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Avoiding Fraud When Buying Long-Term Care Insurance: A Guide For Consumers And Their Families

Introduction

When a consumer buys a fire insurance policy on their home they are betting in favor of a potential risk that most probably will not occur. To appreciate the rareness of a home fire consider all the times you have driven through your neighborhood or have flown into a major city. The number of house fires commonly encountered is rare. But if one does occur, it is a total financial catastrophe for most people. For that reason fire insurance policies are common. This is classic case of insurance at its best: everyone pays a small premium and in return receives the assurance they will not bear the full burden of a rare catastrophe.

In buying long-term health care, the consumer and the insurance company are engaging in a far different bet. The probability of the purchaser needing long-term health care at some time in the future is fifty percent.

Needing long-term health care is not rare. It is virtually guaranteed.

From an insurance standpoint the risk clearly becomes greater as the policyholder grows older and as expected, premiums can be expected to increase to cover this risk, otherwise there is no profit in being in this business.

When buying long-term care coverage, the consumer should anticipate that premiums will increase to levels that in all probability will severely strain a fixed-income budget, resulting in cancellation, just prior to the time when coverage is needed. All insurance companies know this because their records confirm an increasing level of cancellations as premiums increase with aging policies and aging policyholders. The customer does not. The end result is a system that is rich with the potential for fraud. Add to this situation the fact that sales agents are driven by high commissions and the potential for fraud can readily become a reality.

Just as in the case of health care coverage, once a consumer needs the benefits of a long-term care policy they are often physically, mentally and emotionally disabled and unable to assert their rights. This project was undertaken to alert, educate and warn consumers, and their families, now while they have the ability to make intelligent choices. Obviously this effort is not intended to be relied upon as legal advice and anyone who does so is making a dreadful mistake. The purpose of this compilation of information is to open the eyes of purchasers of long-term care insurance, describe some of the major problems consumers encounter and to warn of traps to be avoided.

The best possible advice

Every insurance policy is a legal contract developed by teams of skilled lawyers working and modifying the document over a period of many years. Every time a new court decision alters existing law, trained contract specialists modify the contract in order to take advantage of new developments.

Understanding what a policy means and comparing the policies of different companies requires an understanding of the jargon of the insurance business and a familiarity with how terms of art have evolved and have been interpreted by courts.

If you have any doubts what the contract means and whether or not it will protect you after spending thousands in premiums and to avoid risking litigation in the future, it is far more sensible to pay for an informed opinion at the outset.

The key to having your expectations met when you submit a claim for benefits and to avoid being defrauded is to believe nothing you are told by a sales agent and to rely upon only what you read and understand in the policy. Ignore what you may read in promotional brochures. In 1994 a California appellate court declined to rule that a misleading advertising brochure was actionable and held that all that was needed to determine the relationship between the consumer and the insurance company was to read the policy.

If you do not understand the policy's terms, do not buy it until you fully understand what you are buying or else hire someone who can and will make sure you are making an informed decision. Some attorneys specialize in coverage questions. They know and understand insurance coverage issues. Ask potential lawyers if they have experience in insurance coverage questions and to detail that experience for you. Before you retain a lawyer, come to an understanding on the fees to be charged to interpret the policy.

If you cannot afford to hire a lawyer to interpret the contract you want to buy, you should ask yourself if you can afford to buy coverage and once you are in poor health and look forward to receiving policy benefits whether you then will be able to pay for a lawyer to enforce your rights under the contract if benefits are not forthcoming.

In the absence of an informed legal opinion, deal only with an established and respected insurance brokerage firm that has been in your community for years. An insurance broker is an independent agent for many companies and normally knows what the market is offering. Such a person can explain the advantages and disadvantages of various policies on the market.

Many insurance companies do not sell through brokers, but instead utilize exclusive agents. If you are considering a policy offered from such an agent, be sure to listen carefully and obtain opinions from independent brokers. Ask them to compare their best policy with the one you are considering, explain which is best and why.

When buying long-term care, make it a family decision. Bring together everyone who has an interest: your spouse, children, siblings, and closest personal friend. There is a special value in collective decision-making that will help avoid some of the pitfalls that have been well documented.

Promises, easily made

Nearly one out of every two persons age 65 and older will probably spend some time in a nursing home, which costs on average $30,000 annually across the United States and in major metropolitan areas the average escalates to $60,000 and as much as $100,000 per year. With an average nursing home stay of 19 months, seniors living in major metropolitan areas will spend $100,000 on long-term care in addition to medical bills and prescriptions.

Fearful of losing economic independence, older Americans are looking for security in long-term care insurance. Even though for seniors over 65 premiums can range from $2,000 to over $10,000 per year, long-term care insurance is "the fastest-growing type of health insurance sold in recent years." Still, only five percent of those over 65 have purchased private long-term care insurance. Uninsured seniors constitute a lucrative market and as a result over 100 insurance companies now offer long-term care policies.

Long-term care policies pay the cost of the day-in, day-out care for a person with an acute or long-term illness or disability. Many seniors receive this care in nursing homes, but more effective and less expensive care at home and at adult day-care centers is growing in popularity, because it is less expensive and still provides the security of a longstanding home.

That is the theory, but in practice these policies are often riddled with loopholes that do not adequately protect a senior's life savings. Some policies have such strict disability criteria that many policyholders who need help do not qualify for benefits. Other policies narrowly define qualifications so that insurance company doctors, who are given bonuses for controlling costs, can overrule the medical orders of a policyholder's private doctor. Even when policyholders qualify for benefits, many will learn that their coverage has been out-paced by inflation. Yet only five of every one hundred 60-year-old consumers who take out long-term care insurance policies in 1995 will still have coverage in place at age 80 when they need it, because the high cost of premiums, which are likely to rise even higher, will force them to drop their coverage. Insurance companies carefully study buying and use patterns and know from experience that as the cost of policies increases the amount of policies in force declines at increasing rate, especially as consumers on fixed incomes find themselves facing increasingly tighter budgets as inflation continues.

Add to this cauldron of conflict the insurance company's sales commission structure. Insurance agents are loath to disclose policy pitfalls when it means risking the loss of a commission equal to life insurance commissions of 30% to 65% of the first year's premium, far more than the typical 10% commission many auto insurance agents earn. State regulatory agencies are insufficiently staffed to monitor sales presentations, except in undercover investigations such as the one conducted by the New York Superintendent of Consumer Affairs. In effect, no government agency holds insurance agents directly accountable for unacceptable sales practices.

In addition to the complicated terms in long-term care policies, the fear of actually needing long-term care can be even more difficult to face for seniors and their families. The expectation of needing long-term care strikes at the heart of personal concerns about losing one's health and economic independence. Seniors are particularly vulnerable to scare tactics and to stories of the infirm being thrown onto the street because they do not have long-term care coverage and lack the financial ability to provide for themselves.

Complicated policies loaded with fine print, sales agents driven by substantial commissions, and the vulnerabilities of seniors as consumers is fertile territory in which the strong can and will take advantage of those who cannot defend themselves.

Sales presentations are designed to overstate what policies will cover, explain eligibility criteria for benefits in terms that are not grounded in reality and manipulate statistics to make sales now. In addition, agents fail to explain significant aspects of policies and the high probability that premiums will increase. Scare tactics result in sales, so it is not uncommon for agents to report the cases of destitute seniors. Providing the new insured with a copy of the contract is also rare.

It is impossible for a consumer to make an informed purchase based on what is learned in a sales presentation. Even worse, insurance company promotional literature cannot be trusted to carefully explain the terms of the contract being sold.

For example:

AMEX Assurance Company is a subsidiary of American Express Travel Related Services, is a name well known to consumers and enjoys the reputation of the American Express name. Nonetheless, a senior manager of the company relied upon blatant scare tactics in his sales presentation, pressing his customers to recall personal experiences with nursing home patients who were abused. Pushing to close the sale, he declared "my grandfather would be turning in his grave now" if we had passed up the chance to buy this protection.

A CNA agent falsely promised a level premium under the CNA. When pressed as to whether premiums can ever go up, the agent promised that a premium increase "has never happened." Premium increases are common and to be expected.

Consumers should be equally leery of sales literature. An AMEX pamphlet tells buyers, "Your nursing home stay is covered when your doctor certifies that it is appropriate." That is a lie. The policy clearly states that the company, not the policyholder's doctor, makes the final decision whether the policyholder qualifies for benefits.

Long-term care policies contain strict restrictions and limitations on benefits. Strict definitions control when and where patients can receive care. For example, it is not uncommon for policyholders to need "continuous one-on-one assistance" in performing daily activities in order to receive benefits. To qualify, one would have to be severely ill and be in need of admission to an intensive care unit to collect under the policy.

The solution to these abuses must come from government. Government has not acted because in large part insurance companies spend thousands of dollars in lobbying and consumers do not. In addition consumers lack the financial standing to prosecute cases and many times the actual damage is not suffered until the victim's health has so deteriorated that they are physically incapable of assisting their attorneys in fighting a major insurance company. In a perfect world government should mount undercover investigations of insurance agents who mislead consumers and make public examples of them by criminal prosecution. Insurance companies should be held strictly liable for the acts of their agents to make sure policies are not exaggerated and sales presentations are honest and straightforward.

Consumers should never believe they are smarter than the carrier's lawyers. Buying insurance is a legal gamble and consumers need to know the odds. Even with coverage, out-of-pocket costs of hundreds of thousands of dollars are not uncommon. Never buy a long-term care policy unless you fully understand it and have analyzed your complete financial needs. Always have a policy studied by a trained professional before spending. Make sure you know what you are buying. The General Accounting Office of the U.S. government is clear in its warning that consumers should never rely on the price of a policy "as a good measure of value." The question of buying coverage is not what the price is today, but what will it cost in the future, what are the benefits and what do you need to do to qualify.

Defining long-term care

As a result of disability or a prolonged illness, long-term care is the assistance provided when a person is unable to provide for himself or herself. It ranges from providing personal care at home, such as bathing and dressing, to skilled nursing services in a nursing home.

Long-term care is offered through home care agencies, senior centers, adult day care centers, traditional nursing homes, and retirement communities that provide on-going care.

In considering long-term care insurance policies various kinds of care are mentioned. Here are the most commonly used terms and their generally accepted meaning. Remember, the definitions given here can and often times are re-defined by carriers in their policy and given special meaning under a particular contract. It is important to read the fine print.

Skilled nursing care is needed for medical conditions that require care by specially trained nurses or therapists, who routinely are licensed by the state. This level of care is on the specific orders of a doctor who dictates the care to be provided and is usually required around the clock, 24 hours a day. It is the care given as part of a severe illness and can extend well after the severest level of an illness has passed. Skilled care can be provided in a person's home with help from practical, as opposed to registered, nurses.

Intermediate nursing care is associated with stable conditions that require daily supervision, but not around the clock care. It is less specialized than skilled nursing care, often involves more personal care and is supervised by registered nurses. Intermediate care is commonly needed for a matter of months and years.

Custodial care is intended to assist with daily living, which includes bathing, eating, dressing, and other routine activities. Special training or medical skills are not required. It is provided by unskilled nursing assistants in nursing homes, day care centers, and at home. It is often called personal care.

It is common for long-term care services to be provided in a person's home. It includes part-time skilled nursing care, practical nursing assistance, the services of a nurses aide, physical or occupational therapy, homemaker assistants, and chore workers, who provide assistance with daily living activities. The cost of long-term care Long-term care is expensive, depending on the severity of a disability, the degree of care needed and where it is to be provided. In 1991, the cost of a year in a nursing home averaged $30,000 across the United States. Skilled nursing care at home with two-hour visits by a nurse three times a week over a year, would cost approximately $12,500. Personal care at home from a home health aide three times a week for two hours would cost approximately $8,400 a year.

In major cities, the cost can be expected to reach $60,000 a year and as much as $100,000. With an average nursing home stay of 19 months, seniors living in major metropolitan areas can expect to pay $100,000 on long-term care in addition to medical bills and prescriptions.

Who pays for long-term care?

The answer is simple: it comes from your cash and your assets, your family's assets and for those without assets it is paid by Medicaid programs administered by state government. More than half of nursing home bills are paid out-of-pocket by individuals and their families, and somewhat less than half are paid by state Medicaid programs. Insurance, and that includes Medicare, Medicare supplemental coverage and health insurance provided by employers, does not pay for most long-term care expenses.

Only in certain cases will Medicare cover the cost of some skilled nursing care in approved nursing homes or in your home, but there is no coverage for custodial or intermediate care or prolonged home health care.

Medicare does not offer long-term care as a benefit.

Medicare supplement policies are sold by private insurance companies and are offered to fill some of the gaps in Medicare coverage. Hospital deductibles and excess physicians' charges are routinely covered, but these policies do not cover long-term care expenses.

Standardized Medicare supplement policies, Plans D, G, I and J, do contain an at-home recovery benefit that may pay up to $1,600 per year but only for short-term, at-home assistance with activities of daily living, for an illness, injury or surgery during a limited recovery period.

Almost half of all nursing-home care billings are satisfied by Medicaid programs. This coverage is only for those who meet federal poverty guidelines for income and assets. For many people it means consuming assets to qualify for health care. Usually a personal residence is not counted when determining Medicaid eligibility, but other assets must be reduced to qualify. When it comes to long-term care it is common for the elderly to pay for care from their assets until they reach the poverty level and qualify for Medicaid to continue paying for nursing home expenses. As a result most people in nursing homes are so poor that financially they need to remain in the nursing home.

Qualifying for Medicaid differs from state to state as does the level of assets you are allowed to keep and remain eligible for Medicaid. While those requirements can and will be expected to change as the WW II Baby Boomer generation ages, it is strongly recommended that you ask your state Medicaid office, office on aging, state department of social services or local Social Security office to make sure you know the current eligibility rules before you begin looking at long-term care coverage.

