PLANNING FOR SENIOR NEEDS

Transcription

1 PLANNING FOR SENIOR NEEDS SANDI KRUISE INSURANCE TRAINING

2 PLANNING FOR SENIOR NEEDS Second Edition Copyright 2015 Written By: SANDI KRUISE, CPCU, CPIW Published By: SANDI KRUISE INSURANCE TRAINING PO BOX 786 BONITA, CA COPYRIGHT 2015, ALL RIGHTS RESERVED. No portion of this book may be reproduced in any manner whatsoever without express written permission of the publisher SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. I

3 TABLE OF CONTENTS INTRODUCTION... 6 MEDICARE... 8 Medicare Eligibility... 9 MEDICARE ENROLLMENT... 9 Part A - Hospital Insurance Benefits Part B - Supplementary Medical Insurance Part C Medicare Advantage Part D Prescription Drug Benefit LTC provisions of Medicare Medicare Payment for Care in the Home Medicare Coverage Limitations MEDICARE SUPPLEMENT (MEDIGAP) INSURANCE Basic Medicare Supplement Plans "HIGH DEDUCTIBLE OPTIONS" Medicare SELECT policies MEDICAID Medicaid Defined Eligibility Requirements for Medicaid Married Individuals Single Individuals Medicaid Estate Recovery OTHER KINDS OF HEALTH INSURANCE FOR SENIORS Group Health Coverage Employee or retiree coverage from an employer or union COBRA Coverage (Consolidated Omnibus Budget Reconciliation Act of 1985) The PACE Program (Programs of All-Inclusive Care for the Elderly) Hospital Indemnity Insurance Specified Disease Insurance Veterans Administration Benefits Community Services Available for Seniors LONG TERM CARE WHAT IS LONG TERM CARE? THE NEED FOR LONG TERM CARE Demographics And Costs Nursing Home Bankruptcies Nursing Home Neglect Risks and costs are high Acute vs. Chronic Conditions Scheduled vs. On-Demand Care DEMONSTRATING THE NEED FOR CARE Benefit Triggers (Coverage Triggers) Physical Impairment Cognitive (Mental) Impairment PROVIDERS OF LONG TERM CARE THE LTC CONTINUUM INSTITUTIONAL FORMAL CARE FACILITIES Nursing Homes SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. II

4 Levels of Nursing Home Care Skilled Nursing Care Intermediate Care Custodial Care Other Types of Long-Term Care Facilities Residential Care & Assisted Living Board and Care Congregate Housing / Independent Living Community Continuing Care Retirement Communities NON-INSTITUTIONAL FORMAL CARE COMMUNITY CARE Adult Day Care Respite Care Hospice Care HOME CARE Home Health Care Personal Care / Homemaker Services Types of Home Care Providers LICENSING OF FACILITIES PAYING FOR LONG-TERM CARE THE COST OF LONG-TERM CARE THE EFFECT OF INFLATION ON LTC COSTS Projected LTC Cost Increases vs. Policy without Inflation Protection LONG TERM CARE REGULATIONS HISTORY OF LONG-TERM CARE REGULATION NAIC MODEL LAWS AND REGULATIONS FEDERAL LEGISLATION The Health Insurance Portability and Accountability Act (HIPAA) THE CONTINUING EVOLUTION OF LONG TERM CARE COVERAGE LONG TERM CARE INSURANCE LTC BENEFIT DESIGN OPTIONS Benefit Period Benefit Amount ELIMINATION OR WAITING PERIOD INFLATION PROTECTION RENEWABILITY PROVISION IN INDIVIDUAL POLICIES NONFORFEITURE UNINTENTIONAL LAPSE OF POLICY DOWNGRADING OPTION TO LOWER PREMIUM UPGRADING STEP-UP IN COVERAGE PROVISIONS UPDATING EXISTING COVERAGE Alternate Plans Of Care Ancillary supplies and services Extension of Benefits Coverage For Home Care Assisted Living/Residential Care - RCFE Ambulance benefits Bed Reservation SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. III

5 Caregiver training Home modification Restoration of benefit Return of premium Survivorship benefit for married couples Therapeutic device benefit Personal Emergency Response Systems Waiver of Premium EXCLUSIONS, LIMITATIONS & PROHIBITED PROVISIONS Prohibited Provisions Prohibited Limitations for Home Care Benefits Exclusions and limitations TAX QUALIFIED VS. NON-TAX QUALIFIED POLICIES STATE AND FEDERAL IMPLICATIONS State Legislation Grandfather Rules for Certain Pre-1997 Insurance Contracts HOW BENEFITS ARE TRIGGERED TQ Benefit Triggers TQ ADL Definitions TQ Cognitive Impairment Trigger Non-TQ Benefit Triggers ASSESSMENT AND CASE MANAGEMENT Assessment Care Management -- care coordination Plan of care requirements TAX ISSUES FOR LONG-TERM CARE INSURANCE Tax Treatment of Long-Term Care Insurance Premiums Tax Treatment of Long-Term Care Insurance Benefit Payments Replacement Issues Per Diem Product Employer Ramifications Tax Implications for the Self-Employed Reporting Long-term Care Insurance Benefits To Internal Revenue Service LTC 1099-LTC Form PARTNERSHIP PROGRAMS FOR LONG-TERM CARE How The Partnership Works Policy Provisions in Partnership products GROUP LONG-TERM CARE INSURANCE Eligible Groups Qualified Group Policies Continuation and Conversion Tax Treatment of Group LTC Policies MARKET CONDUCT & ETHICS CONSUMER PROTECTION Agent Responsibilities CONTINUING EDUCATION UNFAIR TRADE PRACTICES SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. IV

6 ADVERTISEMENTS DISCLOSURE REQUIREMENTS OUTLINE OF COVERAGE CONSUMER BUYING GUIDES SUITABILITY CONSUMER SUITABILITY STANDARDS Long-term Care Insurance Personal Worksheet Determining the Most Appropriate Means of Funding Long-Term Care FINANCIAL CONSIDERATIONS FOR PURCHASE OF LTC INSURANCE REPLACEMENT ISSUES Notice of Replacement Effect of Material Modifications Waiver of Preexisting Conditions Replacement of Group Policies CHOOSING THE RIGHT INSURER CARRIER RATINGS & STABILITY State Guarantee Funds or Associations UNDERWRITING SOURCES OF UNDERWRITING INFORMATION PREEXISTING CONDITIONS PREMIUM Rules Regarding Premium Collection Day Free Look Claims Denial Information ALTERNATIVES TO LTC INSURANCE INFORMAL CARE GIVERS OUT OF POCKET EXPENDITURES REVERSE ANNUITY MORTGAGES PRIVATE INSURANCE (Other than LTC) Traditional Health Insurance Medicare Supplement Insurance LIFE INSURANCE/ANNUITIES COMBINED WITH LTC VIATICAL SETTLEMENTS CONTINUING CARE RETIREMENT COMMUNITIES FRATERNAL AND RELIGIOUS COMMUNITIES LTC INFORMATION SOURCES SOURCES OF INFORMATION ABOUT LTC Important Telephone Numbers INFORMATION HOTLINES The U.S. Public Health Care Service HEALTH CARE FINANCING ADMINISTRATION REGIONAL OFFICES APPENDIX HIPAA IRS NOTICE IRS Form IRS Form 1099 & Instructions Index SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. V

7 PLANNING FOR SENIOR NEEDS INTRODUCTION The elderly have always been a part of our society, but there hasn't always been the degree of attention focused on the issue of aging as today. The quantity of life has increased dramatically during the past century, primarily due to quantum leaps in medical science. Unfortunately the quality of our later years has not kept pace as chronic ailments have surpassed acute ailments in our elder citizens. It is well known that the median age in our society is climbing. The age mix is gradually shifting as the birth rate declines, the mortality rate declines, and the average life span is longer. AVERAGE REMAINING LIFETIME Age in 2009 Total Male Female SOURCE: NATIONAL VITAL STATISTICS REPORTS, VOL. 62, NO. 7, JANUARY 6, 2014 In 2050, the population aged 65 and over is projected to be 83.7 million, almost double its estimated population of 43.1 million in SOURCE: CENSUS BUREAU - CURRENT POPULATION REPORTS, MAY 2014 One of the biggest unfunded expenses of seniors is Health Care, especially Long Term Care. Financial planners, securities brokers and quality insurance professionals have done much to help people amass the funds they will need for a retirement, only to see all of their client s assets and income used within a very short time when chronic care is needed SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 6

8 This book will examine the primary sources of health care coverage for seniors: Medicare, Medicare Supplements, Medicaid and Long Term Care Insurance. Examine how to integrate these products into an overall financial plan for your clients SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 7

9 MEDICARE Enacted in 1965 under Title XVIII of the Social Security Act, Medicare is a federally funded program of health insurance for the aged (those 65 and over), the disabled, and persons suffering from end stage renal disease (severe kidney malfunction). It became effective July 1, Medicare is administered by the Health Care Financing Administration (HCFA), an agency of the US Department of Health and Human Services. Because it is related to the Social Security Program, eligibility is based on a person s work history or relationship with another individuals with a work history (i.e., spouse or dependent child). Medicare was designed to pay for physician and hospital care for people who are elderly or disabled. Medicare pays for hospital services and medical (physician) services, limited nursing home, home health care and hospice benefits. The level and scope of nursing home coverage focus on post-acute care and do not fully address extended care or custodial needs. The Department of Health and Human Services contracts with private insurance companies for the processing of payments to patients and health care providers. These private insurance companies are called fiscal intermediaries under Part A and are selected by the health care providers. Under Part B, these private insurance companies are called carriers and are selected by the Department of Health and Human Services. Unfortunately, when it designed the Medicare program, Congress failed to understand the age-related differences in the way people use the nation's health system. Although senior citizens sometimes suffer accidents or acute illnesses (which Medicare and the supplemental private "Medigap" insurance do a pretty good job of covering), they also often suffer chronic conditions that cannot be cured. Medicare has very limited nursing home coverage (only 100 days, in a skilled nursing facility, when recuperating from an episode of acute illness) and no custodial nursing home coverage, although millions of older people need custodial care. Although Medicare has home care provisions, the amount of home care available is not enough for the needs of many impaired elders even though the cost of providing this benefit has grown tremendously in the 1990s. Since Medicare was enacted, the program has undergone numerous changes affecting its financing, its method of operation, and its benefits. Medicare attempts to hold down the cost of medical care by limiting the scope of its coverage and benefit amounts, and shifting a significant share of medical expenses to the covered person in the form of deductibles, coinsurance and benefit caps SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 8

10 The Medicare program consists of three parts: Hospital Insurance (Part A) protection, Medical Insurance (Part B) protection, and Medicare Advantage (Part C). MEDICARE ELIGIBILITY "Medicare", legally defined as "The Health Insurance for the Aged Act, enacted by the 89th Congress of the United States of America, is a federal health insurance program, administered by the Social Security Administration, designed to pay expenses resulting from acute medical care for the elderly and persons of any age with certain disabilities. Because it is an entitlement program, eligibility for Medicare benefits is not determined by financial need. The following persons are entitled to Medicare Benefits: Persons who are U.S. citizens or a permanent legal residents 65 or over and eligible for Social Security Retirement benefits or federal employees; Workers, of any age, with disabilities, who have been eligible for Social Security Disability benefits for at least 24 consecutive months; Widows or widowers with disabilities age 50 or over who have been receiving Social Security for at least two years through a spouse; or Persons who have End State Renal Disease (ESRD), usually with a three-month waiting period. MEDICARE ENROLLMENT Coverage under Medicare Part A is automatic and premium-free for those who are receiving Social Security or Railroad Retirement benefits or their spouses if they meet certain requirements. Although people are automatically enrolled in Part B when they enroll in Part A, They may elect to decline this coverage. Part B coverage, requires payment of a small premium, approximately $ per month (2015). The initial enrollment period is a period of seven full calendar months, the beginning and end of which is determined for each person by the day on which he is first eligible to enroll. The initial enrollment period begins on the first day of the third month before the month a person first becomes eligible to enroll and ends with the close of the last day of the third month following the month a person first becomes eligible to enroll. For example, if the person's 65th birthday is April 10, 2000, the initial enrollment period begins January 1, 2000 and ends July 31, People who initially do not elect Part B coverage may sign up for this coverage during an annual general enrollment period from January through March each year but coverage will not become effective until July of the year in which he or she signs up. He or she must also pay a 10 percent higher premium for each full 12 months that the individual did not enroll after becoming eligible. A seven-month special enrollment period is provided if Medicare has been the secondary payer of benefits for individuals age 65 and older who are covered under an employer group health plan because of current employment. The special enrollment period generally begins with the month in which coverage under the private plan ends. Coverage under Medical Insurance (Part B) will begin with the month after coverage under the private plan ends, if the individual enrolls SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 9

11 in such month, or with the month after enrollment, if the individual enrolls during the balance of the special enrollment period. MEDICARE FINANCING Medical Insurance is voluntary and is financed through premiums paid by people who enroll and through funds from the federal government. Each person who is enrolled pays a basic monthly premium of $ per month in The Medical Insurance premium is set at 25 percent of program costs each year. The federal government pays three times as much as a matching amount from general revenues. In September-October of each year, the government announces the premium rate for the 12-month period starting the following January. A separate Hospital Insurance tax is imposed upon employers, employees and self-employed persons. Every individual, regardless of age, must pay the tax. The tax is imposed upon all earnings. For 2015, the rates of the Hospital Insurance Tax are 1.45% for employees and employers and 2.90% for self-employed persons. Part A - Hospital Insurance Benefits Medicare Hospital Insurance (Part A) pays for medically necessary inpatient care in a hospital, skilled nursing facility, psychiatric hospital or hospice. In addition, Part A pays for the cost of medically necessary home health care and 80 percent of the approved cost for durable medical equipment supplied under the home health care benefit. Certain deductibles, coinsurance and limitations apply to Part A coverage. In general, Part A hospitalization benefits cover the following: Semiprivate room and board Regular nursing services Drugs furnished by the hospital Lab tests, X rays and medical supplies such as dressings, splints and casts Blood transfusions, except for the first three pints, which are paid for by the Medicare recipient Use of durable medical equipment such as wheelchairs as long as the equipment is used while the person is an admitted inpatient at a hospital Use of the operating room, recovery room and special-care units, such as intensive care Rehabilitation services, including physical therapy The first 60 days of hospitalization in each benefit period are covered in full with the exception of the deductible of $1,260. During the 61st through the 90th day the patient is responsible for a co-payment of $315 per day. After that, the patient must use one of his or her 60 "lifetime reserve" days and pay a co-payment of $630 per day. (2015) Once the lifetime reserve days are used up, the patient must pay the full charges themselves. The benefit period" ends 60 days after discharge from the hospital or skilled nursing facility. If another hospital admission occurs after that, a new benefit period begins with a new deductible and 90 days of hospitalization SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 10

12 (subject to co-payments). The 60 lifetime days however can only be used once are not restored in a new benefit period. Under Part A, the following items and services are excluded: Services not reasonable or medically necessary Routine foot care and orthopedic shoes, except for diabetics Items or services for which you are not legally obligated to pay Most chiropractic services Services paid for by the government or workers compensation Cosmetic surgery (except after an accident) Services performed by a relative or household member, at home Most prescription drugs and medicines taken which are self-administered Most immunizations Services outside the US (exceptions are Canadian and Mexican facilities if they are nearest to your home or for emergency care while you are traveling to or from Alaska through Canada) Private nurses and extra charges for a private room (unless medically necessary) Telephone, television, and other personal comfort items Routine physical exams, eye exams, glasses, hearing aids, and dental care Intermediate or "custodial care" SOURCE: When patients are admitted to a hospital, a doctor must make a diagnosis of the patient's condition and order a hospital stay to help cure that illness or injury. The doctor's diagnosis establishes the patient's DRG, or diagnostic related group. Under this system, possible diagnoses are classified into 23 major diagnostic categories and then further subdivided into 477 additional categories. Virtually all hospital services fall into one of the DRGs with a prospective pricing schedule for each, which the hospital receives no matter how long the patient is actually hospitalized. Diagnostic related groups have given many care providers an incentive to hasten the recovery time after a procedure because; the less time the provider spends with the patient, the more profitable the procedure becomes. The term quicker and sicker has often been used to describe the speed with which a Medicare patient is discharged from a hospital. Although costs are controlled to some extent, the patient often has less time to recover in the hospital, which may result in a longer recovery time at home or in a nursing home. Hospice Care A hospice is an organization that furnishes a program of inpatient, outpatient and home care for terminally ill patients, including counseling, control of symptoms and pain relief. Hospice care does not cover housekeeping or other services associated with home care. In addition, hospice services are part-time or intermittent and not full time. Usually a caregiver, such as the spouse or another family member, provides the primary care, which is supplemented by hospice services. Terminally ill patients can elect to receive hospice care under Part A, in lieu of other Medicare benefits. Medicare benefits for this care are available for up to 2 90-day periods for patients SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 11

13 who are considered terminal. This period can be extended by an unlimited number of 60-day periods as long as a doctor certifies the care is needed. The patient pays 5 percent of the cost of prescription drugs (not to exceed $5 for each prescription) and 5 percent of the cost of respite care (not to exceed five consecutive days or more than the current Part A deductible). Effective after January 1, 2015 SUMMARY OF HOSPITAL INSURANCE (PART A) BENEFITS Service Benefit Medicare Pays You Pay HOSPITALIZATION Semiprivate room and First 60 days All but $1,260 $1,260 board, general nursing, and 61st to 90th day All but $315 a day $315 a day other services and hospital supplies 91st to 150th day All but $630 a day $630 a day Beyond 150 days Nothing All costs SKILLED NURSING First 20 days 100% of approved Nothing FACILITY CARE amount Semiprivate room and board, skilled nursing and Additional 80 days All but $ a day $ a day rehabilitative services and other services and supplies Beyond 100 days Nothing All costs POST-HOSPITAL HOME HEALTH CARE Part-time or intermittent skilled care, home health aid services, durable medical equipment and supplies and other services First 100 days in spell of illness 100% of approved amount; 80% of approved amount for durable medical equipment Nothing for services;20% of approved amount for durable medical equipment HOSPICE CARE For as long as the All but limited Limited costs Pain relief, symptom doctor certifies need costs for outpatient for outpatient drugs management and drugs and inpatient and inpatient respite care support services for respite care the terminally ill. BLOOD Unlimited if All but first 3 pints For first 3 pints When furnished by a medically necessary per calendar year hospital or skilled nursing facility during covered stay. 60 Reserve days benefit may be used only once in a lifetime. Neither Medicare nor private Medigap insurance will pay for most nursing home care. Blood paid for or replaced under Part B of Medicare during the calendar year does not have to be paid for or replaced under Part A SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 12

14 Part B - Supplementary Medical Insurance Part B is the medical expense portion of Medicare and pays for covered medically necessary services no matter whether they are received at home, in a doctor's office, in a hospital or in a nursing home. Part B covers the following: Surgeons and physicians' fees outpatient services Medical lab fees Ambulance costs Some outpatient psychiatric care Durable medical equipment, such as hospital beds, wheelchairs and oxygen equipment, if ordered by a physician. In addition to a monthly premium, the recipient must pay an annual deductible of $147 before Part B benefits begin, and a co-payment of 20% of all covered expenses, with no stop-loss. Under Part B, the following items and services are excluded: Services not medically necessary Routine physical exams, eye or hearing exams and related tests Eyeglasses, hearing aids or dental care Most immunizations Services of a chiropractor, except for conditions detected by an X ray Full-time private nursing care in the home Homemaker services provided by a relative or household member Prescription drugs that can be self-administered or taken at home SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 13

15 Effective after January 1, 2015 SUMMARY OF MEDICAL INSURANCE (PART B) BENEFITS Services Benefit Medicare Pays You Pay MEDICAL EXPENSES Unlimited if 80% of approved $147 deductible, Doctors' services, medically necessary. amount (after $147 plus 20% of approved inpatient and outpatient deductible). amount and limited medical and surgical Reduced to 50% for charges above approved services and supplies, most outpatient mental amount. physical and speech health services therapy, diagnostic tests, durable medical equipment and other services. CLINICAL LABORATORY SERVICES Blood tests, urinalyses, and more Unlimited if medically necessary. Generally 100% of approved amount Nothing for services. HOME HEALTH CARE Unlimited but covers only home health care Part-time or intermittent not covered by Hospital skilled care, home health Insurance(Part A) aide services, durable medical equipment and supplies and other services. 100% of approved amount; 80% of amount for durable medical equipment. Nothing for services; 20% of approved amount for durable medical equipment OUTPATIENT HOSPITAL Unlimited if medically necessary. Medicare payment to hospital based on 20% of whatever the hospital charges TREATMENT hospital cost. (after $147 deductible) Services for the diagnosis or treatment of illness or injury. BLOOD Unlimited if 80% of approved First 3 pints plus20% medically necessary. amount (after $147 of approved amount deductible and for additional pints starting with 4th pint). (after $147 deductible) AMBULATORY Unlimited if medically 80% of pre- determined $147 deductible plus 20% SURGICAL necessary. amount of predetermined SERVICES after $147 deductible amount Once a person has had $147 of expense for covered services in 2015, the Part B deductible does not apply to any further covered services received for the rest of the year. A person pays for charges higher than the amount approved by Medicare unless the doctor or supplier agrees to accept Medicare's approved amount as the total charge for services rendered. Blood paid for or replaced under Part A of Medicare during the calendar year does not have to be paid for or replaced under Part B SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 14

16 Part C Medicare Advantage The Balanced Budget Act of 1997 created Medicare Part C, the Medicare+Choice program. Legislation in 2003 renamed this program Medicare Advantage. Medicare Advantage permits contracts between the Centers for Medicare & Medicaid Services and a variety of different managed care and fee-for-service entities. Following are the primary Medicare Advantage plans: Coordinated care plans, which include health maintenance organizations (HMOs), provider-sponsored organizations (PSOs), preferred provider organizations (PPOs), and other certified coordinated care plans and entities that meet the standards set forth in the law. Private, unrestricted fee-for-service plans, which allow beneficiaries to select certain private providers. Providers are authorized to charge enrolled beneficiaries up to 115% of the plan's payment schedule (which may be different from the Medicare fee schedule). For those providers who agree to accept the plan's payment terms and conditions, this option does not place the providers at risk, nor does it vary payment rates based on utilization. Those who decide to join a Medicare Advantage Plan will use the health care card issued by their Medicare Advantage Plan (provider) to access health care. These plans often provide more choices and, sometimes, extra benefits, like extra days in the hospital. They may also be subject to additional premiums or co-payments. Part D Prescription Drug Benefit Concerns about seniors lacking prescription drug coverage and the rising cost of drugs led to the enactment of the new Medicare Part D prescription drug benefit. The Voluntary Prescription Drug Benefit Program consists of two parts: Medicare-approved drug discount cards, which were available in 2004 and 2005, and prescription drug benefits, which began in Medicare pays for outpatient prescription drugs through private plans. Drug benefits, not just discounts, will be provided through private plans. Medicare will contract with private companies to offer this drug coverage. These companies will most likely offer a variety of options, with different covered prescriptions, and different costs. Beneficiaries can remain in traditional Medicare and enroll separately in a private prescription drug plan, or they can enroll in a Medicare Advantage plan that also covers prescription drugs. Part D covers most FDA-approved prescription drugs and biologicals. Those specific drugs currently covered in Parts A and B will still be covered there. LTC provisions of Medicare Medicare no longer pays for long hospital stays, and home health agencies. They are paying based on patient's diagnosis and nursing homes are catching the overflow. Doctors and SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 15

17 hospitals are under tremendous pressure to get the patient out as quickly as possible. Patients often go to a nursing home to continue the recovery process. Medicare pays only for skilled care and the majority of nursing home care is not skilled. Most people don't qualify for very many days of skilled care under Medicare guidelines. Medicare only pays home health care visits when some skilled care is being done. Skilled care has nothing to do with how sick you are. Skilled care is care to get you well. When progress stops, the care is considered "chronic," or "custodial". Medicare supplements generally won't pay for anything that Medicare doesn t cover, so they usually won't pay either. Medicare Part A can help pay for up to 100 days of skilled care in a skilled nursing facility (SNF). A SNF is different than a regular nursing home in that it provides skilled nursing and rehabilitation services. Medicare will not pay for any part of a patient's stay in a SNF or any other facility if the services received are primarily personal care or custodial services, such as assistance with the activities of daily living. Most long-term care is furnished in nursing homes to people with chronic, long-term illnesses or disabilities. The care they receive is personal care, often called custodial care. Medicare does not pay for custodial care if that is the only care needed. WHAT MEDICARE PAYS FOR LTC EXPENSES Benefit Medicare Pays You Pay First 20 Days Approved Costs Nothing Next 80 Days Any Costs Over $157.50/day $157.50/day Beyond 100 Days Nothing Everything Medicare only pays for LTC expenses under these conditions: Hospitalization: 3 consecutive days (plus the day of discharge) Enter Medicare Approved facility within 30 days of discharge from the hospital Physician ordered Skilled Care, no custodial care Skilled nursing facility only Care must be restorative in nature (the patient must be improving. Once the patient is considered stable Medicare stops paying) Medicare Payment for Care in the Home The Medicare home health care benefit may pay for some long-term care services. Medicare pays the approved cost of medically necessary home health visits by a Medicare-approved home health agency but Medicare will not pay for full-time nursing care, meals delivered to the home or homemaker services that are primarily designed to assist the patient in meeting personal care or housekeeping needs. Between 1994 and 1995, Medicare expenditures rose four times faster than persons served. Reimbursements for Medicare's home health care increased 36% while actual persons served rose by only 9%. Because of this, Medicare has implemented some major changes in coverage for home care. Part A now only pays if the individual was in the hospital or for at least 3 days within the past SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 16

18 days. All other home care is now paid under Part B. Medicare will pay for some unskilled services received along with skilled services. Hospital Insurance pays for the first 100 home health visits in a "home health spell of illness" if all six of the following conditions are met: (1) The care is post-institutional home health services. (2) The care includes intermittent skilled nursing care, physical therapy, or speech therapy. (3) The person is confined at home (homebound). (4) The person is under the care of a physician who determines the need for home health care and sets up a home health plan for the person. (5) The home health agency providing services participates in Medicare. (6) The services are provided on a visiting basis in the person's home, or if it is necessary to use equipment that cannot be readily made available in the home, on an outpatient basis in a hospital, skilled nursing facility, or licensed rehabilitation center. "Part-time or intermittent services" is defined as skilled nursing and home health aid services (combined) furnished any number of days per week, for less than eight hours per day and 28 or fewer hours per week (or, subject to review on a case-by-case basis as to the need for care, less than eight hours each day and 35 or fewer hours per week). A patient is considered "confined to the home" if he or she has a condition, due to illness or injury, that restricts the ability to leave home except with the assistance of another person or the aid of a supportive device (such as crutches, a cane, a wheelchair, or a walker), or if the patient has a condition such that leaving home is medically unsafe. While a patient does not have to be bedridden to be considered "confined to the home", the condition should be such that there is a normal inability to leave home, that leaving home requires a considerable and taxing effort, and that absences from home are infrequent or of relatively short duration, or are attributable to the need to receive medical treatment. Home Health Agency (HHA) HHAs provide services such as in-home nursing, physical therapy, occupational therapy, and home health aide services in the homes (or other community settings) of their patients. Medicare covers HHA services, with no deductibles or coinsurance. Medicare managed care beneficiaries face an additional requirement in that they must get their home care from a HHA that also has a contract with their own managed care plan. In order for a Home Health Agency (HHA) to be reimbursed for care of a person under Medicare, the agency must have a state license and a contract with the HCFA. Medicare will not reimburse care provided by individuals hired privately by a Medicare beneficiary, or care provided through an agency that does not have a contract with the HCFA SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 17

19 A "home health agency" is defined as a public agency or private organization which: (1) is primarily engaged in providing skilled nursing services and other therapeutic services, (2) has policies, established by a group of professional personnel, including one or more physicians and one or more registered professional nurses, to govern the services which it provides, and provides for supervision of its services by a physician or registered professional nurse, (3) maintains clinical records on all patients, (4) is licensed pursuant to applicable state and local law, (5) has in effect an overall plan and budget, (6) meets additional requirements and conditions of participation as the Department of Health and Human Services finds necessary in the interest of the health and safety of individuals who are furnished services by the home health agency, (7) meets additional requirements of the Department of Health and Human Services for the effective and efficient operation of the program. A "home health agency" does not include any agency or organization which is primarily for the care and treatment of mental diseases. Home Health Aides Home health aides provide personal care, assist in maintaining the patient s health and facilitate the recommended treatment. Services include: Bathing, grooming, nail care, foot care, shaving, ear care, turning and positioning, changing bed linens, assistance with elimination, dressing oral hygiene, skin care, ambulation, assistance with transfers. THE BALANCED BUDGET ACT OF 1997 & ITS EFFECT ON MEDICARE In an attempt to shore-up the ailing Medicare system, the Balanced Budget Act of 1997 implemented several drastic changes in the Medicare skilled nursing facility and home health benefit which will result in restricted access to these benefits for many years to come. Sweeping budget reform will have an impact on Medicare and has already led to cutbacks in long-term care provided. This makes LTC policies even more meaningful now than in the past. Under a prospective reimbursement system called DRGs (Diagnosis Related Groups) started in 1983, Medicare pays a flat amount of money for hospital stays based on the patient's medical diagnosis. Hospitals have great incentive to discharge people as soon as possible. Sometimes they are too sick to go home. In the first 18 months of operation under DRGs, nursing home admissions went up 40%. With managed health care, private health insurance is not paying as much for long hospital stays either. The Prospective Payment System is being extended into nursing home care under Medicare as well. Patients will be allowed a certain period of nursing care depending on their diagnosis, rather than what their doctor feels is appropriate. This is currently being phased in throughout the United States SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 18

20 Home health care has been one of the fastest growing expenditures in Medicare, rising from just 2.9 percent of all payments in 1990 to nearly 9 percent in In that same time, the average number of visits per beneficiary doubled from 33 to 76 per year. In 1996, there were 8,437 HHAs participating in the Medicare program, and HCFA payments to HHAs increased greatly, causing additional concern about the financial stability of the Medicare program. In 1994, Medicare HHAs received a total of $12 billion. The next year this amount increased 25.8% to $15.1 billion. A number of rules and procedures have been established to stop fraud and abuse, including regulations requiring all home health agencies serving Medicare to obtain surety bonds of $50,000 or 15 percent of annual Medicare payments received, whichever is greater. Agencies must be bonded and must provide quality care to at least 10 patients before applying to provide care to Medicare patients. At least seven of the 10 patients must be receiving active care at the time the agency applies for entry into Medicare. Since 2004, Part A covers only post-institutional home health services for up to 100 visits during a home health spell of illness following a 3-day hospital stay or a skilled nursing facility stay, except for those persons with Part A coverage only who will be covered for services without regard to the post-institutional limitation. Drawing blood, which used to be considered a skilled service prior to 1998, is no longer considered skilled. This means that unskilled services that used to be provided along with drawing of blood are no longer available under Medicare unless other skilled services are also required. SECONDARY PAYOR RULES Medicare is secondary payer, under specified conditions, for services covered under any of the following: Group health plans of employers that employ at least 20 employees and that cover Medicare beneficiaries age 65 or older who are covered under the plan by virtue of the individual's current employment status with an employer or the current employment status of a spouse of any age. Group health plans (without regard to the number of individuals employed and irrespective of current employment status) that cover individuals who have end stage renal disease. Generally, group health plans are always primary payers throughout the first 30 months of end stage renal disease based on Medicare eligibility or entitlement. Large group health plans (that is, plans of employers that employ at least 100 employees) that cover Medicare beneficiaries who are under age 65, entitled to Medicare on the basis of disability, and covered under the plan by virtue of the individual's or a family member's current employment status with an employer SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 19

21 Medicare Coverage Limitations Because of deductibles, coinsurance and other limitations, there are many gaps in coverage. Medicare pays only limited benefits for the cost of long-term care. Medicare nursing home care benefits are extremely limited. Medicare does not cover custodial care at all (the primary type of care offered in nursing home environments) nor does it cover intermediate care. The patient is still responsible for most of the cost. Medicare will provide these benefits only if the individual is an inpatient in a Medicare certified skilled nursing facility, and only if the admission follows a period of prior hospitalization. Many nursing homes are not certified by Medicare, and many nursing home confinements do not follow a period of hospitalization. It is clear that the coverage and benefits for LTC provided by Medicare are by no means comprehensive or complete. This leads us to our next subject, Medicare Supplement Insurance SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 20

22 Chapter 1 Quiz 1) Under the Medicare Eligibility rules, which of the following is NOT true? a. Must be a U.S. citizen b. Must be at least 65 years of age c. Persons with End Stage Renal Disease d. Children of a deceased Medicare recipient 2) The initial enrollment period lasts for full calendar months. a. 3 b. 6 c. 9 d. 7 3) Medicare Part A DOES NOT cover which of the following: a. Hospital room and board b. Cosmetic Surgery c. Blood transfusions d. Physical therapy 4) Part D of Medicare covers: a. Long term care b. Physical therapy c. Prescription drugs d. Acupuncture SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 21

23 MEDICARE SUPPLEMENT (MEDIGAP) INSURANCE Unfortunately, Medicare leaves many gaps in its coverage. Due to limited benefit periods, deductibles, coinsurance and exclusions, the coverage it provides is limited. To help fill these gaps, private insurance companies have developed insurance policies, designed to supplement Medicare's coverage to some extent. Medicare supplement insurance covers some or all of Medicare's deductibles, co-payments, and co-insurance. Coverage and premiums vary from company to company. There are ten standard Medicare supplements allowed for sale in most states. In addition to these traditional contracts, many seniors are opting for the senior HMO alternatives, which combine Medicare coverage with preventive care. Some Medicare supplement policies sold in the past cover prescription drugs, but Medicare supplement policies sold after January 1, 2006 aren't allowed to include prescription drug coverage. If the Insured wants prescription drug coverage, they can join a Medicare Prescription Drug Plan (Part D). Part B (the Supplementary Medical Insurance program) is financed through general revenues (73%), beneficiary premiums (25%), and interest and other sources (2%). Basic Medicare Supplement Plans POLICY A - CORE (BASIC) BENEFITS The basic Plan A provides the core package of benefits, which are also included under all the other plan forms: Coverage for the Part A coinsurance amount ($315 (2015) per day) for days of a hospital stay in each Medicare benefit period. Coverage for the Part A coinsurance amount ($630 (2015) per day) for days of a hospital stay while using Medicare's 60 lifetime reserve days (which may only be used once). All charges for 365 days of hospitalization after all Part A inpatient hospital and lifetime reserve days are used up SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 22

24 Hospital Insurance (Part A) and Medical Insurance (Part B) deductible for the cost of the first three pints of blood. Coverage of Part B coinsurance (generally 20 percent of the approved charge, after satisfaction of a $147 annual deductible for physician services; other services may have different coinsurance amounts). POLICY B The basic services of Plan A Plus the Part A deductible POLICY C The basic services of Plan A The Medicare Part A deductible ($1,260 (2015)), The coinsurance for care in a skilled nursing home (days , $ (2015) per day) The Medical Insurance (Part B) deductible ($147) Emergency care during travel outside the U.S., subject to a $250 deductible and 20 percent coinsurance up to a lifetime maximum benefit of $50,000 ("foreign emergency care"). POLICY D The basic services of Plan A The Medicare Part A deductible ($1,260 (2015)), (but not the Part B deductible); The coinsurance for care in a skilled nursing home (days , $ (2015) per day) Coverage of foreign travel emergencies, and "At-home recovery" for short-term home care assistance with activities of daily living (ADLs) (e.g., bathing, dressing, personal hygiene), as part of the process of recuperating from injury, an operation, or an illness. POLICY F The basic services of Plan A SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 23

25 The Medicare Part A deductible ($1,260 (2015)), The coinsurance for care in a skilled nursing home (days , $ (2015) per day) The Medical Insurance (Part B) deductible ($147) Coverage of foreign travel emergencies One hundred percent of "excess charges" under Part B (excess charges are amounts greater than the schedule amount for the service, but within the permissible 15 percent limit over and above the schedule amount that providers are allowed to charge) The possibility of using a high deductible insurance plan. POLICY G The basic services of Plan A The Medicare Part A deductible ($1,260 (2015)), The coinsurance for care in a skilled nursing home (days , $ (2015) per day) Coverage of foreign travel emergencies At-home recovery assistance 80 percent of excess doctor charges under Medical Insurance (Part B) POLICY K All Part A hospital co-insurance, plus 100% of costs for a lifetime maximum of 365 additional hospital days; and 100% of Part B coinsurance for Preventive Services. 50% of Part A deductible 50% of Skilled Nursing Facility coinsurance 50% of Hospice cost sharing 50% of the first three pints of blood 50% of Part B coinsurance After $4,940 in out of pocket expenses for covered benefits has been paid during a calendar year by the person covered by Plan K the plan then pays 100% of any remaining covered SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 24

26 benefits for the remainder of that calendar year. The Part B deductible is not a covered benefit but it does count towards the $4,940 out of pocket limit. POLICY L All Part A hospital co-insurance, plus 100% of costs for a lifetime maximum of 365 additional hospital days; and 100% of Part B coinsurance for Preventive Services. 75% of Part A deductible 75% of Skilled Nursing Facility coinsurance 75% of Hospice cost sharing 75% of the first three pints of blood 75% of Part B coinsurance After $2,470 in out of pocket expenses for covered benefits has been paid during a calendar year by the person covered by Plan L, the plan then pays 100% of any remaining covered benefits for the remainder of that calendar year. The Part B deductible is not a covered benefit but it does count towards the $2,470 out of pocket limit. "HIGH DEDUCTIBLE OPTIONS" High-deductible Option: In 1997, Congress added two more high deductible plans to the list of 10 standard plans. Insurance companies may offer a high-deductible option on Medigap Plan F. In 2010, Medigap plans E, H, I, and J were eliminated due to the Medicare Modernization Act. Those who choose this option must pay the first $2,180 in Medigap-covered costs (the deductible in 2015) before the Medigap policy pays anything. This amount can change each year. Policyholders must pay the deductible first before the Medigap policy pays anything. High-deductible option policies often have lower premiums, but if people need a lot of Medicare covered health care services, supplies, and equipment, their out-of-pocket costs will be higher. They may not be able to change plans. In addition to the $2,180 (in 2015) deductible that they must pay for the highdeductible option for Plan F, they must also pay deductibles for: Foreign travel emergency ($250 per year for Plan F). Some choices may not be available in Massachusetts, Wisconsin and Minnesota because these states already required standardized Medigap policies prior to SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 25

27 Medicare SELECT policies Medicare SELECT was introduced on a trial basis in 15 states in The difference between Medicare SELECT and regular Medigap insurance is that a Medicare SELECT policy may (except in emergencies) limit Medigap benefits to items and services provided by certain selected health care professionals or may pay only partial benefits when the patient gets health care from other health care professionals. The Medicare SELECT program was expanded to all 50 states in 1995 and made permanent in Insurers, including some HMOs, offer Medicare SELECT in the same way standard Medigap insurance is offered. The policies are required to meet certain federal standards and are regulated by the states in which they are approved. A person is able to choose from among the 10 Medigap policies, but the premiums charged for Medicare SELECT policies are generally 15 to 25 percent lower than premiums for comparable Medigap policies that do not have this selected-provider feature. Standard Medicare Supplemental (Medigap) Insurance Plans Plan A Plan B Plan C Plan D Plan F Plan G Basic Basic Basic Basic Basic Basic Benefits Benefits Benefits Benefits Benefits Benefits Part A Part A Part A Part A Part A Deductible Deductible Deductible Deductible Deductible Skilled Skilled Skilled Skilled Nursing Nursing Nursing Nursing Coinsurance Coinsurance Coinsurance Coinsurance Part B Part B Deductible Deductible Foreign Foreign 100% of Part 80% of Part Travel Travel B Excess B Excess Emergency Emergency Foreign Foreign At Home Travel Travel Recovery Emergency Emergency At Home Recovery Plan K Plan L Part A Coinsurance Part A Coinsurance 50% Part A 75% Part A Deductible Deductible 50% Skilled 75% Skilled Nursing Nursing Coinsurance Coinsurance 50% Part B 75% Part B Coinsurance Coinsurance Part B Coinsurance Part B Coinsurance for Preventive Services for Preventive Services 50% of first three pints of blood 75% of first three pints of blood 50% of Hospice cost 75% of Hospice cost sharing 100% costs up to 365 hospital days sharing 100% costs up to 365 hospital days SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 26

28 1) Policy A is known as the. a. Core b. Special c. Premium d. Deluxe Chapter Two Quiz 2) Which of the following Medicare supplement policies includes prescription drug coverage? a. Plan A b. Plan C c. Plan L d. None of the above SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 27

29 MEDICAID One of the first things to understand is the difference between Medicare and Medicaid. Medicare is a federally funded entitlement program providing health care to the elderly and disabled and is not subject to a means test. Medicaid, on the other hand, is a welfare program to assist poor persons of all ages with needed health care. The Medicaid Program is funded by both federal and state tax dollars and provides health care services to people with low incomes and few assets. The program provides health care services to people on public assistance and to others who cannot afford to pay for their health care. Funded with state and federal money, it assures health care to 68 million low-income Americans, including more than five million over the age of 65. In 2013, Federal and state government spending on Medicaid was $ billion. Two-thirds of all nursing home residents rely on Medicaid, making this program an important source of financial assistance for those needing long-term care. Medicaid pays for hospital, medical, prescription drug, and medically necessary nursing home care. It does not consider a person s impairment in their ability to perform Activities of Daily Living in determining eligibility for Medicaid s nursing home benefit. Medicaid usually provides choreworker and personal care services (assistance with activities of daily living and personal safety) at home through waiver or other programs but these are strictly limited and vary greatly state to state. When congress passed the Deficit Reduction Act of 2005, it became more difficult for people to get Long Term Care under Medicaid by transferring funds or by purchasing annuities. This made private insurance coverage for Health care and Long-term care even more important, especially for those middle income and above SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 28

