Notice, November 1996

Commentary: Considerations
In Long-Term Care Insurance

By Harold Simon

Long-term care insurance (LTCI) provides benefits for individuals who, because of incapacitation, require extended health care or "personal care" in settings outside a hospital -- for example in the home, in a residential care facility, or in a nursing home. Health insurance almost never covers long-term care and Medicare covers only a fraction of its costs (and then only under highly restrictive circumstances). LTCI plans are attractive to people concerned about becoming financial burdens to family or community in the event of long-term debility, and they provide those insured with greater freedom in making long-term care choices in the event of need.

For many months, the University Committee on Faculty Welfare (UCFW) and a specially convened task force -- made up of representatives of the Benefits Office, constituent groups within UC and an outside consultant -- have studied the possibility of UC sponsoring an employee-paid LTCI plan. UCFW regrets having to inform the faculty that it is the unanimous consensus of the task force that UC should not attempt to sponsor any LTCI plan at present.

The central reason for this decision is that few companies responded to the UC request for LTCI proposals, while those that did respond proposed premiums that were not competitive with offerings now available in the marketplace. Consequently, any UC-sponsored plan would probably not generate sufficient participation to justify the educational and operational expenses that UC and the carrier would encounter in making the offer.

However, as a result of UCFW's review of LTCI issues, the committee can offer some guidance to faculty who may consider buying such insurance.

What follows is not intended as a comprehensive exposition of the topic and UCFW is making no recommendations on what LTCI, if any, faculty should consider purchasing. Instead, the committee wants to assist faculty in assessing their personal need for LTCI and to point out what to look for in a policy. UCFW does note below, however, that UC faculty may want to investigate two LTCI providers who are offering policies at competitive rates. These are the Teachers Insurance and Annuity Association (TIAA) and California's Public Employees Retirement System (PERS).

Long-term care can be very expensive. Currently, nursing home costs in California average about $50,000 per year and home care costs come to $20 per hour or more. Long-term care insurance provides benefits for a limited range of services, such as home health care, adult day-care, nursing home care and "respite care" (in which family caregivers are given respite from their caregiving).

Congenital problems excepted, most of the need for long-term care comes after age 65. Current estimates are that among the very old -- persons 85 and older -- one in three will need long-term care at some time. There also is, however, some need among younger persons, as motor vehicle accidents, falls in the home and the like often result in the need for long-term care. LTCI premiums are lowest for younger persons, whose need for long-term care is likely to lie in the more distant future.

Consensus opinion is that LTCI is not for everyone. It is most appropriate for persons who are concerned about the possibility of exhausting personal assets because of a need for long-term care. For persons of some financial means, the decision on whether to insure involves both the opportunity costs involved -- what else might be done with the money spent on premiums? -- and consideration of whether, when the time comes, long-term care could be paid for out of personal resources.

When considering the purchase of LTCI, all the following issues should be considered carefully; all have an impact on premium costs.

· How well is the carrier rated by industry and regulatory agency standards? Standard insurance ratings should be provided by carriers and by insurance agents.

· Is there individual underwriting? That is, must each applicant submit information about current health and medical history? Individual underwriting is the rule for individual policies, though it is variously interpreted among carriers. It may be foregone in group policies, however, and may actually result in lower premiums for younger, healthy applicants.

· What dollar amounts are available for lifetime benefits? What are the daily or monthly limits on how much a policy will provide for any services rendered? Consideration should be given to the fraction of nursing home benefits that will be provided for home-care benefits, as home-care may be expensive.

· What is the elimination period (or benefit waiting period)? This is the time between the date of the onset of a covered disability and the beginning of benefit payments.

· Is there inflation protection? This is a critical issue, with major impact on premiums. It is most important for younger applicants.

· What are the terms of the policy with respect to pre-existing conditions and other limitations or exclusions? Policies may stipulate that benefits will be delayed for pre-existing conditions for which the purchaser received attention during a specified period of time prior to the policy coming into effect.

· What are the benefit triggers? What defined conditions must an insured person meet in order for benefit payments to commence? These are usually specified in terms of medical diagnoses, limitations in the "activities of daily living" (dressing, bathing, etc.) and defined cognitive impairments. Policies may also contain coverage for limitations on so-called "instrumental activities of daily living," meaning such things as shopping and housework.

· Are there additional charges for care/case management? Sometimes the carrier or an independent agency works with the client to define long-term care needs and then helps to locate appropriate providers for them. Does the policy call for insured persons to incur out-of-pocket expenses for this work?

· Also to be considered are: Appeals mechanisms (in the event of a dispute between client and carrier); waiver of premium provisions (which control when a policy holder no longer has to pay premiums, something that should generally occur soon after the time benefits commence.); portability (whether benefits are paid in the event of a move, a change of employer or employment status, etc.); and renewability (the policy should not be subject to cancellation so long as premiums are paid on time).

· Finally, is there non-forfeiture of benefits? This is an extension of coverage for months or years after a policy has been canceled or premiums are no longer paid, following a prolonged period of paying premiums. Non-forfeiture clauses may significantly boost premiums; their value is that persons with policies containing them retain coverage for a specified period time after they cease paying premiums.

A new factor entering into the LTCI equation is the recent enactment of the Kennedy-Kassebaum bill, which is designed to enhance the public's interest in purchasing LTCI and offers tax advantages for employers who provide it. This bill may have significant impact on LTCI products to be offered in the near future.

Faculty interested in LTCI may wish to consult organizations to which they belong (or could belong) to see whether they might offer quality insurance. In this respect, TIAA offers LTCI at competitive rates to its members. California's PERS began offering its own LTCI in 1995 and has announced that it will offer enrollment to UC employees early in 1997. As with the TIAA offering, the PERS LTCI rates are competitive. TIAA's telephone contact number is (800) 223-1200, Dept. 8XB; for PERS, the number is (800) 923-9119.

Harold Simon is Professor of Family and Preventive Medicine at UC San Diego and co-chair of UCFW's Health Subcommittee.