Who should buy long-term care insurance?

Long-term care insurance policy is not for everyone. For a limited population, long-term care policy makes sense as an affordable and worthwhile form of insurance. Buying long-term coverage should not cause financial hardship and force you to forego other financial needs. Whether long-term care insurance is appropriate requires a full financial analysis. For many people it is not a good idea.

Although the need for long-term care can arise gradually as a person ages and needs more and more assistance with activities of daily living, for most a stroke or a heart attack will be the precipitating need. Those with acute illnesses may need nursing-home care for a matter of months, while others may need care for years.

In any specific case it is difficult to predict who will need long-term care, but studies point out the likelihood of needing such care. In one study, it is anticipated that 43% of those who turned age 65 in 1990 will enter a nursing home at some time during their life. Of those who live to age 65, nearly 1 in 3 will spend three months or more in a nursing home and 1 in 4 will spend one year or more in a nursing home. Only 1 in 11 will spend five years or more in a nursing home.

Women outnumber men in nursing homes according to this specific study. Thirteen percent of the women as compared to 4% of the men were projected to spend five or more years in a nursing home. And obviously the risk of needing nursing home care increases with age.

After assessing the odds that you will need long-term care, consumers must stringently analyze the reasons for a policy and the ability to pay for it for the balance of a person's life. It makes no sense to buy a policy unless it can be paid every year until death and far too many policies are cancelled by policyholders on fixed incomes as they grow older and their premiums increase accordingly.

Buying a policy is a function of your age, health status, overall retirement objectives, income and wealth. If the only source of income is a minimum Social Security benefit or Supplemental Security Income (SSI), do not purchase a policy. If paying utilities, food or medicine stretches a budget; this person should not purchase a policy.

Long-term care policies are only for people with significant assets they want to preserve for family members, to assure independence and not burden family members with nursing home bills. Never buy a policy if paying the premiums will be a problem. If you have existing health problems that will result in the need for long-term care, such as Alzheimer's or Parkinson's disease, no company will sell you a policy because the probability of losses exceeds the probability the carrier will earn a profit on its contract with you.

What coverage is available?

Standardized long-term care policies, such as can be found for Medicare supplement insurance, do not exist in the long-term care market. Comparing policies is extremely difficult because companies are selling policies with many different combinations of benefits and coverage. Most offer to pay a fixed dollar amount each day you receive care. Other companies offer to pay a percentage of the cost of services or a specified dollar amount to cover the actual charges for care. These policies are useless, unless they provide for benefits to increase as nursing home costs rise. Without inflation protection [described below] a consumer will be left with a benefit that is meaningless.

Long-term care benefits are offered as part of some individual life insurance policies. Under this plan, a percentage of a policy's death benefit is paid when long-term care is needed and death benefit and cash values are reduced accordingly. These policies also commonly have strict rules for qualifying for coverage.

Who offers long-term care policies?

Private insurance companies, both stock and mutual companies, sell long-term care policies through agents Some sell coverage through the mail and others through senior citizen organizations, fraternal societies, continuing care retirement communities and other groups. Employers are beginning to offer long-term care policies to their employees, their employees' parents, and their retirees.

What do contracts provide?

What benefits are offered?

There are no "standard" benefits so it is difficult to compare policies offered by different companies. Some policies limit coverage for services provided in nursing homes and do not provide coverage for services delivered in your home, while others cover both nursing home and home care. Others companies pay for care only if it is provided by adult day care centers or other community facilities. Each policy defines what benefits it will pay, so it is imperative that you carefully read the fine print to understand what is offered.

In general, nursing home coverage usually pays for skilled, intermediate and custodial care. Some policies offer to pay for any care required, provided eligibility requirements are met.

Home care coverage is trickier. Some companies offer to pay for skilled nursing care in your residence but only if it is provided by certain providers: registered nurses, licensed practical nurses, and licensed rehabilitation therapists. These policies usually do not provide home health aides. A home health aide has less education and training than registered or practical nurses and they are paid less than a licensed practical nurse. An aide assists with personal or custodial care. Only the exceptional policy will provide for homemaking services to cook in your home, run errands and perform work that otherwise could not be done. Because of the potential for being defrauded and the difficulty of monitoring benefits, rarely will an insurance company pay benefits to family members who perform home care services. Occasionally group policies sold to employers will provide some coverage allowing family members to provide care.

It's best to look for a policy that provides for a range of services, including home care services, since the nature and extent of the care to be required in the future is at best a guess.

Where are services provided?

Insurance companies carefully limit and control where you can receive services to make sure they are paying benefits required under the policy and unless you are receiving services in an approved facility, companies will refuse to pay for your care. Many carriers will not cover custodial care unless it's provided in a skilled or intermediate nursing facility. Some will describe by name the types of facilities where you will not be covered. Most often these are homes for the aged and rest homes, even if they are in fact providing custodial care. There are so many different restrictions written by insurance companies that it is impossible to list them all here. Common descriptions include the type of nursing supervision, the size of the facility, type of care provided, and level of licensing. Check these rules very carefully and search for companies that offer a range of facilities. Remember, the insurance carrier wants you in the least expensive facility that will not provide any level of care above the minimum care it is obligated to provide.

Policy restrictions will often be in conflict with state licensing requirements and will not authorize payment for custodial care coverage in a particular facility even though it is licensed to provide custodial care. Another pitfall is that facilities certified by Medicare to provide skilled nursing care may be excluded as skilled nursing care providers.

Common exclusions

Do not expect any carrier to pay benefits for:

  • mental disease and nervous disorders, other than Alzheimer's;
  • addictions to drugs and alcohol;
  • injuries and illnesses caused by war;
  • treatment paid by the government; or
  • injuries that are self-inflicted, such as in suicide attempts.

Some companies cover Alzheimer's disease. As always, read the fine print.

Limits on benefits

Benefits are usually described in terms of the amount the carrier will pay per day for care in a nursing home and vary from $75 up to $250 a day. Gain familiarity with the general charges for nursing homes in your area before you buy a policy. Keep in mind that prices will increase by the time you will need care, so all you are obtaining is a reference level to familiarize yourself with the market. Once you know prices in your area you can calculate the range of future charges by following the Rule of 72. This simple formula allows you to determine the length of time it will take for a price to double at a given rate of interest. Assuming a nursing home near you charges $100 per day and that nursing home charges will increase at an annual rate of 6% per year. How long will it take the price to reach the $200 level? The answer is calculated by dividing the number 72 by the interest rate. Seventy-two divided by six gives a quotient of 12. Assuming a six percent rate of inflation, the $100 a day charge will double in 12 years. So if you are 60 years of age and purchasing a policy with the expectation that you may need nursing home care in your early seventies, you should be looking for a policy that will be paying benefits of at least $200 per day twelve years from now.

Home care is growing in popularity with patients and carriers so read policies carefully for limits. Many policies usually agree to pay for home care at a rate that is one-half of the nursing-home rate. Other policies limit the benefits for home care to a specified daily sum or limit the number of hours at a specific rate per hour.

All policies allow you to specify how long you desire benefits to last. Benefit periods range from one year to life. Remember that most nursing home stays are three months or less and many people have illnesses that last for years. Obviously policies with long benefit periods cost more. How do you decide? If you own your home or have a minimum mortgage and will be depending upon Social Security and a company pension for retirement income, you will want to protect your equity in your home in order to preserve a place for your spouse to live. Assume that you will need up to 19 months in a nursing facility at current rates and compute that cost. Compare that to your available assets and you can begin making some intelligent choices.

Carefully consider any limits on benefits if you have a repeat stay in a nursing home. Some policies require that you must be discharged from a nursing home for a stated time period before you can be re-admitted. Others calculate the second admission as part of the first if you return within 30, 90 or 180 days. Does the policy require an elimination period to run again for a second stay? Repeat nursing home admissions are not the rule, so this is a minor consideration when comparing policies.

Under home care provisions, the benefit period is usually more limited than for nursing home stays and benefit periods of one to two years are available.

Calculating when benefits will start

Most policies do not pay benefits until after a waiting period, commonly called an elimination or a deductible period. That means benefits begin 20, 30, 60, 90 or 100 days after you are admitted to a nursing home. Some policies have no elimination period and they naturally cost more. During any waiting or elimination period, you are responsible for paying for your care, but there are significant trade-offs. Having a reasonable waiting period during which you are personally responsible for your care means the insurance company can expect to pay out fewer benefits and accordingly underwriters can establish lower prices for these contracts.

Inflation protection

Only a fool would buy a policy to provide long-term care that does not provide for inflation protection. Most people are fools and end up with policies that provide benefits which are meaningless and in the process have squandered years of premiums that have done nothing but enhanced insurance company profits. However, unless your policy provides a way for your daily benefit to increase, you will learn a very serious and sad lesson about the increasing costs of nursing home services. Assume nursing home costs today of $100 a day and 8% inflation, what will the cost per day be in 18 to 20 years? Apply the Rule of 72, the cost will double every 9 years and in 18 years a charge of $100 per day will be $400 [double in nine and then re-double in an additional nine years]. If you bought a policy that did not provide for an annual inflator your insurance carrier would only pay a fraction of your expenses. Inflation protection is critically valuable and important.

Insurance companies provide inflation protection through two vehicles. Some offer customers the right to buy additional coverage in the future at the future price the company will be charging. The catch here is that the new premium will be based on your current age, which means it will be more expensive because it is more probable that you will need nursing care, but many companies will sell you the coverage without proof of insurability. If you have a policy with this protection and if you are suffering from a progressive condition you would be smart to exercise your option to buy more coverage. The major disability for the consumer is that the price of buying added coverage goes up rapidly, and many customers decline the additional protection because they cannot afford it. Furthermore, some companies require that you buy the additional coverage when it's offered or you lose the right to buy more in the future.

The second approach to inflation protection is to provide for automatic benefit increases. But even here while the daily benefit increases by a fixed percentage, carriers usually cap coverage at the end of 10 or 20 years. Some companies may offer unlimited increases and others end benefits when a customer reaches age 80 or 85. The next trick employed by the carriers is the method used to calculate the percentage increase. Some use a "simple interest" approach and add to the daily benefit each year by a stated percentage of the original coverage. In a 5% simple inflator policy the coverage on a $100 daily benefit would increase by five dollars every year. At the end of fourteen years the daily benefit would be $170 dollars, but if the company used the "compound interest" method, at the end of 14 years the daily benefit would be close to $200 [72 divided by 5]. Always buy a policy with automatic increases that are calculated using the compounded method.

Waiver of premium

A provision waiving premium payments is common in health insurance policies. It discontinues your legal obligation to pay premiums if you are receiving benefits. Some companies stop billing you as they make the first benefit payment. Others wait 60 to 90 days. Often premiums are not waived while you are in a hospital or if you are receiving care at home.

Nonforfeiture benefits

Nonforfeiture benefits in policies provide that at least some benefits will be paid even if the buyer fails to keep up premium payments and the policy is cancelled for non-payment. The benefits provided are usually minimal.

Death benefits

Death benefits are an agreement to refund to your estate any premiums you paid minus benefits paid to you.

Who determines if you are entitled to benefits?

All policies have "gatekeepers" who have the power to decide if you are eligible for benefits. Every policy contains terms usually referred to as "eligibility for benefits," "qualifying for benefits," or "benefit conditions." Gatekeepers are a critical feature of every long-term care policy and one you should carefully study before you buy because there is a big difference between companies when it comes to who decides if the company will pay out money. For some companies this issue is so important that the policies provides for more than one gatekeeper.

Under the best policies, you can qualify for benefits if your doctor orders specific care. Other policies will require that care be "medically necessary for sickness and injury." You already know who will make that determination. If you are in need of nursing-home services, but are not sick or injured, you would not qualify. The insurance company would determine whether you were sick or injured. A third type of rule limiting your right to benefits requires that you be unable to perform a certain number of "activities of daily living," commonly referred to as ADLs. These normally include bathing, dressing, walking, moving from bed to chair, toilet, maintaining continence, and eating.

Some policies evaluate mental functions to determine the qualifications for benefits. This gatekeeper standard is important in cases of Alzheimer's disease. Even though insurance regulators require policies to cover Alzheimer's disease, a policyholder who has the disease can be denied benefits if he or she is physically able to perform the activities of daily living specified in the policy, unless there is a mental functioning criteria. If the policy uses an ADL gatekeeper, an insured with Alzheimer's disease may not qualify even though they are at risk for forgetting to take medications and may forget to come home after they walk to the corner store for a loaf of bread. With a mental functioning standard, a policyholder with the disease is more likely to receive benefits.

ADL criteria are not the same from one company to another. Most insurers define what is meant by an inability to perform a particular activity such as failure to feed or bathe oneself. A definition that requires someone to physically assist in performing the activity is more restrictive than one that calls for someone to supervise the activity. It is the difference between being able to climb into a bath by yourself, needing someone to lend a hand or needing someone to actually make the transfer for you. The more specifically a company describes its requirements, the opportunities for disagreements and disputes will be lessened.

A few policies require customers to have a prior hospital admission of at least three days before qualifying to receive benefits. This requirement severely limits a disabled person's ability to receive benefits. Medicare uses this requirement to determine eligibility for skilled nursing benefits.

As explained in great detail below, gatekeepers are used to keep consumers from reaping benefits and are a major source of cost control for carriers.

Eligibility to buy coverage

Insurance companies do not sell policies without first determining what the probability will be that they will have to make good on the bet. This is called "underwriting" and it means the company evaluates your health before it will sell you a policy. Some companies follow "short-form" underwriting. On the application for coverage, you will be asked to answer a few questions about your health. Have you been in a hospital during the last 12 months or are you confined to a wheelchair? If you answer "no" to all of the questions, the company believes you are a good bet to be a customer who will pay money in and not force them to pay out. The insurance sales person is authorized to issue coverage as soon as you write a check.