30 Medicaid Defined Title XIX of the Social Security Act, known as Medicaid, became law in 1965 as a program to provide medical assistance for certain individuals and families with low incomes and resources. As a jointly funded cooperative venture between the Federal and State governments, it is the largest program providing medical and health-related services to America's poorest people. Within broad national guidelines provided by the Federal government, each state: 1. Establishes its own eligibility standards; 2. Determines the type, amount, duration and scope of services; 3. Sets the rate of payment for services; and 4. Administers its own program Because of this, the Medicaid program varies greatly from state to state, including being called by different names, such as Medi-Cal in California. Medicaid s requirements are quite complex, often dependent upon case law interpretations. Failure to obtain advice from a qualified professional before taking actions could be one of the most financially devastating decisions a senior could make. States are required to provide certain basic medical assistance services to eligible recipients. These mandatory Medicaid services include inpatient and outpatient hospital care, health screening, diagnosis and treatment to children, family planning, physician services and nursing facility services to individuals over age 21. States may also elect to cover any of over 30 specified optional services, which include prescription drugs, clinic services, personal care services, and services provided in intermediate care facilities for the mentally retarded. States have increasingly expanded the availability of Medicaid funding to groups of beneficiaries who are not otherwise eligible for welfare assistance. One of the biggest changes in Medicaid usage is the substantial role Medicaid has begun to play in long-term care. As of 1994, Medicaid paid about 45% of nursing home and home health care with even greater percentages being paid when stays exceed 4 months. Overall, the program has grown from covering 23.1 million recipients in 1987 to 36.1 in 1997 and from a total cost of $47.7 billion in 1987 to $ billion in Cost increases have exceeded the consumer price index. One of the four identified contributing factors to these cost increases is the increase in very old and disabled individuals who require extensive acute and/or long-term care. Total Medicaid spending in 2013 exceeded $438 billion. Federal responsibility for the Medicaid program lies with the Health Care Financing Administration in the Department of Health and Human Services. The relevance of Medicaid for seniors results from the need to pay substantial costs for longterm care. 2 of every 5 Americans will need long-term care at some point in their lives. The impact of these statistics touches the lives of many seniors and the adult children who contribute to the emotional and financial support of their aging parents. The Baby Boomers, 76 million strong, will began to turn 65 in SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 29

31 Home health services are a mandatory benefit for individuals who are entitled to nursing facility services under the State's Medicaid plan. Services must be provided at a recipient's place of residence, and must be ordered by a physician as part of a plan of care that the physician reviews every sixty days. Home health services must include nursing services that are provided on a part-time or intermittent basis by a home health agency, home health aide services provided by a home health agency, and medical supplies, equipment, and appliances suitable for use in the home. Physical therapy, occupational therapy, speech pathology, and audiology services are optional services that States may choose to provide. All of the states have at least one "waiver" program for providing home care. See for more discussion of the waiver process and its significance. Under the waiver programs, state Medicaid agencies are allowed to offer home care services without having to conform to all of the federal requirements that would otherwise apply. Most importantly, a waiver program can be made available only to certain Medicaid beneficiaries, such as sufferers from a specific disease, or elderly people who need a nursing home level of care, without being made available to all Medicaid beneficiaries. Waiver programs can also be limited to only part of a state. The financial eligibility rules for waiver programs, including transfer penalties, are the same as for Medicaid nursing home care. Medicaid Facts In 2013, 68 million people received Medicaid benefits. In 2013, $438 billion was expended for Medicaid benefits. 28.1% of these were for LTC services. Three-fourths of Medicaid LTC spending is on institutional services. SOURCE: THE KAISER COMMISSION, MEDICAID MOVING FORWARD, JANUARY 06, 2015 Currently Medicaid represents approximately 20% of every state budget and it is the fastest growing segment of state budgets nationwide. Taxpayers can no longer afford LTC for everyone and it is even more urgent for future generations. Medicaid pays almost 40% of the annual bill. About a quarter of the patients paid for by Medicaid did not enter a nursing home on Medicaid. They spent down, exhausted their resources, and then became Medicaid patients. In 2013 over 68 million persons received health care benefits from the various state Medicaid programs SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 30

32 Medicaid Planning "Medicaid planning" is the process of impoverishing oneself on paper to qualify for Medicaid's nursing home benefit. Medicaid was intended to be a true welfare program. It was not designed to be used as an estate planning tool to aid the wealthy in transferring their assets to avoid spending their own money for long-term care. People who did not wish to spend their own assets for their care have legally avoided doing so and are now siphoning dollars away from the legitimate poor who need care. The Medicaid program is simply running out of money. Many attorneys and financial planners provide counsel to their upper and middle-class elderly clients on how to protect their wealth and still qualify for Medicaid. Many elderly persons who are not in poverty have found ways to get Medicaid to pay for nursing home care. However, changes made by the Omnibus Budget Reconciliation Act of 1993 make it much more difficult for upper and middle-class persons to qualify for Medicaid. Spend down and estate recovery have made an impact on those who transfer assets in order to qualify for Medicaid. The estate recovery program was designed to enhance the state's rights and ability to reimburse the state treasury. It has helped to restore benefits for those individuals who truly qualify for Medicaid. HIPAA made it illegal for persons to transfer funds in order to make themselves eligible for Medicaid. The Balanced Budget Act of 1997 amended this HIPAA provision, making it a crime for attorneys and others to counsel individuals to transfer assets and then apply during the penalty period (if the adviser was paid to render advice). Criminal liability (federal misdemeanor - one year s imprisonment and/or up to $10,000 fine) could have been applied to lawyers, accountants, financial planners, insurance professionals, or anybody else who gave professional advice about Medicaid planning, for a fee. Due to efforts of the New York State Bar Association, however, in 1988, Attorney General Janet Reno declared this legislation unconstitutional and unenforceable, and an injunction against it was granted later in the year that set policy nationwide. In a letter to the Speaker of the House, she offered to help Congress write something that would be enforceable. On she filed a notice of appeal to protect the Justice Departments right to appeal the injunction. Attorneys, insurance agents and financial planners should also be aware of the sharp rise in errors and omissions claims particularly for those involved in Medicaid planning. These professionals must be wary of conflict of interest situations wherein they are representing the interest of the heirs in protecting their inheritance instead of protecting the best interest of the elderly client. Professionals may be deemed guilty of participating in "senior financial abuse" if they conserve the estate for the children or grandchildren by intentionally impoverishing the nursing home patient (many of whom are cognitively impaired) in order to qualify them for Medicaid SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 31

33 HOW MEDICAID PLANNING FAILS TO PROTECT ASSETS Transferring assets has produced some unexpected and undesirable outcomes for those who did it. Many people who transferred their assets found themselves in the unwanted position of having to ask their children or relatives for money. Many nursing facilities and home health care agencies do not accept Medicaid assignment so individuals who otherwise would have had the choice of a nursing home facility or home health care agency were limited to facilities that accepted Medicaid. And many have experienced adverse tax consequences as a result of Medicaid planning. In this instance transfer, means an outright gift or a sale made at less than fair market value. If such a transfer of property is made, Medicaid will calculate the period of ineligibility for nursing facility level of care. It will be the number of months resulting when the Net Fair Market Value of the transferred asset is divided by the monthly average private nursing facility cost (ADPPR). Clients should beware of anyone who encourages them to transfer assets to their children or trusts in order to qualify for Medicaid. Children may misuse or lose the assets (lawsuit or divorce). Many nursing homes no longer accept Medicaid patients because a Medicaid patient is at the mercy of the system and may have nowhere to go if nursing homes are full. In most states, being on Medicaid means being in a nursing home. Most Medicaid programs pay very little for home health care and nothing for eight-hour shifts in the home. There are significant problems associated with transferring assets, such as: Once they have turned their assets over to someone else, they have lost control of them and will probably feel a sense of loss at not being able to access their assets ever again. Children can lose the money due to divorce and lawsuits and may be tempted to spend the money by rationalizing that they will be inheriting it shortly anyway so why not go ahead and use it now when they need it. Children or others to whom the client has transferred funds may also misuse the funds, either deliberately or innocently such as making a poor investment choice. Worse yet, the child dies before the parent and now their money is in the hands of their in-laws. The child will pay tax on the "paper gain" on the price of stock or other property which was purchased at a much lower price than now is worth. If the child received this property in an inheritance, a much more favorable cost basis would result. Transferring assets and using government money means using our own money as taxpayers. In New York, 20% of the Medicaid Recipients spend approximately 80% of all Medicaid funds, most of which is spent on Long-term care, leaving only 20% for all other recipients, 75% of which are children. This same ratio is found in many other states including California, where a little over 1 percent of the recipients are seniors in nursing homes, however over 16% of all Medicaid (Medi-Cal in California) is spent on them. The impact of people who have transferred assets to qualify for Medicaid is hurting all of us as taxpayers SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 32

34 The biggest problem is that by giving their assets away, clients lose access to them and they lose the one thing that matters most - their independence and control. A long-term care insurance policy may be the only thing that makes it possible for them to stay in control by guaranteeing that they will have purchasing power and decision-making power when they need long-term care. Although some transfers, such as the ones below, may make good financial and estate planning sense, many of these methods can still trigger a penalty period of ineligibility for Medicaid benefits. Putting a home in the name of a son or daughter or other family member or friend Transferring assets into an immediate annuity, which changes the assets into income if based on their life expectancy. Any projected payout that exceeds life expectancy is treated as a transfer and may trigger a period of ineligibility. Transferring $10,000 per year ($20,000 if they are married) to their children and grandchildren to stay within the federal gift-tax exclusion. Setting up a special trust for a disabled dependent can be accomplished if they designate that repayment for medical assistance will be made to the state at the death of the disabled dependent or earlier termination of the trust. Consumers should always obtain competent legal advice before making any transfers if Med- Cal application may be contemplated in their future. Agents should never attempt to give legal advice to their clients regarding property transfers. Tax and estate planning and Medicaid planning do not work well together. The interests of the Medicaid plan may require sales or transfers of assets that raise rather than lower the taxes. Sound estate-planning moves can have bad Medicaid consequences. The tax consequences to the recipient are different depending on whether a lifetime gift or an inheritance is received. The parent's Medicaid plan may call for transferring excess assets to a child or other person who would actually prefer, and have a better tax outcome, from an inheritance. Potential earnings from a transaction, or possible tax savings or beneficial estate tax consequences must be balanced against potential loss of future Medicaid benefits. Remember that eligibility for benefits depends on following Medicaid rules, not rules for other legal systems. The fact that something is tax-deductible, or has been removed from the taxable estate, does not matter for Medicaid purposes. The fact that a transaction is permitted by Medicaid rules does not exempt it from income taxation or estate tax consequences. For example: If persons give their house away outright, they lose the capital gains exclusion. Their children, or whomever they give the house to, could take advantage of the capital gains exclusion, but only if they live in the house at least two of the last five years before the house is sold. Giving the home to children and continuing to live in it can mean the children wind up payment a steep capital gains tax when the house is eventually sold SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 33

35 In many cases the tax ramifications of transferring the cost-basis for assets and/or home cost far more than a lifetime of premium for a long-term care policy! Spending some of the money they intended to transfer on a good long-term care insurance policy can be less expensive and more effective than transferring funds. Transferring assets to artificially impoverish themselves so that Medicaid will pay for their nursing home expenses is morally and ethically questionable and it can result in serious legal and financial consequences. And ultimately, the transfer may prove to be ineffective, if there are no Medicaid beds available when they need one, or at least none in the home they would want to be in. The primary reason people are purchasing long-term care insurance policies is to maintain choice, and consequently, independence. Transferring assets isn t a dignified safety net, due to losing control of assets and depending on the welfare system for LTC care. Long-term care insurance provides a dignified safety net, particularly in the case of middle-income Americans. There is no substitute for careful planning based on all the alternatives, by considering what will be the income tax consequences of a proposed transaction, how it will affect a possible future Medicaid application, and how it will affect the administration and taxation of the estate. ELIGIBILITY REQUIREMENTS FOR MEDICAID When a person applies for Medicaid, all of that person's financial transactions for three years before the application are scrutinized. Scrutiny goes back five years with respect to certain trusts. Furthermore, if the applicant is married, all of the spouse's financial transactions are also scrutinized under the same standards. It does not matter that there were sound reasons for the transactions. It does not even matter that the person did not know anything about Medicaid or had no intention of making a Medicaid plan when the transfers were actually made. To qualify for Medicaid, applicants must have both incomes and assets below certain limits, which vary from state to state. To determine eligibility Medicaid counts the property held in either or both spouses names. The entire contents of joint accounts are considered as available to Medicaid applicants, unless funds can be clearly traced to income or transfers of an exempt account holder. Eligibility rules are different for single individuals than for married couples. Determining eligibility for Medicaid is the responsibility of the eligibility worker who will look at how much the applicant and each member of the family has in monthly income (wages, dividends), property (real and personal), and assets (savings and CD accounts, investments). The home the applicant lives in, its furnishings, personal items, a limited amount of jewelry, and one vehicle are not counted as assets and are considered exempt for determining eligibility. All other property must be spent down in order to qualify. Giving resources away or selling them below a fair price may make the person ineligible for nursing facility care under Medicaid SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 34

36 Married Individuals Couples however do not have to spend down to the above limits if only one needs Medicaid assistance for the nursing home. The person going into the facility can transfer his or her interest in the home to the spouse remaining at home without affecting Medicaid eligibility. The couple may also divide its non-exempt property so that the spouse at home may keep up to $119,220 in assets. This amount, called the Community Spouse Resource Allowance (CSRA), varies by state from $23,844 to $119,220 (2015). In 2015, if a person is receiving Medicaid nursing home benefits, the spouse at home may keep all of the couple s income up to $2, each month. This amount, called the Monthly Maintenance Needs Allowance, varies by state from $1, to $2, in the year The spouse at home may keep all of the income received in his or her name, regardless of the amount. If the amount is below the allowed MMNA per month, the institutionalized spouse may allocate income to bring the at-home spouse s income up to the per month limit. The spouse in the nursing home is permitted to keep at least $30 a month for personal needs and can retain up to $2,000 in assets. Most people envision being married with one spouse still living in the community when one must enter the nursing home and apply for assistance under Medicaid. They often site the amounts they are allowed to keep in assets and income due to special spousal impoverishment rules. However, in fact, fewer than 10% of the persons receiving Medicaid nursing home benefits in 1999 were married. For them the stricter rules for single individuals will apply. Single Individuals Single individuals will be able to retain only $2,000 or less in assets and about $1 per day in income. All other income and assets will have to be spent for their care and Medicaid will pay any amounts to make up the difference up to the allowable Medicaid charges. Note: The income and asset limits are subject to change each year and vary state to state. Medicaid Estate Recovery Even the home, if it has not been previously transferred, is part of the estate against which Medicaid has the right to recover the cost of Medicaid benefits received after the recipient is age 55. Such recovery will not occur until after the death of the community spouse and/or when there are no more dependents. The purpose of estate recovery is to replenish the states funds so that the money can be used to help other needy persons, once the Medicaid beneficiary has no further use of the property. Medicaid Quality Care Issues It's important to realize that having Medicaid pay the bills for long-term care, especially nursing home care, does not mean that the recipient must accept care that is substandard. While longterm care will vary from provider to provider, there are regulations that protect recipients of all long-term care including that paid for by Medicaid. Nursing homes must be licensed by the state and are subject to inspection. Nursing home residents maintain all rights guaranteed to all citizens by the US Constitution. In addition, the Omnibus Budget Reconciliation Act of 1987 (OBRA) mandated specific rights guaranteed to all residents of nursing facilities. These include SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 35

37 the right to voice concern about the facility, the right to receive visitors, the right to form resident councils, and the right to informed consent, privacy and freedom of choice. Once admitted to the nursing home, when private insurance or funds are exhausted and the patient looks to Medicaid to pay the bills for LTC, the facility is prohibited by law from transferring them to another facility or discriminating against them in any way, if the individual was placed in a Medicaid approved facility in the first place. If a facility does not accept Medicaid at all, and it advises persons when they are admitted that if they need to apply for Medicaid assistance to pay their LTC expenses, they may be required to move to another facility SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 36

38 1) The Medicaid program is funded by: a. Federal taxes b. State taxes c. Local taxes d. Federal and state taxes Chapter Three Quiz 2) In 2013, people received Medicaid benefits: a. 68 million b. 10 billion c. 20 million d. 100 million 3) To qualify for Medicaid applicants must have below a certain amount. a. Incomes b. Assets c. Both income or assets d. Neither income nor assets 4) Medicaid estate recovery applies only to benefits received: a. After age 65. b. After age 55. c. Before age 65. d. Before age 55. 5) Under Medicaid, single individuals will be able to retain only: a. $100,000 b. $50,000 c. $2,000 d. $1, SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 37

39 OTHER KINDS OF HEALTH INSURANCE FOR SENIORS There are several kinds of health coverage, besides Medigap, that pay for some of the health care costs for seniors. They include: Group Health Coverage There are several kinds of coverage that might be called "group" health coverage, such as coverage offered under: Employers or unions: This type of group health coverage is for current employees or retirees. Organizations or associations: This type of group health coverage is for members of an organization or association. Employee or retiree coverage from an employer or union Employers with 20 or more employees must offer the same benefits, including health benefits under the same conditions, to current or active employees age 65 and over as they offer to younger employees. If they offer coverage to spouses, they must offer the same coverage to spouses age 65 and over that they offer to spouses under age 65. The Health Insurance Portability and Accountability Act (HIPAA) of 1996 requires the employer to send a Certificate of Creditable Coverage when group health coverage ends. All the information needed for the Medicare Carrier will be on this certificate. Retiree coverage that is not a Medigap policy does not have to follow the rules for Medigap policies. These plans might not fill the gaps in Medicare. These policies might not pay medical costs during any period in which the insured were eligible for Medicare but did not sign up for it. While retiree coverage may not offer the same benefits as a Medigap policy, it may offer other benefits such as prescription drug coverage and routine dental care SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 38

40 COBRA Coverage (Consolidated Omnibus Budget Reconciliation Act of 1985) COBRA (The Consolidated Omnibus Budget Reconciliation Act of 1985) is a law that requires employers with 20 or more employees to let employees and their dependents keep their group health coverage for a time after they leave their health plan under certain conditions. This is called "continuation coverage." Persons may have this right if they lose their job or have their working hours reduced, or if they are covered under their spouse's plan and their spouse dies or they get divorced. COBRA generally lets beneficiaries and dependents keep the group coverage for 18 months (or up to 29 or 36 months in some cases), but they may have to pay both their share and the employer's share of the premium. If a person already has continuation coverage under COBRA when they enroll in Medicare, their COBRA may end. This is because the employer has the option of canceling the continuation coverage at this time. The length of time their spouse may get coverage under COBRA may change when they enroll in Medicare. However, if COBRA coverage is elected after they enroll in Medicare, they can keep the continuation coverage. COBRA is a federal law. In addition, some state's laws require employers with less than 20 employees to let you keep your group health coverage for a time. State law may also give the right to continue coverage under COBRA beyond the point COBRA coverage would ordinarily end. The PACE Program (Programs of All-Inclusive Care for the Elderly) The Programs of All-Inclusive Care for the Elderly (PACE) is a program that combines both inpatient and outpatient medical and long-term care services. To be eligible, a person must be at least 55 years old, live in the service area of the PACE program, and be certified as eligible for nursing home care by the appropriate state agency. The goal of PACE is to keep them independent and living in the community as long as possible and to offer quality care at low cost. Services include primary care, social work, therapy, medical services for special problems, medical services that support routine treatment, and long-term care services (such as transportation, meals, and personal care). The services are given in the PACE center, at home, and in other inpatient settings such as a hospital. A team of health care providers looks at patients needs, makes a plan of care, and provides services for the total care needed. This health care team includes, but is not limited to, doctors, nurses, therapists, and social workers. If nursing home care is needed, PACE will provide this service and check the patient s health condition on a regular basis. PACE sites get payments directly from Medicare and Medicaid for services that all eligible enrollees get. However, PACE sites are only in certain communities. To find a PACE site, or for more information, call the state, county, or local medical assistance office - not a federal office or look on the Internet under the Nursing Home section of for PACE locations and telephone numbers. Remember, PACE does not work with Medigap policies SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 39

41 Federally Qualified Health Centers (FQHCs) These are special health centers, like a community health center, tribal health clinic, migrant health service, and health center for the homeless that can provide routine health care at a lower cost. Medicare pays for some health services like preventive care that are not usually covered. FQHCs include community health centers, tribal health clinics, migrant health services, and health centers for the homeless. Anyone with Medicare may go to a FQHC for health care services. They are usually in inner-city and rural areas. FQHC services that are available to people with Medicare include: Routine physical exams. Screening and diagnostic tests for vision and hearing problems, and other health problems. Flu shots and other similar shots. For the above services at a FQHC, patients do not have to pay the $147 yearly Part B deductible. Other services, like X-rays, will have the usual Part B yearly deductible of $147. Sometimes patients do not have to pay the 20 percent coinsurance for Part B services. Hospital Indemnity Insurance Hospital indemnity insurance pays a fixed cash amount for each day you are in the hospital up to a certain number of days. Some policies may have added benefits such as surgical benefits or skilled nursing home confinement benefits. Some policies have a maximum number of days or a maximum payment amount. It is not designed to fill gaps in your Medicare coverage or provide coverage for long-term care expenses. Specified Disease Insurance Specified disease insurance, which is only available in some states, pays benefits for only one disease, such as cancer, or for a group of specified diseases. The value of this coverage depends on the chance the insured will get the specific disease or diseases covered. Benefits are usually limited to a fixed amount for each type of treatment. It is not designed to fill the gaps in Medicare coverage or provide coverage for long-term expenses. Veterans Administration Benefits Some elderly persons may be entitled to limited nursing home coverage from the federal Veterans' Administration (VA) if discharged directly from a VA hospital into a nursing home or if the patient's need for a nursing home is a result of a military service connected disability. Because of budget constraints, the Department of Veterans' Affairs will only be able to provide nursing home care to approximately 16 percent of veterans who need this care. VA nursing home benefits are very restricted and seldom last more than six months and the VA does have the right to recover amounts spent under certain circumstances from the veteran s estate following their death. Clearly veterans, and their spouses, should not count on receiving SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 40

42 coverage from the VA for all, or even the majority, of their LTC needs. See for more information. COMMUNITY SERVICES AVAILABLE FOR SENIORS Senior Centers Although many seniors are healthy, they may lack the opportunities for social interaction that they had when they were working or raising children. Many communities now have senior centers where older people may gather for planned social activities, health screening, educational programs, communal meals or legal and financial counseling. Senior centers usually charge a small fee for classes or activities; however most communities offset costs through donations so that no one is denied participation because of his or her inability to pay. Transportation When seniors must give up driving their loss of independence is a source of embarrassment and frustration. Community services offer free or subsidized transportation to doctor's appointments, shopping centers or senior activities. Home-Delivered Meals People with arthritis, impaired eyesight or other disabilities may find meal preparation difficult. Those who are homebound may be reluctant or unable to prepare a nutritious meal for themselves. Without basic nutrition, these people often become ill, lose their independence and may be forced to enter a nursing home. Volunteers from Meals on Wheels deliver nutritious meals five or more days a week to those who cannot get out to purchase their own groceries or prepare their own meals. Often the visit from the volunteer dropping off the meal is of as much value to the well-being of the shut-in as is the food itself. In some areas senior centers, housing projects, churches, synagogues, or schools, offer free or low-cost meals to seniors. Transportation to and from a congregate meal site is sometimes provided. Call the National Meals on Wheels Foundation, , to find out there is a program in your town. The Eldercare Locator can also help locate meals programs. Companion Services Volunteers who have the time to give often make regular visits to ailing or homebound older adults. Companionship can alleviate loneliness and isolation and give additional advice and help to family caregivers. Volunteers may just talk, read, or help with writing letters. Look for these kinds of services through State or Area Agencies on Aging; local churches and synagogues; neighborhood groups and other local social organizations; civic, social, or volunteer organizations; home health agencies; friendly visitors or senior companion programs; YMCA/YWCA; city recreation departments; youth organizations; and hospice volunteers SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 41

43 Senior Alert Programs Letter carriers, newspaper delivery persons and others are often trained to identify homebound elderly and to spot signs of trouble such as mail or newspapers piling up, unmowed lawns and porch lights burning for days on end. Contact the public utility or postal service community service department or check with your State or Area Agency on Aging. Some communities organize their own community watch program, with volunteers from the neighborhood taking turns making scheduled patrols. Telephone Reassurance Caregivers who live far from their parents or who travel a great deal because of their work may be unable to telephone as often as they would like. Many communities offer telephone reassurance programs that provide regularly scheduled telephone calls by volunteers to elderly care recipients. These callers check on the elderly person's health and safety and calls might be made daily, weekly or monthly. In addition to providing an important link to emergency services or medical care, these calls also help to end the social isolation that so many homebound elderly experience SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 42

44 1) COBRA is a law. a. Federal b. State c. Local d. Part of Medicare supplements Chapter Four Quiz 2) The PACE program provides. a. Only outpatient care. b. Only inpatient care. c. Only long term care. d. All of these types of care. 3) The VA is only able to provide nursing home coverage to approximately % of veterans who need long-term care. a. 16 b. 25 c. 70 d SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 43

45 LONG TERM CARE WHAT IS LONG TERM CARE? Long-term care refers to the wide range of types assistance required for people who are unable to function independently on a daily basis over a relatively long period of time. This can result from either physical or mental limitations and is defined in terms of the inability to perform essential activities of daily living (ADLs), such as eating, bathing, dressing, using the toilet, getting into or out of bed, and moving about, or due to cognitive impairment, such as Alzheimer s disease. The term does not include hospital care, and long-term care insurance benefits do not include hospital benefits. The commonly accepted definition of long-term is 90 days or longer. Activities that a healthy person takes for granted, such as grocery shopping, housecleaning and paying bills, often present huge difficulties for the ill or disabled person. When a person is disabled, the environment in which he or she lives can become threatening. Stairways, basements and long hallways become physical barriers. Labor saving devices such as microwave ovens or remote controls may become confusing to operate. Simple chores, such as preparing a meal or washing clothes, may now take hours to complete. THE NEED FOR LONG TERM CARE According to the October 1997 issue of Consumer Reports magazine, half of all women and a third of all men who are now 65 will spend their last years in a nursing home at a cost of $40,000 a year. This is but one of hundreds of articles in newspapers, magazines, and programs on radio and television. It s almost impossible to pick up a paper or turn on the television without seeing or hearing something about the plight of the elderly. And, now with the baby-boomers looming on the senior horizon, things are just getting started! Due to changes in the demographic mix of the population, the ranks of the elderly are expanding and the need for LTC in this society is growing accordingly. The greatest risk of an extended need for long-term care is depletion of income and personal assets. Unfortunately, traditional health insurance products and government programs provide little, if any, benefits for this exposure. All Americans are touched by the long-term care problem: those who currently need care, those caring for (or paying for care of) relatives, and the taxpayer who bears the ultimate cost of care SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 44

46 for those who cannot afford it and/or failed to adequately plan for the future. Long-term care is expensive, regardless of who pays for it. None of us want to spend our time thinking about, much less spending our money on, long-term care. It isn t glamorous or exciting, but it is a fact of life for the majority of Americans, and most of them have done virtually nothing to prepare themselves for the devastating effects it can have. LTC insurance is a relatively new product. Since its introduction, both the number of companies offering LTC benefits, and the scope of coverage offered, have steadily expanded. LTC policies today provide benefits for skilled nursing care, intermediate and custodial levels of care. Many policies also include, or offer as optional benefits, coverage for assisted living, home care, adult day care, hospice, and respite care. With the passage of the Deficit Reduction Act of 2005 there are going to be cuts in Medicare and Medicaid. This makes private insurance coverage for Health care and Long-term care even more important since it will be more difficult to get assistance from government programs, especially for those who are middle income and above. The Act also makes it more difficult for people to get long-term care under Medicaid or by transferring funds or purchasing annuities. A plus, however, is that a nationwide long-term care partnership program has been established as part of this new law. This chapter includes a variety of topics with respect to long-term care, ranging from how it is provided to how it is paid for. It should be clear that there is no single solution to the multifaceted issue of long-term care. Agents and brokers can make a real difference in the lives of countless persons by helping them to understand the need for long-term care, the costs involved and the methods with which to finance it. Long-term care insurance isn t for everyone. Part of what you will learn from this course is who should and who should not purchase a policy, and if they should, which of the myriad of choices available are best suited for the individual client. The LTC Problem in America There is a growing awareness in our society of the need for both long-term care services and long-term care insurance benefits. Although nursing homes and other types of extended care facilities have been around for quite some time, concern with economic problems related to long-term care have grown more acute in recent decades due to a number of trends. These include the aging of our population, longer life expectancies, rapidly increasing health care costs, limits to the benefits provided by traditional insurance products and government programs and changing demographic trends, leaving fewer unpaid family caregivers available at home. DEMOGRAPHICS AND COSTS In 2020, the number of elderly will increase to twelve million. 70% of elderly people are currently cared for at home by family and friends. AHCA projects that the number of elderly living in nursing homes will increase 58 percent by the year People of age 65 face at least a 40 percent lifetime risk of entering a nursing home, about 1 percent will stay there five years or longer SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 45

47 SOURCE: US DEPT OF HEALTH AND HUMAN SERVICES The odds of entering a nursing home for those 65 or older: 50% 40% 30% 20% 10% 0% Women Men 50% 33% According to the U.S. Census Bureau, the over-90 population is the fastest growing segment of the U. S. population, having nearly tripled over the past three decades, and having one or more disabilities, living alone or in a nursing home and graduating from high school. People in this age group also are more likely to be women and to have higher widowhood, poverty and disability rates than people just under this age cutoff. Americans now live longer than ever following their retirement. As a result, the number of Americans age 65 or older was greater in 2010 than in any previous census. Between 2000 and 2010, the population 65 years and over increased at a faster rate (15.1 percent) than the total U.S. population (9.7 percent). When compared with the number of older people in the past, the population 65 years and over has notably increased over time. In 1900, there were 3.1 million people aged 65 and over in the United States. As the population 65 years and over steadily increased throughout the twentieth century, the older population reached its highest level at 40.3 million in 2010 up from 31.2 million in 1990 and 35.0 million in While the general population perceives the risk of needing long-term care services to be less than 25%, the actual risk for needing long-term care is greater than 50% at any point in our lives. One in five Americans over age 50 are at high risk of needing long-term care services during the next 12 months, according to Harvard University. The huge wave of baby-boomers (the population born in the post-world War Il period from 1946 to 1964) representing one-third of all Americans (76 million people) will be turning 65 beginning in about 10 years. SOURCE: THE OLDER POPULATION: 2010, US CENSUS BUREAU, NOVEMBER SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 46

48 Long life doesn't guarantee long quality of life. The longer we live, the greater the chance we will need long-term care. The people who take care of themselves the best will need long-term care the most, because they won't die suddenly -- they'll just wear out! The Need for Long-Term Care Assistance in Percentage by Age 50% 40% 30% 20% 10% 0% SOURCE: DATA FROM NATIONAL CENTER FOR HEALTH STATISTICS, HEALTH INTERVIEW SURVEY PEOPLE OVER 65 WHO RESIDE IN THE COMMUNITY NEEDING HELP WITH ADLS SOURCE: TAKING CARE OF TOMORROW, CALIFORNIA DEPARTMENT OF AGING, SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 47

49 Nursing Home Bankruptcies Nursing Facilities and Home Care Providers can t operate on government payments alone. Bankruptcies among the nation s skilled nursing providers are reaching an alarming level. The total number of bankruptcies across the nation exceeds 1,651 skilled nursing facilities, which care for 175,000 patients nationally. Most cited low reimbursement rates of Medicaid and Medicare cuts tied to the program s new prospective payment system as key factor contributing to the filing. While Medicaid reimbursement is low, the real problem is over-utilization, with 7 out of 10 persons in nursing homes in the state relying on Medicaid to cover the cost. SOURCE: MCKNIGHT S LONG-TERM CARE NEWS, JANUARY 14, 2000 Nursing Home Neglect Despite federal and state laws, neglect and abuse of the elderly remain cruel realities. One nursing home in four has severe deficiencies that endanger health or lives, according to a recent federal study. Many cite the low payments by Medicaid as a major cause of abuse. There seems to be a cycle of abuse. Even after sanctions, 40 percent of homes with the most severe deficiencies were in violation again within three years. The most prevalent of the serious problems are bedsores, letting people go hungry, failing to care for the incontinent. These are not physical beatings or physical abuse but simple neglect. These are often due to staffing levels that are so low that they do not allow nurses and aides to do their jobs properly. In a recent case in Florida where a resident of a nursing home developed a bed sore which was so bad that it ate into her bone and she died after having her leg amputated. Staff testified that they were hired to manage 15 residents and instead had a work load of 30 to 60 at any given time. There was no way they could feed, bathe and care for so many at a time. SOURCE: CNN.COM FEBRUARY 2000 Risks and costs are high A new study by the American Council of Life Insurers (ACLI) finds that the chances they'll end their lives in a nursing home are far higher than most Baby Boomers imagine -- and that middle income families are at the greatest risk. Middle income Baby Boomers will find that to successfully age 'in place', in their homes or in the home-like setting of an assisted living facility, they will have to use their retirement savings to pay for increasingly expensive long-term care services. Without private long-term care insurance, many will face potentially catastrophic costs that could lead to impoverishment and the need to use Medicaid-funded nursing home care. By 2030, total national expenditures for home- and community-based long-term care will more than quadruple, from $41 billion today to $193 billion. Total national expenditures for nursing home care could reach $330 billion -- equal to today's entire Social Security budget. This SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 48

50 illustrates the importance of taking personal responsibility for their financial future and for future long-term care needs. When they retire, Boomers will have less family caregiving support to rely on. They have typically had fewer children than previous generations and one in five Boomer women have no children at all. High divorce rates among Boomers are likely to take a toll as well, because divorced parents are less likely to receive caregiving assistance from their adult children than widowed parents. Without adequate family support, older Americans' need for paid long-term care services increases the risk that they will impoverish themselves while living in the community. Those costs can be prohibitive. When they run out of funds, middle-income elders must turn to government programs, which primarily provide institutional nursing home care. A long-term care insurance policy can help ensure those caregiving costs don't deprive them of the ability to decide where and how they will live their final years. Because government programs are biased toward nursing home care, if clients rely on government help, a nursing home is where they re likely to end up. A government study says half of the people in nursing homes don't need that kind of intensive care, and could have maintained their independence if they received long-term care services at home. While the financial benefits to individual policyholders are obvious, the benefits to government, and future taxpayers, of wider purchase of private long-term care insurance are substantial. Medicaid's annual nursing home expenditures are projected to skyrocket from today's $29 billion to $134 billion by an increase of 360 percent. ACLI's research indicates that by paying policyholders' nursing home costs, and by keeping policyholders out of nursing homes by paying for home- and community-based services, private long-term care insurance could reduce Medicaid's institutional care expenditures by $40 billion a year, or about 30 percent. In addition, the wider purchase of long-term care insurance could increase general tax revenues by $8 billion per year, because of the number of family caregivers who would remain at work. Today, 31 percent of caregivers quit work to care for an older person; nearly two-thirds have to cut back their work schedules; more than a quarter take leaves of absence, and 10 percent turn down promotions because of their caregiving responsibilities. It costs the typical working caregiver about $109 per day in lost wages and health benefits to provide full-time care at home, which is almost as much as the cost of nursing home care. When the youngest Boomers reach age 65 in 2030, the nation's elderly population will have doubled to 70 million and the number of severely impaired elders at risk of needing nursing home care could double to six million. Because Baby Boomers are expected to live longer than any preceding generation, the likelihood that they will need nursing home and other long-term care services will only increase. The duration of those impairments is also likely to increase as life expectancy rises, as will the risk of outliving one's retirement assets. At greatest risk for nursing home placement will be middle-income elders unable to afford longterm care services in the home or the community. Aging Baby Boomers who plan ahead for their long-term care needs can potentially postpone or avoid institutionalization. Private longterm care insurance can ensure choice, dignity and security for middle income Americans who want to age in place. SOURCE: THE AMERICAN COUNCIL OF LIFE INSURERS IS A WASHINGTON, D.C SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 49

51 Acute vs. Chronic Conditions The health problems of the elderly differ from those of younger persons both in degree and in kind. The young and the middle aged tend to suffer from acute problems, such as infectious diseases, and traumas, such as broken bones. Women also have medical needs associated with childbirth. The younger person can usually expect to return to their previous lifestyle and activity level after recovery. The elderly, however, experience fewer acute problems and suffer mostly from chronic conditions. They cannot usually expect to recover, but instead see their conditions worsen steadily. Acute conditions are those that require a high level of medical monitoring and treatment in order to restore a person to health or the ability to function. These are often conditions which would be life threatening without immediate medical attention and care, which is usually provided in a hospital setting Acute care is usually provided for a relatively short period of time (a number of days or weeks) until a patient stabilizes and may be released or transferred to a nursing home. Chronic conditions are those which are long lasting and require continuing care rather than the type of care provided in emergency medical situations. The care required for chronic conditions may involve some medical monitoring and treatment, but it primarily involves non-medical care such as assistance with various activities of daily living. Chronic conditions may evolve over time and require higher levels of care as time passes. Long-term care is generally provided for chronic rather than acute conditions. Scheduled vs. On-Demand Care A person's loss of independence tends to occur in a predictable order. Long-term care needs generally progress along a continuum of care, from supporting services such as assistance with the basic Instrumental Activities of Daily Living (IADLs) to extensive nursing and therapeutic services, depending upon the individual's condition and needs at a particular time. It is an SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 50

52 evolutionary process, during which Activities of Daily Living fall into two categories: those that can be performed on a scheduled basis, and those that must be taken care of on demand. For example, a person who only needs help with bathing and dressing can get along very well with scheduled care a few hours per day, whereas someone who needs help with toileting or who cannot move about on their own needs full-time on demand care which escalates the cost of care greatly. This scheduled versus on demand distinction is important, because the cost of care rises sharply when care on demand becomes necessary. People who need assistance with toileting or transferring cannot wait for that assistance; it must be delivered on demand. Regular, full time assistance is needed at this point. It can often be the difference of whether care can be delivered in the home or whether the patient must enter a facility. Unfortunately home care is not practical when care on demand or continuous observation and supervision become necessary. Over half of those age 65 or older today will enter a nursing facility some time in their lives. The stay may be a long one. Of those who enter nursing homes, 55% will have total lifetime use of at least one year, and 21% will have a total lifetime use of five years or more. DEMONSTRATING THE NEED FOR CARE Measuring the extent of an individual's functional impairment is essential to determine care needs as well as whether or not the insured has met the coverage triggers in LTC policies. Much research has gone into defining minimal components of independent functioning. Both physical and mental measurements are being used in state and federal laws to measure an individual's ability to function independently in the community. LTC BENEFIT TRIGGERS (COVERAGE TRIGGERS) Long-term Care services can become necessary because of a sudden, serious illness or accident, or due to a slow progression of chronic conditions. The benefit trigger in a long-term care policy is an event or condition that must occur before insurance benefits are paid. Although most LTC policies require a physician's certification that nursing home or home care is required because of physical or mental impairments and the resulting inability to care for oneself. Policies sold today may no longer require prior hospitalization. Coverage Triggers differ between TQ and NTQ policies. (This will be discussed in detail in a later section) SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 51

53 Physical Impairment The basis of physical impairment research is a 1963 study by Stanley Katz in which he developed a measurement of physical functioning called Activities of Daily Living (ADLs). ADLs are often used by health care experts to determine whether a person is capable of living independently. ADLs are excellent measures to assess a person's need for nursing home, home health or other health related services. Other functions which persons may require assistance with in order to maintain their overall independence and continue to live on their own outside a nursing facility are sometimes called IADLs (Instrumental Activities of Daily Living.) These include cooking, cleaning, doing laundry, household maintenance, transporting themselves, reading, writing, managing money, using equipment such as the telephone, and comprehending and following instructions. ADLs Bathing Dressing Toileting Continence Ambulating Transferring Eating IADLs Managing medications Moving about outside Shopping for essentials Preparing meals Laundry Light Housekeeping TOP FIVE CONDITIONS CAUSING ADL OR IADL IMPAIRMENTS, BY AGE Age Age 65 and over 1. Bad back 1. Arthritis 2. Mental retardation 2. Coronary heart disease 3. Mental illness 3. Visual impairments 4. Coronary heart disease 4. Stroke 5. Respiratory conditions 5. Respiratory conditions SOURCE: ASPE RESEARCH NOTES, POPULATION ESTIMATES OF DISABILITY AND LONG-TERM CARE, FEBRUARY SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 52

