premium will not change unless it is raised on a class basis. Long-term care policies of this nature are often advertised as being "level premium." This is misleading because premiums may be (and in a few cases have been) increased by class. As a result, the current NAIC model act prohibits the use of this term unless a policy is noncancelable, which means that rates cannot increase.

A few companies have guaranteed renewable policies with scheduled premium increases. These increases may occur as frequently as annually or as infrequently as every 5 years.

While most premiums are paid annually for the insured�s lifetime, a few insurers offer other modes of payment. Lifetime coverage can sometimes be purchased with a single premium. Some insurers are now also beginning to offer policies that have premium payment periods of 10 or 20 years, after which time the premium is paid up.

Numerous factors affect the premium that a policyowner will pay for a long-term care policy. Even if the provisions of several policies are virtually identical, premiums will vary among companies. For example, the premiums for three similar policies from three different companies are shown in table 8�2. Each policy has a daily benefit of $100 per day, a waiting period of 20 days or less, a lifetime benefit period, and coverage for home health care.

Age. Age plays a significant role in the cost of long-term care coverage, as shown by the rates in the table. These figures demonstrate that long-term care coverage can be obtained at a reasonable cost if it is purchased at a young age.

Types of Benefits. The benefits provided under a policy have a significant bearing on the cost. Most policies cover care in a nursing home. However, many policies also cover home health care and other benefits provided to persons who are still able to reside in their own homes. This broader coverage increases premiums by 30 percent to 50 percent.

Duration of Benefits. The longer the maximum benefit period, the higher the premium. The longer the waiting period, the lower the premium. With many insurers a policy with an unlimited benefit period and no waiting period will have a premium about double that of a policy with a 2-year benefit period and a 90-day waiting period.

Inflation Protection. Policies may be written with or without automatic benefit increases for inflation. All other factors being equal, the addition of a 5 percent compound annual increase in benefits will usually raise premiums by about 50 percent.

Waiver-of-Premium. Most long-term care policies have a provision that waives premiums if the insured has been receiving benefits under the policy for a specified period of time, often 60 or 90 days. The inclusion of this benefit usually increases premiums by about 5 percent.

Spousal Coverage. Most insurance companies offer a discount of 10 percent to 15 percent if both spouses purchase long-term care policies from the company.

Nonsmoker Discount. A few insurers offer a discount, such as 10 percent, if the insured is a nonsmoker.