Other companies are more selective. They will examine your current medical records and ask for a statement about your health from your doctor. Having conditions that are likely to require long-term care makes you a bad bet and will disqualify you with these companies.

Always answer all health questions truthfully. If the salesperson completes the form as you are asked questions, change any entries that are not 100% correct before you sign the application. The reason is simple. Once you make a claim you become just another statistic and the company will not pay you a penny if it later can claim that you lied about your health. If there is anything the carrier can do to avoid paying it will and the carrier will lament that it relied on the misstatement to grant coverage. Even though you "won" the bet and are entitled to benefits, the carrier will rescind your policy and return the money you wagered. These companies do not investigate your medical record until you file a claim, and then they investigate it with extremely fine attention to every conceivable reason why they should deny benefits based on inconsistencies. This practice is called "post-claims underwriting." It is illegal in many states. Companies that do their underwriting studies at the outset and thoroughly check on your health before issuing a policy are not as likely to engage in post-claims underwriting.

Never guess when filling out an application. Do not answer a question unless you understand it. If you do not know that "pulmonary" refers to lungs, then you should not respond to any inquiries concerning "pulmonary" conditions, complaints or symptoms. Just because you believe you know what a word means, does not mean you understand it. This is not a matter of pride. If you do not know what a word means, ask.

Trying to remember every condition you ever had and when you had it is not easy. It is far better to state that you believe you have had that condition but do not recall when or the details. Add an asterisk [*] to every section of the application where you are not sure and at the place for explanations add an asterisk and the words "please see the records of Dr. Smith" or whoever can provide the necessary information. If you follow this advice, the company can never deny you benefits after the fact because you were honest in disclosing what you remembered and offered the carrier access to a specific doctor's records where the information could be found. If a carrier tries to deny coverage for a customer with this information in their application, the insurance company's lawyers will be facing a lawsuit not only for the damage caused by the company, but in addition punitive damages.

Many companies will issue a policy if a customer has relatively minor health problems, but will not cover those particular conditions for a period of time, usually six months or longer. A pre-existing condition is one for which you sought medical advice or treatment or had symptoms within a certain period before applying for the policy. Companies also vary in the length of time they will look back at your health status, and you will want to consider these variations as well. If the company discovers you have not disclosed a pre-existing condition on your application, it may refuse to pay for treatment related to that condition and perhaps terminate your coverage.

The company's right to rescind

An insurer can rescind a policy and refuse to honor a claim where the policyholder has not provided full and complete information in the application.

Where the language of the application is clear and capable of only one interpretation, where there have been no modifications in the application made by the sales agent, the purchaser had knowledge of the information requested, the policyholder concealed requested information or misrepresented his/her history and the misrepresentation was material or critical, then the insurer can rescind the policy.

The burden of proving misrepresentation falls on the insurance company. In many cases the carrier must prove its case by clear and convincing evidence, which is a more stringent burden than the usual standard that requires proof by a preponderance of the evidence.

Nonetheless, many companies accept policyholders only to provide the most rigorous scrutiny when a claim is presented, which is natural and to be expected. Insurance companies and their employees have the highest duty not to pay a false, fraudulent or illegal claim. It is the nature of the beast. If a policyholder has failed to disclose his/her full medical history, the company would be a fool not to take advantage of such a failure to avoid paying a claim.

The best insurance against have a policy rescinded for failure to make a timely and full disclosure is to make a full and complete disclosure, not matter what the sales agents says. On this issue the agent should be thought of as the enemy. The agent's interest is in making the sale and earning the commission. It matters not that 10 years later coverage will be denied. What matters to the agent is getting paid this month for the policies submitted and accepted by the company.

Defend yourself by making a full disclosure no matter what the agent says. If the policy is not issued to you now, at least you can apply to other companies. This is a far better result than having the carrier issue the policy to you and then rescind once you have need for benefits and are not in a position to apply to anyone because of the condition of your health.

Check the application carefully. If any condition has not been fairly reported, added it to the form.

Tender your complete medical records with your doctors by name and address in answer to any question where you do not know the answer. Never answer "no" when you do not recall. "I don't know" is a common idiom in American speech. Literally it means absence of knowledge, but as a practical matter most folks use it when they do not recall. In a court of law there is a huge gulf of difference between the two. So, be smart and be safe, always answer "I do not recall" when an answer does not immediately come to mind, instead of answering "I do not know." It may save you from losing coverage when you need it most.

Limitations on renewing

Today almost all policies are guaranteed renewable. Even if your health worsens after you buy the policy, it cannot be cancelled. But keep in mind that companies can raise premiums on guaranteed renewable policies. Renewability does not mean you will be guaranteed a good price. It only means you will be again offered the bet, although the amount you will have to put up may increase substantially. It is this aspect of long-term care that is the most troublesome. The older you get the greater is the probability that you will be injured or take ill. As a result carriers facing an older customer will routinely increase the amount of the bet to cover their losses, knowing full well that for a customer on a fixed budget the probability the insured will not renew increases as the amount of the premium increases. The carriers also know with a high degree of probability when the cost of a future year will be declined, at what age most customers give up their coverage and what price increase will cause the most cancellations for those in the highest risk groups. This is the real world and there are no free lunches, but this reality is still troublesome.

Cost of a policy

A long-term care policy can be expensive. Before signing a contract analyze whether you can readily pay the premiums for long-term care, Medicare and Medicare supplement coverage. The annual premium for long-term care policies with good inflation protection is in the neighborhood of $2,000 for 65 year-olds. Premium are lower for those who are a better bet the carrier will not have to pay benefits, primarily those who are younger. Policies cost more for those who are older. At age 75, the premium will be two and a half times greater than if the policy had been purchased at age 65 and six times higher than if you bought it at age 55. It's common for a husband and wife age 65 to spend approximately $7,500 a year for health insurance coverage. A policy with a large daily benefit that lasts for several years, is more expensive. Inflation protection can add 25 to 40 percent to the benefits and nonforfeiture rights can add 10 to 100 percent to the bill.

When buying a long-term care policy you must consider whether you can afford to pay the premium now, and more importantly whether you will be able to continue to pay the premiums in the future. Policies that are "guaranteed renewable" only mean that the company guarantees that it will offer you the opportunity to renew the policy and continue the coverage; it does not mean that you are guaranteed renewal at the same premium. Premiums can and will rise over time as companies begin to experience greater payouts in nursing home claims. However, once you buy a policy the premiums won't rise just because you get older, although add-on coverage will increase in cost.

Perform a personal financial audit and decide how much income you have available to spend on a long-term care policy now. Project your future income, your living expenses, and how much you can pay. If you don't expect your income to increase, it would not be prudent to buy a policy now with a premium that is at the upper limit of what you think you can afford.

Ripe with the potential for fraud

Loopholes and Fine Print Written by Insurance Company Experts

Now that the fundamentals of long-term care insurance are understood, it is time to look more closely at how long-term care insurance companies operate.

The most important concept to understand is that long-term care insurance policies will not protect a person's savings.

Despite the claims of sales personnel, most policies are so flawed that if agents were honest about the policies' limitations, many customers would probably not purchase them at all.

Furthermore, to properly cover anticipated future costs and reasonably hedge their bets against rising premiums, consumers would have to choose such high benefit amounts that most would decide that the policies would be unaffordable.

Consumers who are wealthy enough to afford adequate coverage most probably have the assets to cover the costs of long-term care without the high cost of long-term care insurance. The most common and most serious pitfalls of buying long-term care are detailed below.

Inflation Protection

Long-term care policies for seniors living in major metropolitan areas with high labor costs can expect to pay $167 per day for nursing home care. This translates into $61,000 per year. If a consumer purchases a policy that pays a fixed $100 per day, with an inflation rate of six percent per year, $100 per day will pay less than one-third of the daily cost in 12 years, and 14% of the cost in 24 years. The math is easy. At six percent inflation the cost of nursing care will double every 12 years and the daily charge will become $354. In twenty-four years the same nursing charge will have grown to $708 daily. So a consumer who purchases today at age 56 a long-term care with a fixed benefit of $100 per day who requires nursing-home care at age 80 will have to pay more than 85% of the costs out of his or her own pocket.

The answer is to purchase compounded inflation protection that increases the benefit the policy will pay each year. Since health-care costs predictably will continue to inflate, the U.S. House Select Committee on Aging concluded that "without inflation protection, long-term care insurance policies are not a wise purchase."

Carriers offer purchasers the option to buy inflation protection under four different options, none of which will fully protect buyers against increasing nursing home costs.

Simple inflation protection. This option increases the daily benefit annually by a given percent of the original base benefit. In other words, a $100-per day nursing home benefit which covers 60% of today's costs would increase $5 each year, making the daily benefit $150 after ten years and doubling the benefit after 20 years to $200. But if inflation in the long-term care market continues at 6%, the average daily cost of a nursing home is projected to $296 in ten years and $530 in twenty years. As a result, rather than maintaining a benefit at 60% of cost, simple inflation protection allows this coverage to erode to only 37% of cost in 20 years.

Five percent compounded inflation protection. Rather than increasing the daily benefit by five percent of the original benefit, this option increases the benefit by five percent compounded, meaning that each successive year's benefits are increased by five percent over the previous year. So while the example above pays simple inflation protection and only covers 37% of expected future costs after 20 years, the compounded option at 5% compounded per year will pay approximately $265 per day, after twenty years. This approach is the best option available, but given the historical, as well as anticipated, six percent inflation rate for long-term care costs, this plan does not keep pace with inflation.

Indexed inflation option. This option gives the buyer the right to increase the amount their policy will pay once every three years. The amount of the increase is indexed and tied to the Consumer Price Index reported by the U.S. government. This option is based on the real rate of inflation. This is not much help for the consumer if the inflation rate for long-term care services continues to be higher than that for goods and services. Additionally as the benefit increases so does the premium. As the policy and the owner age the premium increases significantly and for purchasers on fixed incomes it is probable the policy will be discontinued because it is too expensive at a time when coverage is most needed.

Option to purchase additional coverage. This option offers little benefit to the consumer because it only allows the policyholder to purchase additional benefits at then-current rates. Sales agents tout this coverage as a worthwhile option because it offers a policyholder the right to purchase additional coverage without having to prove medical eligibility. Consumer Reports rated this the worst possible option. It is equivalent to no inflation protection.

Because these options increase the cost of a policy nearly 50%, sales agents interested in earning a commission do not urge inflation protection to sales prospects. As a result inflation benefits are not often sold and the Health Insurance Association of America (HIAA) reports that of the major carriers offering inflation protection across the United States only one-quarter of the policies sold include inflation provisions

Nonforfeiture Benefits

A nonforfeiture benefit is essentially a useless option added to a contract to give a sales person something to crow about. The promise is that the carrier will return to the policyholders some of their "investment" in the policy if they discontinue coverage. Without a nonforfeiture benefit term, these companies claim that it would be unfair if you drop the policy say 10 or 20 years later and never used it. These companies usually offer a nonforfeiture benefit in the form of a reduced paid up policy in which lesser benefits are provided after you drop the coverage. Other carriers may offer a "return of premium" in which they return a portion of the premiums after a certain number of years if the policy is cancelled. A nonforfeiture benefit is a cost item carefully calculated by the carrier's actuary. It has a cost that is added to the underlying policy.

Assuming a policy is purchased at age 60 and remains in effect until age 80, the age by which 50% of all seniors will need a nursing home, the average policyholder will have paid in the neighborhood of $60,000, about the cost of a year of nursing home care. Most seniors have difficulty maintaining their policies until they reach age 80, when they most probably will need them. The National Association of Insurance Commissioners reports that 16% of all nursing home insurance buyers drop their coverage each year because they can no longer afford it. Insurance companies know that of those who buy coverage at age sixty, 95% will have cancelled the coverage by age 80. The U.S. General Accounting Office confirmed those figures. Of insurance company files that were investigated and excluding those who had died, 60% or more of the original policyholders allowed their policies to lapse within 10 years and one insurance company reported a lapse rate approaching 90%.

Nonforfeiture benefits provide consumers who most probably will not be able to maintain their premium payments at least something for their premium dollars. Without nonforfeiture benefits, once a consumer stops paying all rights under the policy end. The most popular nonforfeiture benefits are:

Reduced paid-up benefit.

This benefit pays the policy benefits at a reduced rate, depending upon how much money was paid into the insurance company. For example, if an individual paid premiums for 10 years, he might receive one-third of the benefit of a $100 a daily policy or $34 per day. The amount of reduced benefits is specified in the original contract. The reduced paid-up benefit amount will not increase for inflation and all policy restrictions apply.

Extended term benefit.

Under this concept the customer receives the originally specified daily benefit, but only for a reduced period depending upon how much money was paid to the carrier over the life of the policy. For example, after 10 years, 25% of the premium paid is credited to a "benefit account" and, if the policyholder qualifies, the company will pay benefits until the money in the account runs out. So after paying nearly $30,000 over 10 years the customer would be entitled to $7,500 in long-term care benefits - little more than the cost of one month in a nursing home today in a metropolitan area The insurance company would only pay benefits from this account until the account was depleted.

At best, nonforfeiture benefits are similar to a consolation prize paid by the carrier to customers who have guaranteed a profit to the company by never making a claim, paying premiums and then canceling the policy prior to qualifying for benefits.

Gatekeepers

"Gatekeepers" are what consumers typically refer to as the "fine print" when they are denied benefits they believe they are entitled to receive. To the insurance company expert these terms are the key aspects of the policy because they limit the rights of consumers to collect benefits, they specifically define what coverage is provided, and where it can be received. Gatekeeper rules are the reasons why claims are denied, and they can render policies virtually worthless. Important gatekeeper limitations are often contained in the "definitions" section of the policies which many consumers do not carefully read.