54 Cognitive (Mental) Impairment Cognitive Impairment refers to confusion or disorientation resulting from a deterioration or loss of intellectual capacity that is not related to, or a result of, mental illness, but which can result from Alzheimer s disease, senility or irreversible dementia. Many seniors with mental impairments can perform all of the ADLs, but they need constant supervision to protect themselves and others while performing them. A great many seniors with mental impairments live in the community. Alzheimer's disease, senility, strokes and other diseases and conditions cause irreversible brain damage that worsens over time. Forty-seven percent of people over age 85 have some type of dementia. An Alzheimer's patient can live an average of eight years and as many as 20 years. The average expense for an Alzheimer's patient is $214,000, and only $14,000 is reimbursable by Medicare or other health insurance. Policies sold today must include coverage for long-term care required by people who are physically able to perform the tasks but forgot how or why to perform the tasks or can t perform them safely on their own. Approximately one third of all senile people can perform all ADLs, but they need constant supervision, prompting or cuing in order to complete them safely. Many states no longer allow insurers to include mental illness exclusions in their policies. As long as a policyholder needs assistance and/or supervision due to a mental impairment, whether organic or not, coverage will apply. This removes one more perceived obstacle from the insured s path at time of claim. Facts about Alzheimer s: Alzheimer s disease has received increased attention in the past decade as the nation's elderly population has grown. Following are some facts about the disease: An estimated 5.2 million Americans have Alzheimer s disease. This includes an estimated 5 million people age 65 and older and approximately 200,000 individuals under age 65 who have younger-onset Alzheimer s. (2014) Eleven percent of those 65 are thought to have Alzheimer s. This is about one in nine people age 65 and older. The disease may take hold years before symptoms appear. Researchers hope anti-oxidants, anti-inflammatory and estrogen treatments will delay the onset of Alzheimer s symptoms. Half of all nursing home residents have Alzheimer s disease or a related disorder. In 2000, there were an estimated 411,000 new cases of Alzheimer s disease. For 2010, that number was estimated to be 454,000 (a 10 percent increase); by 2030, it is SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 53

55 projected to be 615,000 (a 50 percent increase from 2000); and by 2050, 959,000 (a 130 percent increase from 2000). By 2025, the number of people age 65 and older with Alzheimer s disease is estimated to reach 7.1 million a 40 percent increase from the 5 million age 65 and older currently affected. By 2050, the number of people age 65 and older with Alzheimer s disease may nearly triple, from 5 million to a projected 13.8 million, barring the development of medical breakthroughs to prevent, slow or stop the disease. Previous estimates based on high range projections of population growth provided by the U.S. Census suggest that this number may be as high as 16 million. In 2013, the 15.5 million family and other unpaid caregivers of people with Alzheimer s disease and other dementias provided an estimated 17.7 billion hours of unpaid care. This number represents an average of 21.9 hours of care per caregiver per week, or 1,139 hours of care per caregiver per year. With this care valued at $12.45 per hour, the estimated economic value of care provided by family and other unpaid caregivers of people with dementia was $220.2 billion in Unpaid caregivers of people with Alzheimer s and other dementias provide care valued at more than $1 billion in each of 39 states. Unpaid caregivers in each of the four most populous states California, Florida, New York and Texas provided care valued at more than $14 billion. In 2012, the average cost for a paid non-medical home health aide was $21 per hour, or $168 for an eight-hour day SOURCE: THE ALZHEIMER S ASSOCIATION SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 54

56 PROVIDERS OF LONG TERM CARE Long-Term care services can be provided in a wide range of settings: informally by family, friends, neighbors, and volunteers; at home through home health care agencies and homemaker services or other community based services such as adult day care centers; and through institutions such nursing homes and assisted living or residential care facilities. Regardless of the degree of care provided, those providing the care are called caregivers or providers. The majority of caregiving responsibilities will fall on a primary care giver, such as a spouse or child, with additional responsibilities falling on secondary care givers, such as home health care agencies. An individual who receives assistance is called a care recipient. Long-term care policies define benefit limits by how the provider of care is defined. Agents should examine their policies carefully because these are critical components when comparing policies. At one time, LTC policies followed Medicare's definition, but now coverage is included for a broader spectrum of providers. Whether a particular policy or program will provide benefits depends upon the specific definitions of covered services in the contract or program. Agents need to understand what is meant by various service definitions in order to evaluate what benefits are available and determine unmet needs. This will be discussed in detail, including examples, in the section on long-term care insurance policies and provisions. THE LTC CONTINUUM There is a unique correlation between children and the elderly. The lack of independence and inability to function is the same during childhood as it is in the elderly stage of life. Children generally learn to perform the following functions independently in this order: eating - first with hands and then with utensils; walking - first crawling and then culminating with baby's first steps; using the toilet; and bathing. As people age, the inability to perform normal functions follows the adage "last learned - first lost": needs assistance to bathe; needs assistance in performing the task of going to the toilet, including getting undressed; mobility becomes more and more difficult for an elderly person slowed by arthritis and other ailments; and eating - inability to hold a utensil or feed themselves SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 55

57 INSTITUTIONAL FORMAL CARE FACILITIES The facilities that provide LTC services are as diverse as the range of possible services. Some new types of facilities have emerged in recent years and, as the number of elderly persons in the population continues to grow, we can expect to see additional variations and alternatives in the future. These are general categories of LTC services and the actual services provided at any level of care may overlap to an extent with others. Additionally, the actual terms and descriptions found in insurance policies may vary. For example, "custodial care" is sometimes referred to as "personal care." State laws may also require benefits for a particular type of care to include other services as well. For instance, in California, any policy providing benefits for "home care" must include benefits for home health care, adult day care, personal care, homemaker services, hospice services and respite care. NURSING HOMES Although there are different levels of care in nursing facilities, all involve full-time residence and include room and board, monitoring, personal assistance, nursing and other care for people who are physically or mentally unable to attend to all of their own needs. Nursing home care is at the highest end of the continuing care continuum. They are also the most common types of facility providing LTC services. Nursing homes may be the first thing we think of when we consider the need for LTC insurance, and concern over nursing home costs may be the most motivating factor in the decision to buy LTC coverage. Thousands of nursing homes in this country play an important role in the care of Americans, and this number is growing due to the increase in the number of elderly persons in the population. It's estimated that one in four Americans of all ages will enter a nursing home at some time in their lives. Just under half of all individuals who reach age 65 and over will enter a nursing facility at least once before they die. The older a person gets, the likelier he or she will have to receive nursing home care for some period of time. SOURCE: CALIFORNIA PARTNERSHIP FOR LONG-TERM CARE Regardless of how much they have improved over the years, many people still have negative impressions of nursing homes. Both state and federal authorities regulate nursing homes. To make sure the quality of care given in nursing homes meets high standards, the states grant licenses and also conduct on site reviews of nursing facilities each year. In 1987, the Omnibus Budget Reconciliation Act (OBRA) resulted in national reform of nursing homes. Key provisions of this act require: SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 56

58 Additional nursing home staff, Higher staff proficiency; More individualized resident care plans; and Resident involvement in the care plan. LEVELS OF NURSING HOME CARE Long-term care services in a nursing home are usually classified into three categories: Skilled Care, Intermediate Care and Custodial Care. While these are categories of benefits are based on levels of care received; policy provisions may actually define and describe benefits differently. Virtually all policies on the market today cover all three levels of care. Nonetheless, it is important that agents understand the meaning of these various levels of long-term care. Agents should always read the descriptions of care in policies so they know, and can explain to their clients, what benefits the company will and will not pay. Skilled Nursing Care Skilled nursing facilities provide the highest level of medical care, and tend to be the most expensive for this reason. Less than 1% of people in nursing homes at any given time are receiving skilled care. These facilities provide daily nursing and rehabilitative care performed only by, or under the supervision of, skilled medical professionals or technical personnel. Basic skilled and custodial care for "activities of daily living are delivered in addition to one or more of the following: specialized rehabilitation programs, respiratory therapy services, ventilator care, tracheotomy care, IV services for hydration/pain management, hospice services, respite care services, Alzheimer's and dementia units. This care is available 24 hours a day, must be ordered by a physician, involves a medical treatment plan, and is usually performed directly by, or under the supervision of, a registered nurse. Skilled nursing facilities are licensed by the state in which they operate. This type of care is often needed for a short time immediately after being hospitalized with a stroke, surgery, major illness or accident. Intermediate Care Intermediate Care is nursing and rehabilitation services offered in an institutional setting that are below those offered in a hospital or skilled nursing facility, but above that of custodial care. For instance, sometimes a person needs some therapy, but on an intermittent basis rather than every day. The rest of the time they are receiving custodial care. About 3% of persons residing in nursing homes fall into this category. This type of facility accepts individuals who are relatively independent but who may need assistance with ADLs like bathing, dressing, getting out of bed, etc. Some nursing care is provided but not continual nursing services or supervision. They are usually lower in cost than skilled nursing facilities. Supervision by a physician is required. Most care is provided by licensed personnel, such as RNs and therapists but not necessarily on a continuous or daily basis. LVNs and nurse s aides may provide some intermediate care services SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 57

59 Custodial Care Custodial Care, also known as "personal care, is non-medical care and assistance with activities of daily living and/or constant supervision and observation due to mental impairment. Over 96% of all persons in nursing care are receiving custodial care. This is the most common type of long-term care and it is provided in a variety of settings, ranging from nursing homes to other facilities, convalescent homes, and the patient's home. It includes such things as assistance with walking, bathing, dressing, shopping for food, preparing meals, eating, and doing household chores. This is the lowest level of care because it does not involve any medical care and unskilled volunteers or family members may provide it. Custodial care is nonetheless essential for a person who cannot be self-sufficient. Although custodial care is the least expensive daily cost, ultimately it is the most expensive level of care because of the length of time it is needed. Over the long run it can devour a lifetime of savings. COMPARISON OF LEVELS OF CARE SKILLED Continuous Medically Necessary Licensed Medical Professionals Ordered by Physician Short-term, restorative (Usually less than 90 days) CUSTODIAL Assistance of Supervision ADL or Mental Needs Family, Friends & Health Aids Physician or Care Manager Long-term, debilitative (Usually 90 days or more) How long the average stay in a nursing home is depends on how the statistics are read. DURATIONS OF NURSING HOME STAYS Under 2 weeks 23% 1 year 7% 2-3 weeks 20% 2 years 4% 1-2 months 21% 3-4 years 3% 3-6 months 12% 5-6 years 2% 7-12 months 8% 7-10 years 1% 10 years + 0% While it appears that nearly half of all nursing home stays are less than a month, the figures can be misleading because SNFs are increasingly being used for convalescence from acute illnesses and surgeries and nursing facility stays are interrupted by brief hospital visits, the return from which is counted as a new admission. 70% of nursing home stays were three years or less, 15% of the patients stayed longer than five years SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 58

60 OTHER TYPES OF LONG-TERM CARE FACILITIES Residential Care & Assisted Living Assisted Living Facilities are one of the fastest growing segments of the health care industry. Today, over 700,000 seniors live in approximately 25,000 facilities. The number of residents is expected to double over the next 15 to 20 years and skyrocket when baby boomers "hit" their golden years. A residential care facility (called assisted living facility in some states) is a retirement residence for senior citizens, which includes various levels of care in addition to housing. Some of these facilities provide personal care only (such as providing meals, housekeeping, and other personal services) and do not provide any medical or nursing care. Some offer low levels of nursing care in addition to personal care. Generally, residential care facilities do not and cannot offer the same level of care that is available in a nursing home. Such facilities offer a combination of independence and service for individuals where varying levels and intensities of care and supervision, protective supervision, personal care, or healthrelated services are provided based upon their varying needs. Assisted Living/Personal Care is either included with the monthly care fee or residents are charged according to the level of services used. The fees charged can be based on an hourly rate for different types of services, or according to the level of care provided. 24-hour supervision and assistance are provided for residents with minor medical problems or who need assistance with such things as bathing, grooming, dressing and meals (ADLs & IADLs). Most of these facilities offer private or semi-private rooms, or efficiency apartments with or without kitchenettes. They typically provide common living areas (card/games room, library, lounge, social activities, and central dining room), housekeeping, linens (towels and sheets), from one to three meals, and transportation. They can also supervise and distribute medications to residents. Remember, not all Assisted Living Facilities are licensed, and usually only facilities which are licensed are covered by LTC policies. In some states the facility is licensed as a Residential Care Facility (RCF) or Residential Care Facility for the Elderly (RCFE) rather than Assisted Living Facilities (ALF). Perhaps the greatest issue facing the assisted living industry is the direction states will take regarding regulation and licensing. Board and Care This term, often used for Residential Care Facility for the Elderly (RCFE), applies primarily to small converted single-family homes. Housing must be licensed can provide "hands on" assistance, and is for individuals who are unable to live alone but do not need nursing home care. Board and Care facilities provide a more home-like atmosphere for residents. Often an older couple can stay together in one room rather than in separate rooms and can sometimes even keep a beloved family pet with them. They provide assistance with personal hygiene, grooming and care during periods of minor or temporary illness or disability. They may also provide some recreational and social activities in a family-like atmosphere SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 59

61 Congregate Housing / Independent Living Community Provides a residential environment with more shared common space and service supports than fully independent living facilities. While residents still live independently in their own rooms or apartments, congregate housing includes centralized dining services and support services such as transportation, social and recreational programs, and housekeeping. Some of these look identical to any other neighborhood home on the outside and fit right into the community at large. They are special constructed, however, to provide access features such as ramps, grab bars, wide halls and doors to accommodate people with a number of different disabilities and limitations. Often many seniors will reside in these homes providing companionship and a support system for one another. These communities offer similar services to those provided by Assisted Living/Personal Care communities, but can be licensed or non-licensed offering limited services. Most policies will only pay if an insured is receiving care in a licensed facility. Continuing Care Retirement Communities Continuing care retirement communities, also known as life care communities, offer residential housing provide housing, recreational activities, and personal and sometimes even medical care according to one's need. The advantage of such a community is that individuals can move into it when they're healthy. If their health declines and they need increasing amounts of care, they don't have to move out of the community. This is often referred to as aging in place. If assisted living or nursing home care is needed, long-term care insurance may cover some or all of the costs. The level of care can be increased if needs change. Unfortunately, the quality of care provided by different facilities varies considerably, and large front-end investments or "admission fees" are required upon entering such a facility. The object is to provide independent living, congregate living, assisted living, and skilled nursing care on site where residents move from one level to another as their needs change. Some CCRCs have licensed Residential Care Facilities, Assisted Living Facilities, Residential Care Facilities for the Elderly, Nursing Facilities, Skilled Nursing Facilities and Home Health Care Agencies on premises. In this case most policies would pay when the insured is receiving care in one of these licensed facilities. Usually, if the insured is receiving care in their own residential unit in the CCRC, the policy will only pay if a licensed Home Health provider is providing health care services. Unlicensed personnel may be covered only if the assistance provided is strictly Personal Care or Homemaker services. Consumers should look carefully at the type of contract and care that is included in the agreement. In many CCRCs and LCCs the entry fee is non-refundable after a limited period, though the trend has been towards guaranteeing a refund of a substantial portion upon death, departure, or nursing home confinement. In exchange for these fees and charges, the resident is provided with a contract guaranteeing shelter and an array of services throughout the remaining lifetime of the individual. The life care contract represents the long-term commitment of the continuing care provider to the community resident for the rest of their life. Some Continuing Care Retirement Communities, on the other hand, typically offer care for only a specified number of days per year, and only specific levels of care, i.e. custodial only SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 60

62 Resources regarding senior housing: U. S. Dept. of Housing and Urban Development (HUD) American Association of Homes and Services for the Aging American Health Care Association Assisted Living Facilities Association of America The National Council on Aging, Inc National Resource and Policy Center on Housing and Long-Term Care NON-INSTITUTIONAL FORMAL CARE Non-institutional Formal Care means Long-Term Care services for which the provider is paid. As the nation's population continues to age, more people will be needed to care for this elderly population. Formal caregivers, such as social workers, home care aides and nurses provide needed professional care when informal caregivers are unable or unwilling to care for elderly or disabled people. COMMUNITY CARE Community services consist of a wide variety of options from nutrition services to assisted living. Each service is designed to assist, not replace, a primary care giver, and they are provided either free of charge or at a nominal cost. Volunteers or individuals receiving a small wage normally give these services. A few of the most common programs are outlined here. Adult Day Care Adult day care centers provide an elderly person with social interaction, therapeutic activities, opportunities for learning, preventive health services and well-balanced meals on a less than 24-hour basis. Typically, centers are open Monday through Friday from the early morning through early evening and cost between $20 and $40 per day in most areas. They offer a lower cost alternative to using full-time providers at home along with the social benefits of interaction with others. Participants in adult day care may stay for a half or full day, one to five days a SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 61

63 week. In addition to personal care assistance, adult day care centers provide meals and snacks, exercise, recreation, outings and educational programs. Some centers also provide limited medical services, such as blood pressure screening, flu shots and some types of therapy. Adult Day Care Centers provide needed respite care for the caregiver. While the care recipient is at a center, the caregiver can take care of personal needs. Once the care recipient realizes that he or she is not being abandoned, he or she often looks forward to time spent away from home in the company of peers. Some centers specialize in care of Alzheimer s patients only while others combine senior care with care of children. This arrangement benefits both the children, who often are separated from their own grandparents by great distance, and the seniors who look forward to seeing their surrogate grandchildren each day. Respite Care Respite care is short-term full-time care provided on a regular or occasional basis to give the regular caregiver a break. It benefits both the caregiver and those who receive care. Care may be given a few times a week, one weekend a month, or for a full or week when primary care givers are unavailable. It may consist of sending a home health worker to the home for a while, or temporarily moving the patient to a nursing home or other facility, so that the person normally caring for the patient is able to rest. This is often a separate policy benefit with its own conditions for eligibility and maximum benefit levels. Hospice Care Hospice services are outpatient services designed to provide care, to lessen the pain and reduce the consequences of a disease (palliative care), in order to alleviate the physical, emotional, social and spiritual discomforts of an individual who is experiencing the last phases of life due to a terminal disease, and to provide supportive care to the primary caregiver and the family. A skilled or unskilled person may provide hospice care under a plan of care and medical direction. Hospice care can be offered in a facility or in the patient's home where nurses and social workers visit the patient on a regular basis. Virtually all policies today include hospice care benefits. HOME CARE Home care involves various levels of care delivered in a home setting. It includes both health care services delivered by health care professionals as well as supportive social services such as homemaker and personal care. Care delivered in the home can be grouped into three categories: medical, personal or environmental care. The type of care needed will determine the type of professional to be hired SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 62

64 There has been tremendous growth in the home care industry. About 1.5 million people are in nursing homes and about 10 million are being cared for at home or in a community setting like assisted living or adult day care, so less than 15% of long-term care is in a nursing home, The number of nursing homes has actually declined in recent years due to an increased availability of home health and other community services. Many people are reluctant to give up their homes simply because they are unable to perform household chores or personal ADLs. Most individuals want to remain in their own home as long as possible and home care from trained professionals is a way to delay the need for institutional care. But this can be very expensive. The best use of home care is to complement, not replace, a family member or other primary care giver. In fact home care coverage may be the only way a spouse or other family member can keep a person out of a nursing home by providing assistance with heavy chores and respite care. Both the family and the care recipient have important decisions to make and personal issues to consider when a disability or an illness begins. The family is often unaware of the available health care options, confused about what steps to take and anxious about the care recipient's future. They may require help from social workers who are professionally trained to provide care consultation, counseling, information, referrals and case management. They also have access to support and educational groups. In addition to helping medical and emotional needs, social workers often assist the family with managing finances. Diagnosis will have a great impact on the ability of the person to receive care in their home. Some types of disabilities and illnesses make facility care mandatory almost from the beginning (i.e. major strokes, non-ambulatory situations and severe mental impairments), whereas others lend themselves to home care on an intermittent basis (i.e. semi-ambulatory, cardiovascular, and minor mental impairment.) If the applicant can afford the premium, they should be encouraged to purchase a comprehensive policy that will provide the most choices for the client and their family when the time comes. Sometimes we simply cannot be cared for at home due to physical or mental conditions even when someone is at home 24 hour care is extremely difficult for most families to manage. Almost half of nursing home patients have some type of dementia. 47% of severely disabled people with both spouse and children receive some formal care. A home health aide may stay with you for 8-10 hours while your children work, which can postpone and even eliminate entering a nursing home for some people. How precious a few hours a day of home health care can be to a distraught, exhauster caregiver. It may literally mean the difference between sanity and insanity, and is not covered by health insurance. Nursing homes still carry a stigma for many adult Americans and less than 20 percent of longterm care services are delivered in this environment. The home is the ideal, if not always practical place, to care for a loved one. Long-term care is an emotional ordeal for a family. The decision to have a parent or relative be cared for by someone else is a traumatic one. Remaining at home, even under the care of another person, helps the individual retain their independence much longer. Home care can cost as much, if not more than nursing home care - especially for 24-hour per day, around-the-clock care. The average cost for a home care aide - not a nurse - to stay and help with baths, eating, dressing, etc. is $90-plus per eight-hour shift. Nurses cost much more, but most people only need the services of an aide SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 63

65 At present Medicare has capped the amount it will reimburse home health agencies to care for patients, regardless of how sick individual patients are or how much care they need. This means a lot of the sicker patients may not receive the care they need and makes private insurance coverage even more important now than in the past. (See the Medicare Section for more information.) LEVELS OF HOME CARE Home care means care received at the patient's home. This care is provided to individuals who can be maintained in their residence and do not require institutionalization. Home care agencies offer a range of services, from assessing an individual's needs to putting together and arranging care. Skilled health care by nurses, therapists, and other licensed health care professionals, may be delivered in the home. Also included are the use of devices, such as crutches, canes, walkers, IV setups, hospital beds, wheelchairs, ostomy supplies, prostheses, and oxygen. Personal care such as assistance with ADLs and IADLs is available. Home Health Care Home health care may include part-time skilled nursing care, such as occasional visits by registered nurses or licensed practical nurses. It may include speech, physical or occupational therapy, and part-time services of home health aides. It almost always includes some degree of custodial care, such as assistance with meal preparations, personal hygiene, and taking medications. Home Health Care agencies and independent providers must be licensed to be covered under most LTC policies. Advances in medical science have made the delivery of health-related care to the home much easier. Smaller, portable equipment enables respiratory therapy, drug therapy and chemotherapy to be done in the home rather than in the hospital. In addition, hospital beds, power lift chairs, walkers, wheelchairs and monitoring devices are available for rent so that most people can return home sooner. You can find home health care through State or Area Agencies on Aging, social service agencies, public department of family services, private home care agencies, Red Cross, Visiting Nurses Association, public health department, hospital social services or discharge planning, United Way, and the Yellow Pages. Personal Care / Homemaker Services Personal care means non-medical services to assist older persons with ADLs and/or IADLs provided by a skilled or unskilled person under medical direction. Homemaker Services provides care for the house or environment, such as cleaning, minor household repairs and maintenance, laundry, shopping and running errands, to make it possible for the person to remain in their home when they can no longer perform these functions. State or Area Agencies on Aging, social services departments, religious groups, and service and civic organizations and clubs may provide chore services. The Red Cross, Visiting Nurses Association, home care agencies, or local area agencies on aging may offer homemaker services. Check the Eldercare Locator for services near you SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 64

66 If the patient is receiving "skilled" home health care services, paid for by Medicare, Medicare may cover a portion of the cost of a homemaker/home health aide to help with personal care. The local Social Security office can provide information. For those with low incomes, Medicaid will sometimes help. Check with your local Medicaid office. TYPES OF HOME CARE PROVIDERS Home Care Aide Organizations These companies provide a wide variety of supportive services such as housekeeping, meal preparation, and live-in-attendants. These companies are not licensed in many states. Medicare Certified Home Health Agencies These agencies are certified by the states to provide services to Medicare beneficiaries and are required to provide nursing, and at least one of the following services: occupational, physical and speech therapies, medical social services, and home health aides. Medicare certified home health agencies are licensed by the State to provide skilled nursing care in the home. Individual Providers RNs, LVNs and others, are eligible for payment for the above type of services. It often costs less to arrange care through an individual provider than it does through an agency. If the care to be provided is Home Health Care, the provider would have to carry the appropriate license. If they are hired to provide personal care and homemaker services, no license is required. LICENSING OF FACILITIES Agents should be aware of any state licensing and certification requirements and their relationship to coverages and benefits included in long-term care insurance policies they sell. It is important to remember that the actual contract provisions need to be examined in order to determine which benefits are payable. Many variations are found in the LTC insurance market. In some policies these are optional benefits, while they are included as part of the standard benefit package in other policies. For example, some policies will include coverage for care in an assisted living facility, while others will only include assisted living if the insured purchases the optional benefit, still others will offer more than one level of assisted living depending on what the insured wishes to purchase. It is important for agents to know the range of services that are covered and are not covered by the policies they are selling. Most types of LTC facilities are required to be licensed by the state. Agents need to be aware of differences between licensed facilities and how benefits may depend upon the type of facility used. In general, the following long-term care providers must be licensed: Skilled nursing facilities SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 65

67 Intermediate care nursing facilities Custodial care nursing facilities Congregate living health facilities Hospices Assisted Living Facilities Residential Care Facilities Residential Care Facilities for the Elderly Respite care facilities Adult Day Care Facilities Home health care agencies Understanding the various kinds of long-term care providers allows the agent to explain policy coverages designed to meet the different levels of care that an individual might require and to make it clear that an individual may require different levels of care at different times. Many LTC insurance policies are required to provide benefits for care rendered by unlicensed providers if the state has no licensing requirements for that particular service and the policy covers that type of service. A policy cannot limit coverage to services provided by licensed practitioners when it covers services for which a license is not required. Non-medical care, provided in the home, may usually be given by a variety of unlicensed individuals. This category of care may include personal care; help with housecleaning and shopping, transportation, and other services that do not require skilled personnel. The intent is to allow lower-cost, unlicensed providers to perform personal care services, thereby maximizing the daily benefit to allow the person to remain at home for the longest period possible. It is important to remember that the actual delivery of services could occur outside the state in which the policy was purchased, and the policy must be worded broadly enough to deal with licensing requirements in any state where the service may be provided SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 66

68 PAYING FOR LONG-TERM CARE THE COST OF LONG-TERM CARE Whether the care is provided in the home, a community-based facility or a skilled nursing facility, the cost of long-term care is expensive and getting more so all the time. How the care recipient pays for such care is, of course, dependent on several factors, including personal wealth, eligibility for state and federal assistance programs and personal insurance protection. Average Costs Long-term care, no matter how or where it is provided, can be very expensive. How expensive depends on several factors: what kind of care is required, who is delivering the care and how long the care is needed. At the low end of the spectrum is informal care, provided by family and friends at home. At the high end is skilled nursing care in a first-class facility. In 2014, a year in a nursing home costs an average of $212 per day, or over $77,000 per year. Home care services can also be quite costly; in fact, round the clock home care is more expensive than being in a nursing home. Here are some examples: The average annual cost nationally for nursing home care is about $77,000, or $212 per day for room and board, not including drugs and medical supplies. Care can cost twice that amount in some areas depending on the size, location, amenities. Residential care facilities costs: Average of $116 per day. Those designated as Assisted Living may be more expensive than Nursing Facilities. A Home health visit by a nurse costs approximately $20 an hour. Home care, just five visits per week, five hours per visit, can easily cost $1,900 per month, $22,800 per year, or more in many areas. The cost of skilled nursing or therapists can easily add $100 per visit or more. An 8-hour shift for a home health care aide through a home health agency is at about $160. The average annual cost of a nursing home stay is $3,500 a month. Adult day care costs an average of $65 per day SOURCE: GENWORTH 2014 COST OF CARE SURVEY SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 67

69 Ninety two percent of all long-term nursing care costs are paid by the individual needing care or by Medicaid. This is the largest unfunded liability in the country. Medicare pays an overall eight percent of the total costs of long-term care. SOURCE: KAISER FAMILY FOUNDATION, 2012 THE EFFECT OF INFLATION ON LTC COSTS Another aspect of the LTC problem is the fact that costs for all forms of health care have been continually rising, and frequently rising at a more rapid pace than general increases in overall consumer prices. Costs for nursing care, and all other forms of long-term care, are expected to continue to rise. Longevity is also of concern. People are living longer these days, which could mean that they might need nursing home care at a reasonably advanced age, years after they had purchased long-term coverage and after inflation had taken its toll. Half the population is expected to live longer than average and half to live less than average. But persons healthy enough to eventually qualify for long-term care benefits are expected to live longer than average SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 68

70 Effect of Inflation On Long-Term Care Costs SOURCE: WHAT HAPPENS WHEN LONG-TERM CARE COSTS RISE, CALIFORNIA PARTNERSHIP FOR LONG-TERM CARE, 2015 Protecting a policyholder s benefits against inflation is one of the most important decisions clients can make when purchasing a long-term care insurance policy. However, if a prospective policyholder hesitates to purchase inflation protection since it adds significantly to a policy's cost, years from now they may find themselves needing long-term care, but owning a policy whose benefits have not kept pace with the increasing cost of services. By 2030, total national expenditures for home- and community-based long-term care is expected to reach $193 billion. Total national expenditures for nursing home care could reach $330 billion -- equal to today's entire Social Security budget. This illustrates the importance of persons taking personal responsibility for their financial future including future long-term care needs. When discussing the inflation facts with clients, it is usually helpful to go over what has happened in the past, transition to the present then discuss what is expected to happen in the future: SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 69

71 Rising costs mean that long-term care is likely to be more expensive in the future than it is today. This could seriously drain a person's resources if LTC benefits are not available. Even when LTC benefits are available, a person has to consider whether benefit levels are adequate, and whether benefits will be adequate if they are needed 10 years or 20 years or more in the future. ANTICIPATED INCREASE IN COST PER YEAR OF NURSING FACILITY CARE Year 5% Compound Inflation 2010 $ 83, $106, $136,100 The increase in nursing home care costs has almost always surpassed the increase in the Consumer Price Index indicating that nursing home care costs are going up at a greater rate than the general costs of living. Even at a modest rate of inflation, the cost of nursing home care is likely to become more and more expensive as time goes along. For people on a fixed income, as are many retirees, this rise in cost should be of special concern. Projected LTC Cost Increases vs. Policy without Inflation Protection 140, , ,000 $78,000 Differrence 80,000 60,000 Projected LTC Cost Increases 40,000 20,000 0 Policy WITHOUT Inflation Protection SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 70

72 Chapter Five Quiz 1) According to the Kaiser Family Foundation, in 2012, of LTC services was paid by Medicaid. a. 40 % b. 10 % c. 15 % d. 20 % 2) People of age 65 face at least a percent lifetime risk of entering a nursing home. a. 40 % b. 30 % c. 10 % d. 15 % 3) Most long term care is needed for which of the following levels of care? a. Chronic conditions b. Acute conditions c. Emergency conditions d. Urgent conditions 4) Which one of these is NOT an ADL? a. Eating b. Bathing c. Shopping d. Transferring 5) Which of the following is NOT Community care? a. Adult day care b. Respite care c. Board and care d. Hospice care SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 71

73 LONG TERM CARE REGULATIONS HISTORY OF LONG-TERM CARE REGULATION The states rather than the federal government generally regulate insurance. There are two important exceptions to that rule, Medicare Supplement insurance and long-term care insurance. Recent changes in federal law allow for the sale of long-term care policies and certificates that may be eligible for favorable federal tax treatment. As a result of these changes in federal law, the state legislatures have passed a number of laws that have had a profound impact on long-term care insurance. NAIC MODEL LAWS AND REGULATIONS The National Association of Insurance Commissioners (NAIC) is an association of the chief insurance regulators from each state. The NAIC meets regularly to discuss various insurance issues and to propose recommendations and model acts that are intended to create better and more uniform insurance laws throughout the various states. The NAIC has developed minimum standards to long-term care policies that attempt to balance the consumers interest with the insurance company s ability to successfully market quality coverage. On a regular basis, the NAIC updates its model act and regulations to reflect changes occurring in the industry. State insurance regulators are advised about the type of language they should use in regulating long-term care policies. The NAIC s recommendations aid states in the adoption of some guidelines and laws. However, the NAIC has no power to enforce its recommendations and can, at best, merely suggest that states adopt them. The Model Act and Model Regulation includes the following key provisions: Alzheimer s Disease must be covered Individual policies must be guaranteed renewable or non-cancelable Coverage for pre-existing conditions may be excluded for only six months Policyholders must be provided with an outline of coverage Individual policies must have an expected loss ratio of at least 60 percent Policy may not cover skilled care only or provide higher benefits for skilled care than for lower levels of care Benefits may not be conditional or prior hospitalization Inflation protection must be offered Minimum standards specified for home health benefits SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 72

74 Recent regulatory attention has been focused on three areas: Non forfeiture Benefits Rate Stabilization Suitability of Coverage NAIC standards permit state commissioners to adopt disclosure regulations, dealing with issues such as: Terms of renewability Eligibility Non-duplication of coverage with other insurance Dependent coverage Treatment of preexisting conditions Continuation, conversion or termination of policies Waiting periods Limitations on coverage Tax-Qualified long-term care policies must satisfy various provisions of the Long-Term Care Insurance Model Act and Model Regulations as issued by the National Association of Insurance Commissioners (NAIC). FEDERAL LEGISLATION The Health Insurance Portability and Accountability Act (HIPAA) The Health Insurance Portability and Accountability Act of 1996, P.L , popularly known as Kennedy-Kassebaum, was signed into law on August 21, 1996, by President Clinton. It contains a strong endorsement for private long-term care insurance by including tax incentives, product requirements and consumer protection standards. Effective January 1, 1997 HIPAA gave policyholders the option to purchase tax-qualified LTC insurance contracts. The government is sending a message loud and clear: Take care of long-term care needs with private insurance, because there isn t enough money to create a new entitlement program for everyone. Although some confusion still exists regarding the tax status of benefits received, this new law should help insurers and their producers to better meet their clients needs and to encourage consumers to make the decision to protect themselves rather than expecting the government to cover these expenses when the need for LTC services arises. (A copy of the section of HIPAA regarding LTC is in the Appendix of this book) SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 73

75 THE CONTINUING EVOLUTION OF LONG TERM CARE COVERAGE Although long-term care insurance policies aren t a recent innovation, however, quality long-term care insurance is a relatively new development. As the need for long-term care insurance has grown, insurers have reevaluated their products and have responded with coverages that are better designed, less restrictive and more comprehensive than their early counterparts. More and more insurance companies are beginning to offer this quality coverage as the need for it continues to grow The insurance industry has long recognized the need for long-term care insurance coverage. However, when long-term care products were initially developed, they were filled with restrictions and limitations such as: A three-day prior hospital stay was required before nursing home benefits were payable. There were limitations on the length of time after a hospital stay the recipient could wait before entering a nursing home and still qualify for benefits. Alzheimer s disease or similar forms of senility or irreversible dementia were seldom covered. Certain types or levels of care were required before custodial care was payable. Contracts were not always guaranteed renewable. Inflation protection was not always available. These policies were first offered during the 1960 s and 70 s, but significant sales did not occur until 1985, when there were approximately 125,000 policies in force. The emphasis was on the individual market. Serious development of the group market did not occur until the late 1980 s. In 1980, only about one dozen companies offered LTC coverage in this country. Today, there are over 100 companies marketing LTC insurance products on both on an individual and group basis, as well as LTC riders attached to life insurance contracts and annuities. Competitive pressures and consumer demands encouraged insurers to offer more features and benefits in order to attract more policyholders. State regulatory intervention played an important role in assuring consumers that LTC policies would meet minimum standards to qualify for state approval. Today most long-term care insurance policies cover skilled, intermediate and custodial care in state-licensed nursing homes as well as assisted living and/or residential care facilities. They may also cover home care services provided by home care agencies. In addition, many policies cover adult day care and other community based care. Agents need to understand the continuing evolution of long-term care services and providers in the context of relating those changes to both old and new policy language. They need to keep informed about current LTC insurance requirements and recent changes in coverage. In newer SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 74

76 policies, coverage has changed due to modifications to policy definitions of covered benefits, services and ADLs. Available coverage has evolved considerably from the days when nursing home confinement or prior hospitalization were required, as insurers have increasingly become willing to provide benefits for new variations of home care, assisted living care, and other levels of care given in residential care facilities. Early LTC policies contained much more restrictive definitions than contracts being issued today. Being able to compare and analyze differences in coverage is essential if agents are to adequately serve members of the insurance, buying public, and it is especially important in replacement transactions. Agents are responsible for determining that any replacement LTC coverage they sell is appropriate. This means they must know how older policies compare to newer policies, and how an insured would be affected by changes in benefits. Because many of the recent changes broaden coverage, the changes may in fact justify a replacement transaction if new coverage can be obtained at the same cost or for a lesser premium. The LTC market will continue to evolve and mature in terms of the number of companies offering LTC coverage, the types of policies marketed and, the number of people who purchase LTC insurance. Continued growth of the market will naturally lead to new issues, problems, and policy innovations. We can expect to see additional changes in LTC benefits and policy provisions. With the cost of LTC rising so rapidly in contrast with inflation in general, it might not be long before inflation guard provisions are required in all policies, rather than just required to be offered as they are today. Some of these changes will be voluntary new options introduced as insurers compete with each other to satisfy consumer demands. Another potential source of change in the LTC insurance market is the government through legislation designed to protect consumers and continue to refine the benefits and tax codes. Agents will need to keep informed as these changes happen, however, until these changes actually occur, we need to stay focused on the LTC issues and market that exists today SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 75

77 Chapter 6 Quiz 1) Which of the following is NOT a key provision in the NAIC's Model Act and Model Regulation? a. Alzheimer s Disease must be covered b. Individual policies must have an expected loss ratio of at least 60 percent c. Policyholders must be provided with an outline of coverage d. Inflation protection must not be offered 2) The first long-term care products were offered during the. a s b s c s d s SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 76

78 LONG TERM CARE INSURANCE Long-term care insurance is a contract designed to pay for care when necessary due to the mental or physical loss of one's ability to function independently whether it is due to an injury or illness, or through the natural progression of growing old and becoming frail. This kind of insurance policy may cover non-medical care like care to help people with their daily needs, such as bathing, dressing, using the bathroom, and eating. Almost six million Americans have turned to private long-term care plans to protect their assets. Over 1,500 employers offer group long-term care coverage. Just over half of these companies have 100 employees or less. LTC BENEFIT DESIGN OPTIONS In cases where it is determined by the consumer that a long-term care insurance policy is an appropriate solution to the challenge of funding long-term care, the insurance professionals must be prepared to help the consumer select the most appropriate benefit design options. The agent must find a policy that meets the client's coverage needs and his or her budget. When an agent is proposing the purchase of a long-term care policy, he or she must help the client address four basic coverage issues: (1) How long should benefits be paid? (The length of the benefit period) (2) When should the benefit start? (The length of the waiting period) (3) How much should be paid? (The maximum benefit amount) (4) Should the policy cover facility care only or include care for home and community care services? SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 77

79 These are some of the variables consumers need to consider. No one can know how long they may be confined, or whether they ever will be. Decisions about whether to buy full daily coverage or partial coverage, and the length of elimination and benefit periods, are often based on cost comparisons of different options and the consumer's perception about whether it is more important to have a greater degree of security for a shorter period of time or a lesser degree of security for a longer period of time. Plan design and policy features may vary from one carrier to another. Some policy provisions are required by law and some are options which can be added to enhance the basic coverage. Adding such options to a policy may result in a premium increase. Not all options are offered by all companies or in all states. Typical long-term care policy features and options include: Types of Policies: Facility Only Home Care Only Comprehensive Benefit Period Daily Benefit Amount Elimination Period (Deductible) Non-Forfeiture Option Waiver of Premium Benefit Triggers Levels of Care Care Coordination Tax-Qualified Pays only if the insured is confined to a nursing or residential care facility Pays for home care and community care but not if the insured is confined to a facility full-time Pays for care both in a nursing home or residential care facility as well as in the community and home care 1, 2, 3, 4, 5, 6 years or Lifetime (unlimited) $50 up to $300 per day or more Various options are offered by individual insurers including: 0, 7, 10, 20, 30, 50, 60, 90, 100, 180 days Provides for a return of part or all of the premium if the policy lapses or the policyholder dies. After benefits begin, the insured no longer pays the premium May apply to both home and facility care, or just to facility care Inability to perform various ADLs or Cognitive Impairment Skilled, Intermediate or Custodial for facility benefits Home Health Care, Personal Care and Homemaker services for Home care benefits Provides for assistance in assessing insured s physical and mental condition, selecting and arranging for care providers and facilities, and developing plan of care Meets the Federal guidelines for favorable tax treatment under HIPAA effective Each of these will be discussed in detail as follows: SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 78

80 LTC POLICY TYPES The types of benefits provided by any LTC policy are described in the contract. A policy may describe benefits for particular levels of care, specific types of care, or use broader benefit classifications that distinguish between institutional and non-institutional care. The vast majority of LTC policies being issued today provide benefits for each of these standard levels of care, but this is not true in all cases. Agents and buyers of LTC insurance need to be aware of the benefits actually provided by any policy under consideration. Regardless of whether a policy is qualified or nonqualified, long-term care coverage permitted for sale in most states fall into three general classes: A policy that covers institutional care only, usually referred to as a "nursing facility only" policy. Some of these policies also cover care in Assisted Living Facilities or Residential Care Facilities or they may offer this as an option at additional premium. An LTC policy under which benefits are limited to home care services including community-based services, usually referred to as a home care only policy. A policy providing benefits for both institutional care and home and community care often referred to as a Comprehensive policy. These are general classifications only. Within each class of policy variations may be found in the types of benefits provided and the amount of coverage. The distinctive feature that determines which class a particular policy falls into is the nature of the benefits being provided. Different names may be used in different states for the same types of policies. Providers of services, such as: skilled nursing facilities, intermediate care facilities, and home health agencies should be defined in the policy in relation to the services and facilities they provide and the license or degree required of those providing or supervising the services BENEFIT PERIOD When choosing the benefit period, how many years of benefits should the applicant select? Common options are two, three, four and six years, with some companies offering unlimited lifetime benefit periods. The length of time that benefits are paid is expressed in years, but companies actually count the number of days that add up to the number of years. Thus, a two-year plan will pay for 730 benefit days. The longer the benefit period, the higher the premium (all other factors being equal). Lifetime benefits provide the ultimate in peace of mind in that the insured will never run out of benefits regardless of the length of time care is needed. However, since 90% of nursing home stays are under 4 years, a four or five-year benefit period meets most people s needs. Lifetime benefits, or even a benefit period of four or five years can be prohibitively expensive for many people. Reducing the benefit period to three or even two years can cut the premium significantly, often as much as 30 to 50 percent of the same policy offering lifetime benefits. Because the average nursing home stay is 2.5 years, most insureds are adequately protected by selecting shorter benefit periods and can usually afford the premium SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 79