The most important gatekeepers a well-informed consumer needs to understand and recognize are :

  • Requiring prior hospitalization in order to qualify for nursing home and/or home care stays. According to a Congressional study, "57% of all those who enter a nursing home were not hospitalized before their admittance." Insurance companies know this fact and those that include such a limitation in their policy know that 57% of all buyers are being defrauded because the policy is worthless. This is a classic example of a rip-off that is designed and intended to defraud an innocent and unsophisticated purchaser of a policy.
  • Requiring an acute condition before services would be covered. "Acute" is often defined as "medically necessary," and refers to a specific illness with severe onset over a defined period of time, usually brief. A heart attack is an acute condition that requires immediate medical attention. But keep in mind that 47% of all nursing home residents have chronic illnesses. Chronic illnesses are those that are ongoing, long lasting and not likely to subside, including Alzheimer's disease, senile dementia, immune system dysfunctions, and a host of slowly progressive illnesses that simply do not get better. As the patient ages these diseases take their toll. If a policy requires a hospital admission for an acute condition as a pre-condition for nursing care services and long-term care, do not buy this policy. As long as you are going to be giving away your money, give it to someone you love or someone that needs it more than an insurance company. The probability of seeing any benefits with both restrictions in place is highly doubtful.
  • Limiting services to those provided by registered nurses or licensed practical nurses. There are many custodial and home care needs that do not have to be performed by licensed nurses, these include cooking, cleaning, and general supervision at home or in a nursing home.
  • Requiring providers to be certified by Medicare. Hundreds of nursing home and home care providers are not Medicare-certified. Nonetheless they are capable of providing necessary services. By limiting coverage to Medicare-certified agencies carriers restrict the freedom to choose appropriate care providers.
  • Covering only "skilled" care. "Skilled" care is insurance language meaning services provided by a doctor or a nurse. Most "skilled" care is already covered by Medicare and most Medicare supplemental insurance, making policies covering only "skilled" coverage absolutely and totally worthless. Nearly 50% of people receiving nursing home services do not require skilled care.
  • The inability to perform three or more Activities of Daily Living (ADLs). The commonly recognized ADLs are: bathing, dressing, toileting, transferring (getting in and out of a chair or bed), and continence (voluntary bowel and bladder functions). Approximately 2.9 million U.S. citizens need assistance with only one or two ADLs. A policy that requires assistance with three or more ADLs is designed and intended to rarely offer benefits to the policyholder.
  • Vaguely defining the inability to perform an Activity of Daily Living. What constitutes "needing assistance" with performing an ADL can be made a subjective standard by the insurance company, when it should be subject to objective verification. Many carriers define the inability to perform an activity as needing "continual one-on-one assistance." This is tantamount to denying coverage since it is an impossible restriction. A person would have to be unable to do an activity such as getting up from a chair without always having the direct physical assistance of another person. So if a consumer often could not get out of a chair, but at times could get up with the help of a cane, then that person would not qualify as needing "continual one-on-one assistance," and would not qualify for benefits. This type of gatekeeper is in reality a stone wall since a person would have to be so severely ill as to require an intensive care unit or be at death's door in order to meet the requirement. Under such conditions a hospital and not a nursing home would be needed. It would be virtually impossible under such a policy to qualify for benefits covering home care assistance for a portion of a day.
  • Having the right to have insurance company controlled doctors determine the health needs of the policyholders. Patients have close relationships with their doctors and expect to be covered for services their doctors prescribe. All companies reserve the right to demand that policyholders be examined by company's physician or "benefit advisors" who can overrule a consumer's own doctor. This restriction places the decision for health care in the hands of insurance companies motivated by cutting costs and maximizing profits.
  • "Service based" not "disability based" coverage. According to Consumer Reports "the most liberal coverage would be provided by policies that allowed policyholders to obtain services wherever they wish when disabled." This is known as disability-based coverage. No long-term care policies have been discovered that meet this standard for nursing-home care. Instead, current policies are "service-based," so that regardless of the type or level of disability, policyholders are limited to receiving particularly defined services at specific facilities.
Elimination Periods

Most long-term care insurance policies require policyholders to pay for their own care for a specified number of days before they are entitled to receive benefits. The days paid for directly by the policyholder are commonly referred to as an "elimination period," which is very much like a deductible in accident insurance. In the long-term care policy the deductible is set forth in days rather than dollars, most probably to keep consumers from focusing on the fact that nursing care is always increasing in cost and defining the deductible in this manner is a direct benefit to the carrier. Some companies offer products without an elimination period, but most require as few as 30 days to as long as one year.

How the elimination period is calculated differs from company to company. Some carriers count the days cumulatively, where for example a patient moves in and out of a nursing home. Other companies demand that the waiting period be counted consecutively, namely, they do not allow any interruption in the days of nursing home care in order to qualify. Some require only one elimination period for the life of the policy and others begin counting every time a policyholder applies for benefits. Elimination period rules can require consumers to physically pay costs out of their own pockets, not just incur liability for services. Most policies even require the consumer to continue paying premiums while also paying health care costs during the elimination period.

Elimination periods are designed to contain costs and because carriers are interested in lowering the cost of total benefits to be paid, many push insureds into less expensive home care. As an incentive to encourage home care, waiting periods often are shorter than for nursing home benefits, but once the choice is made for home care obtaining more comprehensive care will be a problem.

In selecting a waiting period, you'll have to weigh the trade-off between paying more for coverage that begins when you enter a nursing home or paying out of your own pocket for the first days you spend there. Generally speaking you are better off choosing the highest deductible period that you can afford because the probability of an additional day in a nursing home decreases with each day of an illness. Another way to view this choice is to consider the length of a nursing home stay in terms of gambling odds. The odds are high that after spending the first night in a nursing home you will need to be there for at least a month. After ninety days in a nursing home the odds of your needing to stay there an additional day are much lower. That is exactly how an insurance company actuary views this situation. If a nursing home in your area costs $100 a day, a policy with a 30-day elimination period will require you to pay $3,000 or in other words your insurance company does not have to pay $3,000. Consider what you can afford today for a thirty-day nursing home stay. If you have the discipline to put that much money into a long-term government treasury bill you will be guaranteed that money will be there when you need it. Only then you should buy a policy with a thirty-day wait.

As a practical matter, there are significant savings the longer the waiting period you can accept. Look closely at this aspect of purchasing long-term care coverage.

Death Benefits

In a policy offering a death benefit the company agrees to refund to your estate a stated level of the premiums you paid minus the benefits paid to you. To qualify for a death benefit with most companies you must have paid premiums for a certain number of years. Others limit the payback if the policyholder dies before a certain age, usually 65 or 70. Death benefits are a cost to the carrier, increase the premiums to be paid by an insured and offer little value.

The main value of a death benefit is to provide the insurance company sales agent with an opportunity to present the carrier in a false, beneficent light, in the event premiums are paid for years and the policyholder promptly dies without ever qualifying or needing care. Should this case arise "we obviously have no need to be unjustly enriched and for that reason pay the death benefit provided in the policy," is what you can expect to hear from the sales agent.

Remember, there is no such thing as a free lunches. Every aspect of an insurance contract has a specified cost. The idea is for money to come into the company and not to go out unless it is absolutely mandatory under the specific terms of the policy. Life insurance policies, while still having their own peculiar defenses, do not provide as many opportunities for denying coverage. The insured is either dead or alive in most cases. Long-term care because of the seemingly endless possibility for different facts to occur has that many more potential opportunities for carriers to hide behind policy provisions and to avoid paying benefits unless they are squarely mandated by the policy.

Seniors: targets for scams

Seniors abhor losing physical independence and becoming financially dependent. They buy long-term care insurance coverage to avoid becoming dependent on family or friends. The fear of nursing homes makes them especially vulnerable to high-pressure sales tactics that focus upon the risk of losing assets and with reassuring promises of protection.

Loneliness clearly magnifies seniors' concerns and their vulnerabilities as consumers. One-third of those who are older than 65 live alone, and the ratio of women to men is two to one. Looking at those who own their own homes and who are often targeted to buy long-term care insurance, more than half live alone. When people are isolated their beliefs are readily influenced by those who fill the loneliness of their lives. This is a human factor well understood by long-term care insurance sales agents, who focus on these seniors as the most likely source of sales.

Lonely seniors have difficulty resisting sales pressure, especially those who live alone who do not have anyone looking out for their interest and no one with whom to discuss the decision to buy long-term care. The opportunity for fraud to occur in this setting is unchecked. The most common tactic is known as "turning, turn to earn, or churning," in which sales agents return once a year to pitch a "new and improved" insurance policy. By convincing a buyer to cancel a good policy a sales agent subjects a customer to higher premiums and new waiting periods for the sake of earning a new commission. State insurance departments commonly report receiving complaints of this type of misconduct.

Sell, sell, sell

Long-term care insurance, like life insurance, routinely pays a high percentage of the first year's premium to the sales agent. In the long-term care field the sales commissions are usually 50 to 66% of the first year's insurance premium. The average long-term care insurance commission is 48.5%, which is enormous. When policies are renewed, a long-term care agent earns an average commission of 13% of the premium. By way of comparison, more readily sold auto insurance policies pay ten percent commissions on new policies and 5% on renewals, which in some cases only continue for a specified period. Because of the need to "sell" long-term care and the time necessary to secure a purchaser, companies offering a long-term policy with $200-per-day benefits for three years and with compound-inflation protection will pay commissions in the range of $2,000 for the first year of the policy, and $500 for every year the policy is renewed. If a consumer purchases such a policy at age 65 and pays premiums for 20 years, the sales agent will earn $12,000 over the life of the policy. By focusing sales efforts on selected adult communities, such as synagogues, churches, senior centers, senior recreation programs, and senior neighborhoods, an aggressive agent with a thousand policyholders can generate a substantial cash flow with minimum overhead.

Because they are dealing with a gullible market of unprotected consumers, insurance agents are rarely reported to state insurance investigators and few are charged with misrepresenting benefits or rights under the policies they sell. In virtually all states the Insurance Commissioner or the State Department of Insurance does not have financial resources to conduct undercover investigations and that is the only way the unscrupulous are caught. The little undercover enforcement is targeted at thieves engaged in criminal activity, rather than misleading sales presentations, which is believed to be less serious, although the damage can be as equally devastating to the victim.

An undercover Investigation in New York

Salesmen promoting long-term care routinely urge the elderly to buy protection to preserve their life savings, as was shown by an undercover investigation spearheaded by the New York Superintendent of Consumer Affairs. A sales brochure claimed that the company's "Individual Long-Term Care insurance plan will allow you to protect your assets and insure your independence should you require long-term care services." Unfortunately for the average American, with or without a long-term care policy, life savings are still at risk. Most policies, in all probability, will not cover the total cost of extended medical care 10 to 15 years after the policy is purchased. The policyholder will always be out of pocket for some portion of care, especially if the policy provides a limit, or cap, on the available benefit unless it provides for inflation protection.

To understand why this is the case apply the Rule of 72 to calculate how often the charge for nursing care today will double. Assuming a 6% rate of inflation in the medical sector, a nursing facility charging $150 a day will be charging $300 a day in 12 years. Unless a long-term care policy has equivalent inflation protection, it will never keep pace. The policyholder will always have to pay for some care from accumulated savings or home equity.

A long-term care insurance policy purchased in 1995 that would actually cover the anticipated cost of an average nursing home in 2010 would have to pay $200 daily benefit inflated by five percent on a compound basis or a $235 daily benefit using a five percent simple inflation factor. And even at these high levels, seniors would still exhaust personal assets for each year of care after 2010, or even sooner assuming nursing costs home inflate at a greater than expected rate.

Although a policy with high benefit amounts could be expected to cost $3,000 annually, many agents sell policies providing much lower benefit levels costing $2,000 per year. These sales personnel routinely claim that such a policy will cover all long-term care expenses, which is not true.

In the New York special investigation, an agent selling a plan that provided $200 a day with a simple five percent inflation protection said, "...this is the one most people go for because it pays all the costs that are involved. It pays up to $200 a day for your care in nursing home, $6,000 per month for the nursing home benefit, which is about what nursing homes are in this area...these benefits are going to increase every year for 20 years at the rate of inflation."

Sounds good, but if benefits increase at only a five-percent simple-inflation rate, less than the predicted six-percent rate of nursing home inflation, this proposal cannot "pay all the costs that are involved." If the consumer should need benefits at age 80 the policy is $16,000 short and every year thereafter the amount increases. At age 85 this customer would be out of pocket approximately $50,000 for every year of needed care.

A CNA agent reported: "I think that if you have the five-percent simple interest, you'll be pretty much keeping up with it fairly well. You might have a little bit that's not covered, but you can buy $220 a day." In this case, at age 80 the shortfall would be $16,000 per year. If the consumer bought the $220-a-day benefit, the shortage would be $3,000, but then the difference in premiums paid in the interim would be substantial.

An IDS agent claimed that for a $2,400 annual premium, "the best kind of protection" could be bought, i.e. a $150 daily benefit. Obviously, this is totally insufficient to cover actual costs.

Protected from higher premiums

Customers are often told by agents that their policies could not be canceled and that premium costs would remain level, a promise that everyone would like to believe, but it is not that simple.

Insurance companies cannot unilaterally raise premiums on any one individual policy, but they can petition state insurance commissioners or departments of insurance for legal authority to raise premiums for all policyholders in a given pool of insured and then raise rates for everyone in that class.

Despite the promises by agents that premiums are fixed and will not increase, premiums have increased and are expected to increase in the future. Experts in industry, government, and consumer advocacy organizations expect it to continue. No one has yet found a company that decreased rates in the long-term care field.

According to an officer with Standard Life and Accident, "The next five years will produce rate increases as the rule rather than the exception for most companies currently marketing long-term care insurance." The U.S. Government Accounting Office also found that, "because the long-term care insurance market is still developing, the extent to which policy prices will increase remains uncertain." Consumers Reports [July, 1991] describes the precarious future of long-term care premiums as follows: Companies can justify lower premiums by underestimating the dollar value of claims they will eventually have to pay or by overestimating the number of policyholders who will drop their coverage before they ever file a claim. Some insurers are doing both. Either way, if more claims materialize than the company has counted on, it will have to raise policyholders' premiums or risk going out of business.

Such predictions are a realistic appraisal of what can be expected. For example when Standard Life and Accident took over United Equitable's policies, the company raised premiums between 103% and 213%. The expected result would be that many would cancel their coverage. A U.S. Congressional study reports that 66 companies requested rate increases nationally in 1990, and 60 were approved. The increases averaged 31.7%.

All care is not covered

Next to no one understands what long-term care involves at the time when they purchase a policy. Restrictions are not truly understood until care is needed. Agents readily gloss over restrictions on their policies and misstate what is actually provided.

A New York Life agent described respite care as informal care, even that provided by "a friend." Actually, the policy defines it as "care provided by or through a Home Care Agency, including companion care or live-in care, to temporarily relieve other care providers in the Home Convalescent Unit." This does not cover services provided by members of the policyholder's immediate family or friends.

When asked if consumers could spend their insurance benefits however they wanted, a CNA agent agreed. Read the fine print. The policy specifically lists what is covered by nursing homes as well as home-health-care services. The carrier is not going to turn over a check to the insured under this policy.

Qualifying will not be easy

In the New York investigation salesmen told customers that policyholders simply had to get a note from their doctor to qualify for benefits. That is far from the truth. Under all policies there are critical "triggers" for receiving benefits, such as not being able to perform activities of daily living or sustaining a mental disability. Even worse, some argue that the customer's personal doctor's order could not be overruled by the carrier's physician. This occurred even though nearly all policies can demand a medical examination of the claimant in order to determine eligibility for benefits.

An AMEX manager told undercover agents that "your nursing home stay is covered when your doctor, not our doctor, not somebody else's physician, gives approval. This is what distinguished us from other companies, and this is why we have the American Health Care endorsement." Read the policy: "we reserve the right, as part of the review, to do a face-to-face assessment or to require you to take a physical examination paid for by us. Similar reviews may be required, at reasonable intervals, to determine your eligibility for continued benefits. We may use an outside service to assist in evaluating your condition; but any decision will be made by us based on consistently applied, reasonable standards."

According to a New York Life agent promised if "you're sick, they'll pay." Under the actual policy an insured could be sick and still not meet the restrictive "continual one-one-one assistance" standard in the policy.

Many times the trigger requirements are grossly misstated. In one case a Travelers agent said that not being able to take medications was a trigger. However, taking medications is not one of the "activities of daily living" described in the Travelers policy and a policyholder would not qualify to receive benefits if he or she could not take their own medications.

In another case when asked what activities-of-daily-living criteria were the triggers for benefits under an IDS policy, that agent said "basic taking care of the house." However, the policy language is clear and unambiguous. The definition of daily living is: bathing, dressing, toileting, continence, transferring and feeding.

Filing a claim will be a challenge

Most consumers know nothing about the important requirements for filing claims until policy benefits are needed. It is a tragic pitfall for the unwary. Nearly all long-term care policies in New York, for example, require that the insured give written notice to the company within 30 days of disability. Most policies require verification of disability not just once but every 30 to 90 days. Giving timely notice and continuing to verify disability can be a daunting task for a long-term care claimant often suffering from a serious disability. Insurance companies can and will deny benefits if the insured does not comply with guidelines for filing claims or cannot meet exactly the criteria to qualify for benefits. If a claim is denied consumers have little recourse other than contacting their State Department of Insurance, or filing suit. Few contracts provide for appeal rights and force a policyholder to proceed with filing a suit to obtain benefits.

On the other hand, the New York investigation found agents promising that filing a claim was "a very easy, uncomplicated process. You make a phone call to an 800 number, notifying the company that this individual is going to go on claim and that there's going to be a claim form that the doctor, your doctor, is going to complete and send up to us." A reading of that company's policy requires the insured submit a "written notice of claim" within 60 days after a covered loss and a "proof of loss," including copies of medical records and/or telephone consultations with a primary physician and with providers of health care services.

An UNUM agent said, "When you receive the policy, there's a form inside. But actually you would call me. That's why I'm here, to call me." The written policy though requires that the insured must give the company "written notice of claim within 30 days of the Loss of Functional Capacity or Cognitive Impairment" and that the company "will send you our initial claim forms when we receive your written notice of claim." The customer must also provide an initial proof of claim no later than 90 days after the date of loss, and must give proof of continued loss at intervals requested by the company. Finally, the contract notes that the company may require "an independent medical examination" and that it reserves "the right to select the physician to perform the independent medical examination." Independent medical examination in this case is all to often an insurance company medical examination by a physician specially selected to be disposed towards the carrier.

Dirty tactics

Fear of Financial Disaster

Agents skillfully utilize carefully contrived scripts to stampede customers to buy now by using the fear of financial ruin, becoming dependent on family or going on "welfare" because of catastrophic medical bills. Sometimes more subtle tactics are used, but real scare tactics are effectively used because they motivate many seniors to buy coverage in the first place and sales agents readily manipulate this common concern.

Uninsurable tomorrow

Closing the sale is often accomplished by telling the customer that he/she risks being uninsurable in the future, but if the consumer hands "over a check today," he or she would be covered even if an illness or disability struck tomorrow. Not so easy. Agents do not explain that a customer could still be turned down for the policy and he or she would not receive any benefits, regardless of whether the prospective insured paid the whole premium immediately.

Another technique is to threaten the risk of increasing premiums in the future so that consumers will "buy now." But buying long-term care insurance at a younger age can be a mistake. Many policies limit increases for inflation after 20 years or at the point where the original benefit doubles, so a consumer buying early in life could be left with inadequate benefits when needed.

Small print and big disappointments

In 1990 the U.S. House Select Committee on Aging reported that it had received a wide range of complaints, which included delays in receiving premium refunds, twisting and churning, duplicate sales, overselling, clean sheeting, and agent misrepresentations. The Committee also heard numerous complaints from consumers who have been damaged by anti-consumer provisions in policies that benefited the carriers. The number and severity of those complaints are a direct warning to the elderly to protect themselves from similar abuses.

One customer wanted to purchase nursing home coverage for an 83-year-old aunt with arthritis and suspected Alzheimer's disease. An insurance agent sold the customer a policy with an annual premium of $1,735 promising that Alzheimer's was a covered disability. However, the company later denied a claim on the grounds that the application had not noted Alzheimer's. The aunt is now on Medicaid. Out-of-pocket cost for the first two months of care totaled $7,000. The only avenue for relief was to retain a lawyer.

A widow from Oregon died penniless in a nursing home, even though she had two policies and had paid thousand of dollars in premiums for nearly 10 years. The carrier denied nursing-home care because the care needed did not meet the definition of "skilled" care described in the policies. The sales agent had promised the policy would provide financial security. It did not.

An Illinois man purchased a nursing-home policy in 1981 for $1,000 a year. By 1985 his annual premiums had increased to more than $5,000. In 1987, he cancelled his coverage because his insurance company raised his annual premium to $8,000 a year. A few years later, he needed care, and paid the entire cost himself because he no longer was covered and did not have nonforfeiture of benefit protection.

In Missouri, a physician prescribes nursing home care for a man who was unable to care for himself and selected an intermediate-care facility. The director of the facility agreed the placement was correct. Nonetheless the carrier denied the claim on the ground there was "no indication they any medical regimen was being pursued which would require the continued residency on a clinical basis." The carrier vetoes the personal physician and the nursing home director.

Caveat emptor. Let the buyer beware.

Switching plans or upgrading coverage

Before you buy a new policy, make sure it is better than the one you already have. Even if your agent has switched companies and wants you to switch too, carefully consider any changes. If you do decide to switch, make sure your new application is accepted before you cancel the old policy. If you cancel a policy in the middle of its term, most companies will not return any premiums you had paid. If you switch policies, pre-existing conditions clauses may have to run again, and you may not have coverage for certain conditions for a specific period of time.

It may be appropriate to switch, however, if you have an old policy with requirements for a prior hospital stay or for prior levels of care, and you are in good health and can qualify for another policy. If you have a good policy you bought when you were younger, you might ask if the insurance carrier can enhance the policy, for example, by adding inflation protection. It might be cheaper to keep the policy you have and improve it rather than buy a new one.

Considerations when buying a policy

Here are some points to keep in mind as you shop.

Always check with several companies and agents

Is it wise to contact several companies (and agents) before you buy. Be sure to compare benefits, the types of facilities you have to be in to receive coverage, the limitations of coverage, the exclusions, and, or course, the premiums. (Policies that provide identical coverage and benefits may not necessarily cost the same.)

Take your time and compare outlines of coverage

Never let anyone pressure or scare you into making a quick decision. Don't buy a policy the first time an agent comes calling. Ask the agent to give you an outline of coverage. The outline of coverage summarizes the policy's benefits and highlights important features. Compare outlines of coverage for several policies.

Understand the policies

Make sure you know what the policy covers and what it does not. If you have any questions, ask the agent or call the insurance company's home office before you buy.

If the agent gives you answers that are vague or differ from information in the company literature, or if you have doubts about the policy, tell the agent you will get back to him or her later and don't hesitate to call or write to the company and ask your questions. Beware of an agent who claims the policy can be offered only once.

Some companies may sell their policies through the mail, bypassing agents entirely If you decide to buy a policy through the mail, contact the company if you don't understand how the policy works.

Don't be misled by advertising

Don't be misled by the endorsements of celebrities. Most of these people are professional actors who are paid to advertise. They are not insurance experts.

Neither Medicare nor any other federal agency endorses or sells long-term care policies. Be skeptical of any advertising that suggests the federal government is involved with this type of insurance.

Be wary of cards received in the mail that look as if they were sent by the federal government. They may actually have been sent by insurance companies or agents trying to find potential buyers. Be skeptical if you are asked questions over the phone about Medicare or your insurance. Any information you give may be sold to insurance agents who will call you or come to your home.

Don't buy multiple policies

It is not necessary to purchase several policies to get enough coverage. One good policy is enough.

Your medical history is extremely important

Accurately disclosing your medical history is extremely important. Make sure you fill out the application completely and accurately. If an agent fills out the application for you, don't sign it unless you have read it and made sure that all of the medical information is correct. If information about the state of your health is misstated, incomplete, or wrong, the company will refuse to pay your claims and cancel your policy. For that reason you should always fully and completely explain the full extent of your medical condition. If you are unsure about any particular item be sure to state "do not recall." And as a catchall to protect yourself, always refer the carrier to your doctors' records of the care provided to you and list the names and address of your doctors.

Never pay the agent in cash Write a check and make it payable to the insurance company. Get the name, address, and telephone number of the agent and of the company If you don't receive your policy within 60 days, contact the company or agent Read the policy again and make sure it provides the coverage you want Reread the application you signed

It becomes part of the policy. If it's not filled out correctly, notify the insurance company immediately. Keep the policy in a convenient place where you or anyone else readily can find it, and tell a trusted friend or relative where it is.

Pay premiums automatically

It may be a good idea to have premiums automatically deducted from your bank account and paid electronically by your bank. Should an illness delay or prevent paying your statements on time, your coverage will not lapse.

Buy only from a financially stabile company

Several private companies or rating agencies conduct financial analyses of insurance companies and grade them. These ratings carry no guarantee of accuracy but can provide you with information on how some analysts view the health of particular insurance companies. Different agencies use different rating scales, so be sure to find out how the agency labels its highest rating as well as the ratings for the companies you are considering. Ratings from some agencies are available at most public libraries, or you can call the agencies directly at the numbers listed below. (Note that there will be an extra charge on your telephone bill for calls to a "900" number.)

Best Company (900) 420-0400

Demotech, Inc. (614) 761-8602

Fitch Investors Service, Inc. (212) 908-0500

Moody's Investor Service (212) 553-1653

Standard & Poor's (212) 208-1527

Weiss Research, Inc. (800) 289-9222

The United States General Accounting Office in September, 1994 issued a special report to the Subcommittee on Commerce, Consumer Protection and Competitiveness of the U.S. House of Representatives committee on Energy and Commerce, entitled Insurance Ratings: Comparison of Private Agency Ratings for Life/Health Insurers [GAO/GGD-94-2094BR]. The report is worthwhile ordering at a cost of $2 by writing U.S. General Accounting Office, P. O. Box 6015, Gaithersburg, MD 20884-6015.

In brief, the General Accounting Office concluded that the insurer ratings issued by Weiss, Best, Standard and Poor's, Moody's and Duff & Phelps could not be easily compared because the companies did not use the same approach and methods to rate insurers. But, "Weiss placed far less reliance than the other agencies on analysts' judgment." In addition, Weiss was the only agency to rate more than half of all insurers. Both Weiss and Moody's were less likely than others to assign insurers their top ratings.

On average Weiss' ratings reflected financial vulnerability much sooner than other companies. In comparing the two leaders in life and health carrier evaluations, the federal government study found that out of 26 cases of financially vulnerable insurance firms, in which both Weiss and Best issued "vulnerable" ratings, Weiss was the first to warn in 19 cases. In addition Weiss reported on 4 additional companies that Best did not report as financially vulnerable. Weiss also acted earlier than Best. On average Weiss acted 8 months before Best did.

In addition, Weiss has a record of reporting adverse ratings well before public regulatory commissions and state departments of insurance. Weiss identified Executive Life of California 379 days before the first public regulatory action. Executive Life of New York in 372 days, Fidelity Bankers in 308 days, First Capital in 617 days, Monarch in 162 days and Mutual Benefit in 40 days. Best on the other hand reported on Executive Life of California only 6 days before regulators took action and in the case of the other reported failures only issued a report several days after public action had been taken.