81 When the applicant chooses less than lifetime benefits, he or she might consider a policy that offers a restoration of benefits clause. Under this policy provision, if the insured receives care in a nursing facility and recovers, the policy benefit is restored to its original level after the insured is certified treatment-free for a period of at least six months. A restoration of benefits clause helps to prevent short nursing home stays from using up the coverage, making the choice of a lifetime benefit less important. Be careful when using the words lifetime benefit however. Many policies use the phrase to refer to the total dollar amount of coverage that can be used over the insured s lifetime (a lifetime limit expressed in dollars). Other companies use the phrase to mean unlimited dollar amount of benefits that will last for the insured s entire lifetime and will never run out as long as the insured is alive. Many insureds have purchased policies with lifetime benefits that ran out because they were not unlimited lifetime policies! Some long-term care policies provide an integrated pool of dollars (a single dollar amount that may be used interchangeably for any home, and community based services, or facility care covered by the policy or certificate. Some insurers sell policies with separate benefits, for example, 4 years facility care and 2 years home care. An insured that only uses 1 year of home care then transfers to a facility, would lose the unused 1 year of home care and could not use its value to increase the amount of facility care. With the pooled approach the insured can use any amount of the total for any of the covered services as long as there is still money in their pool of dollars. There can be no limit on any specific covered benefit except for daily, weekly, or monthly limit set for home, and community based care and for the limits for facility care. The insurance company is not prohibited from imposing limitations for reimbursement of actual expenses and incurred expenses up to daily, weekly, and monthly limits. BENEFIT AMOUNT The benefit amount is the number of dollars an insurer pays a claimant. Reimbursement plans reimburse the insured for the actual daily costs while indemnity (also known as per diem ) plans pay a stated daily benefit regardless of the amount the insured actually spends for care. With both types, the higher the benefit amounts to be paid, the higher the premium. Policies can vary as to whether they apply a daily, weekly or monthly limit to the home and community care benefit. The monthly or weekly limits would provide the greatest flexibility for the insured in that they would not be limited to a specific amount per day but could use the entire weekly or monthly benefit as needed. For example, John has an $1800 monthly home care benefit. He is gets therapy only 3 days per week and has no care on the other 4 days. As long as his total monthly expenses do not exceed $1800 all of it is covered. With a per diem policy, he would only be paid a specified amount per day and only for the days in which he received covered care. Also with daily benefit policies, on the four days he did not receive care, he would be paid nothing. In choosing the daily benefit amount clients should begin with the average cost of room and board in a facility in their current area, then add an amount for ancillary services and supplies. Some people will want to purchase insurance to cover only part of the risk and self-insure the rest, planning to use income and investments to cover the difference. In any case, this is a decision that should be given adequate thought, weighing the cost of full coverage against the cost savings of self-insuring part of the risk SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 80

82 ELIMINATION OR WAITING PERIOD The Elimination Period works like a deductible stated in time rather than dollars. The insured will not receive benefit payment for a certain number of days at the beginning of a period of care, even though they are receiving services covered by the policy. The insured has a choice of how many days deductible" they want on their policy, and the number of days has a direct impact on the policy premium. The longer the elimination period, the lower the premium. Remember, however, each day relates to a specific amount the insured will have to pay out of pocket for care. Most companies offer elimination periods ranging from days, with 30, 60 & 90 being the most common. The agent must advise the insured carefully on this issue and the choice should be made very carefully! For example, with a daily benefit of $100 per day, the out-of-pocket difference between a 30-day and a 90-day elimination period is $6,000 now. Assuming inflation of 5% compound, and assuming an average of 15 years between purchase and use of an LTC policy, the difference in the out-of-pocket cost at the time of claim would be more than $12,000! This should be compared to the difference in the premium over the same period of time to see if the savings in premium justifies the longer elimination period and higher out-of-pocket cost later on. Usually shorter elimination periods are the best value overall. The plan's definition of the elimination period can require consecutive days or it can allow the insured to accumulate days over a period of time. The longer the amount of time given to accumulate days towards the elimination period, the more liberal the plan. Some policies do not impose a waiting period for home and/or community care whereas other policies impose the waiting period before any covered benefits are payable. An elimination period that may be satisfied only once during the lifetime of the policy is preferable to one that requires that the elimination period be re-satisfied every time the insured files a claim. Usually long-term care policies cannot contain a provision establishing a new waiting period in the event existing coverage is converted to, or replaced by, a new or other form with the same insurer, except when there is an increase in benefits voluntarily selected by the policyowner SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 81

83 INFLATION PROTECTION Nursing home costs are likely to continue to increase over time, and long-term care insurance can help to offset the increasing costs. The NAIC Model Act and most states require all insurers to offer a way to increase benefits. Including inflation protection in a long-term care policy, however, will increase the cost of the policy, but applicants may reject the offer after careful explanation by the agent. The increase in long-term care costs generally surpasses the increase in the Consumer Price Index. At even a modest rate of inflation, nursing home care costs could reach $200,000 a year or more within the next 30 years. For people on a fixed income, as many retirees are, that kind of expense could wipe them out financially in practically no time at all. Long-term care insurance benefits are a safeguard against long-term care costs, but if benefits don't keep pace with costs, the result could be devastating, especially since people who purchase a long-term care insurance policy usually don't place a claim until several years later, the average delay being 15 years. One solution to this potential problem is inflation protection. Insurers usually offer to each policyowner, at the time of purchase, the option to purchase a long-term care insurance policy containing an inflation protection feature. The offer is usually not required of any of Life insurance policies or riders Some insurers offer inflation protection benefit increases that continue without regard to an insured's age or claim status. Others stop their increases at a certain age (i.e. 75 or 80) or when the coverage has doubled, or sometimes when the client goes on benefit under a claim. To fully inform the applicant of the inflation protection available with an LTC policy as well as the costs of the protection, an outline of coverage should include a graphic comparison of the benefit levels of a policy including inflation protection with a policy that does not increase benefits. This comparison should show benefit levels and premiums over a period of at least 20 years. (The difference between compound and simple inflation guard is not apparent until after the 10 th year.) It is especially important to compare the out-of-pocket costs with and without inflation protection so that client can compare the cost of inflation protection to the risk of going without it at time of claim. Some states even require a written rejection of inflation protection signed by the policyholder. If your state does not require one, it may still be in your best interest to put something in writing to prove that you did in fact offer and explain inflation protection to the applicant and that they decided not to purchase it. This might help you later if the client were to sue you for inadequate coverage due to not having this provision in their coverage. If the policy is issued to a group, the offer to protect against inflation is usually made to the group policyholder. The individuals who are covered under the policy may not be able to choose independently SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 82

84 Insurance companies use two basic methods to offer increased benefits: automatic increase riders or offers to purchase additional coverage without proof of insurability. Automatic Increase Rider The automatic increase rider increases the daily benefit annually on the policy's anniversary. The amount of increase is normally based on a predetermined rate, usually 5 percent. Companies may also use the Consumer Price Index (CPI) or the Medical CPI to determine the annual increases. The cost of the automatic increase riders is built into the policy's original premium. Insureds are prepaying for future benefits. The annual premium that includes an automatic benefit increase rider will be more expensive in the beginning than other methods of inflation protection, however, it is the least expensive option overall during the lifetime of the policy. Guaranteed Insurability Option An alternative to an automatic increase rider is a pay as you go option. An insured may purchase additional coverage in the future, usually at the insured's attained age rates and without evidence of insurability, even if his or her health has deteriorated. This option is less expensive in the beginning, but, since it requires additional premiums when the benefit actually increases, it may cost more over the life of the policy than the automatic increase rider may. Purchasing Additional Insurance For the oldest clients, (over age 75) who cannot afford the premium increase for inflation guard, another strategy might be employed. They can purchase more coverage than they currently need, for example double the daily limit, and the premium will usually be considerably lower than purchasing inflation protection. Remember, even at age 70 LTC costs can still double or triple in their remaining lifetime! Purchasing more insurance than currently needed will not completely deal with the inflation exposure, but it is certainly better than no inflation protection at all. It is best to always 0ffer inflation protection first, then if the client cannot afford it, step down to another option. Types of Inflation Protection Compound Increase: Each year, the daily maximum and lifetime maximum both increase by 5% of the previous year's amounts. Simple Increase: Each year, the daily maximum and lifetime maximum both increase by 5% of their original amounts. Compounding the rate each year provides larger annual increases and costs a little more than the simple increase. Compounding increases will double the benefit amount in approximately 15 years while simple increases take about 20 years to double SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 83

85 Monthly benefit with no inflation rider, simple or compound inflation rider and Out-of-pocket expense if long-term care costs rise at 5% compound Policy No Simple Compound Out of Year Inflation 5% 5% Pocket % compound inflation protection increases the premium an average of 70% for 65 year olds and an average of 60% for 70 year olds. 5% simple inflation protection increases the rates for 70 year olds by about 50% but it is well worth the added expense and the client will usually recoup the entire additional premium within the first 3-6 months on benefit. It is one of the best values in the world! Example: 5 years coverage with $100 a day benefit, 60 year old insured. Premium without inflation protection: $2,000 annual, with inflation protection $3,000. Over a period of 15 years the insured would have saved $15,000 by not purchasing inflation protection. However when they went on benefit 15 years later they would have to pay the different between the amount the policy paid and the actual amount the services cost, in this case $3,000 per month. It is easy to see that in the first five months in the nursing home the client has spent all of the $15,000 they saved by not purchasing LTC insurance. Since the policy pays for 5 years of coverage, this savings of $15,000 ends up costing them many thousands of dollars in out-of-pocket expenses. When an insured does not want to pay for inflation protection, ask them where else they can invest the same amount and get 100% return on their investment after 3-6 months and then make a profit on it year after year. Chances are there aren t any! Some agents feel that lifetime coverage without inflation protection is superior to shorter (2-4 years) coverage including inflation protection. Often short and fat is better than long and skinny when it comes to LTC insurance. In other words, it is better to be fully covered for a shorter time and then eventually run of coverage and then, if care is still needed, dip into savings and assets, or request assistance from Medicaid, than to be only partially covered from the start and have to use savings and assets or assistance from others from the very first day that benefits are needed, or having to settle for types of care and/or accommodations which are way below what is desired SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 84

86 RENEWABILITY PROVISION IN INDIVIDUAL POLICIES All Individual long-term care insurance policies must contain a renewability provision. This provision should clearly disclose the term of coverage for which the policy is initially issued, the terms and conditions under which the policy may be renewed, and whether or not the issuer has the right to change the premium. If this right exists, the policy provisions should clearly and concisely describe each circumstance under which the premium may change. Individual policies must be either Guaranteed Renewable or Noncancelable. "Guaranteed renewable" means that the insured has the right to continue coverage in force if premiums are paid on a timely basis. The insurer may not unilaterally change the terms of coverage or decline to renew, except that the insurer may, in accordance with provisions in the policy, change the premium rates to all insureds in the same class. The "class" is determined by the insurer for the purpose of setting rates at the time the policy is issued. "Noncancelable" means the insured has the right to continue the coverage in force if premiums are paid on a timely basis and the insurer may not unilaterally change the terms of coverage, decline to renew, or change the premium rate. Except for riders or endorsements in response to a request made in writing by the insured under an individual long-term care insurance policy, all riders or endorsements added to an individual long-term care insurance policy after date of issue or at reinstatement or renewal shall require signed acceptance by the insured. NONFORFEITURE The purpose of a nonforfeiture provision is to provide a mechanism whereby all of the money put into a policy cannot be lost if the policyowner stops paying premiums at some future date. Federal law requires that a nonforfeiture provision must be offered to every prospective policyowner. Including a nonforfeiture provision can result in a significant increase in premiums. Since the provision must be offered, the agent will want to clearly explain the relationship between the benefit and the cost and explore with the prospect the applicability of such a provision with respect to his or her individual situation. It probably makes more sense in the case of a younger applicant (i.e ) than one who is older (i.e. 70 or over). The Model Act - requires the nonforfeiture options for a qualified policy to include at least: SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 85

87 a reduced paid-up insurance benefit; an extended term insurance benefit; a shortened benefit period; and other forms that have achieved regulatory approval. The issuer of a qualified policy can refund the premiums when the insured dies or when the policy is surrendered or canceled. However, the refund cannot be an amount greater than the total premiums paid and there can be no adjustment for interest. Contingent Nonforfeiture In some states, if you don't accept the offer of a non-forfeiture benefit, a company is required to provide a "contingent benefit upon lapse." This means that when your premiums increase to a certain level (based on a table of increases), the "contingent benefit upon lapse" will take effect. The benefits offered are: 1) a reduction in the benefits provided by the current policy so that premium costs stay the same; or 2) a conversion of the policy to paid-up status with a shorter benefit period. You may also choose to keep your policy and continue to pay the higher premium. Premium Refund at Death This benefit pays to the insured s estate any premiums you paid minus any benefits the company paid. To get a refund at death, premiums must have been paid for a certain number of years. Some refund premiums only if the policyholder dies before a certain age, usually 65 or 70. The premium refund option may also add to the cost of a policy SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 86

88 UNINTENTIONAL LAPSE OF POLICY The possibility exists that an insured may become mentally or physically impaired and forget or be unable to make premium payments. This could result in the unintentional lapse of a long-term care insurance policy just at the time when its benefits are needed most. To prevent this from happening, many insurers offer a policy provision to protect against unintentional lapse. Prospective policyowners who do not wish to include this provision in their long-term care policy usually must sign a written waiver. The policyowner may designate another individual who will receive notification should the policy be in danger of lapsing. The policyowner may change the designation once every one to two years. If the policy does lapse, many states include a provision that allows reinstatement of the policy if it can be demonstrated that the lapse was due to cognitive impairment or loss of functional capacity, and no more than five months have passed since the policy was terminated and the past due premiums are paid. DOWNGRADING OPTION TO LOWER PREMIUM Many policies include a provision that gives the policyholder the right to reduce coverage and lower premiums by: Reducing the lifetime maximum benefit. Reducing the nursing facility per diem benefit Reducing the home-and community-based service benefits Converting a comprehensive policy to a Nursing Facility Only or a Home Care Only policy SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 87

89 The premium for the policy that is reduced in coverage will usually be based on the age of the insured at issue and the premium rate applicable to the amount of reduced coverage at the original issue date, and if inflation protection was included in the original contract, it will be continued on the new policy. Some states make it mandatory that the insurers send notification of this provision if the insured is in danger or lapsing their policy and include the options available to the policyholder and the costs of each option. UPGRADING STEP-UP IN COVERAGE PROVISIONS Many insurers allow policyholder to choose to increase coverage by paying an additional premium for riders that: Increase the amount of the per diem benefits; Increase the lifetime maximum benefit; and Increase the amount of the nursing home per diem benefit and the home and community-based care benefits of a comprehensive LTC policy. The premiums for the additional riders are usually based on the insured's attained age at the time of the additions. Since the riders provide additional coverage, the insurer may require the insured to undergo new underwriting before issuing the riders. UPDATING EXISTING COVERAGE Many policies contain a provision that, in the event the insurer develops new benefits or benefit eligibility or new policies with new benefits or benefit eligibility not included in the previously issued policy, the insurer will grant current holders of its policies who are not in benefit status or within the elimination period the rights to add new benefits or benefit eligibility SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 88

90 Usually the company will add a rider to the existing policy and charge a separate premium for the new benefit or benefit eligibility based on the insured's attained age. The premium for the existing policy will remain unchanged based on the insured's age at issuance. An alternative is to replace the existing policy with a new policy in which case the premium for the replacement policy at the issue age of the policy or certificate being replaced. The insured may be required to undergo new underwriting. ALTERNATE PLANS OF CARE The focus of early long-term care policies was on reimbursing the costs of qualified nursing home stays. Later, home health care was added as a coverage feature. But long-term care services today are delivered in a variety of settings, and long-term care insurance policies have responded accordingly. Because of the number of potential facility settings, most long-term care policies today contain a provision which allows claim payments for long-term care services delivered outside the scope of the usual policy definitions. Most insurers recognize that most of these "non-covered" services are less expensive to cover than the services defined in the policy, making it easier for them to provide a means for the insured to receive this care without penalty (withholding of benefit payments). ANCILLARY SUPPLIES AND SERVICES Some long-term care policies provide reimbursement for care in a nursing facility and reimburse for per diem expenses, as well as the costs of ancillary supplies and services. It is important, therefore, when the client is considering how much of a daily benefit to purchase, that they take into consideration the additional costs of ancillary supplies and services and purchase a limit high enough to cover both the room and board and these ancillary expenses. These expenses can easily add $10 to $30 per day, or more, above the cost of room and board. EXTENSION OF BENEFITS If long-term care coverage is terminated for some reason while the insured is in benefit status, such as for non-payment, state law usually requires that benefits continue for as long as the benefit period lasts, up to the maximum benefit limit. COVERAGE FOR HOME CARE Most people would prefer to stay in their own homes when the need for care arises, however home care can easily cost as much, or more than, nursing facility care. Having a home care benefit in the LTC policy may be the only way a person can stay at home when they need care. The home care benefit may be equal to or less than the nursing facility benefit SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 89

91 Long-term care policies that provides benefits for home care and community-based services, usually include coverage for all of the following benefits: "Home health care" is skilled nursing or other professional services in the residence, including, but not limited to, part-time and intermittent skilled nursing services, home health aide services, physical therapy, occupational therapy, or speech therapy and audiology services, and medical social services by a social worker. "Adult day care" is medical or non-medical care on a less than 24-hour basis, provided in a licensed facility outside the residence, for persons in need of personal services, supervision, protection, or assistance in sustaining daily needs, including eating, bathing, dressing, ambulating, transferring, toileting, and taking medications. "Personal care" is assistance with the activities of daily living, including the instrumental activities of daily living, provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. "Instrumental activities of daily living" include using the telephone, managing medications, moving about outside, shopping for essentials, preparing meals, laundry, and light housekeeping. "Homemaker services" is assistance with activities necessary to or consistent with the insured's ability to remain in his or her residence, that is provided by a skilled or unskilled person under a plan of care developed by a physician or multidisciplinary team under medical direction. "Hospice services" are outpatient services not paid by Medicare, that are designed to provide palliative care, alleviate the physical, emotional, social, and spiritual discomforts of an individual who is experiencing the last phases of life due to the existence of a terminal disease, and to provide supportive care to the primary care giver and the family. Care may be provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. "Respite care" is short-term care provided in an institution, in the home, or in a community-based program, that is designed to relieve a primary care giver in the home. This is a separate benefit with its own conditions for eligibility and maximum benefit levels. ASSISTED LIVING/RESIDENTIAL CARE - RCFE Due to the overwhelming preference of consumers for care in an assisted living facility or residential care facilities as opposed to nursing homes, coverage for ALF and RCF care should be included in all policies today that cover nursing home confinement. Some states actually require this. Eligible providers should be defined in the policy as facilities that meet applicable licensure standards, if any, and are engaged primarily in providing ongoing care and related services sufficient to support needs resulting from impairment in activities of daily living or impairment in cognitive ability and which also provide care and services on a 24-hour basis, have a trained and ready-to-respond employee on duty in the facility at all times to provide care and services, provide three meals a day and accommodate special dietary needs, have agreements to ensure that residents receive the medical care services of a physician or nurse in case of emergency, and, have appropriate methods and procedures to provide necessary assistance to residents in the management of prescribed medications SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 90

92 The benefit amount payable for care in an assisted living facility or a residential care facility may be less than or equal to the benefit amount payable for nursing facilities. All expenses incurred by the insured while confined in a residential care facility, for long-term care services that are necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, needed to assist the insured with the disabling conditions that cause the insured to be a chronically ill individual, should be covered and payable, up to the maximum daily ALF or RCF benefit of the policy. There should be no restriction on who may provide the service or the requirement that services be provided by the residential care facility, as long as the expenses are incurred while the insured is confined in a residential care facility, the reimbursement does not exceed the maximum daily residential care facility benefit of the policy. The threshold establishing eligibility for care in a residential care facility should be no more restrictive than that for home care benefits, and the definitions of impairment in activities of daily living and impairment in cognitive ability should be the same as those for home care benefits. AMBULANCE BENEFITS Medicare or private insurance often picks up the cost of transporting patients with chronic conditions. Generally speaking, there is little advantage in purchasing ambulance benefits under an LTC policy. Nursing home staff may call an ambulance to take the insured to and from medical appointments and Medicare will not pay for the trip unless it was unsafe for the patient to travel in any other vehicle. This coverage may provide payment for such instances, but it is not worth a large additional premium. BED RESERVATION If the insured is hospitalized during a covered stay in a nursing home or assisted care facility, the company will continue to pay benefits or credit the Elimination Period for a certain number of days each year to cover charges to reserve accommodations. The number of days may vary by company and some companies also pay to reserve the bed when it is vacated temporarily under other circumstances such as going home for a visit during the holidays. CAREGIVER TRAINING If an individual needs someone to informally help him/her at home, such as a friend or family member, the company will pay the expenses of training this person or pay a percentage of the daily Home Care benefit for a pre-determined period of time. Providing the appropriate training will usually reduce the overall costs of care and treatment. HOME MODIFICATION Sometimes a ramp, lift, handrails, grab bars, wider doors, special bed or other items and devices can increase accessibility and help an individual stay at home and prolong the time before facility care is required. In accordance with the Plan of Care, the company will pay the expenses incurred for purchase or rental of supportive equipment. The lifetime maximum for this benefit will vary by company SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 91

93 RESTORATION OF BENEFIT For policyholders without unlimited benefits, this provision might be useful. Full policy benefits are restored if the insured no longer requires the assistance necessary to be eligible for benefits for six consecutive months (180 days) and their policy benefits have not been exhausted. Merely leaving the nursing home for this period of time, if the insured still requires the level of assistance, however, will not trigger this benefit under most policies. RETURN OF PREMIUM This option provides for a percentage refund of the total premiums paid less any benefits paid or payable, should one die or terminate the coverage. In general this is allowed only on NTQ policies. On TQ policies cash back, extended term, and reduced paid-up forms of nonforfeiture benefits shall not be allowed. Any refund on a complete surrender or cancellation of the contract shall be includible in gross income to the extent that any deduction or exclusion was allowable with respect to the premiums. Each company has its own version of ROP and agents must be careful to see that premium dollars are not spent on these provisions until adequate types and limits of coverage have been purchased and inflation protection has been sufficiently dealt with. SURVIVORSHIP BENEFIT FOR MARRIED COUPLES Some companies provide a paid-up policy for the surviving spouse of a deceased insured after the couple has paid premiums for a minimum number of years. This, as well as discounts for couples, is an attractive incentive for both spouses to apply for coverage. THERAPEUTIC DEVICE BENEFIT This provides benefits for the lease, rental, purchase, repair and maintenance for durable therapeutic devices such as wheelchairs and respirators. This option may or may not have benefit amounts based on the minimum daily benefit for nursing facility coverage or home care coverage. This option may or may not be subject to the elimination period. PERSONAL EMERGENCY RESPONSE SYSTEMS Many elderly people who live alone fear that they will have an accident or become ill and no one will be there to assist them. These people may be interested in small, wireless devices called personal emergency response systems. These devices are worn around the neck or wrist and, when activated, they alert the emergency room of a nearby hospital via the user's telephone. An emergency team will then call either the user or a prearranged neighbor or relative, who will check on the status of the user. These emergency systems can provide the elderly with a vital link to the outside world in difficult situations. Many policies will provide a limited benefit for these systems, usually in the neighborhood of $500 or less SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 92

94 WAIVER OF PREMIUM Even though the benefits might be continued during a claim, if the insured stops paying the premiums the policy will still lapse. If the policyholder were to recover and, at a later date, needed to re-enter a nursing home, their policy would not be available if terminated due to non-payment of the premium. The better option is to add a Waiver of Premium rider to the LTC policy, which allows an individual to stop paying premiums during the time they are receiving benefits but the policy remains in full force. A company will waive premium payments on a month-to-month basis during extended Nursing Home and other facility stays and some contracts also waive premium when the insured is receiving Home Care benefits. If the insured recovers, they must begin to pay premiums again to keep the coverage in force but are not responsible to repay any of the premiums paid under the WP rider. This is only a partial list of the many options that LTC companies offer to attract applicants. Although the right combination of bells and whistles can be a determinant in the decision to go with one policy or another, it is best to remember that without a solid base policy from a reputable company, these unique policy features can be of little use. Agents should be very careful not to sell the sizzle at the expense of the steak! EXCLUSIONS, LIMITATIONS & PROHIBITED PROVISIONS PROHIBITED PROVISIONS Owners of long-term care insurance policies are afforded certain protections under the law. The following provisions are usually not allowed in any long-term care policy: A provision that would reduce insurance benefits because of out-of-pocket expenditures by the insured or by another individual on behalf of the insured. That is, policyowners may not be subjected to any form of "means test." A provision that would cancel, non-renew or otherwise terminate the coverage based on the insured's age or the deterioration of the insured's mental or physical health. A provision allowing insurers to or refuse to renew the policies and/or increase premiums on individual insureds A provision that would establish a new waiting period, probationary period or pre-existing conditions in the event existing coverage is converted to or replaced by a new or SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 93

95 different policy with the same insurer (except in cases where the insured voluntarily selects an increase in benefits). A provision for coverage for skilled nursing care only or a provision for significantly more coverage for skilled care in a facility than coverage for lower levels of care. A provision that limits or denies benefits to policyowners who are diagnosed with Alzheimer's disease or other similar degenerative illnesses of the brain. A provision that terminates a policy, certificate, or rider, or allows the premium for an inforce policy, certificate, or rider, to be increased due to the divorce of a policyholder or certificate holder. A provision that includes an additional benefit for a service with a known market value, unless the additional benefit provides for the payment of at least five times the daily benefit and the dollar value of the additional benefit is disclosed in the schedule page of the policy. PROHIBITED LIMITATIONS FOR HOME CARE BENEFITS Most states restrictions on limitations that insurers can include in policies for Home care benefits such as: Requiring that skilled nursing or therapeutic services be used before or with unskilled services. Requiring the existence of an acute condition. Limiting benefits to services provided by Medicare-certified providers or agencies. Limiting benefits to those provided by licensed or skilled personnel when other providers could provide the service, except where state law requires prior certification or licensure. (In most cases an individual who is defined as unskilled provides homemaker and personal care services. A licensed or skilled requirement would greatly increase the cost of delivering these services and adversely impact the availability of these services.) Defining an eligible provider in a manner that is more restrictive than that used to license that provider by the state where the service is provided. Requiring "medical necessity" or similar standard as a criteria for benefits. The purpose of these prohibitions is to make benefits available when care is needed and avoid unnecessary levels of care that add to the expense of treatment. This is why skilled care cannot be required before, or in addition to, benefits are payable for unskilled care if an unskilled person can provide the necessary care. LTC policies have to provide benefits for care rendered by unlicensed providers if the state has no licensing requirements for that particular service SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 94

96 EXCLUSIONS AND LIMITATIONS Long-term care insurance policies usually contain a few limitations or conditions for eligibility which are generally set forth in a separate paragraph of the policy. The following limitations and exclusions are common, though they will vary from state to state as well as company to company: Preexisting conditions or diseases. Mental Illness without an organic basis. Alcoholism and drug addiction. Illness, treatment, or a medical condition arising out of any of the following: o o o o o War or act of war, whether declared or undeclared. Participation in a felony, riot, or insurrection. Service in the armed forces or units auxiliary thereto. Suicide, whether sane or insane, attempted suicide, or intentionally self-inflicted injury. Aviation in the capacity of a non-fare-paying passenger. Treatment provided in a government facility, unless otherwise required by law, services available under Medicare or other governmental programs (except Medicaid or Medicaid), any state or federal workers' compensation, employer's liability or occupational disease law, or any motor vehicle no fault law, services provided by a member of the covered person's immediate family, and services for which no charge is normally made in the absence of insurance. Insurers are generally not prohibited from including exclusions and limitations by type of provider or territorial limitations. Preexisting conditions If a long-term care insurance policy or certificate contains any limitations with respect to pre-existing conditions, those limitations should appear as a separate paragraph of the policy labeled as "pre-existing condition limitations". The definition of preexisting condition is usually a condition for which medical advice or treatment was recommended by, or received from a provider of health care services, within the six months preceding the effective date of coverage of an insured person. Most long-term care insurance policies cover preexisting conditions that are disclosed on the application no later than six months following the effective date of the coverage of an insured, regardless of the date the loss or confinement begins. In fact, most policies cover them immediately from the first day of coverage after the elimination period, of course. Usually long-term care insurance policies may not exclude or use waivers or riders of any kind to exclude, limit, or reduce coverage or benefits for specifically named or described diseases or physical conditions other than pre-existing conditions as described above SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 95

97 TAX QUALIFIED VS. NON-TAX QUALIFIED POLICIES Agents need to be aware of the differences between qualified and non-qualified long-term care insurance contracts, and of the potential tax consequences of each type of policy, in order to evaluate how purchase decisions and/or policy changes might affect insureds. While agents should be able to explain that there may be tax benefits under qualified policies, they should avoid giving professional tax advice. In this chapter we will review the general framework for taxation of long-term care insurance, examine some of the federal tax issues that remain unresolved, and discuss some of the tax implications due to recent IRS forms. The difference between a tax-qualified LTC policy and a non-tax qualified LTC policy lies in the coverage triggers and the tax treatment of premiums paid and benefits received. Both offer advantages and disadvantages to the consumer, who must decide which type best suits his or her plans for long-term care. SUMMARY OF TQ VS. NTQ DIFFERENCES TAX-QUALIFIED POLICIES NON TAX-QUALIFIED POLICIES 1. Premiums can be included with 1. Policyholders can't deduct any part other annual uncompensated Of their annual premiums. medical expenses for deductions from income in excess of 7.5% of adjusted gross income up to a maximum amount adjusted for inflation. 2. Benefits received 2. Benefits received will not be counted as income. may or may not count as income. The U.S. Department of the Treasury has not yet ruled on this issue. 3. Benefit triggers may be more 3. Policies can offer a different restrictive than those which combination of benefit triggers. may be allowed in non tax- Benefit triggers may not be qualified policies. The federal restricted to 2 of 6 ADLs. law requires the inability to do Some states use 2 out of 7 2 of 5 out of 6 possible ADLs ADLs. without substantial assistance. 4. "Medical necessity" can't be 4. "Medical necessity" and/or used as a trigger for benefits. other measures of disability can be offered as benefit triggers. 5. Disability must be expected to 5. Policies don't have to require SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 96

98 last for at least 90 days. that the disability be expected to last for at least 90 days. 6. For cognitive impairment to be 6. Policies don't have to require covered, a person must require "substantial supervision." "substantial supervision" to trigger benefits for cognitive impairments. STATE AND FEDERAL IMPLICATIONS Recent changes in federal law allow for the sale of long-term care policies and certificates that may be eligible for favorable federal tax treatment, if the policies and certificates conform to federal standards for eligibility, benefits, and consumer protections. The Health Insurance Portability and Accountability Act of 1996 specifies what constitutes a "qualified" long-term care insurance policy. The federal requirements as follows: The contract may only provide coverage for qualified long-term care services. The contract must be guaranteed renewable. The contract cannot have a cash value. Any premium refunds, other than those paid upon the death of the insured or complete surrender or cancellation of the contract, along with any dividends can only be used to reduce future premiums or increase future benefits. The contract must not pay for, or reimburse, any expenses paid by Medicare, except when Medicare is a secondary payer when the contract makes periodic payments that do not bear any relationship to actual expenses. Federal law defines the eligibility requirements for benefits under long-term care policies that are intended to be federally "qualified" for tax purposes. These requirements may be more restrictive than the eligibility requirements for benefits under policies issued prior to January 1, Contracts sold before January 1, 1997 were automatically granted the status of "qualified" contracts, regardless of the nature of the benefits or eligibility requirements in those contracts. However, an insured that requests material changes in such contracts may lose their tax "qualified" status. As a result of differences in federal and state laws, persons who purchase the federally tax "qualified" policies and certificates may be required to have a greater level of disability before qualifying for benefits than individuals who purchased coverage that conformed to the more permissive eligibility requirements of non-tax-qualified policies. Additionally, the federal Health Insurance Portability and Accountability Act of 1996 mandates that certain consumer protections be included in all policies that are intended to be federally tax qualified, but these standards do not apply to policies that are not federally tax qualified. The most obvious implication of the new federal tax laws is that there are some potential tax advantages for some insureds that purchase "qualified" long-term care insurance. These advantages are tempered by a number of limitations SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 97

99 In the area of premium deductibility, there are a number of significant limitations. The deduction is available only to individuals who itemize deductions on their tax returns, and most senior citizens do not. Even when they do itemize, the combined health insurance premiums and unreimbursed medical expenses must exceed the 7.5% threshold of adjusted gross income in order to qualify for a premium deduction, and many seniors would not satisfy this test, especially since they have few unreimbursed medical expenses due to Medicare and Medicare Supplements. On top of this, age limitations reduce the amount of premium to certain maximums that may be considered in the 7.5% threshold, even if the actual LTC premiums being paid are greater. In the area of benefit exemptions from tax liability TQ benefits are specifically exempt and are not taxable as income. The new IRS form 8853, in Part C, gives instructions for reporting taxable benefits received; both where the benefits are higher than the per diem benefits allowed on a tax-qualified policy or where the benefits received are from a non-tax-qualified policy. Although both policies are technically still sold, more than 90 percent of the long-term care policies sold in 2002 were tax-qualified. STATE LEGISLATION To remedy some of these discrepancies, many states passed a number of laws that have had a profound impact on long-term care insurance. Different states are doing different things at the legislative level to make LTC policies more affordable and more attractive. For example the Legislature in California decided that consumers should be given the opportunity to purchase both types of policies or certificates - those meeting the eligibility requirements of the California Insurance Code, but that are not intended to be federally qualified, and those meeting the requirements to be federally tax qualified. The laws authorize the sale in California of long-term care insurance policies that are intended to qualify for favorable tax treatment under federal law, but also require insurers offering such policies to offer "non-qualified" policies to consumers. If a company offers both types, an agent must offer both types of policies to every applicant. Other provisions are designed to assure that consumers are informed about their choices and are given enough information to make informed choices. A bill was passed during the 1995 Colorado legislative session requiring companies that sell LTC insurance to present a "Basic LTC Plan" and a "Standard LTC Plan" to each person solicited for LTC insurance. The BASIC and STANDARD plans offer three years of "bare bones" benefits paying $100 a day for nursing home care. The BASIC plan is for nursing home benefits only and the STANDARD plan pays $50 per day for home health care and adult day care in addition to nursing home benefits. Each plan has a "bed reservation" benefit. The BASIC and STANDARD plans may be an affordable option for those with more moderate income levels. Certainly some protection is always better than none. Individual states were more likely to take action on their own. Much as they did with health insurance and managed care, states will address issues that take time to come to federal attention. Medicaid costs, rising primarily due to long-term care expenditures, have caused many state legislative bodies to encourage private long-term care insurance as an alternative financing solution. Several states have implemented state tax incentives for long-term care including, AL, CA, IA, KY, ME, MD, MN, MT, NY, NC, ND, WV, VA, and UT SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 98

100 Wisconsin's legislative assembly proposed allowance of a 100 percent premium deduction to encourage the purchase of long-term care insurance. The Wisconsin Department of Health and Families Services reported the number of persons over age 85 to have increased by nearly 30 percent between 1990 and Obviously concerned with the impact of these numbers on Medicaid spending, the deductibility legislation expands on the sliding scale premium deductions allowed for long-term care insurance under HIPAA. Many states have enacted laws that if a federal law is enacted, or the United States Department of the Treasury issues a decision, declaring that the benefits paid under long-term care insurance policies or certificates that are not intended to be federally qualified are either taxable or nontaxable as income, that policyholders of long-term care insurance shall be given a onetime opportunity to exchange their long-term care policy. Grandfather Rules for Certain Pre-1997 Insurance Contracts The Health Insurance Portability and Accountability Act "grandfathered" all long-term care policies, including group policies, issued prior to January 1, 1997 that met state requirements at the time of their issuance. Such policies are considered qualified and are eligible for the same tax advantages given to qualified policies issued beginning January 1, However, the act also provides that any "material change" in the contract will be considered as the issuance of a new contract. If this "new contract" does not meet the qualification requirements that must be met by all qualified long-term care insurance policies issued beginning January 1, 1997, it will lose its qualified status. Just exactly what constitutes a "material change" was not spelled out in the law itself. The IRS, however, has given some direction in its Notice After Notice was issued, commentators recommended that certain common practices should not cause long-term care insurance contracts issued before January 1, 1997, to lose their grandfathered status. In response to these comments, the proposed regulations provide additional exceptions to the general rule that a material change in a long-term care insurance contract issued before January 1, 1997, will be considered the issuance of a new contract. The proposed regulations provide that the exercise of any right provided to a policyholder (i.e., a right that can be exercised without the issuer s consent and without other conditions such as underwriting) or the addition of any right that is required by State law to be provided by the policyholder will not be treated as a material change to a long term care insurance contract. In addition, the proposed regulations provide that the following practices will not be treated as material changes for purposes of section 7702B: (1) any change in the mode of premium payment, such as a change from paying premiums monthly to quarterly; (2) any class-wide increase or decrease in premiums for contracts that have been issued on a guaranteed renewable basis; (3) a reduction in premiums due to the purchase of a long-term care insurance policy by a member of the policyholder s family; SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 99

101 (4) any reduction in coverage (with correspondingly lower premiums) made at the request of a policyholder; (5) the addition, without an increase in premiums, of alternative forms of benefits that may be selected by policyholder; (6) the purchase of a rider to increase benefits under a pre-1997 contract if the rider would constitute a qualified long-term care insurance contract if it were a separate contract; (7) the deletion of a rider or provision of a contract (called HHS rider) that prohibited coordination of benefits with Medicare; and (8) the effectuation of a continuation or conversion of coverage right under a group contract following an individual s ineligibility for continued coverage under the group contract. Great care must be taken when considering changes of any kind to an older long-term care policy that has been grandfathered into qualified status in case the policy would lose that status and the tax advantages it affords SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 100

102 HOW BENEFITS ARE TRIGGERED Benefit triggers determine when the benefits under a long-term care policy will begin to be paid and are therefore extremely significant. Agents must be able to fully explain benefit triggers to prospective purchasers of long-term care insurance so that purchasers can make a decision as to whether they wish to purchase a qualified or nonqualified policy and so that purchasers understand exactly what is required before the policy begins to pay benefits In the past, long-term care insurance policies paid benefits when a doctor determined that it was medically necessary for the insured to be in a nursing home. Currently, Federal and state law pretty much agree on cognitive impairment as a legitimate benefit trigger for long-term care policies, though federal requirements stipulate certain tests be made to establish such impairment. The major differences between federal and state requirements come with regard to the inability to perform ADLs. Prior to HIPAA policies included from five to seven ADLs, depending on state law. Federal law now requires them to include at least five of six specifically defined ADLs (some states use all six). The federal definitions of what constitutes the inability to perform the ADLs for TQ vs. NTQ also differ. In general many feel that the federal definitions make it more difficult to qualify for coverage than do the more liberal definitions allowed by state law. TQ Benefit Triggers In every long-term care policy or certificate that is intended to be a federally qualified long-term care insurance contract and provides home care benefits, the threshold establishing eligibility for home care benefits shall be that the person be determined to be Chronically Ill. In establishing that the insured is Chronically Ill, either of these two criteria may be used: Impairment in two out of five or six activities of daily living, for a period of at least 90 days; or Severe cognitive impairment TQ ADL DEFINITIONS Until such time as these definitions may be superseded by federal law or regulation, for purposes of the ADL Trigger, taxpayers may rely on all or any of the following safe-harbor definitions contained in Internal Revenue Service Notice 97-31, issued May 6, SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 101

103 Impairment in activities of daily living means that the insured needs "substantial assistance" either in the form of "hands-on assistance" or "standby assistance," due to a loss of functional capacity to perform the activity. "Activities of daily living" in every policy or certificate intended to be a federally qualified long-term care insurance contract as provided by Public Law shall include eating, bathing, dressing, transferring, toileting, and continence; "impairment in activities of daily living" means the insured needs "substantial assistance" either in the form of "hands-on assistance" or "standby assistance," due to a loss of functional capacity to perform the activity; Substantial assistance (with respect to activities of daily living) means hands-on assistance and standby assistance. This level of assistance must be expected to last at least 90 days Hands-on assistance means the physical assistance of another person without which the individual would be unable to perform the activity of daily living (ADL). "Standby assistance" means the presence of another person within arm's reach of the individual that is necessary to prevent, by physical intervention, injury to the individual while the individual is performing the ADL (such as being ready to catch the individual if the individual falls while getting into or out of the bathtub or shower as part of bathing, or being ready to remove food from the individual's throat if the individual chokes while eating. A person is "chronically ill" in light of the ADL triggers if a licensed health care practitioner has certified that the person is unable to independently perform at least two of at least five of the six ADLs listed below for at least 90 days due to a loss of functional capacity. The "activities of daily living" to be used in policies and certificates that are intended to be federally qualified long-term care insurance shall be: Eating Dressing Bathing Toileting Continence Transferring It is important for agents to be able to explain which definitions are included in the contracts they are selling. TQ COGNITIVE IMPAIRMENT TRIGGER Under the Cognitive Impairment Trigger, a qualified long-term care insurance contract is not required to take any ADL into account for purposes of determining whether an individual is a chronically ill individual. It is possible that a severely cognitively impaired individual may be able to perform various activities of daily living without assistance but still may need substantial supervision. Impairment of cognitive ability means that the insured needs "substantial supervision" due to "severe cognitive impairment." SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 102