Assuming that the past is prologue for the future, Weiss is the odds on choice for a rating agency, followed by Best. Weiss also provides a very valuable "watch dog" warning service to consumers interested in a specific company at a cost of $76 dollars a year or consumers may choose to call for a verbal rating at a charge of $15, a brief written report for $25 or a personal safety report for $45. When you are planning on spending thousands of dollars on long-term care premiums, a detailed personal safety report and a "watch dog" reports make good sense. Reviewing a policy during the free-look period

If you decide you do not want the policy after you purchase it, you can cancel the policy and get your money back if you notify the company within a certain number of days after the policy is delivered. This is called the "free-look" period. Check with your state insurance department to find out how long the free-look period is in your state. If you want to cancel do the following:

  • Keep the envelope the policy was mailed in, or insist your agent give you a signed delivery receipt when he or she hands you the policy.
  • If you decide to return the policy, send it to the insurance company along with a brief letter asking for a refund.
  • Send both the policy and letter by certified mail and obtain a mailing receipt.
  • Keep a copy of all correspondence.
  • The refund process usually takes 4 to 6 weeks.
  • If you have questions about the agent, the insurance company, or the policies, you can contact the state insurance department.

Policies from your employer

Your employer may offer long-term care insurance as an employment benefit. The coverage provided by these employer-group policies is similar to what you could buy from an agent. Companies providing long-term care insurance usually give their employees a choice of benefit periods, maximum payments, and elimination periods. Group policies may offer nonforfeiture benefits and inflation protection and allow employees to keep their coverage after they leave their employer. They do this by offering continuation of coverage or conversion options.

Many employers also allow employees to buy coverage for their parents, which could be an advantage. Typically, employees' parents must pass the company's medical screening to qualify for coverage; employees usually do not have to pass any medical requirements. If your child's company offers such coverage, be sure to consider it carefully. It may offer advantages you won't find if you try to buy a policy on your own.

Final word

Look for policies that provide compounded inflation protection at a realistic percentage.

Avoid policies that use "continual one-on-one assistance" as the trigger to qualify for benefits. Few people needing long-term care meet this highly pro-insurance company requirement.

Only buy policies that clearly define and illustrate all criteria for qualifying for benefits, including the criteria that determine a policyholder's "inability to perform" the activities of daily living.

When a policy requires that services must be provided by a licensed agency or provider, the policy should state exactly what license is required so consumers can verify for themselves that they are being treated by an approved provider.

Policies should explain in detail the claim-filing process and the policyholder's rights to appeal the company's benefit decisions.

Ignore any promises made in promotional literature. If it is not in the contract, it does not exist. If you cannot read and understand the contract do not buy it, unless you have the advice of a trusted and established broker or have had the policy reviewed and explained to you by an attorney who has experience in insurance contract interpretation.

Before buying a policy calculate your income, your assets and your budget. How much of your income can you afford to pay for insurance premiums? Long-term care does not cover doctor bills and prescription drug costs. Elimination periods, waiver-of-premium clauses, benefit amounts, and inflation factors all affect the price of a policy. For the purpose of these calculations, consumers can assume that the average nursing home charges today are approximately $60,000 per year. To be prudent expect increases at a rate of six percent annually. Home care nationally averages $50 per visit for a health aid and $100 per visit for a trained nurse; this cost will also increase with inflation.

Premiums are likely to increase in the future. Know how much you are able to spend, and consider hedging your bet by purchasing nonforfeiture benefits in case you are forced to let your policy lapse.

Never be rushed into signing on the spot. Be sure to read and understand a policy's fine print before you give an agent your check. Do not accept assurances that you will be able to get a full refund if you decide not to buy the policy even after it is approved. The chances of being approved should not be hurt by simply taking a few days to look over the contract. Never do business with an agent who will not provide you with a copy of the contract you are considering.

Know the available options. Most policies give consumers choices in the following areas: benefit amounts, duration of benefits, elimination period, inflation protection, and nonforfeiture benefits.

Know how to qualify for benefits. Keep an eye out for highly restrictive criteria, such as "continual one-on-one assistance" and performance criteria for cognitive disorders, such as Alzheimer's disease.

Know the restrictions on benefits. Under the criteria for qualifying for benefits, will you be able to receive benefits for home-care services? Are there facilities in your area which meet the policy requirements for nursing-home benefits?

Know how to file a claim and how to appeal an adverse decision. You can file a lawsuit against your insurance company, but most companies specify a short time period in which you are allowed to file a legal action, so waste no time in finding a competent lawyer with experience in suing insurance companies for breach of contract and for breach of the covenant of good faith and fair dealing.

Try to make sure the insurance company you choose is highly rated. Many premium increases are the result of one insurance company assuming the obligations of another company that has gone out of business. Be extremely cautious and only do business with companies that have "A+" or "A" financial ratings. High ratings are not a guarantee of a company's future stability.

Do not buy a policy primarily because it has the lowest price. Policy benefits and qualification requirements vary greatly among policies and no one can compare policies based solely on cost.

Once you have purchased a policy, do not readily trade it for what is promised to be a better contract. Trading up is often expensive and subjects you to new preexisting-conditions waiting periods and potentially new elimination periods. You will forfeit all of the money you have already paid in premiums. If you want additional coverage, it is usually better to add-on to what you already have.

When all else fails: suing for breach of contract

First and foremost, what follows is not legal advice. That can only come from a qualified attorney who is familiar with all the facts and circumstances of a particular, specific case.

The following is a brief explication of the general law in the United States. By definition this explanation is flawed. There is no such thing as the general law of the United States, especially when you have a particular legal questions involving a specific case, because the law of each state, while following general common rules, is different.

In virtually all states the laws applying to the interpretation of the enforcement of insurance contracts are generally the same, but there are variations. This is only a general outline of what you can expect the law to be in your state.

Because insurance companies have years of legal experience litigating the terms of their contract and knowing how standard terms have been defined by judges, carriers have the upper hand in drafting policies and selecting the language it finds most advantageous for making a profit. As a result American law routinely provides that should there be an ambiguity or uncertainty in a policy, an uncertainty in choice of wording or ambiguity in meaning would be resolved in favor of the policyholder and against the insurer. In the absence of a misrepresentation regarding coverage or exclusions, if the language of the policy is clear and explicit, it will be enforced.

Insurance contracts are interpreted by judges and courts to effectuate only the objectively reasonable expectations of the insured. Any personal, or subjective, expectation of a policyholder, which cannot be reasonably supported by the language of the contract, is unenforceable. So, it matters not what the policyholder/customer truly and honestly believes in his or her own mind. That subjective opinion is never in issue in a court of law. The real contest is to decide what the words of the policy mean to an objective person.

The guiding public policy routinely followed by our courts is that judges will seek to find and enforce coverage in case of a loss rather than defeat coverage. In other words, if there is a fair and honest interpretation that will result in the policyholder enjoying the benefit of the bargain, then so be it. Courts do not leaned over backwards to interpret a contract to create losses for policyholders.

So, when reading an insurance policy, the words selected by the insurance company are to be interpreted by judges according to their plain meaning. A plain meaning is one which an ordinary person would attach to such words, not as the meaning which might be utilized by an insurance company executive or an attorney.

Exclusions and limitations in a policy, because they often result in denying coverage when there is a loss, must be in clear and unmistakable language. It is for this reason that exclusions and limitations are always narrowly, or strictly, construed. If there is more than one meaning to be given to an exclusion or a limitation, the narrowest interpretation will be adopted by the court. Any exclusionary clause that is not clear and conspicuous will be interpreted in the interests of the insured.

In cases where a policyholder's lack of knowledge could result in the loss of benefits or the forfeiture of rights under a policy, an insurer is required to bring such fact to the insured's attention and to provide relevant information to enable the insured to take action to secure rights provided by the policy.

Unfortunately, an insurance agent is not obligated to advise a policyholder on the adequacy of the limits of coverage selected by the policyholder. The term limits refers to the amount of insurance coverage. In the context of long-term care, the limits of coverage involve the actual amounts that will be paid on a daily basis for care and the length of time such benefits can be enjoyed by the insured.

What an agent says in terms of "puffing" or exclaiming the virtue of a policy is often not actionable, except in the circumstances where an agent assumes additional duties, has a special relationship of trust with the buyer, or holds himself/herself out as having special expertise, then a special duty arises. But when an insurance agent gives assurance of proper coverage and it turns out to be false, that agent will be held liable for negligent misrepresentation.

That is not to say that an insured can remain intentionally ignorant of the terms of a policy. An insured is not required to independently verify the accuracy of representations made by the agent regarding the policy and an agent can be held liable for intentional or negligent misrepresentation.

When an insurance policy contains provisions that are extremely one-sided in favor of the company, courts will find that the contract, or any portion of the agreement, was unconscionable at the time it was made and the court may refuse to enforce that provision. The basic test followed in most states is to ask in light of the general background and the needs of the particular case, whether the causes involved are so one-sided as to be unconscionable under the circumstances existing at the time the contract was made.

When an insurance company has used advertising and solicitation materials that are unfair or deceptive, some states provide legal protection to the policyholders and others do not. For example, the California Insurance Code prevents insurers from engaging in such conduct, but California law does not provide the policyholder with a private cause of action against the carrier. A policyholder may only have a cause of action for negligent or intentional misrepresentation against the agent selling such a policy as opposed to the a cause of action against the carrier who often times is more likely to be able to pay a judgment rendered by a court in favor of the policyholder. In cases, under California law, only the words in the actual policy are actionable and falsely written advertisements do not give rise to a cause of action against the carrier. policyholders must realize that the are buying the contract, not the advertising.

In bad faith: breach of the covenant of good faith and fair dealing

Every insurance contract contains an unwritten, invisible, or implied term referred to as the covenant or promise of good faith and fair dealing. In direct terms, this is a promise by an insurance company to always act in good faith and to act fairly towards its insureds in handling their claims. Whether or not such a clause is included in the policy, judges will read the policy as if it were there. Carriers must meet the reasonable expectations of the policyholder and an insurer must always give as much consideration to the financial interests of its insureds as it does to its own financial interests.

In bad faith cases a jury is always asked whether under the facts the carrier acted reasonably. Denying benefits, delaying payments and paying less than what is owed are examples of bad faith. An insurance company is obligated to thoroughly and promptly investigate all claims and must inquire into all the possible issues that might support an insured's claim. This obligation is not terminated simply because the insured files a lawsuit against the company.

Where an insurer makes a belated offer of settlement, a cause of action for bad faith does not correct or set aside the previous wrongful conduct. Any payments to the insured only reduce the amount of the insurance company's final liability as it may determined by a jury.

In a bad faith action an insurance company's business practices or common course of conduct is routinely admissible to show motive, opportunity, intent, plan, knowledge or the absence of a mistake or an accident in the manner in which it dealt with its insured. It is not necessary to show that the insurer intended to cause harm in a breach of the covenant of good faith and fair dealing. The policyholder need only show that the insurer failed to honor the agreement and had no cause not to pay what was due under the contract.

When a person buys an insurance policy, the very risks that are insured against make it clear that if a claim is not satisfied the policyholder will suffer financial pressure and emotional distress. Policyholders obviously will be vulnerable to oppressive tactics by a carrier and insurance companies are presumed to know that a denial of benefits will very well result in emotional distress to their insureds. Damages that can be collected

Where a policyholder successfully shows that an insurer breached the covenant of good faith and fair dealing, the insured can recover all damages caused by the breach. This includes all consequential losses, loss of use of the insurance proceeds, general damages, attorneys' fees and in cases of egregious and outrageous misconduct, punitive damages.

To recover for emotional distress it must be shown to have been caused directly as a result of the insurer's conduct. Normally, once actual economic loss is established, the policyholder is entitled to recover damages for emotional distress as well, as long as that injury was caused by the insurer's breach of the covenant of good faith and fair dealing. Time limits on filing suit

The statute of limitations in a bad faith case varies from state to state. A statute of limitations is the legal deadline after which a lawsuit cannot be filed. In most states, the two-year statute for personal injuries and emotional distress governs a lawsuit for bad faith. California has a one-year statute.

Many insurance policies impose a contractual obligation on the insured to bring any lawsuit within one year after breach of the contract, no matter what the rule is under state law concerning when a lawsuit can be lawfully filed. Calculating this one-year period, though, is not simple. Most states hold the time limit in the contract is enforceable but suspend the running of the one-year statute between the period of time the policyholder gives notice of the loss and the date on which the claim is denied. Caveat emptor: let the buyer beware

In the case of long-term health care, be very wary.

Remember, you are betting you will need long-term care and the carrier is betting it will not have to pay because of the language that it has included in "its" [not "your"] policy.

It is far wiser to use the right attorney to determine if a policy provides the care you believe you are purchasing now, rather than litigate once you are ill and in need of care. At that time you become an easy target for abuse by an insurance carrier that has a corporate life, i.e. one that will outlive us all. Obtain informed legal advice from the right lawyer at the outset.

A last word of thanks

The perils of purchasing long-term care insurance presented here is the compilation of the works of others. Those efforts have received limited circulation and certainly cannot be found today on the Internet. Any credit for this effort belongs to those listed below who have made their work freely available to the public. Any errors are those of the editor.

Special thanks and appreciation is owed by all consumers to the Commission on Consumer Affairs for New York for its efforts in reporting insurance fraud in New York, its leadership in exposing the hazards consumers face in the long-term care insurance market, its undercover investigation of sales practices, and it significant contribution to public education which provides the backbone of this effort to expand public knowledge. While the scope of the Department of Consumer Affairs of the City of New York focused on New York law and experiences in New York City, the result of the Department's investigation and warnings have universal application.

The U.S. House of Representatives Select Committee on Aging's 1991 report on the Abuses in the Sale of Long-Term Care Insurance to the Elderly deserves special mention and the National Association of Insurance Commissioners is to be commended for its efforts to enhance public awareness of the pit falls of long-term care insurance contracts.