104 "Severe cognitive impairment" means a loss or deterioration in intellectual capacity that is Comparable to (and includes) Alzheimer's disease and similar forms of irreversible dementia, and Measured by clinical evidence and standardized tests that reliably measure impairment in the individual's: o o o Short-term or long-term memory, Orientation as to people, places, or time, and Deductive or abstract reasoning. "Substantial supervision" means continual supervision (which may include cueing by verbal prompting, gestures, or other demonstrations) by another person that is necessary to protect the severely cognitively impaired individual from threats to his or her health or safety (such as may result from wandering). Non-TQ Benefit Triggers The insured's ability to function independently is the framework for benefit eligibility. Until the passage of HIPAA, long-term care policies gave the insured three possible ways of qualifying for benefits. The three definitions for benefit eligibility are: 1. Inability to perform a certain number of activities of daily living (ADLs). The number of ADLs varied from 5 to 7. Some states used ambulating or mobility and other states did not. Some states did not include bathing in their list. Many insurers used a hands-on definition of impairment in order to trigger coverage. All TQ policies use the more liberal stand-by definition of impairment. 2. Suffering from a cognitive impairment, such as Alzheimer's or Parkinson's disease. Some states excluded mental impairments which were not organic in nature. 3. A medical necessity, as prescribed by a physician, for long-term care services. This allows the insured to qualify for benefits by meeting the requirements under any one of these definitions. For those policies with the triple-trigger definitions, this third method of qualifying is called medical necessity. This definition allows eligibility for benefits to be established if the need for long-term care services is substantiated by a physician, usually the insured's own physician. It is, in essence, a fall back provision if the need for long-term care services is warranted, but neither the first nor second method of qualifying for benefits can be achieved SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 103

105 ASSESSMENT AND CASE MANAGEMENT ASSESSMENT Under qualified policies, a licensed health care practitioner, independent of the insurer, must certify that the insured meets the federal definition of "chronically ill." When a practitioner makes a determination that an insured does not meet the definition of "chronically ill," a second assessment by a licensed health care practitioner will be allowed in some cases. The assessments must be performed promptly with the certification completed as quickly as possible to ensure that an insured's benefits are not delayed. The written certification must be renewed every 12 months. A licensed health care practitioner must develop a written plan of care after personally examining the insured. The costs to have a licensed health care practitioner certify that an insured meets, or continues to meet, the definition of "chronically ill" individual, or to prepare written plans of care, may not be applied against any lifetime maximum benefit specified in the policy or certificate. This feature is optional under NTQ policies; however, in TQ policies a "licensed health care practitioner" must be used. Licensed health care practitioner means a physician, registered nurse, licensed social worker, or other individual whom the Secretary of the United States Department of the Treasury may prescribe by regulation. CARE MANAGEMENT -- CARE COORDINATION In addition to the requirements under Federal law for assessment and development of a care plan, some policies provide care management benefits. The primary objective of Case Management is to assist frail persons of any age to remain independent in the community. The process starts through a comprehensive evaluation of each individual's needs: health, social, environmental, financial, and support systems, after which, a plan of care is designed for the individual to fit their needs in regard to level of services and costs. The plan is monitored to be sure that it is working and to determine if and when changes to the plan are required. Case management agencies usually consist of a multidisciplinary team (such as nurses; health care and social workers whose profession and training include experience and/or expertise in managing and arranging for long-term care services) under medical direction that will do the following: SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 104

106 Determine the degree to which the individual is disabled; and Assess the circumstances in the individual's residence; and Work with the individual to determine the specific services required; Develop and suggest a Plan of Care that specifies the type and frequency of all services the individual will require, the service providers, and the estimated cost of services; and Coordinate and monitor services to ensure the individual is care for appropriately. The Care Management provision is one of the most important provisions of an LTC policy. To help you understand the value of the care management benefit here s an example: A 79-year-old woman had been living alone since her husband s death two years before. She was slowing-down and the family kept close tabs on her, even though she steadfastly remained on the family farm about 150 miles from the closest relative. One day she had a massive stroke, which left her confused, unable to recognize family or friends or to speak. In addition her left side was paralyzed and she was incontinent. She was rushed to the hospital where Medicare paid for treatment, minus her deductibles and copayments (which were paid for by her Medicare Supplement). After a few days in the hospital, she was transferred to another section of the hospital, a Skilled Nursing Facility, where she was given physical and speech therapy as well as other skilled nursing services, also paid for by Medicare. After only 14 days of care in the SNF, her doctor certified that she was no longer improving and her condition was stable. This meant that, even though she was still paralyzed and incontinent, and there was no way she could take care of herself, she had to be moved or the family would have to begin paying the daily fee for the SNF. The family had long ago ruled out the prospect of long-term care insurance, as many families do, stating that if and when she ever needed help, they would provide the care for her themselves. True to their word, her daughter and son-in-law had her transferred to their residence where she was put into a twin-bed in a bedroom that had previously been occupied by one of her grandsons. Her son-in-law was 60, was not in good health himself and had a bad back so her daughter had to handle all of the heavy lifting, bathing and so on. Her daughter took early retirement from her job in order to be able to provide care for her mother, losing considerable retirement income in the process. Other family members, who worked full-time and were raising small children, were only available intermittently to help with her care. It wasn t long before her daughter and son-inlaw realized what an incredible burden it was providing 24-hour a day care to an invalid senior, no matter how much they loved her. About two weeks after they brought her home to care for her, the elderly woman tried to get out of bed by herself, fell and broke her hip on the right side. Back to the hospital she went. This time the family knew that taking care of her at home simply was not an option. They also knew what a short time they had to make so many important decisions. Where could they find out about what kind of care she would need for her condition, what was available in their community and what they could afford? They needed a lot of information and they needed it quickly. Consider how much better things would ve been if, instead of having to handle all of these emotional and financial issues by themselves, they had had the benefit of a trained, impartial SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 105

107 care manager to assist them. Someone who deals with these type of situations day in and day out and has the expertise not only to determine the patient s physical condition and to assess their needs, but is familiar with all of the facilities and services available in the area, what their cost is and is able to draw-up a comprehensive, individualized plan for her care, utilizing the best combination of formal and informal care. In fact, had this type of assistance been available, and affordable home care had been arranged to help with the heavy lifting, it might have prevented the second injury, which ultimately resigned her to a nursing home for the remaining 7½ years of her life. It could also have allowed her daughter to stay at her job long enough to earn her full retirement pension, by providing someone to take care of her mother during the day. It is hard enough dealing with this type of situation when it arises, but having to face things by yourself is much more difficult. Imagine how much more important the care management provision would have been if the women in question didn t have a family support system or if her family had all lived out of state. PLAN OF CARE REQUIREMENTS "Plan of Care" means a written individualized plan of services approved by a health care practitioner which specifies the type, frequency, and providers of all formal and informal Long-Term Care services required for the individual, and the cost, if any, of any formal long-term care services prescribed. Changes in the Plan of Care must be documented to show that such alterations are required by changes in the clients medical situation, functional and/or cognitive abilities, behavior abilities or the availability of support services. "Formal Long-Term Care Services" means long-term care services for which the provider is paid. "Informal Long-Term Care Services" means long-term care services for which the provider is not paid. In a TQ policy the insurer must pay for the cost of the assessment and reassessments, including the development of the plans of care, and cannot deduct this cost from the insured s benefit amount. The following form is an example of those used by care management agencies and/or hospital discharge workers to assess the patient s prognosis and ability to perform ADLs and IADLs. You will note that it does not merely ask yes or no questions, but rates a person s abilities or inabilities on a scale ranging from totally independent to totally dependent on others to perform the ADL or IADL. Differences in policy definitions such as stand-by vs. hands-on and the first vs. the second definition for Transferring can make a profound difference as to when or whether a policy will begin paying for care depending on the level of disability certified by these care managers. Please take a few minutes and review the definitions for the various levels of disabilities on the form. The Second Form is a sample claim form requiring the 90-day certification following the assessment. Remember, these are only samples used in this text for illustrative purposes SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 106

108 FUNCTIONAL STATUS SCORING TOOL Patient Name: Patients Address: Completed by: ADL Activity: Bathing Ambulation Transferring Toileting Dressing Eating Hygiene Estimated Period of Time for ADL Dependency: Under 90 days At Least 90 Days Cognitive Impairment: Yes No Results of diagnostic tests administered: IADL Activity: Planning, Preparing Cooking Meals Management of Medications Oral Medications: Inhalants/Mists: Injections: Management of Equipment By Patient: By Caregiver: Communication Housekeeping Transportation Shopping Laundry Type of Test: Score: Telephone Use Prognosis: Rehabilitation Potential: 1 2 Disposition: Independent with self-care Independent with care from family Requires on-going assistance: Home Health/Personal Care Adult Day Care Assisted Living Facility Care Nursing Facility Care SNF/ICF Placement Hospitalization Other: SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 107

109 Descriptions of ADL Levels Bathing 0 Independent Able to bathe self independently 1 Independent W/Device Able to bathe self with device i.e. grab bar, bath bench 2 With Minimum Assistance Able to bathe self with assistance getting into and out of tub/shower 3 With Assistance Able to bathe in shower/tub, but requires the presence of another throughout for Assistance or supervision 4 Bed/Chair Bathing Unable to use shower/tub and is bathed in bed or bedside chair 5 Dependent Unable to effectively participate in the bathing process and is totally bathed by another person Ambulation 0 Independent Able to walk independently on even and uneven surfaces without human or mechanic assistance. Able to climb stairs without railings 1 With Minimal Assistance Able to walk alone only when using a device or require human supervision/assistance to negotiate stairs, steps or uneven surfaces. 2 With Assistance Able to walk only with the supervision/assistance of another person at all times. 3 Independently Chairbound Unable to ambulate, even with assistance, but is able to wheel self independently 4 Dependently Chairbound Unable to ambulate or wheel self 5 Bedbound Unable to ambulate or be up in chair Transferring 0 Independent Able to transfer independently 1 Independent W/ assistive device Able to transfer with minimal assistance or with use of an assistive device 2 With Assistance Unable to transfer self, but able to bear weight and pivot 3 Total Transfer Unable to transfer self, unable to bear weight and pivot 4 Independently Bedbound Unable to transfer self, but able to turn and position self in bed 5 Dependently Bedbound Unable to transfer self, and unable to turn and position self in bed Toileting/Continence 0 Independent Able to toilet self independently with or without assistive devices 1 With Minimal Assistance Able to toilet only when reminded, assisted, or supervised 2 Commode Unable to get to toilet, but able to use bedside commode with or without assistance 3 Bed pan/urinal Unable to use toilet or commode, but able to use bedpan/urinal independently 4 Dependent Totally dependent in toileting SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 108

110 Eating 0 Independent Able to feed self independently 1 With Assistance Able to feed independently, but requires meal set-up, periodic supervision or assistance, liquid, pureed, or ground meat diet 2 Dependent Unable to feed self and must be supervised 3 Tube Feeding Supplement Able to eat orally and receives supplemental nutrients through NG or G-tube 4 Tube Feeding Only Unable to eat orally and is fed through NG or G-tube 5 No internal nutrition Unable to take in nutrition orally or by tube Personal Hygiene 0 Independent Able to comb and brush hair, shave or apply makeup, clean teeth or dentures, fingernail care with or without the use of assistive device 1 With minimal assistance Able to groom self when equipment is placed by another 2 With assistance Unable to perform personal hygiene without assistance 3 Dependent Unable to perform any personal hygiene activities without assistance Dressing 0 Independent Able to get clothes and undergarments from closet and drawers and dress self independently 1 With Minimal Assistance Able to dress self independently when clothes are laid out with or without assistive device 2 With Assistance Some assistance required with undergarments, snaps, buttons, etc. 3 Dependent Depends entirely on another person for dressing Prognosis 1 Excellent Full recovery is expected from this episode or illness 2 Good Partial to full recovery is expected from this episode or illness 3 Fair Partial recovery is expected from this episode or illness 4 Guarded Little recovery is expected from this episode or illness, or further decline is possible 5 Poor No recovery is expected from this episode or illness, or further decline is expected Rehabilitation Potential 1 Good Marked improvement in function status is expected 2 Guarded Minimal improvement in functional status is expected; however decline is possible SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 109

111 (Sample) INDIVIDUAL LONG TERM CARE CLAIM FORM Please print or type all information except signature Name of insured Policy number Social Security # Name of Licensed Health Care Practitioner Address: Telephone # Fax # 1. Primary Diagnosis: 2. Concurrent Diagnosis: 3. Please indicate the level of assistance needed with the activities of daily living (ADLs). Independent Supervision Physical Totally Cueing Assistance Dependent Eating: Bathing: Dressing: Toileting: Transferring: Continence: Ambulating: Manage Medication: Housekeeping: Meal Preparation: 4. Has any form of cognitive impairment been diagnosed? Yes No If yes, what specific diagnostic tests were administered? 5. What type of Long Term are you recommending? Nursing Facility Rehabilitation Facility Home Health Assisted Living Hospice Adult Day Care Certification Dates: to Plan of Treatment: 6. Are you the proprietor or employee of the recommended Long Term Care provider? Yes No "I certify that the above named insured's (1) functional capacity is expected to require or has required substantial assistance with at least 2 of the ADLs listed for a period of 90 days, or (2) cognitive impairment required substantial supervision to protect such insured from threats to health and safety." Signature of Licensed Health Care Practitioner Title Date SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 110

112 TAX ISSUES FOR LONG-TERM CARE INSURANCE The Health Insurance Portability and Accountability Act of 1996 (HIPAA), sometimes referred to as Kassebaum-Kennedy, contained a change in tax law for long-term care insurance contracts that meet certain federal standards. In general, HIPAA treats certain qualified long-term care contracts the same as health insurance for tax purposes. The premiums for these contracts are deductible in whole or in part, the benefit payments are excluded from personal income, and the unreimbursed cost of qualified long-term care services are deductible as a medical expense. The federal standards also specify the level of disability required before benefits can be paid under a TQ contract to qualify for tax advantages. These standards conflicted with those that had been required previously. Specifically, federal law restricts the payment of benefits to an inability to perform 2 out of 5 or 6 ADLs, and a certification that services will be needed for at least 90 days. Most states required companies to pay benefits when a person was impaired in 2 out of 6 or 7 ADLs and did not include the application of the 90-day requirement. There were other conflicts in regard to cognitive impairment, the severity of both the ADL and cognitive impairment triggers, and the type of assistance that could be provided under a taxqualified contact. Some companies had been paying for home care when a person needed services, regardless of whether the 2 out of 7 ADLs or cognitive impairment trigger had been met. These payments and other benefit triggers or standards such as medical necessity for benefit eligibility are not permitted in a tax-qualified contract. Contracts that were sold under state law before January 1, 1997 are automatically granted the status of a qualified contract. These older contracts enjoy all of the tax benefits of a qualified contract, regardless of the construction, benefits, or standards in those older contracts. Beginning in tax year 1997, every insurance carrier is required to report to the Internal Revenue Service (IRS) on Form 1099-LTC any benefit paid under a contract that was sold, marketed, or issued as long-term care insurance. The issuance of a 1099 form and the federal silence on the tax treatment of other long-term care contacts has generated a heated controversy among accountants, companies, agents, and consumer groups. Some argue that the law is explicit by implication and that all other long-term care contracts will be treated differently for tax purposes. They believe that the benefits from a NTQ contact will be taxable as personal income. Some believe that not only will the benefit be taxable, but the expenses for care will not be allowed as a medical deduction because they are reimbursed expenses and are for non-medical services. (Remember almost all long-term care is nonmedical) SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 111

113 It is impossible to know which of these interpretations is correct in the absence of some action by the Department of the Treasury or the Congress. This issue could be settled by one or more actions, and there are at least four possibilities: (1) Treasury could rule that all other benefits are taxable as income, and only the tax-qualified benefits are excluded from income; (2) No action or decision is made by Treasury or the Congress, and the tax treatment of other benefits simply remain undetermined; (3) Congress could clarify which benefits are excluded from income, and which are taxable in new legislation; and, (4) Treasury could make a compromise ruling that allows some benefit payments of unqualified contracts to be taxable while others are excluded from income. Tax Treatment of Long-Term Care Insurance Premiums Let us first look at the deductibility of long-term care insurance premiums. The Act allows policyholders to include the premiums for qualified long-term care insurance as an itemized medical cost on Schedule A of their federal income tax return, up to the limits shown below. Long-Term Care Insurance Deductible Long-Term Care Insurance Premiums AGE AMOUNT OF PREMIUM DEDUCTIBLE 40 or Less $ $ $1, $3, $4,660 A long-term care policy with meaningful coverage can be purchased within these limits. However, there are a number of limitations on the deduction that will preclude many policyholders from claiming the deduction, let alone realizing a tax savings. First, the right to deduct the cost of premium only has value for policyholders who itemize their deductions on their tax return. Most taxpayers do not itemize as they take advantage of the standard deduction allowed by the IRS ($7,750 for single taxpayers, $13,600 for married, filing jointly, $10,650 for head of household for 2014, except those who are blind or born before 1941). Nationally, less than 30 percent of all federal taxpayers itemize ( Statistics of Income, Department of Treasury). Even lower percentages of seniors itemize; more than likely because they do not have large mortgages on their homes, dependent children, or business deductions SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 112

114 Second, in order to be deductible, the cost of the qualified long-term care insurance premium plus other qualifying medical expenses must exceed 7.5% of the taxpayer s adjusted gross income (AGI). Many taxpayers do not have sufficient amounts of unreimbursed medical expenses to reach the 7.5% threshold. Unless the 7.5% threshold is exceeded, no deduction can be claimed. Only the portion of medical expenses that exceed 7.5% can be deducted. The amount of tax savings can be nothing or at the most very modest. As the AGI increases, it becomes more difficult to qualify for the 7.5% threshold. The taxpayer must have sufficient nonmedical deductible expenses to make it worthwhile to give up the standard deduction and itemize expenses; something most taxpayers do not have. The taxpayer must have enough other qualifying medical expenses in addition to the qualifying long-term care insurance premium, to receive the maximum tax savings available. This is something that many taxpayers do not have because of insurance benefits. With respect to premiums for non-qualified long-term care insurance, they are not deductible. Therefore, there is no tax benefit arising from these premiums. Tax Treatment of Long-Term Care Insurance Benefit Payments Now let us turn to the tax treatment of the insurance benefits a purchaser of a long-term care policy will receive as a result of filing a claim for benefits. Under the Act, the tax treatment of payments received under a qualified long-term care policy are not considered to be taxable income. Therefore, not subject to income tax except for certain per diem type reimbursements, and then only if the per diem rate exceeds certain amounts. The question naturally arises as to what is the tax status of benefits received under long-term care policies that do not meet the federal standards as qualified contracts. For example, how should a policyholder report $35,000 received from the insurance carrier for reimbursement of nursing home expenses paid by the policyholder. The insurance carrier is required to report to the IRS on Form 1099-LTC the amount paid for long-term care benefits, for the year that the payments were made. Taxpayers rarely reported benefit payments by long-term care insurers before passage of Kassebaum-Kennedy. Passage of the Act changes things for non-qualified, as well as federally qualified policies. Some believe that benefit payments from non-qualified policies should now be reported as taxable income, but the reportable insurance payments would be largely offset by the deduction of the long-term care expenses. However, the deductible medical expenses would not completely offset reporting the insurance payments as taxable income because of the 7.5% threshold for the deductibility of medical expenses. In addition, a portion of the taxpayer s standard deduction could be lost as well as subjecting benefits received under Social Security to taxation, thereby resulting in additional income tax. Some even make a harsher interpretation that a policyholder s incurred expenses for long-term care services cannot be claimed as an itemized deduction. Under this interpretation, the purchase of a non-qualified long-term care policy could result in a potentially large tax liability if benefits are received in the future SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 113

115 Until there is further clarification from the Treasury or from Congress, agents should be cautious about discussing the tax implications of either type of policy. Agents should advise the potential purchaser of a non-qualified policy to consult with his or her tax advisor to determine what his tax treatment would be for benefit payments. Tax-qualified contracts are labeled as intended to be Tax-qualified because it is possible to lose the tax status by a company s unintended failure to comply with some provision of the federal law. This language protects agents from venturing into the profession of tax advisor. Applicants should be directed to their own tax advisor for information on how they will be affected based on their own unique set of circumstances. REPLACEMENT ISSUES Agents need to do a thorough comparison of a grandfathered contract (one sold before 1/1/97) in the event that it is being replaced with another contract. There may be more favorable benefits, benefit triggers or other features that are not in a proposed contract. Agents should also direct applicants to get tax advice in the event that a premium increase result in the loss of qualified status for a grandfathered contract, whether or not the contract is being replaced. Treasury has recently ruled that a premium increase does result in a material change to the contract and the loss of favorable tax treatment. That decision could change in the future based on the opposition Treasury receives on that issue, but until then the ruling stands. Per Diem Product In 2014, the limit on tax-free benefits is $370 per day, or $135,050 per year, but this limit applies only to per diem products. Per diem products are those which pay benefits regardless of whether or not services have been performed. This limit does not apply to reimbursement products. The $370 per day limit is indexed for inflation. EMPLOYER RAMIFICATIONS Employers who pay LTC premiums on behalf of an employee will be entitled to deduct that premium as a business expense, as they do for medical expense. LTC premiums paid by an employer on behalf of an employee will not be treated as income to that employee. TAX IMPLICATIONS FOR THE SELF-EMPLOYED The bill also increases the present law deduction for 60% of health insurance expenses of selfemployed individuals to 100% (starting in 2003) over several years SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 114

116 Reporting Long-term Care Insurance Benefits To Internal Revenue Service LTC 1099-LTC Until the tax issues are fully resolved, agents must be aware that no definitive answers can be given with respect to the tax consequences of non-tq policies. Beginning with tax year 1997, insurers are required to report LTC benefit payments on form 1099 LTC. Copies must be furnished to recipients and to the IRS. The insurance companies are only required to report the benefits paid, and are not required to distinguish as to whether taxpayers for reporting whether benefits were received under a "qualified" LTC policy or not, and for reporting amounts in excess of the "per diem" limit if qualified benefits are otherwise exempt from taxation. A copy of IRS form 1099 LTC, along with its instructions, is included in the appendix. Form 8853 Although the IRS has not released a ruling that all benefits from all NTQ policies will be taxed, some taxpayers are being taxed on NTQ benefits on a case-by-case basis. The new IRS form 8853 deals with Medical Savings Accounts and Long Term Care insurance. Part C of this form requires the reporting of per-diem benefits that are above the amount allowed under HIPAA. It also states that LTC benefits received from a Non-tax-qualified policy which are not paid for accident or sickness must be reported on line 21 of the 1040 form. Several CPA firms have confirmed that many of their clients are receiving letters from the IRS when a 1099 has been filed but they have not reported the benefits on their tax returns. It seems that the IRS does intend to tax benefits from non-tax-qualified policies, when they are not used to pay medical expenses. A copy of form 8853 is included in the appendix of this book. Until there are further clarifications from the US Treasury or the Congress, agents must be very cautious about discussing the tax implications of TQ and non-tq policies, and should avoid venturing into the profession of being a tax adviser. Agents should recommend that applicants for long-term care insurance seek the advice of a professional tax adviser concerning the differences between TQ and non-tq policies, how their own circumstances might affect their tax situation, and what tax consequences might result from any contemplated policy changes. The IRS can be contacted by telephone at (800) TAX-FORM ( ) or on the Internet at SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 115

117 WEIGHING THE DIFFERENCES BETWEEN TQ & NTQ First of all there are five (5), six (6) or seven (7) activities of daily living in non-tax-qualified policies as opposed to five (5) or six (6) activities of daily living in qualified policies. You will also notice that the federal definitions are generally more restrictive than the state definitions. It may be more difficult to meet the five or six more stringent federal requirements than the six or seven Non-tax-qualified requirements with respect to the activities of daily living. There is some leeway, however, in the wording in the TQ definitions, which lessens or removes any real difference in the outcome of the definitions at claim time. Much has been made of the fact that TQ policies do not use the 7 th ADL, Ambulating. TQ policies can, however, at the insurer s option, use the inability to walk as part of their definition for Transferring. Even though this does not give 7 ADLs, the inability to walk is usually accompanied by the inability to bathe, which is covered on both TQ and NTQ. The only other definition that is considerably different between TQ and NTQ policies is that of Eating, which is usually one of the last ADLs with which persons need assistance. Most persons would have been qualified for coverage long before they need assistance with eating. The first ADL a person usually needs assistance with is bathing, which is covered under either policy. Some states, do not include bathing as an ADL, which could definitely make qualifying for coverage much more difficult than under a policy that did include bathing as part of the coverage trigger. Most contracts will require that the insured need assistance with two ADLs before coverage triggers. The need for assistance with bathing is usually followed shortly by dressing, which would also be covered, on either type of policy. Probably the main difference between TQ and NTQ policies is that the Federal law requires that the insured be certified as needing assistance with activities of daily living for a period of 90 days or longer before any benefits may be paid. This certification is completely subjective in that the physician or other medical professional must, in their best judgment, estimate that the impairment will last 90 days. If it ends up lasting less, the insured does not have to pay back the benefits received. This requirement was designed by Congress to pay for only those stays that are truly long-term, not short-term recuperative stays due to acute illness or injury. This will keep the coverage available for those situations where it is really needed and also help to stabilize the premiums. For clients who want coverage for short-term stays, a tax-qualified policy is not appropriate. Agents must make sure that clients understand that they are trading coverage for these short-term stays for possible tax consequences on the benefits. Federally qualified long-term care policies currently cannot allow a lesser requirement than severe cognitive impairment or the inability to perform at least two of the six allowed ADLs. A nonqualified policy, however, does not have to meet the federal requirements, only the state SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 116

118 requirements. The only way a policyholder can be assured of not having to deal with unfavorable tax consequences, however, is to purchase a Tax-qualified contract. Some states have passed laws which guarantee prospects that they can exchange policies when, and if, a decision is made regarding the tax status (usually as long as they are not yet on benefit). The importance of benefit triggers cannot be overemphasized. Tax-qualified or not, a long-term care insurance policy is of no use to an insured who needs benefits but is not eligible for them under the terms of the contract. It is critical for consumers and their agents to understand the impact of the definitions in the insurance policies and how they will be interpreted at the time care is needed. The way impairment is defined affects the number of persons who might qualify for long-term care services As you can see from the following table, most persons do not enter a nursing home until they are in need of more than 2 ADLs. The real difference between the two policies is in the home care area. Again, stand-by assistance is needed for home and community based care, as well as assisted living, usually long before the need for hands-on care. Significantly larger numbers of individuals are deemed impaired if disability is defined as standby assistance than if designed as requiring hands-on assistance to perform the activities of daily living. (Please refer to the assessment form.) All Tax-qualified policies define ADLs in terms of Stand-By level of disability. Some Non-Tax-Qualified policies use Hands-On, or similar language in their definitions. It is estimated that approximately twenty-five percent more persons 65 and over would qualify for insurance benefits if eligibility were defined as needing someone to standby rather than requiring the physical (hands-on) assistance of another person to perform the ADL. The result is that qualified policies may allow the policyowner various tax advantages, but the benefits may be more difficult to come by and nonqualified policies may not allow the policyowner various tax advantages but the benefits may be easier to come by. This is a trade-off that agents must make especially clear to prospects for long-term care insurance SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 117

119 PARTNERSHIP PROGRAMS FOR LONG-TERM CARE In four states - California, Connecticut, Indiana, and New York - "Partnership policies" are available. These are special policies that guarantee to protect some or all of the policyholder's assets from a Medicaid spend down so that lifetime coverage is not needed. In California, Connecticut, and Indiana, one can buy a policy that pays benefits equal to the amount of assets one wants to protect. After the insurance company pays out the benefits under the policy, the policyholder becomes eligible for Medicaid and does not have to spend down assets. In New York one can buy a policy with three years of coverage after which time one becomes eligible for Medicaid (or after six years of home care) without spending down any assets. How The Partnership Works Perhaps the most unique feature of this program is its guarantee that the State and Federal Government will provide a financial safety net should the LTC benefits provided by the Partnership policy be insufficient to meet the needs of the purchaser. Individuals who buy partnership policies are entitled to keep additional assets equal to the amount their policy pays out, should they ever need to apply for Medicaid for health or LTC benefits. Individuals who purchase Non-Partnership policies and use up their policy benefits must spend down their assets to poverty level in order to receive Medicaid assistance. A variety of product designs ranging from one year to lifetime coverage are available. The Partnership policies offer everyone high quality benefits and asset protection against the costs of LTC, including consumers who can afford lifetime coverage. Most important, however, Partnership policies provide people with moderate incomes the option of choosing a shorter duration policy with the high quality protection they need and can afford, and eliminates the fear they might end up in poverty because their LTC costs used up their policy benefits. The impoverishment protection offered by Partnership policies provides an especially good option for the elderly, who are often less able to afford high quality policies covering four years or more. Here are a few examples on how the Partnership s special asset protection feature works: SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 118

120 TABLE 1 Partnership for Long-Term Care Assets Partnership LTC Insurance Policy Payouts Medicaid Spend Down Requirement Person A $50,000 $50,000 $0 Person B $200,000 $200,000 $0 Person C $1,000,000 $500,000 $500,000 Person D $200,000 $0 $200,000 In Table 1 Person A is an unmarried man with $50,000 of savings that would have to be spent down to $2,000 to qualify for Medicaid. Without LTC insurance, this person could quickly wipe out his savings should LTC be required. Person A, however, purchased a Partnership plan that would pay out $50,000 of benefits, the average costs of a nursing home in his community for a year. Person A uses up all $50,000 of insurance benefits and still needs nursing home care. In applying for Medicaid, Person A shows the eligibility worker a form issues by his insurance company indicating a total of $50,000 of Partnership insurance benefits were paid out. Medicaid will allow Person A to keep $50,000 in additional savings and still qualify for Medicaid. Person A is in a nursing home for a year and a half after applying for Medicaid, during which time Medicaid paid out $40,000 worth of claims for LTC and other medical costs. At the time of Person A s death, Medicaid begins action to collect from his estate. However, once again, Medicaid recognizes that Person A received $50,000 of Partnership insurance benefits, which protected an equal amount of his estate against Medicaid estate collection. Person A is able to pass on $50,000 in inheritance to his heirs. Person B in Table 1 has $200,000 of savings and chose to purchase a Partnership policy that would pay out $200,000 worth of benefits, about four years of today s nursing home costs in Person B s community. Unfortunately, Person B ended up receiving services in her home for a year before spending the last 7 years of her life in a nursing home. The policy benefits of $200,000 were used up after about 6 years. When she applied for Medicaid she was able to keep an additional $200,000 of savings, and this amount was protected from Medicaid recovery in her estate at the time of her death. The money was used to provide for her granddaughter s college education. Person C anticipated having assets of $1,000,000 by the time she might need LTC, but chose to protect only a portion of her assets by purchasing a Partnership policy that would pay out $200,000 in benefits. Person C did not need her policy benefits for about 20 years after she purchased the policy. Because of the automatic inflation protection built unto the Partnership policy, both the value of the Partnership benefits and the amount of asset protection had grown to $500,000 by the time she went into a nursing home, where she remained for four years before her policy was exhausted. Person C was allowed to keep $500,000 of additional assets at the time she qualified for Medicaid. In addition, at the time she passed away Medicaid exempted from recovery $500,000 of her estate SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 119

121 Person D in the chart represents an individual who either did not purchase LTC insurance or bought a non-partnership policy. Person D ended up needing to apply for Medicaid to pay his ongoing nursing home costs, however, he was required to spend down his non-exempt assets to only $2,000 before becoming eligible for Medicaid. His home was considered exempt property and was disregarded for the purpose of qualifying for Medicaid. When he dies Medicaid placed a lien against his home, in order to recover the value of the Medicaid claims paid during the time he was in the nursing home. The following case study shows how the Partnership program can be used as part of the overall financial plan of the client: Mrs. Smith has assets of $500,000 including her home (worth about $300,000) and car, some furniture, and other personal property. She has decided to gift the house to her children and grandchildren while she is still alive, and retain a balance of $200,000 of assets in her own name until death, which will then be left to her heirs. She is healthy now, however and wants to keep the home in her name until she is sure she will no longer need to use it. The cost of a good nursing home in her area is $150 per day, not including ancillary services and supplies. She would like to receive care in her own home as long as possible but, since she is a widow and her children all work full-time, she knows this is probably not practical once full time care becomes necessary. Her income from Social Security and some investments is about $2500 per month. Here are three possible ways to use the Partnership policy in combination with her overall financial plans to reach her goals: First of all, if she could afford the premium, she should be encouraged to purchase a comprehensive Partnership policy so that she could use as much of the coverage as necessary for home care as long as it was safe and practical to do so, then have coverage available for quality nursing home care when it became necessary. If premium is a problem, possibly she should put her money into a quality nursing facility and assisted living only policy. At least she would be able to access assisted living care in Residential Care Facility. Since she has already decided to retain only $200,000 of her assets, she only needs to purchase a Partnership policy with lifetime coverage of $200,000. Since the rate for the type of nursing home she would want to enter is approximately $150 per day, she could divide $200,000 by $150 and arrive at 3.65 years of coverage. However Partnership policies are only sold in even increments of years and coverage. To protect $200,000 she could purchase: 1. 3 years of coverage (1095 days) at $180 per day -- $197,100 This would be a good choice for her if she wanted her policy to pay for all costs up until it ran out and then she would apply to Medicaid for assistance years of coverage (1460 days) at $140 per day -- $204,400 This option would be a good choice if she wanted to get the best combination of years of coverage vs. benefit per day. She would have to use some of her income to make up the difference per day SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 120

122 3. 5 years of coverage (1835 days) at $110 per day -- $200,750 This option would be her best choice if she is willing to use virtually all of her income to supplement the coverage under the policy and wants to stay on private pay longest before applying for Medicaid assistance. Each of these options does several important things for Mrs. Smith: 1. They make LTC coverage affordable. She might not have been able to afford a lifetime policy, but with the Partnership, by purchasing only 3-5 years of coverage she meets all of her objectives. 2. They protect approximately $200,000 in assets, both during her lifetime and after death from estate recovery, and, due to the inflation protection, this amount will grow each year. 3. They give her maximum freedom of choice in the type of facility and level of care and services she receives whether in a nursing facility care, home care or assisted living in a residential care facility. 4. They give her admittance to the facility she chooses, near people who want to visit her. She won t be forced to accept the first available bed in a Medicaid approved facility, possibly a great distance from friends and loved ones. When she runs out of coverage she will be able to remain in the facility of her choice (assuming it was Medicaid approved in the first place). 5. They protect her dignity and independence even when she is on Medicaid. She won t have to ask her children for access to her own money which she transferred to them. For example, if she has to leave the nursing home for a few days, once on Medicaid, and Medicaid won t pay to reserve her room while she is away, she has the money to do so herself. Children, who are in possession of the funds, might not feel that it is worth it to spend their inheritance on an empty bed, when she could get another one free when she gets out of the hospital. OTHER POLICY PROVISIONS IN PARTNERSHIP PRODUCTS While the Partnership policy offers excellent protection for everyone, it is specifically designed for individuals with moderate incomes who are unlikely to be able to afford significant rate increases or out-of-pocket expenses at the time they need LTC benefits. The following provisions are usually included in all partnership policies: 1. Inflation protection not only helps minimize out of pocket expenses due to inflation, but also proportionately increases the level of asset protection. 2. Policies cannot be sold that provide less than the minimum nursing home daily amount which is revised each year. 3. The home and community-based care benefit is usually a monthly rather than a daily benefit. The policyholder has a bucket of money to be used for home care, SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 121

123 which provides a flexible way for the policyholder to combine informal care with formal care, and reduce or avoid out of pocket expenses while maximizing the policy benefits. 4. Care Management/Care Coordination. All policyholders have the benefit of having a qualified licensed health care professional evaluate their need for care, and, with the policy holders input, develop a plan of care which lists informal and formal services necessary to help them maintain as much independence in the most efficient way possible. All treatment plans must include a non-exclusive list of providers in the community appropriate to provide the necessary care. Policyholders can also choose to have the care manager/coordinator help them access the care and monitor the appropriateness of that care. This benefit helps maximize the value of the policy benefits, as well as provide assistance to an individual and most often a family during a time of crisis. 5. Prior review of Partnership policy premiums and actuarial memorandum, is part of the Partnership policy approval process. Some states also have rate caps in place. 6. Provisions related to protecting the policyholder against possible lapse. 7. All Partnership policies have the benefit of a stringent review by expert staff at the state to help assure provisions are accurately described in a way that is most understandable by the consumer. While Partnership policies, like all private LTC insurance policies, are transportable throughout the United States, if a policyholder exhausts the policy benefits or otherwise needs to apply for Medicaid benefits for LTC, he or she will have to return to the state in which it was purchased in order to take advantage of the special Medicaid asset protection. Since other LTC policies do not provide this special Medicaid asset protection at all, and since the Partnership policies usually contain very high quality coverage, the policyholder is no worse off with a Partnership policy than any other LTC policy, even if the asset protection feature is never used. Phone numbers for the Partnership Programs in various states are: California Connecticut Indiana New York Iowa Illinois Washington SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 122

124 GROUP LONG-TERM CARE INSURANCE Many employers are unaware of the financial and emotional drain on an employee who is caring for a family member. Almost one-quarter of all workers provide some type of care for their older relatives. These people tend to give up job opportunities, turn down overtime and spend more time away from work because they must care for others. Employer-sponsored group coverage can minimize the impact that caring for family members has on an employee's well-being and job productivity. Caregiving responsibilities impact on job performance Workday interruptions to handle emergencies Absenteeism Increased employee stress often resulting in health-related problems Increased necessity for time off and leaves from work Decreased willingness to relocate or travel for work Decisions to cut back to part-time or leave the work force Decrease in motivation and morale due to pressures outside the workplace Decline in productivity Replacement costs The annual price tag for employers is somewhere around $30 billion. Long-term care insurance can provide a solution to employees with elder care needs by giving the employee peace of mind that the parent or in-law can receive high quality care while the employee is at work. The National Alliance for Caregiving/AARP study showed the following sacrifices made by employed caregivers who provided help with two or more Activities of Daily Living for an average of 56 hours a week. Changed Daily Schedule - 64% Gave Up Work Entirely - 30% Took Leave of Absence - 26% Worked Fewer Hours - 25% Chose Early Retirement - 15% Lost Any Job Benefits - 11% Turned Down a Promotion - 10% SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 123

125 Of all caregivers 54% had to make changes at work to accommodate caregiving and 30% had to give up work entirely. Even long-distance caregivers who live more than an hour away from their older family members devote an average of 35 hours a month, to providing or arranging housekeeping, meals and other services for these aging family members. Among all caregivers, 21% have provided care for five to nine years, and 10% for 10 years or more, and 69% less than 5 years. Seven in 10 caregivers provide care to just one person, 23% take care of two people and eight percent care for three or more people. Of those involved in intense caregiving situations, nearly half were employed and three-fourths of then worked more than 30 hours per week. The average length of time these working caregivers have been providing care is 7.9 years and 28% have been at it longer than 10 years. Half of those remaining expect to be providing care more than ten years! The most reported emotion is a sense of isolation. Three out of five of these caregivers reported they were depressed, six times the national average for clinical depression and particularly those who provided care more than 40 hours a week. Half of them were caring for a spouse, a fourth for a parent, 20% for a child and the remainder for a sibling or friend. Children caring for parents have the highest depression and lowest feeling of inner strength. Three greatest difficulties were role reversal, isolation, and loss of leisure time. Personal time - 79% Social Activities - 59% Major Expenditure - 20% Saving for Education - 14% Moving - 13% Promotion/New Job - 11% Other - 7% More than one quarter of respondents providing financial assistance for a friend or relative have used their retirement savings and 12% used money set aside for a child's education. Nineteen percent gave up a job to provide care, while another 19% took a second job. According to the National Alliance for Caregiving/AARP, the typical caregiver is a married woman in her mid-forties who works full-time. Employed caregivers providing care for severely disabled individuals (3 or more ADLs) 28 average of 36.9 hours worked each week and hours of caregiving each week. Respondents to the National Council on Aging/John Hancock survey provide hands-on care an average of 41 hours a week, 18% provide 50+ hours and 12% provide 90 or more hours per week. The really hard part comes when caring for children and parents or grandparents happens simultaneously. (Forty-one percent of caregivers in the AARP study had one or more children under age 18 living at home.) SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 124