I take personal responsibility for the legal analysis presented here, which only attempts to generally state the law of the various states, but otherwise my contribution as an editor has been to bring these issues and this information to the attention of the public through the Internet. Because this work is intended to assist the widest number of consumers, it is not copyrighted and as long as it is freely distributed, it may be copied and republished. In fact, such efforts are encouraged.


Addendum

December, 1995

There is little impartial information on long-term care insurance. The United Seniors Health Cooperative and the Health Insurance Association of America, a trade association representing 300 commercial insurance companies, each has it biases and viewpoints. A wise consumer should consider all available sources of information. Since publishing this article the following sources have been suggested:

  • Beat the Nursing Home Trap, Nolo Press, 950 Parker Street, Berkeley, CA 94710-2504, 510.549.1976, $18.95 (excellent).
  • United Seniors Health Cooperative, 1334 G Street, N.W., Suite #500, Washington, D.C., 20005-4706, 202.393.6222.
  • Susan Polniaszek, Long-Term Care: A Dollar and Sense Guide, 1991 Edition, United Seniors Health Cooperative, Washington, D.C., 1991, 72 pages, $8.50.
  • Susan E. Polniaszek and James P. Firman, Long-Term Care Insurance: A Professional's Guide to Selecting Policies, United Seniors Health Cooperative, Washington, D.C., 1991, 91 pages, $35.00.
  • National Association of Insurance Commissioners (NAIC), 120 W. 12th Street, Suite 1100, Kansas City, Missouri, 1990 (relatively bland publications, but provides a good introductory overview).
  • Health Insurance Association of America [pro-industry], The Consumer's Guide to Long-Term Care Insurance, 1025 Connecticut Avenue, N.W., Washington, D.C., 20036-3998, 202.223.7780, 1991, 24 pages, free.
  • LTC News & Comment [pro-industry], 5808 Lake Washington Blvd., N.E., Suite 410, Kirkland, WA 98033, 206.827.8626, $95 per year. October 1995 edition critical of this article, primarily for reporting the undercover fraud investigation of corrupt agents in New York, but grudgingly concedes this article "contains some information useful to consumers" and "we agree with a few of the author's recommendations." Considering the source, clearly a compliment.
  • Ken Scholen, Retirement Income on the House: Cashing in on your Home with a "Reverse" Mortgage, NCHEC Press, Marshall, Minnesota, 1992, 340 pages, $24.95.
  • "Who Pays for Nursing Homes?" Consumer Reports, September 1995 (well done).

Addendum

January, 1996

Here's the response of an LTC agent:

January 2, 1996

I am a Long Term Care Specialist who recently read your WWW pages. Unlike most insurance agents, I write more premiums in a month then most agents do their entire careers. I found your material very objective, detailed and informative. I am in the process of developing my own WWW page and with your permission, I would like to link my web site with your "Avoiding Fraud" WWW page.

While reading your materials, I found myself agreeing with much of the information. Although, there were several areas I think you need to be more open minded to. One such area in where you infer that all agents are "driven by substantial commissions" and that the consumer is vulnerable to be taken advantage of. Yes, there are many slimy, unethical agents, just like there are many slimy, unethical lawyers. Not all of us are driven by commissions. There are many companies that pay very high commissions and I have chosen not to write the policies, simply because I don't feel comfortable with the contact language or the overall situation with the carrier. I currently receive between 35% to 45% first year commission. Many carriers pay upwards of 75%. Also, to compare agents who take orders for insurance (auto & homeowners) with those who sell a product, because a need has to be developed, is unfair. Consumers don't walk into agent's offices and ask to buy LTC insurance. At least they don't where I live here in Florida. To infer that agents selling LTC insurance should be paid the same as those selling auto and homeowners insurance is like saying that a lawyer specializing in class action litigation should be compensated at the same level as the lawyer who chases ambulances or who is a public defender. I am sure O.J. would have preferred that option but I doubt Johnny & F. Lee would have.

Overall, your other views about what a consumer should be aware of are valid and with merit. One of the biggest problems with most agents who sell LTC insurance is that they don't understand the definitions within the policies and they don't have the patience in dealing with the older consumer who needs to be thoroughly informed. Also, most agents don't understand the competition so they bash them or their products. Many agents generally over-insure or present a program that is far too expensive for the consumer. The agents need to take into account various financial considerations of the consumer, not simply apply a cookie cutter approach to selling the product. Most of my clients have chosen to self-insure a portion of their risk. The average age of my clients is 72 and the average premiums are $1,290.

When contract language is addressed, the consumer must clearly understand what it says. There are many insurance companies selling the product but, in my professional opinion, there are only 5 that I would consider recommending: (alphabetically) AMEX, CNA Fortis/Time, John Hancock & The Travelers. Of these 5 companies I believe that Fortis/Time has the easiest to understand policy language. A consumer doesn't have to be a Philadelphia Attorney to understand it. I suggest you take a look at the policy. With so many companies entering and then exiting the marketplace, I think it is important that the consumer choose a company with stability and commitment to the market. In addition, the insurance company must have ample financial resources. Companies like Fortis/Time, John Hancock and The Travelers have well over $100 billion in assets. This is important to not only the premium stability but to the ability to pay claims 15 to 20 years from now, when claims start to escalate. I firmly believe that companies will increase rates in the future. I generally convey that to my clients. The question becomes, which company will have the lesser rate increase? It will be a lot more difficult for companies like Fortis, Hancock and Travelers to raise their rates compared to companies who maybe have less assets. If a consumer is 75+, Fortis/Time will Guarantee To Never Increase Rates. No other company that I am familiar with gives this guarantee!

I currently work with an Elder Care Attorney here in Florida. We have an excellent working relationship that is based on commitment, trust and, yes, referrals. He knows that I SPECIALIZE in LTC and I know he specializes in elder care law. I suggest your organization consider the same. Simply because an agent has a CLU, CFP, ChFC or any other designations, doesn't mean he/she understands the market. Many of us who specialize in LTC insurance are competent, knowledgeable and professional. And like you, we financially earn what we deserve.

In closing, yes, the consumer must be very wary when purchasing LTC insurance. I guess the same can be said when choosing an attorney. Lets face it, attorneys, insurance agents, and used-car salesmen are the bottom of the heap when it comes to consumer confidence. Like anything else, the consumer should obtain recommendations or referrals from other friends or professionals they trust. The should deal with professionals that understand their needs and desires and those who are truly concerned about their well-being.

In this world, we will come into it and leave it with only our name. If our name is not respected, then our life has been without meaning.

Thanks for your attention.

Kim Purnell

LTC specialist

P.O. Box 1141

Cocoa, FL 32926

407-726-8648


Addendum October, 1996

Elderly consumers who are shopping for long-term care insurance now have more financially strong companies to choose from, according to Weiss Ratings, Inc. of Palm Beach Gardens, Florida. There are 12 long-term care insurers receiving a Weiss Rating of B+ or better today, as compared to four in 1992. Among the largest strong long-term care insurers are New York Life, rated A, Nationwide Life (B+), Principal Mutual Life (B+), Teachers Ins. & Annuity (B+) and John Hancock Mutual (B+). However, several long-term companies still receive a rating of D+ (weak) or lower, including Union Bankers Life (D). Low-rated companies carry a higher-than-average risk of failure, which, in some cases, could occur by the time the nursing home care is needed. With the cost of a simple two-year stay in a nursing home averaging about $96,000, the failure of a long-term care insurer could be a serious tragedy for elderly consumers, but it¹s easy to avoid this by shopping for policies strictly among the strong insurers. Weiss Ratings, Inc., an independent publisher of insurance company ratings, was the most accurate in identifying life and health insurers that subsequently became insolvent or financially impaired, according to the U.S. General Accounting Office (GAO). Weiss publishes the Life and health Insurance Directory, as well as the HMO and Health Insurance Directory -- the only directory available which includes ratings and financial data on nearly all HMOs, Blue Cross/Blue Shield companies, life insurance companies and property/casualty insurers that write health policies.

Consumers may obtain a rating over the phone for $15 per company, or a one-page Personal Safety Brief for $25 and industry-wide directories for $219, from Weiss Ratings, Inc., 4176 Burns Road, Palm Beach Gardens, FL 33410, 1-800-298-9222.

The following are the weakest and strongest companies that offer Long-Term Care Policies, according to Weiss:

Strong Long-Term Care Insurers

(Companies with more than $1 billion in assets)

Company

State

Total Assets ($Million)

Weiss Safety Rating

Country Life (IL) 2,906.0 A+ Illinois 2,906.0 A+
New York Life New York 59,414.5 A
Life Insurance Co. of Georgia Georgia 2,809.7 A
Mutual of Omaha Nebraska 3,116.3 A-
Teachers Ins. & Annuity Assn. New York 79,794.6 B+
Principal Mutual Life Iowa 51,268.2 B+
John Hancock Mutual Massachusetts 50,776.6 B+
Nationwide Life Ohio 35,656.6 B+
Fortis Benefit Minnesota 4,852.2 B+
Hartford Life & Accident Connecticut 3,170.4 B+
Time Insurance Co. Wisconsin 1,605.2 B+
Trigon Blue Cross/Blue Shield Virginia 1,019.5 B+

Data Date: 3/31/96

A = Excellent; B = Good; D = Weak; E = Very Weak;

Plus sign indicates upper third of grade range; minus sign designates lower third.

Source: Weiss Safety Ratings, Inc. 561-627-3300

Weakest Long-Term Care Insurers

(Companies with more than $25 million in assets)

Company (State) Total Assets($ Million) Weiss Safety Rating

Company

State

Total Assets ($Million)

Weiss Safety Rating

Bankers Multiple Line Illinois 59.5 D+
Network-America Life Pennsylvania 44.0 D+
Union Bankers Life Texas 228.0 D
Atlantic America Life Georgia 36.1 D

Data Date: 12/31/95

A = Excellent; B = Good; D = Weak; E = Very Weak;

Plus sign indicates upper third of grade range; minus sign designates lower third.

Source: Weiss Safety Ratings, Inc. 561-627-3300


Addendum April, 1997

Dave Coffelt is a Long-Term Care Insurance Consultant Educational Seminar Speaker, 4 Lucks Lane Warren, PA 16365 814-723-9663 (Res) 814-723-0175 (Fax). Mr. Coffelt is one of NYS' and PA's experts on the subject of long-term health care. He has over 10 years experience addressing the problems, concerns, and solutions of financing long-term care for the elderly and their families. His primary service is to consult with families and their financial advisors on "How to protect your life savings from catastrophic illness and nursing homes" and to explain the regulatory requirements that must be met in order to qualify for Medicare and Medicaid. Mr. Coffelt has appeared on TV and radio and has testified on the Pepper Commission Report. He has been a guest speaker at bar associations, CPA groups, bank trust officers, state conventions, federal retiree chapters, and AARP Chapters and has taught at several school districts Adult Continuing Education classes on long term care. He is a member of the State Society on Aging, Jamestown Estate Planning Council and the Chautauqua County Long-Term Care Forum.


Addendum May, 1998

Since you published January 1996 Addendum (the response of an LTC agent) on WWW Site Avoiding Fraud When Buying LTC I would say that over 250 agents or shoppers have contacted me. Although I have not made one dollar from this I would like to thank you for the exposure.

The time may be right for you to add some additional materials. This industry is constantly changing and more and more companies are entering the market. Since you published your WWW site on Avoiding Fraud...the IRS (Treasury Dept) is now playing a role in policy designs and consumer purchasing decisions. You may want to made yet another addendum addressing this the tax qualification issues.

Concerning another aspect of the business, I thought I would express some of my views on the Long-Term Care Industry.

Unlike most insurance agents, I specialize in long-term care insurance and I have done so for over 10 years. I have been a sales manager for a large mutual life insurance company as well as a captive agent for a national LTC distribution organization. I am currently an independent personal producer and although I don't consider myself a high volume producer, I personally develop about 100 to 115 new LTC clients annually.

There are some issues that I would like to address regarding the LTC industry, companies, agents and buyers.

The LTC Industry:

For those of us that have been focusing on LTC insurance we can remember when the products were 3rd rate, at best, and it was next to impossible for the insured to actually receive benefit payments.

As with any industry or product, competition, marketing and customer needs and desires are what enhance product development. This market is on the verge of exploding. It is my opinion that within the next few years we will see some truly innovative products and policy features. This is an ideal time for agents to become thoroughly abreast of this industry and recognize the importance of long-term care insurance.

I am not writing this article to slam insurance agents or companies but to bring up issues that needs to be addressed before any serious damage is done. But, what concerns me is the ethics, competence and overall sales practices of those within the LTC industry.

The senior or "seasoned" American is already skeptical and untrusting of most insurance sales people. As I stated in your WWW article Avoiding Fraud When Buying LTC Insurance, "insurance agents, attorney's and used car salesman are at the bottom of the heap when it comes to consumer confidence". With what has happened in the life insurance industry over that last several years, regarding policy churning and misrepresentation, the senior American has every right to feel this way. It has taken many years for the LTC industry to gain creditable recognition and I don't want it to have a relapse.

As someone that have been associated with both a large financial service organization and nationally recognized LTC marketing distribution systems, as a career or captive agent, I can say great certainty that both systems have serious flaws in LTC agent training and management accountability. These organizations are driven by bottom line production results.

Now, don't get me wrong. Everything in this country is driven by sales and produce some form of commission, with the exception of government service (some will disagree about government services). The problem is that both the agents, managers and the companies loose sight of what is best for the consumer in order to generate revenue.

Cases in point:

I have been fortunate enough to earn an exclusive LTC endorsement from a rather larger organization of retired military officers and their spouses. I am the only insurance agent that has been recognized by the management to solicit LTC insurance to the membership. Being retired military, most are very affluent or financially wealthy. Being endorsed by such an organization allows me the opportunity to meet with just about every member of the organization. As you can guess, this has created animosity from many of my peers. They too want to be able to have the opportunity to "tell their story.