126 Caregiving may turn out to be the biggest threat to the women's movement in the next century. Today, the American female is projected to spend more years taking care of aging family members than raising her own children. Long-term care insurance may be the only thing that allows an adult child to continue a career or even keep a marriage from falling apart from the strain of a caregiving need of a very long duration. The Growth of Group LTC Insurance While LTC insurance was initially issued almost exclusively on an individual basis, it is now widely available as a form of group insurance. Group long-term care policies may be issued on a true group basis the same as for group life or health with the employer or association being the master policyowner and the individual insureds receiving certificates testifying to their insured status. Another method may be individual policies issued to the members of the group policies that each member individually owns. Group LTC is different from most group insurance you are accustomed to selling. Most group LTC plans give employers the option of either funding the plan or acting as a sponsor who channels the employees' premiums to the insurer. Typically, employees pay the majority of the premium. Individual and group long-term care policies share many characteristics. Let's look at some differences that are important in group long-term care coverage. One of the potential advantages to group LTC coverage is that eligibility for participation in the group plan may be broader than eligibility for individual policies. Under group plans, eligibility for coverage is often extended to active employees and their spouses, retired employees and their spouses, and the parents of employees and their spouses. Coverage may therefore be available in the group market persons who would not be eligible for coverage in the individual market, or who could not afford individual coverage because of its cost. There are also potential disadvantages to group LTC coverage. Strict requirements apply to individual policies that do not apply to all forms of group coverage. The same range of benefits (both required and optional) may not be available under group coverage. Most significantly, group coverage may be less secure than individual coverage in terms of cost or continued coverage, because renewal is not guaranteed. A group sponsor has the right to change insurance companies, replace the group policy with another policy, or to terminate the group plan entirely. ELIGIBLE GROUPS The following groups are usually eligible for group long-term care insurance: employers or labor organizations SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 125

127 professional, trade, or occupational association for its members or former or retired members An association or a trust or the trustees of a fund established, created, or maintained for the benefit of members of one or more associations. The group offering long-term care insurance must be a legitimate group and not just one that has been formed primarily for the purpose of selling and/or obtaining group long-term care coverage. An agent should take care in establishing a group's credentials before undertaking a solicitation for group coverage. QUALIFIED GROUP POLICIES In addition to all the requirements of federally qualified policies already discussed, the requirements unique to group long-term coverage are as follows: They may not be offered as part of a "cafeteria plan." Long-term care expenses cannot be reimbursed under a Section 125 flexible-spending plan. Group policies issued prior to January 1, 1997, are allowed to remain in force and will be treated as federally qualified long-term care insurance contracts under the grandfather rules issued by the United States Department of the Treasury in accordance with the Internal Revenue Code. In most states, a certificate of insurance must be issued to each insured group member that includes the following information: the principal LTC benefits and coverage provided by the group policy the principal exclusions, reductions and limitations contained in the policy the terms under which the policy may be continued or discontinued, including any reservation of a right to change premiums A statement that the group master policy, and not the certificate, determines the governing contractual provisions of the coverage An explanation of the insured's rights regarding continuation, conversion and replacement CONTINUATION AND CONVERSION Group LTC insurance usually provides for continuation or conversion of coverage for individual insureds if the group coverage terminates for any reason except: failure to make a premium payment or contribution, or replacement of the group policy by another policy providing identical benefits, substantially equivalent benefits, or better benefits SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 126

128 Any insured individual whose eligibility for group coverage is based on his or her relationship to another person should be entitled to continuation coverage under the group policy if the qualifying relationship terminates due to death or divorce. "Continuation coverage" means the maintenance of coverage under an existing group policy when that coverage would be or has been terminated and which is subject only to continued timely payment of the premium. "Conversion coverage" means an individual policy of long-term care insurance, issued by the insurer of the terminating group coverage, without considering insurability, containing benefits which are identical, or at least substantially equivalent, to the group coverage which would be or has been terminated for any reason. The premium for the converted policy is usually calculated on the insured's age at the time the group certificate was issued. If the terminating group coverage replaced previous group coverage, the premium for the converted policy shall be calculated on the insured's age at the time the previous group certificate was issued. TAX TREATMENT OF GROUP LTC POLICIES After HIPAA, a number of tax advantages are available for an employer-sponsored qualified LTC insurance contract. First, employer-paid premiums for employees are tax deductible for the employer. The employer contributions are excludable from the employee's income. However, such premiums are not excludable from an employee's income if they are provided through a flexible spending arrangement. Benefits paid by qualified LTC insurance are not taxable as income to the employee. These features should help you demonstrate the value of qualified LTC insurance to employers and their employees. As always, agents are cautioned to consult the laws in their individual states regarding policy provisions and requirements, which do vary considerably state by state SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 127

129 Chapter 7 Quiz 1) Which of these is not a benefit design option: a. The length of the benefit period b. The length of the waiting period c. The maximum benefit amount d. The amount of the premium 2) HIPAA 1996 defined a qualified long term care insurance policy by requiring all of the following EXCEPT: a. Only provides coverage for qualified long-term services b. Must be guaranteed renewable c. Cannot have cash value d. Premium refunds must be made in cash to the insured 3) A person who needs continual care and supervision due to Alzheimer s disease would qualify for coverage under which of these definitions: a. Severe cognitive impairment b. Chronic illness c. Impairment of ADLS d. Hands on assistance SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 128

130 MARKET CONDUCT & ETHICS CONSUMER PROTECTION WORKING WITH SENIORS A VERY SPECIAL MARKETPLACE! Seniors often view the insurance industry and related services in a negative light including longterm care, insurance agents, Medicare, doctors, nursing homes and other topics related to LTC insurance. This is in part from the Medicare supplement scandal resulting in a great deal of mistrust among agents. The expectation of needing long-term care strikes at the heart of personal concerns seniors have about losing one's health and economic independence. Seniors as a group are particularly vulnerable to high-pressure and scare tactics. Complicated policies, sales agents driven by substantial commissions, and the vulnerabilities of seniors are a scenario ripe for abuse. All insurance companies, agents, brokers and all others engaged in the business of transacting long-term care insurance have a duty to applicants and policyholders to act in good faith in the transaction. They should refrain from any act or practice which could be interpreted as unfair or deceptive such as twisting, high-pressure tactics or cold lead advertising and should at all times conduct themselves in a manner which will warrant the trust and confidence of the public. As legal contracts, insurance policies tend to be lengthy and contain a number of detailed clauses and provisions. Like all legal contracts, LTC policies are open to interpretation. Therefore, every provision must be set forth in clear and definite terms to protect the policyowner's and the insurer's rights. It is essential that the language be as clear and unambiguous as possible. Through the years, court decisions, legislative mandates and individual state governments have played important roles in shaping the language of insurance contracts. Long-term care policies can include not only nursing home coverage but various types of home and community coverage such as home care, home health care, adult day care, and so on. When agents review older policies of prospects, great care must be taken to explain the advantages and disadvantages of replacing those policies. A new policy may be an improvement with respect to gaps in coverage, but the premiums may be higher. Being able to explain the policy provisions of older policies and current policies and relate both to the needs of the prospect is fundamental to selling long-term care insurance SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 129

131 Agent Responsibilities To protect the interests of consumers, all insurance laws provide certain guidelines, procedures and requirements that must be followed by insurance agents, brokers and insurance companies in the marketing, solicitation and sale of long-term care insurance. Any individual or entity that is engaged in the business of long-term care insurance, owes a policyholder the duties of honesty, good faith and fair dealing. The conduct of an insurer, agent or broker during the offer and sale of a policy before it is purchased is relevant to any action alleging a breach of these duties. This means that any aspect of the insurance professional's conduct during the solicitation and sale of an LTC policy can be subject to disciplinary review. This includes the requirement that agents and brokers make reasonable efforts to determine the appropriateness of a recommended long-term care policy purchase or replacement and to understand how a particular policy might relate to the applicant's ability to utilize its benefits. A breach of these duties may be used in an insurance department administrative hearing or in a private cause of action by the policyowner. In some cases, a long-term care policy may not be the appropriate solution to an individual's needs. It is incumbent on the agent or broker to be familiar with alternatives to long-term care insurance so that its applicability to any given situation can be fairly evaluated. CONTINUING EDUCATION To protect the interests of consumers, agents who sell long-term care insurance in many states are required to satisfy special continuing education requirements. This helps to assure that agents have general knowledge about LTC product features, and are better prepared to advise consumers about available LTC services and insurance benefits. UNFAIR TRADE PRACTICES The Insurance Code of most every state specifically identifies and prohibits a number of general practices (such as misrepresentations, false advertising, and unfair discrimination) which are SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 130

132 classified as "unfair or deceptive acts or practices" in the business of insurance. In addition to these acts, the provisions concerning long-term care insurance identify and expressly prohibit the following marketing activities. In addition to other unfair trade practices, the following acts and practices are prohibited: Twisting. Knowingly making any misleading representation or incomplete or fraudulent comparison of any insurance policies or insurers for the purpose of inducing, or tending to induce, any person to lapse, forfeit, surrender, terminate, retain, pledge, assign, borrow on, or convert any insurance policy or to take out a policy of insurance with another insurer. High-pressure tactics. Employing any method of marketing having the effect of or tending to induce the purchase of insurance through force, fright, threat, whether explicit or implied, or undue pressure to purchase or recommend the purchase of insurance. Cold lead advertising. Making use directly or indirectly of any method of marketing which fails to disclose in a conspicuous manner that a purpose of the method of marketing is solicitation of insurance and that contact will be made by an insurance agent or insurance company. ADVERTISEMENTS Most states have requirements for filing any advertisement for long-term care insurance intended for use in that state must be filed with the Insurance Commissioner a certain time period before it is to be used. This filing requirement allows the Commissioner to review the advertising material in advance, and to disapprove any advertisement that fails to comply with advertising standards. The insurance company must generally retain copies of advertisements that are used in for a period of at least three years SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 131

133 DISCLOSURE REQUIREMENTS The preferential tax treatment afforded qualified LTC policies has necessitated certain disclosures by the issuing insurance company. In this way, the consumer will be aware of the tax implications of premiums and benefits under the policy. In most states the Agent is required to provide the client with several items, at the original solicitation, before they may even begin to complete an application for insurance. Some states require a checklist to accompany the application for long-term care insurance that enumerates each of the specific documents which the law requires be given to the applicant at the time of solicitation. OUTLINE OF COVERAGE One of the most useful documents available to consumers in connection with solicitations for long-term care insurance is the outline of coverage. An outline of coverage provides summary information about the insurance company and the product being offered. The states prescribes the language to be used in the outline, usually permitting minor changes. In many places the appropriate information, such as the benefits to be provided, limitations and exclusions, renewal and termination provisions, and the premium, must be inserted for the particular policy being proposed. The outline must specify whether the proposed policy is an individual or group contract. Generally, the outline of coverage must be a freestanding document; the information must be presented in no smaller than 10-point type, and it must not contain any material of an advertising nature SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 132

134 Usually the outline of coverage must be delivered to a prospective applicant for long-term care insurance at the time initial solicitation. This means that the agent must deliver the outline of coverage prior to presentation of an application or enrollment form. In the case of direct-response solicitations, the outline of coverage is usually delivered in conjunction with any application or enrollment form. In addition to other requirements, each outline of coverage usually is required to include the following information and statements: The name, address and phone number of the insurance company The type of policy and title of the coverage being outlined Purpose of the outline - a statement that the outline provides a brief description of the important policy features, is only a summary of coverage and not an insurance contract, and that if the coverage is purchased the insured should Read Your Policy or Certificate Carefully! A brief description of an insured's right to return a new policy within 30 days and receive a full refund of premium (this is known as a 30-day free look provision) A statement that the policy either does or does not provide for a refund or partial refund of premium if the insured dies or surrenders the policy in mid-term A statement that the policy is not Medicare supplement insurance, and that neither the insurer nor its agents represent Medicare or the federal or state government A statement that long-term care coverage is designed to provide benefits for one or more necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services provided in a setting other than an acute care unit of a hospital, such as in a nursing home, in the community, or in the insured's home If the policy is an indemnity contract, a statement that coverage is provided in the form of a fixed dollar indemnity benefit, subject to any policy limitations, waiting periods and coinsurance requirements (this statement must be modified if the policy is not an indemnity contract - for example, if it is an expense incurred contract) A summary of covered services and any related deductibles, waiting periods, elimination periods, and benefit maximums; institutional benefits provided, by skill level; and noninstitutional benefits provided, by skill level A description of limitations, exceptions and exclusions, including preexisting conditions, noneligible facilities or providers, and noneligible levels of care such as care provided by other family members A statement that the policy may not cover all LTC needs and that because costs for services will likely increase overtime, the applicant should consider whether and how benefits may be adjusted SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 133

135 The outline must indicate whether the policy is not subject to benefit increases, whether automatic benefit adjustments are provided, whether a guaranteed option to buy future benefit increases is provided and, if so, the frequency and amounts of the upgrade options A summary of terms under which the coverage may be continued or terminated, including renewability provisions, Continuation and conversion provisions for group coverage, waiver of premium provisions, and whether the insurer has a right to change the premium (if so, the circumstances under which premium may be changed must be stated) A statement that the policy provides coverage for insureds clinically diagnosed as having Alzheimer's Disease or related degenerative and cementing illnesses The total annual premium for the policy and, if the premium varies with choices among benefit options, the portion of the premium that corresponds to each benefit option A summary of any additional important policy features, such as whether medical underwriting is used A notice that information and counseling is available through various state assistance programs CONSUMER BUYING GUIDES Most States require that the NAIC Guide to Long Term Care be given to each applicant. In some states the law does not require the NAIC guide, but instead specifies that the buyer s guide developed specifically for that state be used. These guides are designed to assist the consumer in understanding LTC exposures and coverage and in comparison shopping between various policies and insurers. The guides can also be very useful to agents in the sales presentation, however, since they are an impartial source of information written by the state that helps to confirm and emphasize the need for LTC coverage SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 134

136 SUITABILITY CONSUMER SUITABILITY STANDARDS One of the most difficult decisions a family can face is to place a spouse, parent or other elderly relative in a nursing home. In addition to the emotional trauma, this decision may cause financial hardship when the family must pay for formal long-term care in a nursing home. As an insurance and/or financial planning professional, you can help to ease this burden by providing advice on the alternate means of funding long-term care. LTC policies have many similar benefits and features. However, it is the differences that both you and your clients must carefully consider. Being able to compare and explain differences among policies is just one of your important responsibilities to your clients. The purchase of long-term care policy will not necessarily ensure that someone will avoid Medicaid when they need long-term care. Whether that is to their advantage or not depends upon the particular circumstances. The 1996 NAIC Suitability Standards are required to be used by every insurer end other entity marketing LTC insurance. Even though it is the carrier's responsibility to develop and use suitability standards and train its agents on their use, agents should have a solid understanding of the basic NAIC model requirements and the reasoning behind them. To protect consumers, every insurer or other entity long-term care insurance contracts is required to: Develop and use suitability standards to determine whether the purchase or replacement of long-term care insurance is appropriate for the needs of the applicant Train its agents in the use of its suitability standards Maintain a copy of its suitability standards and make then available for inspection upon request by the Commissioner SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 135

137 The agent and insurer must develop procedures that take into consideration, when determining whether the applicant meets the standards developed by the insurer, the following: The ability to pay for the proposed coverage and other pertinent financial information related to the purchase of the coverage The applicant's goals or needs with respect to long-term care and the advantages and disadvantages of using insurance to meet these goals or needs The value, benefits, and costs of the applicant's existing insurance, if any, when compared to the values, benefits, and costs of the recommended purchase or replacement The issuer, and where an agent is involved, the agent, shall make reasonable efforts to obtain the information, including presentation to the applicant, at or prior to application, of the "Long- Term Care Insurance Personal Worksheet," contained in the Long-Term Care Insurance Model Regulations of the National Association of Insurance Commissioners. The personal worksheet used by the insurer shall contain, at a minimum, the information in the NAIC worksheet in not less than 12-point type. The insurer may request the applicant to provide additional information to comply with its suitability standards. In the premium section of the personal worksheet, the insurer should disclose all rate increases and rate increase requests for any prior policies it has sold in any state Most states require a copy of the issuer's personal worksheet to be filed and approved by the state insurance commissioner. A new personal worksheet shall be filed and approved by the commissioner each time a rate is increased. The new personal worksheet should disclose the amount of the current rate increase and all prior rate increases and rate increase requests or filings in any state. An agent who obtains information through the personal worksheet returns it to the issuer with the applicant. Neither the agent nor the insurer may sell or disclose the information in the worksheet. The issuer must apply the information from the worksheet to its suitability standards to determine whether it should issue an LTC policy to the applicant. Life Insurance riders are exempt from this section SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 136

138 Long-term Care Insurance Personal Worksheet People buy long-term care insurance for a variety of reasons. These reasons include to avoid spending assets for long-term care, to make sure there are choices regarding the type of care received, to protect family members from having to pay for care, or to decrease the chances of going on Medicaid. However, long-term care insurance can be expensive, and is not appropriate for everyone. State law requires the insurance company to ask you to complete this worksheet to help you and the insurance company determine whether you should buy this policy. Premium The premium for the coverage you are considering will be [$ per month, or $ per year,] [a one-time single premium of $.] [The company cannot raise your rates on this policy.] [The company has a right to increase premiums in the future.] The company has sold long-term care insurance since [year] and has sold this policy since [year]. [The last rate increase for this policy in this state was in [year], when premiums went up by an average of %]. [The company has not raised its rates for this policy.] Drafting Note: The issuer shall use the bracketed sentence or sentences applicable to the product offered. If a company includes a statement regarding not having raised rates, it must disclose the company's rate increases under prior policies providing essentially similar coverage. THIS SHOULD SHOW ALL RATE INCREASES IN ALL STATES ON ALL LTC POLICIES. [Have you considered whether you could afford to keep this policy if the premiums were raised, for example, by 20%?] Drafting Note: The issuer shall use the bracketed sentence unless the policy is fully paid up or is a noncancelable policy. Income Where will you get the money to pay each year's premiums? Income Savings Family Members What is your annual income? (check one) under $10,000 [$10-20,000] [$20-30,000] [$30-50,000] Over $50,000 Drafting Note: The issuer may choose the numbers to put in the brackets to fit its eligibility standards. How do you expect your income to change over the next 10 years? (check one) No change Increase Decrease If you will be paying premiums with money received only from your own income, a rule of thumb is that you may not be able to afford this policy if the premiums will be more than 7% of your income. Savings and Investments SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 137

139 Not counting your home, what is the approximate value of all of your assets (savings and investments)? (check one) Under $20,000 $20,000-$30,000 $30,000-$50,000 Over $50,000 How do you expect your assets to change over the next ten years? (check one) Stay about the same Increase Decrease If you are buying this policy to protect your assets and your assets are less than $30,000. You may wish to consider other options for financing your long-term care. Disclosure Statement The information provided above accurately describes my situation. I choose not to complete this financial information. Signed: (Applicant) (Date) [I explained to the applicant the importance of completing this information. Signed: (Agent) (Date) Agent's Printed Name: ] [Note: In order for us to process your application, please return signed statement to [name of company], along with your application.] [My agent has advised me that this policy does not appear to be suitable for me. However, I still want the company to consider my application Signed : (Applicant) (Date) Drafting Note: Choose the appropriate sentences depending on whether this is a direct mail or agent sale. The company may contact you to verify your answers. Drafting. Note: when the Long-Term Care Insurance Personal Worksheet is furnished to employees and their spouse, under employer group policies, the text from the heading "Disclosure Statement" to the end of the paragraph may be removed. If the insurer determines that the applicant does not meet its financial suitability standards or if the applicant has failed to provide the required information, the insurer may reject the application. Otherwise, the insurer will send the applicant a letter of suitability similar to the NAIC's "Long-Term Care Insurance Suitability Letter" contained in the NAIC's model regulation SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 138

140 Long-Term Care Insurance Suitability Letter Dear [Applicant]: Your recent application for long-term care insurance included a "personal worksheet," which asks questions about your finances and your reasons for buying long-term care insurance. For your protection, state law requires us to consider this information when we review your application, to avoid selling a policy to those who may not need coverage. [Your answers indicate that long-term care insurance may not meet your financial needs. We suggest that you review the information provided along with your application, including the book "Shopper's Guide to Long-Term Care Insurance" and the page titled "Things You Should Know Before Buying Long-Term Care Insurance." Your state insurance department also has information about long-term care insurance and may be able to refer you to a counselor free of charge who can help you decide whether to buy this policy.] [You chose not to provide any financial information for us to reviews Drafting Note: Choose the paragraph that applies. We have suspended our final review of your application... If, after careful consideration, you still believe this policy is what you want, check the appropriate box below and return this letter to within the next 60 days. We will then continue reviewing your application and issue a policy if you meet our medical standards. If we do not hear from you within the next 60 days, we will close your file and not issue you a policy. You should understand that you will not have any coverage until we hear back from you, process your application and issue you a policy. Please check one box and return in the enclosed envelope. Yes, [although my worksheet indicates that long-term care insurance may not be a suitable purchase,] I wish to purchase this coverage. Please resume review of my application. Drafting Note: Delete the phrase in brackets if the applicant did not answer the questions about income. No. I have decided not to buy a policy at this time. APPLICANTS SIGNATURE DATE SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 139

141 Determining the Most Appropriate Means of Funding Long-Term Care Every person should at least consider the possibility that he or she might someday need long-term care. No one can be sure that accident or illness won't come his or her way. A sizable portion of the elderly population will at some point require long-term care. But not everyone will, and of those who will require long-term care, not all will need the most expensive type-skilled nursing facility care. Agents must be careful not to overstate the facts to clients in their sales presentations. Ethical considerations demand that insurance professionals offer advice that is appropriate for the prospective client, whatever that might be. To help determine what is appropriate for each client, imagine your parents in various financial and physical conditions and consider what advice you would give them in each circumstance. For those individuals who have the financial resources to afford it, the use of personal assets may be an appropriate means of funding care. Medicaid and, to a lesser extent, Medicare may be the appropriate solution for people of modest or lesser means. LTC Insurance provides the individual with more freedom in selecting how and where long-term care is provided. Selling a long-term care insurance policy to someone who doesn't need it or can't afford it is contrary to serving the consumer's best interests. Because long-term care insurance is a fairly expensive form of protection, an insurance professional has to take a long, hard look at who are good prospects. If an individual would be impoverished after a year or so of paying for long-term care, then perhaps that person should not be considered a valid prospect. People should consider buying LTC insurance if: They have significant assets and income They want to protect some of their assets and income They want to pay for their own care They want to stay independent People should not purchase LTC insurance if: They can t afford the premiums They have limited assets Their only source of income is Social Security or SSI They often have trouble paying for necessities such as housing, food, medicine SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 140

142 REASONS FOR BUYING INSURANCE There are several valid reasons for purchasing LTC insurance. (1) Peace of mind that the need for long-term care is adequately covered. The main reason for buying any type of insurance is the reduction of uncertainty. With insurance the client exchanges a small, certain expense, that they can afford and budget, for the possibility of a large uncertain expense that could be financially devastating in the future. (2) Flexibility and freedom of choice in the selection of a nursing home. When a client uses the Medicaid system for their funding of LTC expenses, they forfeit their choice of facilities allowing the State to make those important decisions for them. (3) Independence. Most people are proud of being independent, both physically and financially and do not want to have to rely on their family, friends or the State when the need for care arises. (4) Asset protection. Many seniors have amassed considerable wealth in the form of cash, home equity, bonds, IRA s, cash value in life insurance, etc. They would much rather pass this along to their heirs than to see it all spent on LTC expenses, and then, once it ran out, to find themselves dependent on others or on the State. The most appropriate candidates for LTC insurance are probably those individuals who fall into the middle class and upper-middle class economically. Here we often find a substantial risk that may be covered by LTC insurance, the ability to afford the coverage, and a reasonable balance between the cost and the potential benefits. Members of the middle class have a lot at risk and "spending down" for Medicaid eligibility would mean drastic reductions in wealth, economic security, and lifestyle. Certainly people who are wealthy enough to pay for long-term care out-of-pocket or who are poor enough to qualify for Medicaid aren't good prospects for long-term care coverage. People who already have long-term care insurance that is adequate for their needs, are also poor prospects for long-term care insurance. But that still leaves a large number and wide variety of prospects. It s important to consider each prospect's individual situation when determining the need for long-term care insurance. Agents should be aware that the purchase of a long-term care policy will not necessarily ensure that an individual will avoid Medicaid when he or she needs long-term care. A long-term care insurance policy that doesn't pay sufficient benefits to meet long-term care costs could eventually result in the insured relying on Medicaid to pay for long-term care expenses. Agents should make this point clear to prospects and urge prospects to get outside advice from some other independent sources before making a decision on purchasing long-term care insurance. WHO SHOULD BE COVERED, AND FOR WHAT TYPE OF COVERAGE If a couple can only afford premiums for one spouse, in most cases they should cover the wife. In many respects, long-term care is a women's issue. The majority of the caregivers and the SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 141

143 majority of those being cared for over long periods are women. (Women make up three-fourths of all nursing home residents 65 years of age or older.) Women have a longer life expectancy than men Women become in great measure caregivers to their husbands until their death at which time there is no one to care for them Women are more likely to develop severe functional impairments. Women are more likely to develop chronic health conditions that limit their mobility, such as arthritis, osteoporosis etc. Women typically enter a nursing home because they live alone and don't have the spousal support at home that would help to delay, if not prevent, their entry into a nursing home To compound matters even more, a woman's average retirement savings, pensions, and Social Security is usually less than that of a man. If they can t afford the same coverage on the husband and wife, most insurers will allow the couple to choose different amounts and types of coverage. For example, the man might choose a 3-year policy and the wife lifetime. Home care might be selected for the husband to help the wife care for him at home. When a husband buys a long-term care insurance policy for himself, it is usually the wife who realizes the greatest benefit from the policy because it pays for the support she needs to keep the husband at home as long as possible. The wife who, after he is deceased, may be forced to enter a facility since no one is left at home to care for her, might be better off putting her money into a strictly facility care policy, unless she can afford a comprehensive policy. Home care often makes more sense for men than for women. An elderly husband, particularly with a younger spouse, can probably expect to receive care in the home provided by the wife. When she needs care, however, there is usually no one available to provide this care and she must enter a nursing home. Home-care coverage with a benefit paying 50% the nursing home amount adds about 30 percent to the price of a policy. 100% home-care coverage that equals the nursing home benefit can boost the price another 20 percent. Ideally, if the client can afford the premium, the benefit level for home and community care should be the same as the benefit for nursing home care since a substantial need for home health care may be more costly than a stay in a facility. The more care needed, the more varied the specialists, the greater the number of visits necessary, the higher the daily costs. The Care Management benefit can significantly stretch the dollars available to provide more care for fewer dollars than a family can usually arrange on their own. Full time home care 24 hours a day is just not reasonable," says Ann Morris, executive director of IVNA Home Health Care in Richmond, Va. That's the illusion of home care. People don't realize how expensive 24-hour home care really is." The illusion sells a lot of coverage. Agents know people fear nursing homes, and not without reason. They play off that fear, often pushing home-care only coverage as an alternative, knowing full well that the benefit won't help much if someone really needs care every day, 24 hours a day. With home-health aides costing around $20 an hour, and a typical daily benefit for SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 142

144 home-care amounting to 50% - 75% of the maximum daily benefit on the policy, a $200 maximum daily benefit on the policy with $100 - $150 allotted for home-health care would yield 5-6 hours of care would buy only about four hours of care a day. This is why the Partnership chose not to endorse home care only policies. They just don t provide the care most people need. As attractive as home care may sound, it should be considered only if there is a good support network of family and friends nearby. No matter how good the benefit, the policyholder will need people around to keep an eye on the home-health aides and chore workers who come in; it may be necessary to get volunteer help when the professional help has left for the day; and there needs to be someone to judge when home care is no longer enough. If they can't count on a volunteer support network in addition to the professional help insurance will pay for, it may not make sense to pay for home-care coverage. Instead, they should put their money into the best nursing-home only coverage they can afford. If the purchaser has a strong support network and the discretionary money to afford the comprehensive policy, they should be encouraged to purchase it not just for the home care benefit but for the community care options, such as adult day care. Someone who has Alzheimer s would need home/community care long before they needed facility care. The comprehensive policy will allow them the widest range of choices both now and into the future. And because of the pool of dollars approach, the total policy benefits can be used for home care, if desired, or any combination of home, community and facility care. FINANCIAL CONSIDERATIONS FOR PURCHASE OF LTC INSURANCE Consumer and financial experts generally agree that LTC insurance is a bad investment unless the monthly premium is 5% or less of their monthly income. For the vast number of elderly with total assets that fall between these extremes, who want to avoid falling into poverty, remain independent and not become a burden on their loved ones or wish to leave a bequest to their heirs, LTC insurance may be a wise purchase ASSESSING A PROSPECT S DAILY BENEFIT AMOUNT NEEDS Common Living Expenses Per Month Mortgage/rent $ Utilities $ Food $ Insurance $ Taxes $ Transportation $ Medical expenses $ Other expenses $ Total living expense $ Plus Nursing Home Costs $ SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 143

145 Equals Expenses When Care Is Needed $ Minus Common Sources of Income Pension $ Social Security $ Savings/investments $ Other $ Total Income $ Equals Minimum Monthly LTC Benefit $ Should a client buy a daily benefit large enough to cover 100% of the estimated daily care cost or should they co-insure a portion? The answer depends on the individual client and their situation. Most insureds will have some income that they can use to supplement the amount received from insurance to pay for their care. On the other hand, some clients will need their income to pay other expenses, particularly when they are still providing for their spouse or another relative. It is not necessary for LTC insurance to cover the entire LTC exposure in order for the benefits to be worthwhile. Purchasing longer elimination periods or lower benefit amounts, or both may reduce premium costs. In many cases buying partial coverage may change an unacceptable exposure into an acceptable exposure. Agents also need to point out that the average costs for care cited in charts in this text do not include ancillary supplies and services. If the client buys only enough benefit for room and board, they might come up short when billed for several hundred dollars per month for items such as hair and nail care, diapers, special diets, laundry, etc. In general it is recommended that people insure at least 80% of the risk in order to provide meaningful coverage at the time of need. The following example may assist you in putting together a program for your clients: Our prospects, a couple, both age 65, own their own home valued at approximately $150,000 (which has no mortgage), a car, and have a modest retirement income of $2,500 per month. They have $35,000 in a certificate of deposit. They are both concerned about not being able to afford the costs of LTC as well as being able to pass along as much of their property as possible to their children and grandchildren. The only way to be absolutely sure that they will not run out of coverage is to purchase a lifetime policy with no dollar limit, however the premium is quite steep and many people frankly can t afford it. If premium is their main consideration, the best premium value for the dollar is a policy that covers: 1. Nursing Home and Residential Care Facility only 2. A short (20-30) day waiting period 3. A two to four-year benefit period 4. The appropriate inflation choice for their age If a couple can only afford premiums for one spouse, in most cases they should cover the wife. In many respects, long-term care is a women's issue. The majority of the caregivers and the majority of those being cared for over long periods are women. If they can t afford the same coverage on the husband and wife, most insurers will allow the couple to choose different SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 144

146 amounts and types of coverage. For example, the man might choose a 3-year policy and the wife lifetime. Home care might be selected for the husband to help the wife care for him at home. When a husband buys a long-term care insurance policy for himself, it is usually the wife who realizes the greatest benefit from the policy because it pays for the support she needs to keep the husband at home as long as possible SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 145

147 REPLACEMENT ISSUES Most states require that all long-term care insurance application forms include a question designed to elicit information as to whether the proposed insurance is intended to replace any other long-term care insurance presently in force. The question or questions may be included in the actual application form, or may be contained in a supplementary application form or other document that the applicant signs and submits with the application. Notice of Replacement Upon determining that a sale will involve replacement, the insurer is usually required to furnish the applicant with a Notice of Replacement. Agents must furnish this notice prior to issuance or delivery of the policy. One copy is usually retained by the applicant and an additional copy, signed by the applicant, must be returned to the insurer. The wording of the notice usually includes: The applicant is advised that the information furnished indicates an intent to lapse or otherwise terminate existing insurance and to replace it with a new policy. The statement is followed by disclosure of the applicant's right to a 30-day free to keep the coverage or reject it with refund of all premiums paid. (For group coverage not subject to the 30-day free look requirement, the notice must be modified to specify whatever period is allowed for returning the policy and receiving a full refund.) The applicant is cautioned that present health conditions, or preexisting conditions, may not be immediately or fully covered under the new policy, while the same claim might have been payable under the present coverage. The applicant is informed that he or she has the right to seek the advice of their present insurer or agent concerning the proposed replacement, and that it may be in the applicant's best interest to do so. The applicant is warned to truthfully and completely answer all health questions on the application for replacement coverage. A warning is given that failure to include all material information could result in denial of a future claim SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 146

148 The notice may be similar to the following: "THE NOTICE TO APPLICANT REGARDING REPLACEMENT OF ACCIDENT AND SICKNESS OR LONG-TERM CARE INSURANCE" According to (your application) (information you have furnished), you intend to lapse or otherwise terminate existing accident and sickness or long-term care insurance and replace it with long-term care insurance coverage to be issued by (company name) Insurance Company. Your new coverage provides thirty (30) days within which you may decide, without cost, whether you desire to keep the coverage. For your own information and protection, you should be aware of and seriously consider certain factors that may affect the insurance protection available to you under new coverage. (1) Health conditions which you may presently have (pre-existing conditions), may not be immediately or fully covered under the new coverage. This could result in denial or delay in payment of benefits under the new coverage, whereas a similar claim might have been payable under your present coverage. (2) You may wish to secure the advice of your present insurer or its agent regarding the, proposed replacement of your present coverage. This is not only your right, but it is also in your best interest to make sure you understand all the relevant factors involved in replacing your present coverage. (3) If, after due consideration, you still wish to terminate your present coverage and replace it with new coverage, be certain to truthfully and completely answer all questions on the application concerning your medical health history. Failure to include all material medical information on an application may provide a basis for the company to deny any future claims and to refund you premium as though your coverage had never been in force. After the application has been completed and before you sign it, reread it carefully to be certain that all the information has been properly recorded. The above "Notice to Applicant" was delivered to me on: Date Applicant's Signature COMPARISON TO YOUR CURRENT COVERAGE: I have reviewed your current long-term care coverage. To the best of my knowledge, the replacement of insurance involved in this transaction materially improves your position for the following reasons: Additional or different benefits (please specify) No change in benefits, but lower premiums Fewer benefits and lower premiums Other (please specify) Signature of Agent and Name of Insurer Signature of Applicant Date Suitable replacement of existing long-term care insurance policies merits special attention. Although it is not illegal or even unethical to sell more than one LTC policy to a client, it is not prudent to sell more insurance than the client needs or to replace policies unnecessarily. As a matter of fact, in the case of a grandfathered policy, it might make more sense to leave an older policy as is and write another policy in addition to it update the client s coverage. Policy SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 147

149 replacement is closely monitored by most states and violators can face stiff penalties. In addition, replacement commissions are usually lower than those on new business to discourage agents from making replacement sales. TQ AND NON-TQ POLICIES REPLACEMENT CONCERNS Agents should be aware that issue dates of policies may affect tax-qualified status and may be an important consideration in replacement transactions. Since policies prior to January 1, 1997, were automatically granted tax "qualified" status, they may have more permissive benefit triggers than TQ policies issued after that date. Replacement with other non-tq policies or material modifications may jeopardize favorable tax status. Policies issued on or after January 1, 1997, before new TQ policies became available, will not qualify for favorable tax treatment unless later exchanged for policies that are specifically designed to comply with state and federal laws for TQ policies. Many insurers issuing Non-TQ policies during the transition period have promised to offer insureds the option to convert to TQ policies when they become available. To justify a replacement, agents must justify that the policy they are selling represents a material improvement over the one the client is replacing. Agents should seek guidance from their respective companies in order to determine what they deem as a "material improvement". The main criteria are that the insured must be substantially better off after the transaction than they were before. If this is not the case, then the agent should not be performing the replacement transaction. In replacing policies, be very careful to explain any actions that will result in the loss of TQ status on the old contract. It might be better, in some circumstances to leave a current policy in force and add another one. Again, seek the guidance of your insurer before making any changes that might result in material modifications. Effect of Material Modifications When a policy or certificate holder of an insurance contract issued prior to December 31, 1996, requests a material modification to the contract as defined by federal law or regulations, the insurer, prior to approving such a request, shall provide written notice to the policy or certificate holder that the contract change requested may constitute a material modification that jeopardizes the federal tax status of the contract and appropriate tax advise should therefore be sought. See IRS notice in the Appendix. WAIVER OF PREEXISTING CONDITIONS If a long-term care policy of certificate replaces another, usually states require the replacing insurer to waive any time period applicable to preexisting conditions and probationary periods to the extent that similar exclusions have been satisfied under the original policy or certificate. REPLACEMENT OF GROUP POLICIES Slightly different requirements apply for replacement transactions involving group LTC coverage. When individual insurance is replaced, the law requires disclosure of information and a warning notice to the individual who will make the purchase decision. When group coverage is SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 148

150 replaced, it is the group master policyholder who makes the decision for the entire group, so the law protects the individual insureds by requiring the replacing insurance company to provide substantially the same benefits without any gaps in coverage. Generally, premiums for replacement of group coverage must be based on each insured's age when the group coverage was originally issued, even if multiple replacements have been involved. If any group coverage being replaced has replaced previous group coverage, the current premium must be based on the ages of insureds under the original group policy. However, if replacement coverage offers new or increased benefits, any premium for those benefits may be calculated according to each insured's age at the time of replacement. Each state s laws should be consulted before attempting any replacement SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 149

151 CHOOSING THE RIGHT INSURER CARRIER RATINGS & STABILITY A number of organizations rate insurance companies on the basis of their financial stability and other criteria. The best known of these organizations is the A. M. Best Company that publishes Best's Insurance Reports. This volume contains statistical data and comments about the background and operations of insurance companies. Its objective is to "evaluate the various factors affecting the overall performance of an insurance company in order to provide our opinion as to the company's relative financial strength and stability to meet its contractual obligations." In making evaluations, the ratings firms consider such things as underwriting, reserves, investments, and management practices. They also consider whether a company could absorb an unusual loss or other financial shock. This information is valuable to an insurance agent who does not want to recommend contracts issued by companies whose financial stability is questionable. Obviously, insureds will be better served if agents recommend purchases from companies that are in sound financial shape. As an agent, you should be able to explain differences implied by these ratings assigned to an insurer so that the prospect understands the financial capacity of the company issuing the policy. A policy with a very low premium issued by a company with a low rating may not be such a bargain if the company is unable to meet its obligations to policyowners when they make a claim. INSURANCE COMPANY RATINGS AND THEIR MEANINGS A.M. BEST Company A++, A+ Superior, very strong ability to meet obligations A, A Excellent, strong ability to meet obligations B++, B+ Very good, strong ability to meet obligations B. B Good, adequate ability to meet obligations C++, C+ Fair, reasonable ability to meet obligations C, C Marginal, currently has ability to meet obligations D Below minimum standards E Under state supervision F In liquidation SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 150

152 Standard & Poors AAA AA A BBB BB B CCC CC,C D Superior, highest safety Excellent financial security Good Financial security Adequate financial security Adequate financial security; ability to meet obligations May not be adequate for long-term policies Currently able to meet obligations, but highly vulnerable to adverse conditions Questionable ability to meet obligations May not be meeting obligations; vulnerable to liquidation Under an order of liquidation Moody's Aaa Aa A Baa B Caa Ca C Exceptional security Excellent security Good security Adequate security Questionable security, moderate ability to meet obligations Poor security Very poor security; elements of danger regarding payment of obligations Extremely poor security; may be in default Lowest security Duff & Phelps AAA AA+, AA, AA- A+, A, A- BB+, BE, BB CCC Highest claims-paying ability; negligible risk Very high claims-paying ability; moderate risk High claims-paying ability; variable risk over time Below average claims-paying ability; considerable variability in risk over time Uncertain claims-paying ability Substantial claims-paying ability risk; likely to be placed under state supervision Various modifiers are added to assigned Best s ratings, to qualify the status of a rating. Caution is signaled by a w which means watch list. For example: B+w (very good, but watch). The rating firms occasionally differ in their opinions on the financial strength of a particular company, so one should obtain the ratings from two or more rating services before making a decision or recommendation. A.M. Best Company (900) 555-BEST (billed to telephone) or (800) 424-BEST (charged to credit card) or on the Internet at SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 151

153 Duff & Phelps, Inc. (312) or (312) or on the Internet at Fitch Investors Service, Inc. (212) or on the Internet at Moody's Investor Service, Inc. (212) or on the Internet at Standard & Poor's Insurance Rating Services (212) or on the Internet at Weiss Research, Inc. (800) or on the Internet at STATE GUARANTEE FUNDS OR ASSOCIATIONS State insolvency funds should not be used as a back-up to sales of policies from financial insecure insurers. These funds have very low maximum benefits and are usually only payable for claims, which are on-going at the time the company goes insolvent. A consumer could conceivably pay a premium for many years but not be in claim status at the time the insolvency takes place. These policyholders would probably not only lose all of the money they had paid in premium, but might very well be unable to purchase a new policy due to inability to qualify medically and/or unable to afford the premiums at their advanced age. The best protection is always a quality contract issued by a financially sound insurer with a proven track record in the long-term care industry SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 152

154 UNDERWRITING Underwriting is not an exact science. It is very subjective, and standards vary from one company to another. Also, long-term care insurance underwriting is different than life insurance or general health insurance underwriting. The first step in underwriting begins with the agent in the field and careful completion of the application. The application consists of three major sections: (1) General Information principally designed to determine whether or not the applicant is currently on Medicaid and if a replacement sale is involved. (2) Medical Information two sub-sections: the first one contains a number of questions, which if answered yes will automatically result in denial. The second one has additional medical questions which assists the underwriter in qualifying and pricing the insurance, including prescription medications and physicians. (3) Personal Profile designed to reveal information regarding the general character and lifestyle of the applicant. As an agent, it is important to find individuals with current good health that likely to continue. In order to do this successfully, one needs to know how to recognize health conditions that would be unacceptable. Field underwriting by an agent is part of the screening and qualifying process. The goal is to weed out unqualified individuals. Determining an individual's eligibility begins with understanding the underwriting guidelines of the particular company the agent has selected. Conditions like Alzheimer s, Parkinson s disease, AIDS, Multiple sclerosis, muscular dystrophy, and psychiatric disorders are uninsurable. Applicants must be ambulatory to qualify and must not need help with activities of daily living, such as bathing, dressing, toileting, transferring from bed to chair, eating or continence. Heart disease, cancer or one mild stroke can be acceptable after recovery periods of two to five years. Conditions such as hypertension are acceptable if controlled. Diabetes, late onset not juvenile, can be insurable if under control and not insulin dependent. Antidepressants may be acceptable if taken for situational depression, due to the death of a spouse for instance SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 153

155 ADDITIONAL SOURCES OF UNDERWRITING INFORMATION While some insurers rely solely on the application as a source of underwriting data, others require additional information. The most common sources of additional information generally used to substantiate application statements are: Medical Information Bureau (MIB) - For applicants who are younger (e.g. ages 40-49) in addition to standard medical records. Attending Physician Statements (APS) - Medical records review, health history & preexisting conditions Personal History Interview (PHI) - Telephone call verifying medical information on the application. Physical Measurements Information (PMI) - In person review of past and present health history. Face-to-Face Assessment - An interview, which includes questions about ADLs, past and present health any medications currently being taken, recent visits to physicians, and questions designed to test cognitive abilities. Physical Exams - May or may not be required at company discretion. PREEXISTING CONDITIONS A preexisting condition is a medical condition that existed prior to the effective date of insurance coverage. The definition of a preexisting condition is a condition for which medical advice or treatment was recommended by, or received from a provider of health care services, within six months preceding the effective date of coverage of an insured person. The definition of preexisting condition does not prohibit an insurer from using an application form designed to elicit the complete health history of an applicant, and on the basis of the answers on that application, from underwriting in accordance with that insurer's established underwriting standards. LOSS RATIO AND EXPENSE RATIO In order to monitor underwriting experience and adjust underwriting guidelines, insurance companies calculate loss and expense ratios. They also look at the combined ratio to determine whether they are experiencing an underwriting profit or loss and whether to tighten underwriting standards or increase premiums. A loss ratio is determined by dividing losses by total premiums received. An expense ratio is determined by dividing an insurer's operating expenses (including commissions paid) by total premiums received. A combined ratio is the sum of the loss and expense ratios. If a company s SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 154

156 combined ratio is under 100%, then it is making an underwriting profit. If it is 100% exactly, the company is just breaking even, and if it is over 100% the company is experiencing a loss. States have developed minimum loss ratio standards so that insureds will be sure that companies will pay out a reasonable amount in benefits compared with the premiums they take in. This prevents companies from reaping windfall profits while policyholders get little, if any, benefits for their premium dollars. In evaluating the expected loss ratio, due consideration should be given to all relevant factors, including the following: Statistical credibility of incurred claims experience and earned premium. The period for which rates are computed to provide coverage. Experienced and projected trends. Concentration of experience within early policy duration. Expected claim fluctuation. Experience refunds, adjustments, or dividends. Renewability features. All appropriate expense factors. Interest. Experimental nature of the coverage. Policy reserves. Mix of business by risk classification. Product features, such as long elimination periods, deductibles, and maximum limits. POST-CLAIM UNDERWRITING Post-claims underwriting is the practice of accepting the applicant for coverage without first performing the necessary underwriting functions, then, at the time of a claim, deciding whether or not the insured is covered. This type of business practice is highly unethical and is illegal in most states in regard to long-term care insurance. The period of time during which the insurer has the right to rescind coverage or deny benefits based on misrepresentation or fraud, the contestability period, is usually limited to two years. PREMIUM Premiums for long-term care insurance are typically based on the product, the applicant's health status and the prospect's age. The younger the buyer, the less his or her premium will be. This SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 155

157 is due to the fact that the morbidity charge within the premium is lower for younger people than for older people because of the lower risk young people represent to an insurer. Although rates vary by company, a 50 year old will usually pay about half as much as a 60 year old insured; a 60 year old insured will usually pay half the cost of a 70 year old; and a 70 year old will usually pay about one-third less than an 80 year old insured for the same insurance policy. In most cases, regardless of the insured's age at the time of purchase, the premiums charged remain level for the life of the policy, although the entire class may be increased if the policy is guaranteed renewable. Most insurers use class rates to determine premiums for LTC policies. Class rates apply an average price to a select pool of insureds that fit a similar category or classification. Insurers vary considerably in how they define a "class. Based on an insurer's claims experience, rates for the entire class may be adjusted up or down if the contract is "guaranteed renewable." However, no single policy can be experience rated or canceled because of the individual insured's age, health status or claims experience. Some LTC policies "non-cancelable," meaning that the insurer may not increase premiums under any circumstances. Rates (premiums) are the same for men and women, but are based on age. Policies are available for ages 18+ but rates usually begin in range. You are never too young for LTC insurance, Premiums are always lower and health is better at younger ages. Premium amounts will vary from company to company on the chosen the age and health status of the proposed insured as well as basis of benefits. According to HIAA, average annual premiums for a "basic" policy ($100 per day nursing home, $50 per day home care benefit, four years of coverage, 20-day elimination period) and for the same coverage with the addition of five percent compounded inflation protection would be as follows: AGE BASIC BASIC + INFLATION 40 $300 $ $409 $ $1,002 $1, $4,166 $5,895 Some insurers may offer a premium discount if both spouses purchase a long-term care policy at the same time. This discount may apply to both policies or only to the policy on the younger or older spouse. Some insurers will even give a spousal discount if both spouses apply, but only one is accepted for coverage. Most insurers will readily admit that they do not have sufficient statistical data to properly price their products. Some states have enacted laws regarding rate increases allowable, but most states have not. In those states insurers are free to price their LTC products as they see fit and increase rates as necessary. This has led to many situations where companies have entered the LTC marketplace with exceptionally low rates, bought up a great deal of market-share then increased the rates, sometimes drastically. Many of the insureds are then unable to pay the new premiums and often unable to qualify for new policies with other insurers SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 156

158 LONG-TERM CARE POLICY PREMIUMS Age 65 Age 70 Age 75 Company A $3,663 $4,600 $5,933 Company B $4,735 $6,389 $8,368 Company C $3,155 $4,305 $6,375 Company D $3,096 $3,674 $4,859 SOURCE: LONG-TERM CARE INSURANCE RATE GUIDE SAMPLE POLICY 1, TEXAS DEPARTMENT OF INSURANCE, 01/09/2015 Inadequate rates and the need to increase are generally more a function of poor underwriting prior to policy issuance than rising long-term care costs. To reduce the risk of this situation occurring, the insurers should engage in proper underwriting before issuing a policy. Again, it is important for an agent to impress on the client the importance of choosing a quality contract from an A rated carrier who has a track record in the LTC industry, especially until states put in place rate laws to protect against this type of rate making. These contracts should not only experience fewer rate increases but will be more likely to be able to pay claims in the future as well. RULES REGARDING PREMIUM COLLECTION Most states have rules regarding the maximum amount the agent can collect from the applicant along with the application. Often this is not greater than one or two month s premium. No further premiums may usually be collected until the policy is delivered to the applicant, even if the premium will eventually be paid on an annual basis. 30-DAY FREE LOOK Virtually all states require that individual long-term care policies must provide for a 30-day free-look period. This means that, for any reason, an applicant can return the policy within 30 days of having received it and request a full premium refund. The insurer must refund all premiums paid plus any other fees paid to acquire the policy within a specified time (usually 30 days) after the policy is resumed. "Buy Now" Motivation $100/day, 90 day elimination period, 5 year benefit period Age Annual Years Total Total Premium To Age 70 Premium Pd Benefts 25 $ $ $182, $ $ $182, $ $ $182, $ $ $182,500 If the real objection is cost of coverage, (which it usually is) you can show clients two scenarios and ask them which one they would rather have happen: SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 157

159 1. The client pays the premium for LTC insurance for a certain number of years resulting in an outlay of a specific amount of money over their lifetime, in a manner they can budget and plan for. (Use dollar examples) 2. The client pays the actual cost for long-term care when needed using their age and the effects of inflation. Then show them how long it will take for them to recoup the entire premium once they go on benefits. Next ask the client which expense would be more likely to alter their retirement lifestyle and other plans for their assets. (See Chart Below). Age at Premiums Daily Benefit Number of Days on benefit Issue Paid 5% Compound to recoup entire premium paid 55 $15, $ $34, $ $53, $ The above calculations are based on $480/day benefit, with 100% home health, three year, 5% compound inflation rider and 90 day elimination period with spousal and preferred discounts. Please remember that this, like all of the charts in this book, is for illustration purposes only. It is important to use the actual premium and age group for your client. Claims Denial Information To be sure that insurers are not denying claims unfairly, states require insurers to report the total number of claims denied in the state each year. States usually have a mechanism through which policyholders can appeal decisions made by the insurer regarding benefit eligibility, care plans, services and providers and claim payments. Agents should make an effort to research the claims payment history of the insurers they represent as well as their history of rate increases SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 158

160 Chapter 8 Quiz 1) Which of the following is NOT an unfair trade practice per state insurance codes? a. Cold lead advertising b. Twisting c. Online advertising d. High-pressure tactics 2) People should consider buying LTC insurance if: a. They can't afford the premiums b. Their only source of income is Social Security or SSI c. They often have trouble paying for necessities such as housing, food, medicine d. They have significant assets and income 3) When processing a sale that involves replacement, the Notice of Replacement must be furnished: a. After the policy is issued b. After the policy is delivered c. Before the policy is issued or delivered d. It does not need to be issued 4) Which of the following is NOT a common sources of additional information for underwriting data? a. MIB b. APS c. PHI d. BMI 5) Which of the following is NOT a factor of a premium's price? a. Height b. Product c. Age d. Health Status SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 159

161 ALTERNATIVES TO LTC INSURANCE While most of us may eventually have a need for long-term care, we do not all necessarily have a need for LTC insurance. Long-term care insurance is not the only, or even the best, solution to every need for long-term care. Many individuals choose not to buy LTC insurance and retain the exposure, either because they do not realize the potential costs involved, or because they simply cannot afford the premium or choose to spend their money for other things. When assets are at risk, insurance may be a wise selection. Nonetheless, many alternatives are available for the delivery of long-term care services. In many cases, these alternatives may reduce the cost of long-term care whether or not there is insurance. INFORMAL CARE GIVERS Informal care is provided by family, friends, volunteers and community services. It includes assistance with daily activities, such as preparing meals, transportation, housework, yard work, grocery shopping, paying bills and companionship. As a care recipient's needs increase, informal care may expand to include assisting the care recipient with bathing, dressing or eating. While it does not include medical care, persons who may also be receiving medical care frequently need these types of services. Informal care may occasionally substitute for insurance as a strategy for providing LTC when the cost of insurance is difficult to justify and family members or friends are available to provide the care. For this reason it is recommended that a person considering the purchase of a LTC policy discuss the matter with family members. Even when LTC insurance is purchased, informal care may still be provided to keep costs down. Incurred expenses may be minimized if informal care keeps someone out of a nursing home or SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 160

162 if it can be provided on a volunteer basis when the cost for other forms of care might exceed benefit levels. Informal care does, however, have its limitations. It cannot substitute fully for all types of longterm care. It does not extend to any kind of medical care. There can be no guarantee that a person will not require confinement in a LTC facility. When a person does require confinement or medical treatment, the insured or family members will have to pay the expenses. Often the need to care for aging parents coincides with the need to pay college tuition for dependent children. The "empty nest" becomes filled with frail parents or in-laws. Children often live extended distances from parents. Fewer than 15% of people over 65 live with relatives. The rest live independently, either alone or with a spouse. Even when an informal caregiver is willing and able, providing the care can create emotional, physical and financial stress or strain. It is not easy to help someone for long periods of time. The caregiver must be able to balance his or her personal needs with those of another who may demand almost constant attention. If it goes on too long, caregiving can eventually lead to emotional, physical or financial exhaustion. Emotional Stress Caring for the elderly or disabled can be frustrating and depressing. Not everyone is emotionally able to provide care for a loved one until that person gets better or dies. Some continue to provide the care until they push themselves to the point of emotional exhaustion, which results in their own need for care. No one should be criticized for trying to provide care and later recognizing he or she is emotionally unable to continue Physical Stress Caring for a disabled person can be physically demanding. The care recipient often needs care all day long and several times during the night. Caregiving can be a 24-hour per day, 7 day per week job that does not leave much time to address personal needs and responsibilities. This is where the respite care benefit in LTC insurance can be so valuable by providing brief periods of rest to the primary caregiver. Financial Stress Surprisingly, it is less costly to provide care in a nursing home compared to around-the-clock care at home. Nursing home costs vary by location and quality of care but an average nursing home will charge approximately $3,000 - $5,000 per month, whereas home care can cost upwards of $6,000 - $8,000 per month, or more. In addition to the cost of the care itself, family members who provide care may have to quit their job or take a part-time job. Most two-income families need the second income to meet their obligations. Demographic Trends Family demographics have changed drastically in the current generation. In previous generations, older persons often lived with their children and daughters or daughters-in-law cared for an aging parent. Today, a majority of daughters are working. And generations are geographically separated, often over great distances. In addition, today older persons are living considerably longer than their parents SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 161

163 THE CHANGING ROLE OF THE FAMILY For generations, family and friends at home have attended elderly, disabled or terminally ill people. Although the traditional family structure has changed, families still provide the vast majority of long-term care in America. Even now only about one in five elderly Americans who needs special care currently lives in a nursing home. Most people not only feel an obligation to give their spouses, parents, siblings and children the assistance needed, but truly want to preserve their pride and dignity when they can no longer take care of themselves. Families today, however, have a more difficult time providing care. What often begins as a labor of love becomes an overwhelming burden on adult children and grandchildren. It often starts with a few visits a week to their home, with the help of friends and neighbors and gradually turns into a very demanding 24 hour a day job. During the past three decades the United States has experienced tremendous social changes that have affected the traditional family structure. In addition to having other social and political consequences, these changes have limited the number of family members available to care for elderly relatives. These demographic trends and the impact they are having on long-term care include: Women in the Work Force Prior to World War II, women, as the primary care providers for the family, had neither the time nor energy to work outside the home for wages. As a result of World War II, when many men were overseas serving in the armed forces, almost 20 million women entered the workplace. Following the war many women continued to work outside the home. Today most households require two incomes in order to pay the bills, leaving no one at home during the day to provide care for aging relatives. Many people juggle a job, children and care of an elderly relative with no time or money left for themselves. Even households where a nonworking spouse or child is available may not be able to adequately handle the demands, both physical and mental, of caring for someone who is seriously ill or disabled. It s a problem for businesses too. Many are seeing reduced production from workers who are providing home care. 55% of working caregivers report missing time from work, or say they worked less efficiently because of their caregiving responsibilities SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 162

164 Delayed Motherhood Many women are electing to have children much later in their lives than in the past. It is not uncommon for women to be raising their own children when their parents may need assistance. This is often referred to as the Sandwich Generation. In many cases, women are juggling the responsibilities of caring for young children and elderly parents at the same time. Lower Birth Rates In our grandparent s day, large families were necessary to operate farms. Because of dangerous conditions and lack of adequate medical care, many children died during childhood. As population centers shifted toward a more urban setting, the importance of a large family lessened. Today, birth rates are down and large families are rare. Smaller families, however, reduce the number of children available to share in caring for their aging parents as well as the number of taxpayers to support government funded LTC programs. Divorce By the end of the last decade, almost half of all new marriages were expected to end in divorce. In the beginning of the 21st century, the divorce rate in America is expected to approach two out of three marriages. As a result of this high divorce rate, many single-parent families have been created. More than 50 percent of single-parent families live below the national poverty level. Limited funds simply do not allow many single parents to take on the added financial and emotional responsibilities of caring for an aging parent. It is reasonable to expect that a spouse's interest in caring for her (or his) in-laws decreases after a divorce. Increased Mobility Most people leave their childhood homes to marry, travel or pursue career opportunities. Most children today live hundreds or thousands of miles from their parents. The physical distance makes it more to care for their aging parents as they lose their ability to remain independent. Increased Longevity It is estimated that the over age 65 population in this country will total 70 million by the year Life expectancy is expected to approach 90 years of age by the year Taking all of this into consideration, it is unlikely that most of today's older Americans will be cared for by their families and will need an alternative solution for the majority of their care. This help often comes from services provided by formal caregivers and will probably need to be paid for by LTC insurance SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 163

165 OUT OF POCKET EXPENDITURES According to the NAIC's Shoppers Guide To Long-Term Care Insurance, approximately one-third of all nursing home expenses are paid out-of-pocket by individuals and their families. Many senior Americans have substantial savings set aside for their retirement in the form of passbook savings accounts, IRAs, annuities, CDs, and other investments such as stocks and bonds. For those with $500,000 or more, meeting the needs of long-term care expenses would not probably be a problem. For most seniors, however, the cost of long-term-care for the average of 2 1/2 years could deplete a lifetime of savings. Many seniors have incomes that fall below 125% of the poverty level. Years of savings quickly disappear due to the effects of inflation and expenses related to failing health. Often the death of a spouse, and the resulting loss of their income, makes the difference between a comfortable retirement and just barely getting by. At this time almost 16% of American seniors live precariously near the poverty line. According to the National Council on Aging, LTC expenses drive about 7 out of 10 senior families into federal poverty levels within four months of beginning institutionalized care. SOURCE: BEST S REVIEW, MAY Often even when a client can afford to self-fund LTC expenses, it makes more sense to purchase insurance. This example illustrates the difference between one individual who buys long-term care insurance and one who chooses to self-insure the risk: Two single men, age 70, each own their own homes, a car, a comfortable retirement income of $3,500 per month and $120,000 in other liquid assets. This $120,000 is invested in various vehicles, earning an average of six percent per year. They would like to pass as much of the money on to their heirs as possible. Both obtain a premium quote for the following coverage: Comprehensive coverage - 100% home care benefit $100 per day in LTC coverage 30 day elimination period Unlimited benefit period Inflation option - compound The premium for this plan is $3,800 annually. One individual pays the premium while the other decides against purchasing the coverage. He assumes that his assets will be more than SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 164

166 sufficient to cover the costs of care if necessary and decides to save the cost of the premium. Both individuals live another ten years before the need for long-term care arises. When the need does arise the individual with long-term care insurance chooses home health care, which averages about $140 per day. The inflation feature of his policy has caused his benefits to rise to $145 per day. The person who elected to self-insure, however, chooses to enter a nursing home for $125 per day since it is less expensive than home care. Insured Self-Insured Assets $120,000 Assets $120,000 Spent on Premium 41,354 Spent on Premium -0- At age 80 assets have $157,589 At age 80 assets have $214,901 accumulated to accumulated to Minus Costs for Care: Minus Costs for Care: First Year 20 day $2,800 First Year All costs $45,625 Elimination period ($140 X 20 days) ($125 X 365 days) Second Year -0- Second Year $49,275 Third Year -0- Third Year $53,217 Fourth Year -0- Fourth Year $57,474 Liquid assets left after 4 years of LTC $195,796 Liquid assets left after 4 years of LTC $34,302 If both of these persons need care for a period of 4 years, the one with insurance would have almost $200,000 to pass along to their heirs while the one who self-insured would have less than $35,000 for their heirs. If the need for care extends into the fifth year, the uninsured man would use up the remaining balance of his funds and end up on Medicaid. The one who was insured spent about $41,000 in total premiums and about $3,000 in co-payments for elimination period and can pass the remainder on to his heirs. Another important thing this case study points out is that the client who was insured had many choices when care was needed whereas the client who did not insure had little choice other than a nursing home, especially if he was planning on relying in the Medicaid system to help finance his stay. A recent national nursing home survey stated that almost half of the persons in nursing homes did not need to be in that intrusive a level of care and would not have been there if they had had access to payment for home and community care SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 165

167 REVERSE ANNUITY MORTGAGES Many Americans age 65 and over own the homes they live in, and 80% of these homes are mortgage-free. Home equity is frequently an older person's largest asset, and many older Americans are not poor, they just have a cash-flow problem. A reverse annuity mortgage (RAM) is a financial device that allows homeowners to convert the equity in their homes to a regular income stream. Over time, the individual enjoys a stream of installment income payments that may be used for long-term care expenses without the worry of making payments or having to give up the security and comfort of their own home. The financial institution, on the other hand, ends up owning the home. While seniors could borrow money from banks, they might have problems qualifying for the loans due to income requirements and would have to make payments on the loans. The HUD (Housing and Urban Development) HECM program is different. It is only available to borrowers who are 62 and over. The only qualification requirement is the equity in the home since no payments are required until the home is sold or vacated for other reasons. This arrangement can make it possible for someone living on a fixed income to provide funds for long-term care expenses in the absence of insurance. It also protects the right to reside in the property, because a homeowner cannot be forced to leave the premises even if it is occupied beyond the term of the reverse mortgage. Once the last person eligible to occupy the home has died or vacated the premises, the loan must be repaid. This is usually accomplished through the sale of the home. Any excess proceeds are payable to the heirs of the deceased homeowner. Should the sale of the home not be enough to pay the loan balance and accrued interest, there will be no deficiency judgment against the estate, because the loan is insured through FHA. Proceeds from the reverse mortgage could also be used to pay the LTC insurance premium. If a single payment option is available, it may be better to take a lump sum loan from the home in order to pay the single premium. In that way, a small amount of the equity is used to protect the rest of the equity as well without changing the insured s lifestyle at all in the meantime. The heirs would still be able to inherit the home subject to a small loan rather than the possibility of Medicaid taking the entire value of the home in estate recovery to pay back the amount spent on the senior s care prior to death. Having insurance would also provide the senior with the ability to enter the nursing home of their choice when the time comes, rather than having to settle for what the state is willing to provide SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 166

168 This program is not the answer for all seniors. There are fees, points and other closing costs involved as well as ongoing charges for mortgage insurance and servicing fees, in addition to the interest. Seniors must attend mandatory HUD counseling prior to taking out the loan to be sure that they understand everything involved. More information, including a list of approved lenders, can be obtained from your local HUD office, or by calling Fannie Mae at You can receive free information from HUD by calling , toll-free. You can also request the booklet "Home Made Money" from AARP Home Equity Conversion Service, 1900 K Street, NW, Washington, DC PRIVATE INSURANCE (Other than LTC) TRADITIONAL HEALTH INSURANCE Standard health care policies currently pay less than 1% of LTC costs. Health insurance policies are designed to provide benefits for acute medical care such as doctors, hospital, surgical or emergency care. Traditional forms of health insurance do not satisfy the LTC need. Some policies may offer optional benefits for skilled nursing care or convalescent home care, but these benefits require prior hospitalization and are generally provided for only a short time. They do not cover other extended care (custodial care) and do not cover non-medical care that may be needed on a daily basis (chronic care). SOURCE: U. S. DEPARTMENT OF HEALTH & HUMAN SERVICES Conventional insurance health plans also restrict coverage to skilled care. Managed care programs, are even more restrictive and pay very little for home health and nursing care. Private insurance and Medicare only provide about one-fourth of the nation's long-term care bill of greater than $115 billion annually. MEDICARE SUPPLEMENT INSURANCE Many people still believe that their Medicare supplements will cover everything not covered by Medicare. Additionally, many people believe their Medicare supplement, particularly the HMO versions, will cover their long-term care costs when in fact most supplements follow Medicare guidelines and requirements pay nothing for services Medicare does not approve. Even though many supplements will cover the daily co-payment for the 21st through the 100th day of skilled nursing home stays, care in a skilled nursing facility for more than 20 days rarely SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 167

169 meets the Medicare's strict requirements for coverage. As is the case with Medicare, this benefit is available only for care in a certified skilled nursing facility following a period of prior hospital confinement, and nothing is payable after the 100th day. No benefits are payable for any insured who was not previously hospitalized, and no benefits are payable for any insured receiving intermediate care, custodial care, community care or assisted living. Payment is only for care that meets Medicare's definition of skilled care and there is no coverage for custodial care. Some Medicare Supplements include at home recovery benefits, but they are limited to $40 per visit and 40 visits (or $1,600) per year. In addition to the dollar and time limitations, this benefit applies only in cases of "recovery" following an illness, injury or surgery. No benefits are payable for any insured who needs any type of care due to a chronic ailment or the general effects of aging. LIFE INSURANCE/ANNUITIES COMBINED WITH LTC Until recently, the only way the insured could access the policy's cash value while he or she was living was through a policy loan or policy surrender. Today, recognizing, the needs of the elderly, many insurers offer either LTC riders or living needs/accelerated benefit riders to their life insurance policies and annuities which allowing the early payment of some portion of the policy s face amount. Some individuals may prefer to purchase a LTC rider to a life policy, rather than stand-alone long-term care insurance, because if the accelerated or living benefits are never used, the policy will at least pay the death benefit when the insured dies. On the other hand, if benefits are used, the face value of the policy will decrease and when the insured dies, there may not be enough in insurance proceeds to meet the needs for which the policy was originally purchased There are basically two approaches to the LTC rider concept. Under the first approach, the LTC rider is independent from the life policy or annuity and the LTC benefits paid to the insured will not affect the policy's face amount or cash value. The second approach deducts the LTC benefits from the life policy (or annuity) face amount and cash value resulting in a corresponding reduction in both of these values. Life insurance LTC riders provide benefits very similar to those found in LTC policies. One difference with LTC riders attached to life insurance is the method of determining the LTC benefits. The benefits may be expressed as a specific daily amount, such as $50, $100 or $150 per day or as a percentage of the face amount of the life policy, payable monthly, up to a specified maximum dollar amount. Life insurance policy riders may also include optional benefits for such things as adult day care, cost of living protection, hospice care, and other types of care. Living Needs Riders / Accelerated Death Benefits draws on the life insurance benefits to generate LTC borrowing from the life insurance to pay LTC benefits. The "Living Needs" rider typically provides up to 70% to-80% of the policy's death benefit to offset nursing home expenses, or up to 90%-to-95% of the death benefit for expenses incurred in connection with a terminal illness. Accelerated payments can be made in a lump sum or in monthly installments SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 168

170 over a specified period. The death benefit, less the accelerated payment, is still payable to the beneficiary. The contract and the insurer determine the conditions under which these benefits are paid and the insured will be eligible for LTC benefits in accordance with the rider provisions. A period of minimum prior hospitalization may be required. Benefits will cease when the insured has used up the specified percentage of the face amount allowed in the rider. In most other respects, the living needs rider functions in much the same way as an individual LTC policy. In cases where an insured person is terminally ill, accelerated death benefits received under a life insurance contract after 1996 are exempt from income tax. This exclusion also extends from the sale or assignment of any portion of the death benefit under a life insurance contract to a viatical settlement contract provider. VIATICAL SETTLEMENTS A relative of accelerated or living benefits is a viatical settlement. A Viatical settlement contract is an agreement under which the owner of a life insurance policy sells the policy to another person in exchange for a negotiated payment, which is generally less than the expected death benefit under the policy. Although the proceeds of the contract are less than the potential death benefit, the policyowner is able to obtain an immediate payment while still living. The purchase price is generally paid to the policyowner in a lump sum but may be paid in installments. The policyowner may use the cash for medical or other expenses. When death occurs, the viatical company collects the policy's death benefit. When a Viatical company purchases a policy, it becomes the policyowner and is responsible for paying the premiums. The price viatical companies pay for the policies depends on the insured's life expectancy and the cost of future premiums. The National Association of Insurance Commissioners (NAIC) has adopted model guidelines for fair payment. Under these guidelines, insureds receive anywhere from 50 percent to 80 percent of the policy's face value. Funds received by insureds under Accelerated benefits and Viatical settlements are given favorable tax treatment under HIPAA, and are not taxed by the federal government so long as the terminal or chronic illness is defined in a manner that meets the requirements of HIPAA. Many states treat these accelerated death benefits and viatical settlements as free from state taxes. With the passage of HIPAA on the federal level, however, other states are expected to adopt similar legislation SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 169

171 CONTINUING CARE RETIREMENT COMMUNITIES Some clients will feel that they don t need LTC insurance because they are planning to move into a retirement community. These Continuing Care Retirement Communities (CCRCs), also known as Life Care Communities (LCCs), offer residential housing combined with personal and medical care. Usually, these facilities provide housing, recreational activities, and personal and medical care according to one's which can be increased as needs change. The concept of "life care" suggests that all needs will be taken care of for as long as a person lives, but consumers need to be cautious when making commitments to these facilities. Large front-end investments and complex contractual agreements characterize CCRCs. The admission fee might be $50,000 to $100,000, or more. There are usually additional monthly fees and separate charges for various types of services. In some cases, the admission fee cannot be recovered or sold to another person if the original occupant decides to leave. In other cases, a person might be permitted to resell their membership in the community, but for a greatly reduced value. Many elderly people have difficulty understanding the contracts, and might not be aware of hidden fees or other unfavorable provisions. Another potential risk with these facilities is that they may not be able to deliver the levels of care promised. The staff may not have the necessary expertise, or it may be spread too thin among the population of residents. If operations are not managed properly, the facility may experience financial problems and begin cutting back on the quantity or quality of services being provided and could even go bankrupt leaving residents without care or return of their money. Some of these facilities are reported to be very good while others do not seem to live up to their promises. Since the track record of continuing care retirement communities has been uneven, anyone considering the purchase of a life care contract should carefully investigate the facility and would be wise to consult an attorney first. The American Association of Homes for the Aging ( ) may be contacted to determine whether a particular facility is accredited or not. Even if a CCRC does provide all levels and types of care, an additional fee is usually charge when the resident accesses these additional services. An LTC policy could pay for these additional expenses, assuming that the providers were properly licensed and that the policyholder meets the coverage triggers SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 170

172 FRATERNAL AND RELIGIOUS COMMUNITIES The "life care" concept has also been adopted by some fraternal and religious organizations. Life care communities established by one of these groups may offer some advantages in terms of social activities, because residents are likely to share the same ethnic or religious culture and beliefs. Various types of benefits are usually made available to members who often sign over all of their assets, home equity, etc. in exchange for lifetime care. These organizations frequently reserve the right to assess members for additional amounts when costs exceed the members financial resources. Consumers should look into the level and quality of services available, cost structures and admission requirements, contract restrictions, and the organization's financial condition, before enrolling or committing to these communities SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 171

173 Chapter 9 Quiz 1) According to the NAIC's Shoppers Guide To Long Term Care Insurance, approximately of all nursing home expenses are paid out of pocket by individuals and their families. a. 1/2 b. 1/3 c. 1/4 d. 1/5 2) Traditional health care policies currently pay of long term care costs. a. Less than 1 % b. 2 % c. 3 % d. 4 % 3) Payment received from a viatical settlement contract is generally: a. The same as the expected death benefit b. Slightly more than the expected death benefit c. Double the expected death benefit d. Less than the expected death benefit 4) Private insurance and Medicare only provide about of the nation's long-term care bill. a. 1/2 b. 1/3 c. 1/4 d. 1/ SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 172

174 SOURCES OF INFORMATION ABOUT LTC There are many sources from which to get information on long-term care, long-term care insurance, the concerns of the elderly, and health care issues in general. The agencies and organizations appearing below are not exhaustive. Information about long-term care services, facilities and providers is available from a variety of sources. The following list identifies some of the more important sources of information, and includes phone numbers and web sites where available: Administration on Aging Room 4760, Cohen Building 330 Independence Avenue, SW Washing-ton, DC (202) American Association of Retired Persons (AARP) 601 E. Street, NW Washington, D.C (202) American Health Care Association (ACHCA) 1201 L Street, NW Washington, DC (202) Publications American Society on Aging 833 Market Street, Suite 511 San Francisco, CA (415) National Institute on Aging 9000 Rockville Pike Bethesda, MD (301) National Council on the Aging 409 Third Street, SW, Suite 200 Washington, DC (202) National Association for Home Care 519 C St., NE, Stanton Park, Washington, DC (202) National Consumers League 1701 K St., NW, Suite 1200 Washington, DC (202) Elder Care Locator - A nationwide service providing information on long-term care services, anywhere in the United States and its territories: (800) Social workers, clergy, hospital discharge workers, nurses, physicians and employee counselors may be able to refer you to appropriate services. Neighbors and friends who have used similar services can provide direction SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 173

175 Other agencies which offer excellent information and referral services include the United Way, Family Services of America and religious social service organizations, such as Jewish Family Services, Catholic Charities and Protestant Welfare Agencies. Also see senior services section of the "Smart Yellow Pages" in your phone book as well as categories such as nursing homes, residential care homes, life care communities, and home health care. A wealth of information is available on the Internet under and search under titles such as aging, nursing homes, long-term care, LTC Partnership, Medicaid, Medicare, etc. An excellent source for the services available in your community is the local Area Agency on Aging (AAA), an organization that was established in 1973 as part of the federal Older Americans Act. Usually state and local governments, and private contributions fund AAAs. Their role is to plan and coordinate community services, provide information and referrals, distribute educational materials and advocate for the elderly. Resources: National Policy and Resource Center on Women and Aging Public Health Services office on Women s Health National Women s Health Network Older Women s League Women s Initiative Program, AARP National Hispanic Council on Aging Wider Opportunities for Women and the National Commission on Working Women US Department of Labor s Women s Bureau Clearinghouse Women Work! National Network for Women s Employment IMPORTANT TELEPHONE NUMBERS State Long-term Peer Review State Medical State Health Care Organization- Assistance Insurance Ombudsman- Office- Assistance Program- Call for nursing home information or about problems with your care. Call with questions about the quality of your care. Call for information on state programs that help pay health care costs. Call with questions about Medicare, Medigap And other insurance policies, your rights and care, choosing a health plan, and Medicare bills. Alabama (877) (800) (334) (334) Alaska (907) (800) (907) (907) American (808) (800) (808) (808) Samoa Arizona (800) (800) (800) (800) SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 174

176 Arkansas (501) (800) (800) (501) California. (916) (800) (800) (800) Colorado (800) (800) (303) (800) x356 Connecticut (860) (800) (860) (800) Delaware (800) (302) (302) (302) Florida (888) (800) (850) (850) Georgia (888) (800) (404) (404) Guam (808) (800) (808) (808) Hawaii (808) (800) (808) (808) Idaho (208) (800) (208) (208) Illinois (217) (800) (217) (217) Indiana (800) (800) (800) (800) Iowa (800) (800) (800) (877) Kansas (785) (800) (316) (785) Kentucky (800) (800) (502) (502) Louisiana (225) (225) (225) (800) Maine (207) (603) (800) (800) Maryland (410) (800) (410) (410) Massachusetts (617) (781) (617) (800) Michigan (517) (800) (800) (800) Minnesota (800) (800) (800) (800) Mississippi (800) (800) (800) (601) Missouri (800) (800) (800) (800) Montana (406) (800) (406) (800) Nebraska (402) (800) (800) (402) Nevada (702) (800) (800) (800) New (603) (603) (603) (603) Hampshire New Jersey (877) (732) (609) (800) New Mexico (505) (800) (505) (800) New York (800) (800) (800) (518) North (919) (800) (919) (800) Carolina North (800) (701) (701) (701) Dakota Ohio (800) (800) (614) (614) Oklahoma (405) (405) (405) (405) Oregon (503) (800) (503) (800) Pennsylvania (717) (800) (800) (717) Puerto Rico (787) (787) (787) (787) Rhode (401) (800) (401) (401) Island South (803) (803) (803) (803) Carolina South (605) (800) (605) (605) Dakota Tennessee (615) (800) (800) (615) Texas (800) (800) (800) (800) SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 175

177 Utah (801) (800) (801) (800) Vermont (802) (603) (800) (802) Virgin (787) (340) (340) (787) Islands x2338 Virginia (800) (804) (800) (804) Win (800) (800) (800) (800) Win (202) (800) (202) (800) D.C. West (304) (800) (877) (800) Virginia x2266 Wisconsin (800) (800) (877) (608) Wyoming (307) (800) (800) (800) INFORMATION HOTLINES The U.S. Public Health Care Service In Maryland: Elder Care Locator Family Caregiver Alliance Medicare National Health Information Center National Clearinghouse For Alcohol & Drug Information National Institute On Aging Alzheimer's Association Alzheimer's Disease Education & Referral Center Arthritis Foundation American Cancer Society Response Line Depression Awareness American Diabetes Association Well Spouse Foundation HEALTH CARE FINANCING ADMINISTRATION REGIONAL OFFICES Regional Office Customer Services States Served Boston CT,ME,MA,NH,RI,VT New York NJ,NY,PR,VI Philadelphia DE,DC,MD,PA,VA,WV Atlanta AL,FL,GA,KY,MS,NC,SC,TN Chicago IL,IN,MI,MN,OH,WI Dallas AR,LA,NM,OK,TX Kansas City IA,KS,MO,NE Denver CO,MT,ND,SD,UT,WY San Francisco AZ,CA,GU,HI,NV Seattle AK,ID,OR,WA SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 176

178 SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 177

179 APPENDIX HIPAA SUBTITLE C--LONG-TERM CARE SERVICES AND CONTRACTS PART I--GENERAL PROVISIONS SEC TREATMENT OF LONG-TERM CARE INSURANCE. (a) GENERAL RULE- Chapter 79 (relating to definitions) is amended by inserting after section 7702A the following new section: `SEC. 7702B. TREATMENT OF QUALIFIED LONG-TERM CARE INSURANCE. `(a) IN GENERAL- For purposes of this title-- `(1) a qualified long-term care insurance contract shall be treated as an accident and health insurance contract, (2) amounts (other than policyholder dividends, as defined in section 808, or premium refunds) received under a qualified long-term care insurance contract shall be treated as amounts received for personal injuries and sickness and shall be treated as reimbursement for expenses actually incurred for medical care (as defined in section 213(d)), `(3) any plan of an employer providing coverage under a qualified long-term care insurance contract shall be treated as an accident and health plan with respect to such coverage, `(4) except as provided in subsection (e)(3), amounts paid for a qualified long-term care insurance contract providing the benefits described in subsection (b)(2)(a) shall be treated as payments made for insurance for purposes of section 213(d)(1)(D), and `(5) a qualified long-term care insurance contract shall be treated as a guaranteed renewable contract subject to the rules of section 816(e). `(b) QUALIFIED LONG-TERM CARE INSURANCE CONTRACT- For purposes of this title-- `(1) IN GENERAL- The term `qualified long-term care insurance contract' means any insurance contract if-- `(A) the only insurance protection provided under such contract is coverage of qualified longterm care services, `(B) such contract does not pay or reimburse expenses incurred for services or items to the extent that such expenses are reimbursable under title XVIII of the Social Security Act or would be so reimbursable but for the application of a deductible or coinsurance amount, `(C) such contract is guaranteed renewable, `(D) such contract does not provide for a cash surrender value or other money that can be-- `(i) paid, assigned, or pledged as collateral for a loan, or `(ii) borrowed, other than as provided in subparagraph (E) or paragraph (2)(C), `(E) all refunds of premiums, and all policyholder dividends or similar amounts, under such contract are to be applied as a reduction in future premiums or to increase future benefits, and `(F) such contract meets the requirements of subsection (g). `(2) SPECIAL RULES- `(A) PER DIEM, ETC. PAYMENTS PERMITTED- A contract shall not fail to be described in subparagraph (A) or (B) of paragraph (1) by reason of payments being made on a per diem or SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 178

180 other periodic basis without regard to the expenses incurred during the period to which the payments relate. `(B) SPECIAL RULES RELATING TO MEDICARE- `(i) Paragraph (1)(B) shall not apply to expenses which are reimbursable under title XVIII of the Social Security Act only as a secondary payer. `(ii) No provision of law shall be construed or applied so as to prohibit the offering of a qualified long-term care insurance contract on the basis that the contract coordinates its benefits with those provided under such title. `(C) REFUNDS OF PREMIUMS- Paragraph (1)(E) shall not apply to any refund on the death of the insured, or on a complete surrender or cancellation of the contract, which cannot exceed the aggregate premiums paid under the contract. Any refund on a complete surrender or cancellation of the contract shall be includible in gross income to the extent that any deduction or exclusion was allowable with respect to the premiums. `(c) QUALIFIED LONG-TERM CARE SERVICES- For purposes of this section-- `(1) IN GENERAL- The term `qualified long-term care services' means necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, which-- `(A) are required by a chronically ill individual, and `(B) are provided pursuant to a plan of care prescribed by a licensed health care practitioner. `(2) CHRONICALLY ILL INDIVIDUAL- `(A) IN GENERAL- The term `chronically ill individual' means any individual who has been certified by a licensed health care practitioner as-- `(i) being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living for a period of at least 90 days due to a loss of functional capacity, `(ii) having a level of disability similar (as determined under regulations prescribed by the Secretary in consultation with the Secretary of Health and Human Services) to the level of disability described in clause (i), or `(iii) requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment. Such term shall not include any individual otherwise meeting the requirements of the preceding sentence unless within the preceding 12-month period a licensed health care practitioner has certified that such individual meets such requirements. `(B) ACTIVITIES OF DAILY LIVING- For purposes of subparagraph (A), each of the following is an activity of daily living: `(i) Eating. `(ii) Toileting. `(iii) Transferring. `(iv) Bathing. `(v) Dressing. `(vi) Continence. A contract shall not be treated as a qualified long-term care insurance contract unless the determination of whether an individual is a chronically ill individual takes into account at least 5 of such activities. `(3) MAINTENANCE OR PERSONAL CARE SERVICES- The term `maintenance or personal care services' means any care the primary purpose of which is the provision of needed assistance with any of the disabilities as a result of which the individual is a chronically ill individual (including the protection from threats to health and safety due to severe cognitive impairment). `(4) LICENSED HEALTH CARE PRACTITIONER- The term `licensed health care practitioner' means any physician (as defined in section 1861(r)(1) of the Social Security Act) and any SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 179