About 6 to 8 months ago, an insurance competitor, marketing annuities, was able to set an appointment with one of my LTC clients. During the interview, the agent was able to uncover that the client had purchased LTC insurance. The program was a state of the art program that covered 100% of the daily benefit selected for both home and facility care. The program was also designed around an Unlimited Benefits Period for the spouse with a 3-year Limited Benefit "pool of money" program for the retired military officer. Understanding military retirees and their retirement "survivor pension benefit" option, you can ascertain why the spouse selected an Unlimited Benefit LTC program and the military retiree selected a Limited 3 Year Benefit program.

The agent recognizing that he had an opportunity to replace my program, recommended a program that cost less than the one I represented. Now, I don' t have a problem with replacement or competition when it is in the best interest of the consumer. The problem here was that the agent recommended a program that paid for home health care ONLY. And the company he recommended was not only inferior in the industry financial rating category is also only paid benefits based on what was considered the "usual and customary" charges in this area. The agent also went on to indicated that since the product would pay for "assisted" living it would therefore pay for "facility" care. The agent had inferred that the policy would pay for nursing facility care when if fact it would not!

After receiving a call from my clients letting me know that they wanted to cancel my program, I was able to set another appointment to review what this agent had recommended. During my appointment I was able to convince my clients to call the replacing insurance company and ask them directly what the program paid. After doing this and determining that I was correct, my clients felt that they were mislead by this other insurance agent. In addition to misleading my clients the agent also neglected to submit a "replacement notice"-which is a insurance violation in Florida. Needless to say, both my client and myself filed a complaint with the FL. Dept. of Insurance.

Another situation that happened just last week. I was in competition with an agent that represents one of the several companies I also represent. I had presented a 4 year Integrated LTC Program with a 20 day Elimination Period. My premium was roughly $4100 annually. The competing agent recommend a program with another company. He recommended a program that would pay for 2 years of LTC services. This particular program has a unique benefit that states if the insured receive 2 years of care "at home", he is also guaranteed 2 additional years in a nursing facility. The premium was roughly $3600 annually. The agent inferred that the insured will have a total of 4 years of coverage. This is not entirely correct. If the insured were to receive care in a facility, his coverage would then end after 2 years of care. If he were to receive care in his home and care was necessary beyond 2 years, he would then have no choice but to go to a nursing facility in order to continue to receive benefits from the policy.

Here is yet another situation that just occurred Friday May 1, 1998. I was contacted by a prospect that wanted to get another opinion on his and his wife's existing LTC coverage. They had purchased a program from an exceptionally reputable mutual life insurance company in 1991 and from another agent that is no longer in the insurance industry. This particular program was designed around a single "pool of money" with a 6 Year Benefit Period. The program would pay 100% of the daily benefit for Nursing Facility Care and 50% for Home Health Care services. The program had a 100-Day Elimination Period w/ a C.P.I Inflation Benefit.

During my interview with this couple they indicated that they had taken an application for LTC insurance with another insurer that is known in the industry for insuring risks that most other companies will not insure. Now, there is definitely a marketplace for insurance companies that accept 'substandard' risks and I do not have a problem with these particular types of insurance companies. The problem that I have here is that I believe that the agent replacing this existing coverage is not addressing the clients' best interest. Since this couple had purchased LTC insurance in 1991, the wife's health has deteriorated substantially and it would be very unlikely for this person to purchase LTC insurance except from this particular company.

During my interview, I expressed my concerns to this couple. I felt that it was not in their best interest to replace a program that has been in effect since 1991; especially since Mrs. Prospect's health had deteriorated. I went on to explain that the company that had insured them in 1991 was obligated to pay claims regardless of current health considerations. In addition, if Mrs. Prospect replaced her existing coverage, she would have to address a new Incontestability Period. Another concern for me was that since this particular company is extremely liberal in its' underwriting practices and since it has had a history of rate increases, Mrs. Prospect might be jeopardizing her future LTC services. If her rates increase to a point where she can no longer afford them, she might attempt to once again replace this program and face the issue of uninsurability. She would either have to lapse this policy or continue to pay premiums which she might not be able to afford.

My recommendation was that they keep their existing coverage that was purchased in 1991 and consider purchasing a "Stand Alone Home Health Care program that would enhance their existing coverage. The only weaknesses noted in their existing program were the 100-Day Elimination Period (okay for facility care, terrible for Home Health Care), and the 50% Home Health Care Benefit. The particular program I recommended was a Stand Alone Home Health Benefit for an additional $50 Per Day with a 30 Day Elimination Period. This program also offered a "Contingent Rider" which would pay the uninsured spouse benefits if the Primary Insured also required services. The client understood that this particular program would not pay for HHC services if the wife was the only individual receiving care---but their existing LTC program would still be in effect. The new premium was $645 annually and I made 60% FYC.

The point I am attempting to make is that in these cases, either the agents were more concerned with their own pockets or they were inadequately trained on how these programs work.

This is a very complex market that requires constant retraining and continued education. A major problem with a lot of insurance agents that sell LTC insurance is that they neither understand benefits and feature of the programs nor do they truly understand the needs and desires of the consumer. Many agents not only misunderstand the LTC programs they represent they also misunderstand their competition. This is extremely apparent when I run into agents that are captive or represent generally one company's product. Not understanding a competitors programs allow for misrepresentation and product/company bashing. This creates confusing and distrust among the buying/shopping public.

Now, I don't pretend to know everything about every company or every LTC program on the market. But, I can say with certainty that when it comes to the major LTC insurance players, I know where their strengths and weakness lie. Understanding the companies and products allow me the opportunity to develop programs and make company recommendations around the individual comfort levels of my clients. This market also requires a great deal a patients. The average consumer needs to be taken through a learning curve. They have purchased many types of insurance throughout their lives and assume that this insurance will be the same. Even though LTC insurance is still a risk transfer it does require a great deal more explanation. Including an explanation of benefits, policy features, definition, benefit triggers, tax ramifications, claim procedures etc. The actual interview can take anywhere from 1 to 2 hours depending on the client. Most insurance agents will not take the time necessary to explain these benefits to the clients nor will they take the time to learn the various policy features or the competitions products.

Another concern that should be addressed by not only the consumer but also the agents is company stability and overall financial ratings. In many cases both the consumer and the agent are more concerned with initial premium than with future premiums and company strength. As an independent broker, I can represent just about any LTC insurance company in the industry. I have chosen to represent only a few of the well-recognized industry leader. Most of these companies are prices competitively with one another. What concerns me is those companies that have extremely lower premiums than the recognized industry leaders. It appears to me that these companies are under pricing their programs to attract buyers and to foster relationships with agents that sell programs based on premiums. If these agents are not careful, they may find themselves in the same situation as many of those property and casualty agents that sold insurance programs to individuals residing in South Florida when hurricane Andrew hit. Many of those small, inexpensively priced insurers are no longer in the business. In 10 to 15 years when the LTC companies really start to get hit with claims, these type of companies could face the same desperate situation. The consumers need to take into consideration-- "you get what you pay for...". Selecting a company based solely on lower premium will probably make the consumer more susceptible to rate increases or possible company failure. The consumer must recognized that these companies must have ample financial resources to pay claims down the road. This can only be done by pricing the product accordingly.

The future of the LTC industry is very promising. And as I previously indicated, it is an ideal time for agents to become thoroughly abreast of this industry and recognize the importance of long-term care insurance. Even though this product is not for everyone it is now finally being recognized as true financial planning tool. The time is now right for not only the industry to set ethical standards but for agents to do so as well.

Kim Purnell

Long Term Care Insurance Specialist

Brevard County, FL

800-553-9582 or 407-726-8648

kpurnell@mindspring.com


Addendum October, 1998

Subject: Your article on LTC Insurance - avoiding fraud

Sent: 10/3/98 5:57 PM

Received: 10/5/98 2:53 PM

From: doug To: Alexander Law Group, LLP, LLP

I wanted to complement you on your fine article.

I have linked to it on my website -- The Long Term Care Insurance Info Page.

My site is an information resource to those seeking info about LTC Insurance.

My main URL is: http://members.aol.com/elderltc

Your link appears at: http://members.aol.com/elderltc/links.htm

Thanks,

Doug


Addendum January, 1999

Jane Bryant Quinn's syndicated column ("Tax Credit Not the Best Option for Caregivers") tackled the new proposal by President Clinton to support Long Term Care, noting that "it sounded like a great idea," but concludes that "a tax credit won't help the poor" and "there is a big risk of fraud."

Under one proposal long-term care insurance would trigger benefits after only two impairments. So the first tax credit proposal, which requires the inability to perform three activities of daily living, would only be for the severest cases.

"Starting a $5.5 billion program suggests that the government will eventually pay more," says Stephen Moses, head of the Center for Long-Term Care Financing in Seattle. That lessens people's incentive to plan for themselves. Highlighting care giving is "a good message but bad public policy," Moses says. "People should be told that they need to save their money or else buy long-term care insurance." Unless people use their own resources, "the needs of the elderly eventually will crowd out everything else," he says.

For current information on LTC contact the Center for Long-Term Care Financing, info@centerltc.com, 206-447-1340 phone, 206-447-1341 fax.


Addendum March 25, 1999

New Federal Law May Limit Access to Medicaid

On March 25, 1999, President Clinton signed into law the Nursing Home Resident Protection Act. The Act had passed both houses of Congress with little opposition.

Under the new statute, nursing homes that do not participate in the Medicaid program must warn incoming residents they can be evicted or transferred if they cannot continue to pay privately, e.g., with long-term care insurance.

In addition, a nursing home cannot evict or transfer existing Medicaid patients if and when the nursing home decides to withdraw from Medicaid.

Why would nursing homes not participate in or withdraw from Medicaid? Medicaid typically pays only 80 percent of the private pay rate. In some cases, Medicaid reimburses less than the cost of providing care.

According to Linda Keegan, Vice President of the American Health Care Association, "We will see more and more nursing homes opt out of Medicaid because of the inadequacy of Medicaid payments."

The message? Plan ahead with private long-term care insurance to avoid dependence on an increasingly imperiled public welfare program.

For more information: "New Law Protects Patients on Medicaid From Eviction," The Wall Street Journal, March 26, 1999 at http://interactive.wsj.com/articles/SB92240864545814470.htm; Robert Pear, "Bill Protecting Medicaid Patients is Signed," New York Times, March 26, 1999 at http://www.nytimes.com/library/national/032699nursing-homes.shtml; Center for Long-Term Care Financing, http://www.centerltc.com/, info@centerltc.com


Addendum May 1, 1999

Nursing Home Industry in Crisis

In a recent Milwaukee Business Journal editorial entitled, "Nursing Home Industry in Crisis," the Journal stated that "[t]he nursing home industry is sick, and unless drastic changes are made soon, this crisis could turn into a national tragedy."

According to the Journal, "all of the nation's largest long-term care providers are having problems, ranging from mounting debts to allegations of over billing the federal government for Medicare reimbursements."

The Journal correctly analyzed that "[w]hen Medicare and Medicaid were created in the 1960s, they weren't intended to be the primary national funding sources for long-term care. But that's exactly what is happening.

"Recently, the federal government began cutting Medicare reimbursements to nursing homes even as the cost for that care continues to escalate," explained the Journal. "For nursing home operators, their revenue is diminishing and their costs are rising-a true prescription for disaster. "The financial squeeze gives nursing homes an incentive to turn away residents whose care is funded by Medicaid, the federal and state program for the poor, in favor of privately insured residents, who can afford to pay more...."

According to the Journal, "[a] group of Wisconsin nursing home executives met recently with politicians and the federal Health Care Financing Administration, which administers Medicare, to discuss their industry's plight. The federal officials had better listen. Nothing less than a national solution will remedy a problem this pervasive." The Center for Long-Term Care Financing couldn't agree more. Implementing the Center's "LTC Choice" plan will provide nursing homes and other long-term care providers the private dollars they need to survive in this era of constricting government support. With the pro-per incentives, most Americans will plan ahead with private long-term care insurance. This, in turn, will allow a reinvigorated public program to provide high quality care to the truly needy. As long as Americans have nearly unfettered access to taxpayer-financed care after the insurable event occurs, however, no marginal public policy changes will significantly alter this nation's LTC planning behavior.

People purchase insurance to protect themselves against real risks. Today, you can ignore the risk, avoid the premiums, and wait to see if you get sick- since Medicaid will bail you out. The Center's "LTC Choice" plan creates the incentives people need to perceive and protect themselves against a real risk of catastrophic long-term care costs. Long-term care providers have a choice: They can either (1) watch an impending financial disaster slowly envelop them; or (2) support public policy which leads Americans to plan ahead with insurance and other sources of private dollars.

Long-term care providers can survive and even flourish with the correct public policy in place.

You can purchase a copy of the Center's "LTC Choice" report ($24.95; free to media) by contacting Nadia Morgen at 206-447-1340 or by replying to this e-mail with your order.

*source: "Nursing Home Industry in Crisis," Milwaukee Business Journal, April 26, 1999 http://www.amcity.com/milwaukee/stories/1999/04/26/editorial1.shtml


Addendum June 22, 2000

Insurers Implied Stable Premiums But Ended Up Raising Them Often

An outstanding article by Ann Davis in the Wall Street Journal's June 22, 2000 edition reports the impact of rate increases by sellers of Long Term Care insurance. The Consumer Law Page first posted this article on Long Term Care in 1994 and warned consumers that rate increases often cause elderly policyholders to give up the coverage at the times in their lives when they are most at risk. Ms. Davis' article, "Insurers Implied Stable Premiums But End Up Raising Them Often" provides real life examples of the tragedy suffered by the elderly when premiums increase beyond their financial means.

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