181 registered professional nurse, licensed social worker, or other individual who meets such requirements as may be prescribed by the Secretary. `(d) AGGREGATE PAYMENTS IN EXCESS OF LIMITS- `(1) IN GENERAL- If the aggregate of-- `(A) the periodic payments received for any period under all qualified long-term care insurance contracts which are treated as made for qualified long-term care services for an insured, and `(B) the periodic payments received for such period which are treated under section 101(g) as paid by reason of the death of such insured, exceeds the per diem limitation for such period, such excess shall be includible in gross income without regard to section 72. A payment shall not be taken into account under subparagraph (B) if the insured is a terminally ill individual (as defined in section 101(g)) at the time the payment is received. `(2) PER DIEM LIMITATION- For purposes of paragraph (1), the per diem limitation for any period is an amount equal to the excess (if any) of-- `(A) the greater of-- `(i) the dollar amount in effect for such period under paragraph (4), or `(ii) the costs incurred for qualified long-term care services provided for the insured for such period, over `(B) the aggregate payments received as reimbursements (through insurance or otherwise) for qualified long-term care services provided for the insured during such period. `(3) AGGREGATION RULES- For purposes of this subsection-- `(A) all persons receiving periodic payments described in paragraph (1) with respect to the same insured shall be treated as 1 person, and `(B) the per diem limitation determined under paragraph (2) shall be allocated first to the insured and any remaining limitation shall be allocated among the other such persons in such manner as the Secretary shall prescribe. `(4) DOLLAR AMOUNT- The dollar amount in effect under this subsection shall be $175 per day (or the equivalent amount in the case of payments on another periodic basis). `(5) INFLATION ADJUSTMENT- In the case of a calendar year after 1997, the dollar amount contained in paragraph (4) shall be increased at the same time and in the same manner as amounts are increased pursuant to section 213(d)(10). `(6) PERIODIC PAYMENTS- For purposes of this subsection, the term `periodic payment' means any payment (whether on a periodic basis or otherwise) made without regard to the extent of the costs incurred by the payee for qualified long-term care services. `(e) TREATMENT OF COVERAGE PROVIDED AS PART OF A LIFE INSURANCE CONTRACT- Except as otherwise provided in regulations prescribed by the Secretary, in the case of any long-term care insurance coverage (whether or not qualified) provided by a rider on or as part of a life insurance contract-- `(1) IN GENERAL- This section shall apply as if the portion of the contract providing such coverage is a separate contract. `(2) APPLICATION OF Section 7702(c)(2) (relating to the guideline premium limitation) shall be applied by increasing the guideline premium limitation with respect to a life insurance contract, as of any date-- `(A) by the sum of any charges (but not premium payments) against the life insurance contract's cash surrender value (within the meaning of section 7702(f)(2)(A)) for such coverage made to that date under the contract, less `(B) any such charges the imposition of which reduces the premiums paid for the contract (within the meaning of section 7702(f)(1)). `(3) APPLICATION OF SECTION 213- No deduction shall be allowed under section 213(a) for charges against the life insurance contract's cash surrender value described in paragraph (2), unless such charges are includible in income as a result of the application of section 72(e)(10) and the rider is a qualified long-term care insurance contract under subsection (b) SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 180

182 `(4) PORTION DEFINED- For purposes of this subsection, the term `portion' means only the terms and benefits under a life insurance contract that are in addition to the terms and benefits under the contract without regard to long-term care insurance coverage. `(f) TREATMENT OF CERTAIN STATE-MAINTAINED PLANS- `(1) IN GENERAL- If-- `(A) an individual receives coverage for qualified long-term care services under a State longterm care plan, and `(B) the terms of such plan would satisfy the requirements of subsection (b) were such plan an insurance contract, such plan shall be treated as a qualified long-term care insurance contract for purposes of this title. `(2) STATE LONG-TERM CARE PLAN- For purposes of paragraph (1), the term `State longterm care plan' means any plan-- `(A) which is established and maintained by a State or an instrumentality of a State, `(B) which provides coverage only for qualified long-term care services, and `(C) under which such coverage is provided only to-- `(i) employees and former employees of a State (or any political subdivision or instrumentality of a State), `(ii) the spouses of such employees, and `(iii) individuals bearing a relationship to such employees or spouses which is described in any of paragraphs (1) through (8) of section 152(a).'. (b) RESERVE METHOD- Clause (iii) of section 807(d)(3)(A) is amended by inserting `(other than a qualified long-term care insurance contract, as defined in section 7702B(b))' after `insurance contract'. (c) LONG-TERM CARE INSURANCE NOT PERMITTED UNDER CAFETERIA PLANS OR FLEXIBLE SPENDING ARRANGEMENTS- (1) CAFETERIA PLANS- Section 125(f) is amended by adding at the end the following new sentence: `Such term shall not include any product which is advertised, marketed, or offered as long-term care insurance.'. (2) FLEXIBLE SPENDING ARRANGEMENTS- Section 106 (relating to contributions by employer to accident and health plans), as amended by section 301(c), is amended by adding at the end the following new subsection: `(c) INCLUSION OF LONG-TERM CARE BENEFITS PROVIDED THROUGH FLEXIBLE SPENDING ARRANGEMENTS- `(1) IN GENERAL- Effective on and after January 1, 1997, gross income of an employee shall include employer-provided coverage for qualified long-term care services (as defined in section 7702B(c)) to the extent that such coverage is provided through a flexible spending or similar arrangement. `(2) FLEXIBLE SPENDING ARRANGEMENT- For purposes of this subsection, a flexible spending arrangement is a benefit program which provides employees with coverage under which-- `(A) specified incurred expenses may be reimbursed (subject to reimbursement maximums and other reasonable conditions), and `(B) the maximum amount of reimbursement which is reasonably available to a participant for such coverage is less than 500 percent of the value of such coverage. In the case of an insured plan, the maximum amount reasonably available shall be determined on the basis of the underlying coverage.' (d) CONTINUATION COVERAGE RULES NOT TO APPLY- (1) Paragraph (2) of section 4980B(g) is amended by adding at the end the following new sentence: `Such term shall not include any plan substantially all of the coverage under which is for qualified long-term care services (as defined in section 7702B(c)).' SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 181

183 (2) Paragraph (1) of section 607 of the Employee Retirement Income Security Act of 1974 is amended by adding at the end the following new sentence: `Such term shall not include any plan substantially all of the coverage under which is for qualified long-term care services (as defined in section 7702B(c) of such Code).' (3) Paragraph (1) of section 2208 of the Public Health Service Act is amended by adding at the end the following new sentence: `Such term shall not include any plan substantially all of the coverage under which is for qualified long-term care services (as defined in section 7702B(c) of such Code).' (e) CLERICAL AMENDMENT- The table of sections for chapter 79 is amended by inserting after the item relating to section 7702A the following new item: `Sec. 7702B. Treatment of qualified long-term care insurance.'. (f) EFFECTIVE DATES- (1) GENERAL EFFECTIVE DATE- (A) IN GENERAL- Except as provided in subparagraph (B), the amendments made by this section shall apply to contracts issued after December 31, (B) RESERVE METHOD- The amendment made by subsection (b) shall apply to contracts issued after December 31, (2) CONTINUATION OF EXISTING POLICIES- In the case of any contract issued before January 1, 1997, which met the long-term care insurance requirements of the State in which the contract was sitused at the time the contract was issued-- (A) such contract shall be treated for purposes of the Internal Revenue Code of 1986 as a qualified long-term care insurance contract (as defined in section 7702B(b) of such Code), and (B) services provided under, or reimbursed by, such contract shall be treated for such purposes as qualified long-term care services (as defined in section 7702B(c) of such Code). In the case of an individual who is covered on December 31, 1996, under a State long-term care plan (as defined in section 7702B(f)(2) of such Code), the terms of such plan on such date shall be treated for purposes of the preceding sentence as a contract issued on such date which met the long-term care insurance requirements of such State. (3) EXCHANGES OF EXISTING POLICIES- If, after the date of enactment of this Act and before January 1, 1998, a contract providing for long-term care insurance coverage is exchanged solely for a qualified long-term care insurance contract (as defined in section 7702B(b) of such Code), no gain or loss shall be recognized on the exchange. If, in addition to a qualified long-term care insurance contract, money or other property is received in the exchange, then any gain shall be recognized to the extent of the sum of the money and the fair market value of the other property received. For purposes of this paragraph, the cancellation of a contract providing for long-term care insurance coverage and reinvestment of the cancellation proceeds in a qualified long-term care insurance contract within 60 days thereafter shall be treated as an exchange. (4) ISSUANCE OF CERTAIN RIDERS PERMITTED- For purposes of applying sections 101(f), 7702, and 7702A of the Internal Revenue Code of 1986 to any contract-- (A) the issuance of a rider which is treated as a qualified long-term care insurance contract under section 7702B, and (B) the addition of any provision required to conform any other long-term care rider to be so treated, shall not be treated as a modification or material change of such contract. (5) APPLICATION OF PER DIEM LIMITATION TO EXISTING CONTRACTS- The amount of per diem payments made under a contract issued on or before July 31, 1996, with respect to an insured which are excludable from gross income by reason of section 7702B of the Internal Revenue Code of 1986 (as added by this section) shall not be reduced under subsection (d)(2)(b) thereof by reason of reimbursements received under a contract issued on or before such date. The preceding sentence shall cease to apply as of the date (after July 31, 1996) SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 182

184 such contract is exchanged or there is any contract modification which results in an increase in the amount of such per diem payments or the amount of such reimbursements. (g) LONG-TERM CARE STUDY REQUEST- The Chairman of the Committee on Ways and Means of the House of Representatives and the Chairman of the Committee on Finance of the Senate shall jointly request the National Association of Insurance Commissioners, in consultation with representatives of the insurance industry and consumer organizations, to formulate, develop, and conduct a study to determine the marketing and other effects of per diem limits on certain types of long-term care policies. If the National Association of Insurance Commissioners agrees to the study request, the National Association of Insurance Commissioners shall report the results of its study to such committees not later than 2 years after accepting the request. SEC QUALIFIED LONG-TERM CARE SERVICES TREATED AS MEDICAL CARE. (a) GENERAL RULE- Paragraph (1) of section 213(d) (defining medical care) is amended by striking `or' at the end of subparagraph (B), by redesignating subparagraph (C) as subparagraph (D), and by inserting after subparagraph (B) the following new subparagraph: `(C) for qualified long-term care services (as defined in section 7702B(c)), or'. (b) TECHNICAL AMENDMENTS- (1) Subparagraph (D) of section 213(d)(1) (as redesignated by subsection (a)) is amended by inserting before the period `or for any qualified long-term care insurance contract (as defined in section 7702B(b))'. (2)(A) Paragraph (1) of section 213(d) is amended by adding at the end the following new flush sentence: `In the case of a qualified long-term care insurance contract (as defined in section 7702B(b)), only eligible long-term care premiums (as defined in paragraph (10)) shall be taken into account under subparagraph (D).' (B) Paragraph (2) of section 162(l) is amended by adding at the end the following new subparagraph: `(C) LONG-TERM CARE PREMIUMS- In the case of a qualified long-term care insurance contract (as defined in section 7702B(b)), only eligible long-term care premiums (as defined in section 213(d)(10)) shall be taken into account under paragraph (1).' (C) Subsection (d) of section 213 is amended by adding at the end the following new paragraphs: `(10) Eligible long-term care premiums- `(A) IN GENERAL- For purposes of this section, the term `eligible long-term care premiums' means the amount paid during a taxable year for any qualified long-term care insurance contract (as defined in section 7702B(b)) covering an individual, to the extent such amount does not exceed the limitation determined under the following table: In the case of an individual before the close of the taxable year of 1997 with an attained age of: Limitation is: 40 or less $ 200 More than 40 but not more than More than 50 but not more than More than 60 but not more than 70 2,000 More than 70 2,500 `(B) INDEXING- `(i) IN GENERAL- In the case of any taxable year beginning in a calendar year after 1997, each dollar amount contained in subparagraph (A) shall be increased by the medical care cost adjustment of such amount for such calendar year. If any increase determined under the preceding sentence is not a multiple of $10, such increase shall be rounded to the nearest multiple of $ SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 183

185 `(ii) MEDICAL CARE COST ADJUSTMENT- For purposes of clause (i), the medical care cost adjustment for any calendar year is the percentage (if any) by which-- `(I) the medical care component of the Consumer Price Index (as defined in section 1(f)(5)) for August of the preceding calendar year, exceeds `(II) such component for August of The Secretary shall, in consultation with the Secretary of Health and Human Services, prescribe an adjustment which the Secretary determines is more appropriate for purposes of this paragraph than the adjustment described in the preceding sentence, and the adjustment so prescribed shall apply in lieu of the adjustment described in the preceding sentence. `(11) CERTAIN PAYMENTS TO RELATIVES TREATED AS NOT PAID FOR MEDICAL CARE- An amount paid for a qualified long-term care service (as defined in section 7702B(c)) provided to an individual shall be treated as not paid for medical care if such service is provided-- `(A) by the spouse of the individual or by a relative (directly or through a partnership, corporation, or other entity) unless the service is provided by a licensed professional with respect to such service, or `(B) by a corporation or partnership which is related (within the meaning of section 267(b) or 707(b)) to the individual. For purposes of this paragraph, the term `relative' means an individual bearing a relationship to the individual which is described in any of paragraphs (1) through (8) of section 152(a). This paragraph shall not apply for purposes of section 105(b) with respect to reimbursements through insurance.'. (3) Paragraph (6) of section 213(d) is amended-- (A) by striking `subparagraphs (A) and (B)' and inserting `subparagraphs (A), (B), and (C)', and (B) by striking `paragraph (1)(C)' in subparagraph (A) and inserting `paragraph (1)(D)'. (4) Paragraph (7) of section 213(d) is amended by striking `subparagraphs (A) and (B)' and inserting `subparagraphs (A), (B), and (C)'. (c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, SEC REPORTING REQUIREMENTS. (a) IN GENERAL- Subpart B of part III of subchapter A of chapter 61 is amended by adding at the end the following new section: `SEC. 6050Q. CERTAIN LONG-TERM CARE BENEFITS. `(a) REQUIREMENT OF REPORTING- Any person who pays long-term care benefits shall make a return, according to the forms or regulations prescribed by the Secretary, setting forth-- `(1) the aggregate amount of such benefits paid by such person to any individual during any calendar year, `(2) whether or not such benefits are paid in whole or in part on a per diem or other periodic basis without regard to the expenses incurred during the period to which the payments relate, `(3) the name, address, and TIN of such individual, and `(4) the name, address, and TIN of the chronically ill or terminally ill individual on account of whose condition such benefits are paid. `(b) STATEMENTS TO BE FURNISHED TO PERSONS WITH RESPECT TO WHOM INFORMATION IS REQUIRED- Every person required to make a return under subsection (a) shall furnish to each individual whose name is required to be set forth in such return a written statement showing-- `(1) the name of the person making the payments, and `(2) the aggregate amount of long-term care benefits paid to the individual which are required to be shown on such return. The written statement required under the preceding sentence shall be furnished to the individual on or before January 31 of the year following the calendar year for which the return under subsection (a) was required to be made. `(c) LONG-TERM CARE BENEFITS- For purposes of this section, the term `long-term care benefit' means SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 184

186 `(1) any payment under a product which is advertised, marketed, or offered as long-term care insurance, and `(2) any payment which is excludable from gross income by reason of section 101(g).'. (b) PENALTIES- (1) Subparagraph (B) of section 6724(d)(1) is amended by redesignating clauses (ix) through (xiv) as clauses (x) through (xv), respectively, and by inserting after clause (viii) the following new clause: `(ix) section 6050Q (relating to certain long-term care benefits),'. (2) Paragraph (2) of section 6724(d) is amended by redesignating subparagraphs (Q) through (T) as subparagraphs (R) through (U), respectively, and by inserting after subparagraph (P) the following new subparagraph: `(Q) section 6050Q(b) (relating to certain long-term care benefits),'. (c) CLERICAL AMENDMENT- The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by adding at the end the following new item: `Sec. 6050Q. Certain long-term care benefits.'. (d) EFFECTIVE DATE- The amendments made by this section shall apply to benefits paid after December 31, PART II--CONSUMER PROTECTION PROVISIONS SEC POLICY REQUIREMENTS. Section 7702B (as added by section 321) is amended by adding at the end the following new subsection: `(g) CONSUMER PROTECTION PROVISIONS- `(1) IN GENERAL- The requirements of this subsection are met with respect to any contract if the contract meets- `(A) the requirements of the model regulation and model Act described in paragraph (2), `(B) the disclosure requirement of paragraph (3), and `(C) the requirements relating to nonforfeitability under paragraph (4). `(2) REQUIREMENTS OF MODEL REGULATION AND ACT- `(A) IN GENERAL- The requirements of this paragraph are met with respect to any contract if such contract meets-- `(i) MODEL REGULATION- The following requirements of the model regulation: `(I) Section 7A (relating to guaranteed renewal or noncancelability), and the requirements of section 6B of the model Act relating to such section 7A. `(II) Section 7B (relating to prohibitions on limitations and exclusions). `(III) Section 7C (relating to extension of benefits). `(IV) Section 7D (relating to continuation or conversion of coverage). `(V) Section 7E (relating to discontinuance and replacement of policies). `(VI) Section 8 (relating to unintentional lapse). `(VII) Section 9 (relating to disclosure), other than section 9F thereof. `(VIII) Section 10 (relating to prohibitions against post-claims underwriting). `(IX) Section 11 (relating to minimum standards). `(X) Section 12 (relating to requirement to offer inflation protection), except that any requirement for a signature on a rejection of inflation protection shall permit the signature to be on an application or on a separate form. `(XI) Section 23 (relating to prohibition against preexisting conditions and probationary periods in replacement policies or certificates). `(ii) MODEL ACT- The following requirements of the model Act: `(I) Section 6C (relating to preexisting conditions). `(II) Section 6D (relating to prior hospitalization). `(B) DEFINITIONS- For purposes of this paragraph SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 185

187 `(i) MODEL PROVISIONS- The terms `model regulation' and `model Act' mean the long-term care insurance model regulation, and the long-term care insurance model Act, respectively, promulgated by the National Association of Insurance Commissioners (as adopted as of January 1993). `(ii) COORDINATION- Any provision of the model regulation or model Act listed under clause (i) or (ii) of subparagraph (A) shall be treated as including any other provision of such regulation or Act necessary to implement the provision. `(iii) DETERMINATION- For purposes of this section and section 4980C, the determination of whether any requirement of a model regulation or the model Act has been met shall be made by the Secretary. `(3) DISCLOSURE REQUIREMENT- The requirement of this paragraph is met with respect to any contract if such contract meets the requirements of section 4980C(d). `(4) NONFORFEITURE REQUIREMENTS- `(A) IN GENERAL- The requirements of this paragraph are met with respect to any level premium contract, if the issuer of such contract offers to the policyholder, including any group policyholder, a nonforfeiture provision meeting the requirements of subparagraph (B). `(B) REQUIREMENTS OF PROVISION- The nonforfeiture provision required under subparagraph (A) shall meet the following requirements: `(i) The nonforfeiture provision shall be appropriately captioned. `(ii) The nonforfeiture provision shall provide for a benefit available in the event of a default in the payment of any premiums and the amount of the benefit may be adjusted subsequent to being initially granted only as necessary to reflect changes in claims, persistency, and interest as reflected in changes in rates for premium paying contracts approved by the Secretary for the same contract form. `(iii) The nonforfeiture provision shall provide at least one of the following: `(I) Reduced paid-up insurance. `(II) Extended term insurance. `(III) Shortened benefit period. `(IV) Other similar offerings approved by the Secretary. `(5) CROSS REFERENCE- `For coordination of the requirements of this subsection with State requirements, see section 4980C(f).'. (a) IN GENERAL- Chapter 43 is amended by adding at the end the following new section: `SEC. 4980C. REQUIREMENTS FOR ISSUERS OF QUALIFIED LONG-TERM CARE INSURANCE CONTRACTS. `(a) GENERAL RULE- There is hereby imposed on any person failing to meet the requirements of subsection (c) or (d) a tax in the amount determined under subsection (b). `(b) AMOUNT- `(1) IN GENERAL- The amount of the tax imposed by subsection (a) shall be $100 per insured for each day any requirement of subsection (c) or (d) is not met with respect to each qualified long-term care insurance contract. `(2) WAIVER- In the case of a failure which is due to reasonable cause and not to willful neglect, the Secretary may waive part or all of the tax imposed by subsection (a) to the extent that payment of the tax would be excessive relative to the failure involved. `(c) RESPONSIBILITIES- The requirements of this subsection are as follows: `(1) REQUIREMENTS OF MODEL PROVISIONS- `(A) MODEL REGULATION- The following requirements of the model regulation must be met: `(i) Section 13 (relating to application forms and replacement coverage). `(ii) Section 14 (relating to reporting requirements), except that the issuer shall also report at least annually the number of claims denied during the reporting period for each class of SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 186

188 business (expressed as a percentage of claims denied), other than claims denied for failure to meet the waiting period or because of any applicable preexisting condition. `(iii) Section 20 (relating to filing requirements for marketing). `(iv) Section 21 (relating to standards for marketing), including inaccurate completion of medical histories, other than sections 21C(1) and 21C(6) thereof, except that-- `(I) in addition to such requirements, no person shall, in selling or offering to sell a qualified longterm care insurance contract, misrepresent a material fact; and `(II) no such requirements shall include a requirement to inquire or identify whether a prospective applicant or enrollee for long-term care insurance has accident and sickness insurance. `(v) Section 22 (relating to appropriateness of recommended purchase). `(vi) Section 24 (relating to standard format outline of coverage). `(vii) Section 25 (relating to requirement to deliver shopper's guide). `(B) MODEL ACT- The following requirements of the model Act must be met: `(i) Section 6F (relating to right to return), except that such section shall also apply to denials of applications and any refund shall be made within 30 days of the return or denial. `(ii) Section 6G (relating to outline of coverage). `(iii) Section 6H (relating to requirements for certificates under group plans). `(iv) Section 6I (relating to policy summary). `(v) Section 6J (relating to monthly reports on accelerated death benefits). `(vi) Section 7 (relating to incontestability period). `(C) DEFINITIONS- For purposes of this paragraph, the terms `model regulation' and `model Act' have the meanings given such terms by section 7702B(g)(2)(B). `(2) DELIVERY OF POLICY- If an application for a qualified long-term care insurance contract (or for a certificate under such a contract for a group) is approved, the issuer shall deliver to the applicant (or policyholder or certificateholder) the contract (or certificate) of insurance not later than 30 days after the date of the approval. `(3) INFORMATION ON DENIALS OF CLAIMS- If a claim under a qualified long-term care insurance contract is denied, the issuer shall, within 60 days of the date of a written request by the policyholder or certificate holder (or representative)-- `(A) provide a written explanation of the reasons for the denial, and `(B) make available all information directly relating to such denial. `(d) DISCLOSURE- The requirements of this subsection are met if the issuer of a long-term care insurance policy discloses in such policy and in the outline of coverage required under subsection (c)(1)(b)(ii) that the policy is intended to be a qualified long-term care insurance contract under section 7702B(b). `(e) QUALIFIED LONG-TERM CARE INSURANCE CONTRACT DEFINED- For purposes of this section, the term `qualified long-term care insurance contract' has the meaning given such term by section 7702B. `(f) COORDINATION WITH STATE REQUIREMENTS- If a State imposes any requirement which is more stringent than the analogous requirement imposed by this section or section 7702B(g), the requirement imposed by this section or section 7702B(g) shall be treated as met if the more stringent State requirement is met. '(b) CONFORMING AMENDMENT- The table of sections for chapter 43 is amended by adding at the end the following new item: `Sec. 4980C. Requirements for issuers of qualified long-term care insurance contracts.'. SEC EFFECTIVE DATES SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 187

189 (a) IN GENERAL- The provisions of, and amendments made by, this part shall apply to contracts issued after December 31, The provisions of section 321(f) (relating to transition rule) shall apply to such contracts. (b) ISSUERS- The amendments made by section 326 shall apply to actions taken after December 31, SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 188

190 IRS NOTICE [46,394] Notice 97-31, I.R.B , May 6, [Code Sees. 213, 4980C and 7702B] Medical expenses: Long-term care: Long-term care insurance contracts: Long-term medical benefits: Exclusion from income. The IRS has provided interim guidance relating to qualified long-term care services and qualified long-term care insurance contracts as provided for in the Health Insurance Portability and Accountability Act of 1996 (P.L ). The guidance includes definitions of key terms and a safe harbor for continuation of pre-1997 insurance standards. It is effective pending the publication of proposed regulations or other guidance. Back references: 12, , 12,543.06, 36, and 43, SUMMARY The notice includes interim guidance concerning the definition of a chronically ill individual, including safe-harbor definitions of the terms substantial assistance, hands-on assistance. standby assistance, severe cognitive impairment, and substantial supervision. Under the long-term care provisions added to the Internal Revenue Code in 1996, certain payments received on account of a chronically ill individual from a qualified long-term care insurance contract are excluded from income. In addition, certain expenditure incurred for qualified long-term care services required by a chronically ill individual are deductible as medical care expenses. The notice also includes an interim safe harbor that allows key provisions in qualified long-term care insurance contracts to be interpreted by an insurance company using the same standards that the company used before 1997 to determine whether an individual is unable to perform activities of daily living or is cognitively impaired. In addition, the notice provides interim guidance on the scope of the statutory grandfather provisions that apply to individual and group long-term care insurance contracts issued before The safe harbors are designed to provide standards for taxpayers to use in interpreting the new long-term care provisions and to provide interim guidance to facilitate operation of the insurance market without the need for interim amendment of contracts. The guidance takes into account comments and information provided by State insurance regulators (including the National Association of Insurance Commissioners), insurance companies offering long-term care insurance, consumer representatives, groups representing individuals with chronic disabilities, the Department of Health and Human Services, health professionals expert in the care and rehabilitation of individuals with chronic illnesses, and others. The notice addresses certain issues identified as those for which interim guidance would be most helpful. The Internal Revenue Service and Treasury Department are continuing to consider these and other issues and welcome further comments. STATUTORY CHANGES Sections 7702B and 4980C, added by 321 and 326 of the Health Insurance Portability and Accountability Act of 1996 (Pub. L , 110 Stat. 1936, 2054 and 110 Stat. at SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 189

191 2065)(HIPAA), establish requirements for qualified long-term care insurance contracts and issuers of those contracts. Section 7702B(b)(l)(A) requires a qualified long-term care insurance contract to provide insurance protection only for qualified long-term care services. Generally, 7702B applies to contracts issued after December 31, 1996, and 4980C applies to actions taken after December 31, See HIPAA 321(f)(1) and 327. Section 7702B(c)(l) defines qualified long-term care services as necessary diagnostic, preventive, therapeutic, curing, treating mitigating, and rehabilitative services, and maintenance or personal care services that are required by a chronically ill individual, and provided pursuant to a plan of care prescribed by a licensed health care practitioner. Section 7702B(c)(2)(A) defines a chronically ill individual as any individual who has been certified by a licensed health care practitioner as (i) being unable to perform without substantial assistance from another individual at least 2 out of 6 activities of daily living listed in 7702B(c)(2)(B) (ADLs) for a period of at least 90 days due to a loss of functional capacity (the ADL Trigger); (ii) having a level of disability similar to the level of disability described in the ADL Trigger as determined under regulations prescribed by the Secretary of the Treasury in consultation with the Secretary of Health and Human Services (the Similar Level Trigger); or (iii) requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment (the Cognitive Impairment Trigger). The 6 ADLs listed in 7702B(c)(2)(B) are eating, toileting, transferring, bathing. dressing, and continence. Section 7702B(c)(2)(B) further provides that a contract is not a qualified long-term care insurance contract unless it takes into account at least 5 of these 6 activities in determining whether an individual is a chronically ill individual. In addition, 322 of HIPAA amended 213 of the Code. For taxpayers who itemize deductions, 213 generally allows a deduction for expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his or her spouse, and dependents, to the extent that the expenses exceed 7.5 percent of the taxpayer s adjusted gross income. As amended by HIPAA, 213(d) provides that the term medical care includes (1) eligible premiums paid for any qualified long-term care insurance contract (as defined in 7702B(b) and (2) amounts paid for qualified long-term care services (as defined in 7702B(c)). INTERIM GUIDANCE I. Chronically III Individual This section of the notice provides interim guidance including safe harbors relating to the determination of whether an individual is a chronically ill individual under 7702B (2). Taxpayers (including uninsured individuals, insurance companies, employers, policyholders, and certificate holders) may rely on this interim guidance to determine whether an individual is a chronically ill individual under the ADL Trigger or the Cognitive Impairment Trigger for purposes of the definitions of qualified long-term care services in 7702B(c) and medical care in 213(d) SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 190

192 ADL Trigger. For purposes of the ADL Trigger, taxpayers may rely on all or any of the following safe harbor definitions (1) Substantial assistance means hands-on assistance and standby assistance. (2) Hands-on assistance means the physical assistance of another person without which the individual would be unable to perform the ADL. (3) Standby assistance means the presence of another person within arm s reach of the individual that is necessary to prevent, by physical intervention, injury to the individual while the individual is performing the ADL (such as being ready to catch the individual if the individual falls while getting into or out of the bathtub or shower as part of bathing, or being ready to remove food from the individual s throat if the individual chokes while eating). An individual is a chronically ill individual under the ADL Trigger only if a licensed health care practitioner has certified that the individual is unable to perform (without substantial assistance from another individual) at least 2 ADLs for a period of at least 90 days due to a loss of functional capacity. This 90-day requirement does not establish a waiting period before which benefits may be paid or before which services may constitute qualified long-term care services. Cognitive Impairment Trigger. For purposes of the Cognitive impairment Trigger, taxpayers may rely on either or both of the following safe-harbor definitions (1) Severe cognitive impairment means a loss or deterioration in intellectual capacity that is (a) comparable to (and includes) Alzheimer s disease and similar forms of irreversible dementia. and (b) measured by clinical evidence and standardized tests that reliably measure impairment in the individual s (i) short-term or long-term memory, (ii) orientation as to people, places, or time, and (iii) deductive or abstract reasoning. (2) Substantial supervision means continual supervision (which may include cuing by verbal prompting, gestures, or other demonstrations) by another person that is necessary to protect the severely cognitively impaired individual from threats to his or her health or safety (such as may result from wandering). Under the Cognitive Impairment Trigger, unlike the ADL Trigger, a qualified long-term care insurance contract is not required to take any ADL into account for purposes of determining whether an individual is a chronically ill individual. Safe-Harbor for Continuation of Pre-1997 Insurance Standards. This safe harbor applies to post-1996 long-term care insurance contracts (including any pre-1997 contracts not grandfathered under 321(f)(2) and the grandfather rules in this notice for certain pre-1997 insurance contracts) issued by an insurance company with outstanding pre-1997 long-term care insurance contracts that base eligibility for payments upon the inability to perform any of the ADLs (eating, toileting, transferring, bathing, dressing, and continence) or cognitive impairment. Insurance companies, policyholders, and certificate holders may rely on this safe harbor (as well as the safe-harbor definitions above for the ADL and Cognitive Impairment Triggers) to determine whether an individual is a chronically ill individual under both or either the ADL Trigger and the Cognitive Impairment Trigger for purposes of the definition of a qualified long-term care insurance contract, whether or not the post-1996 contracts generally incorporate the provisions of 7702B(c)(2). In order to rely on any of these safe harbors for federal tax purposes, contracts are not required to incorporate or refer to the safe harbors SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 191

193 In applying the ADL Trigger to its post-1996 contracts, an insurance company is permitted to use the same standards that it uses to determine whether an individual is unable to perform an ADL for purposes of eligibility for benefit payments under its pre contracts ( pre-1997 ADL standards ). If the insurance company makes determinations regarding an individual s inability to perform an ADL under a post-1996 contract using its pre ADL standards, the contract will be deemed to satisfy the requirement under the ADL Trigger that an individual is unable to perform (without substantial assistance from another person) that ADL due to a loss of functional capacity. For example, if an insurance company has outstanding pre-1997 long-term care insurance contracts that provide for benefit payments if the insured is unable to perform at least 2 ADLs (whether or not the contracts refer to substantial assistance), the company may interpret substantial assistance for purposes of the ADL Trigger as requiring the same assistance as the company requires under its pre-1997 contracts. In applying the Cognitive Impairment Trigger to its post-1996 contracts, an insurance company is permitted to use the same standards that it uses to determine whether an individual qualifies for benefits due to cognitive impairment under its pre contracts ( pre-1997 cognitive impairment standards ). If the insurance company makes determinations regarding an individual s cognitive impairment under a post-1996 contract using its pre-1997 cognitive impairment standards, the contract will be deemed to satisfy the requirement under the Cognitive Impairment Trigger that an individual requires substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment. This safe harbor for continuation of pre-1997 insurance standards applies only for purposes of determining whether an individual (1) is unable to perform (without substantial assistance from another person) an ADL due to a loss of functional capacity or (2) requires substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment. This safe harbor does not apply for purposes of the other statutory requirements of 7702B(c)(2), such as (1) the requirement that an individual s loss of functional capacity apply to at least 2 of 5 or 6 ADLs, (2) the requirement for a certification by a licensed health care practitioner, and (3) the 90day requirement. These statutory requirements must be satisfied in order for the individual to be a chronically ill individual under the ADL or Cognitive Impairment Trigger, whether or not similar requirements are imposed under the insurance company s pre-1997 contracts. II. Qualified Long-tern Care Insurance This section of the notice addresses certain issues relating to the consumer protection provisions of 7702B(b), 7702B(g), and 4980C, rules for adjustments to nonforfeiture benefits under 7702B(g)(4), and the grandfather rules for certain pre-1997 insurance contracts. Taxpayers (including insurance companies, employers, policyholders, and certificate holders) may rely on this interim guidance for purposes of the definition of qualified long-term care insurance contract in 7702B(b) and the requirements of 4980C. Consumer Protections Applicable to Long-Term Care Insurance. Under 7702B(b)(l)(E;),7702B(g), and 4980C, qualified long-term care insurance contracts and issuers of those contracts are required to satisfy certain requirements of the Long-Term Care Insurance Model Act (Model Act) and Long-Term Care Insurance Model Regulation (Model Regulation) promulgated by the National Association of Insurance Commissioners (NAIC), as adopted as of January The requirements for qualified long-term care insurance contracts under 7702B(b)(l)(F) and 7702B(g) relate to guaranteed renewal or non-cancellability, prohibitions on SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 192

194 limitations and exclusions, extension of benefits, continuation or conversion of coverage, discontinuance and replacement of policies, unintentional lapse, disclosure, prohibitions against post-claims underwriting, minimum standards, inflation protection, prohibitions against preexisting conditions and probationary periods, and prior hospitalization. The requirements for qualified long-term care insurance contracts under 4980C relate to application forms and replacement coverage, reporting requirements, filing requirements for marketing, standards for marketing, appropriateness of recommended purchase, standard format outline of coverage, delivery of a shopper s guide, right to return, outline of coverage, certificates under group plans, policy summary, monthly reports on accelerated death benefits, and incontestability period. Sections 7702B and 4980C reference NAIC model provisions that specify exact language (including punctuation), captions, format, and content that must be included in long-term care insurance contracts, applications, outlines of coverage, policy summaries, and notices. See, e.g. 10, 13, and 24 of the Model Regulation. In the case of a State that has adopted all or any portion of the Model Act or Model Regulation, compliance with the applicable requirement of State law is considered compliance with the parallel Model Act or Model Regulation requirement specified in 7702B(g) or 4980C, and failure to comply with that requirement of State law is considered failure to comply with the parallel Model Act or Model Regulation requirement in 7702B(g) or 4980C. For example, if a particular State has adopted Section 6C of the Model Act (relating to preexisting conditions), then, for a contract that is subject to that State s insurance laws, compliance with that State law is considered compliance with 7702B(g)(2)(A)(ii)(I) and failure to comply with that State law is considered failure to comply with 7702B(g)(2)(A)(ii)(I). In accordance with 4980C(f), in the case of a State that imposes a requirement that is more stringent than the analogous requirement imposed by 7702B(g) or 4980C, compliance with the applicable requirement of State law is considered compliance with the parallel Model Act or Model Regulation requirement in 7702B(g) or 4980C. If a State has not adopted a provision of the Model Act or Model Regulation that is specified in 7702B(g) or 4980C (and has not adopted a requirement that is more stringent than the requirement imposed by that provision), the language, captions, format, and content requirements imposed by the Model Act or Model Regulation provision with respect to contracts, applications, outlines of coverage, policy summaries, and notices will be considered satisfied for a contract subject to the law of that State if the language, captions, format, and content are substantially identical in all material respects to those required under that Model Act or Model Regulation provision. Adjustments to Nonforfeiture Benefits Under Insurance Contracts. Section 7702B(g)(4)(B)(ii) provides that the amount of a nonforfeiture benefit available in the event of a default in premium payments may be subsequently adjusted only as necessary to reflect changes in claims, persistency, and interest that have been taken into account in a change in the premium rates for contracts issued on the same contract form if the contract form has been approved by the Secretary of the Treasury. Solely for the purpose of making such adjustments, approval by the State insurance commissioner or other applicable State authority will be treated as approval by the Secretary of the Treasury. Grandfather Rules for Certain Pre-1997 Insurance Contracts. Section 321(f)(2) of HIPAA provides that a contract issued before January 1, 1997, is treated as a qualified long-term care insurance contract if the contract met the long-term care insurance requirements of the State in which the contract was sitused at the time it was issued. For this purpose, the long-term care SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 193

195 insurance requirements of the State means the State laws (including statutory and administrative law) that are intended to regulate insurance coverage that constitutes long-term care insurance (as defined in 4 of the Long-Term Care Insurance Model Act as adopted by the NAIC in December, 1995), regardless of the terminology used by the State in describing the insurance coverage. For purposes of applying the grandfather rule of 321(f)(2) to a contract other than a group contract, the issue date of a contract is generally the date assigned to the contract by the insurance company, but in no event earlier than the date the application is signed. However, if the period between the date of application and the date on which the contract is actually placed in force is substantially longer than under the insurance company s usual business practice, then the issue date is the date the contract is placed in force. For purposes of applying the grandfather rule of 321(f)(2) to a group contract, the issue date of the contract is the date the group contract was issued. Thus, insurance coverage under certificates evidencing the addition, on or after January 1, 1997, of individuals to the coverage available under a grandfathered group contract is accorded the same grandfather treatment under 321(f)(2) as the preexisting coverage under the grandfathered group contract. A policyholder s right to return a long-term care insurance contract within a free-look period following delivery (with a refund of any premiums that have been paid) is not taken into account in determining the issue date of the contract. For purposes of applying the grandfather rule of 321(f)(2), any material change in a contract will be considered the issuance of a new contract. This includes any change in the terms of the contract altering the amount or timing of any item payable by the policyholder (or certificate holder), the insured, or the insurance company. For example, for purposes of 321 (f)(2), any change in the terms of a contract altering the amount or timing of benefits (including nonforfeiture benefits) or premiums constitutes a material change that will be considered the issuance of new contract. A substitution of the insured under an individual contract, or a change Other than an immaterial change) in the eligibility for membership in the group covered by a group contract, also constitutes a material change that will be considered the issuance of a new contract. However, the unilateral exercise of an option or right granted to a policyholder under the contract as in effect on December 31, 1996, will not constitute a material change. For this purpose, a unilateral exercise includes only a change that becomes effective without any consent or other non-ministerial action by the issuer of the contract. A contract issued in an exchange after December 31, 1996, for an existing contract is considered a contract issued after that date. COMMENTS REQUESTED The Internal Revenue Service and Treasury Department invites comments concerning the application of new 7702B and 4980C, the amendments made to 213, and other federal income tax provisions relating to long-term care as enacted under HIPAA 321 through 326, including the standards and definitions in this notice. Comments are particularly requested on: (1) whether the relief provided for insurance contracts complying with the interim guidance provided in this notice needs to be extended beyond the effective date of more definitive guidance; and (2) the types of disability that should be included in any regulations that may be prescribed under the Similar Level Trigger. Comments should be submitted by August 4, Written comments should be sent to: Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Attn: CC:CORP:T:R, Room 5228, Washington, D.C Alternatively, submissions SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 194

196 may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (Notice 97-31), Courier s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. Finally, taxpayers may submit comments electronically via the Internal Revenue Service INTERNET site at: All submitted comments will be available for public inspection and copying. FURTHER INFORMATION For further information, contact Ms. A. Kathie Jacob Kiss at (202) regarding section I of this notice and Ms. Katherine A. Hossofsky at (202) regarding section II of this notice (not toll-free calls). PROCEDURAL INFORMATION This document serves as an administrative pronouncement as that term is defined in (b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or a revenue procedure SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 195

197 1099 LTC and Instructions SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 196

198 IRS Form SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 197

199 SANDI KRUISE INSURANCE TRAINING, SANDI KRUISE INC, ALL RIGHTS RESERVED. 198