Plan Design: Coverage Type
Long, long ago, you may have recommended Nursing Home only coverage for your prospective clients. You may also have offered Home Care only coverage.
Today, 95% of traditional LTC Insurance policies sold provide Comprehensive coverage for care in the home, community and facilities including Nursing Homes.
Another decision you must make regarding the coverage type is whether to sell a Partnership or a non-Partnership plan. With the exception of California, where regulations regarding inflation options are making the Partnership product unaffordable in many cases, you can almost always choose a Partnership product offering comprehensive coverage.
While there is significant activity regarding “hybrid” policies today – Life Insurance products with LTC riders, Annuities with LTC riders and other “linked benefit” products, those products are beyond the scope of this report. Register today for our SB 281 Selling Hybrids course and get four hours of Continuing Education credit with the Queen of Long-Term Care, Cindy Eisenhower.
Plan Design Secret # 1
Design Traditional LTC Insurance with Comprehensive Coverage through Partnership Plans
Plan Design: Daily Benefit
Still Tethered to Nursing Homes?
How might you design a plan if you were still tethered to the Nursing Home as your fundamental LTC Insurance selling and plan design approach?
The National Association of Insurance Commissioners (NAIC) introduced a model years ago that suggested covering institutional care in Nursing Homes at 100%, facility care in Assisted Living Facilities (ALF) or Residential Care Facility (RCF) at 50% (70% in California) of the Nursing Home benefit and Home and Community Care at 50% of the Nursing Home benefit.
Referring to the Costs of Care in your area, you may start with Private Room in a Nursing Facility, recommending a benefit of 100% of the median cost of care (we’ll use the national cost):
$250 per day
Next, you use 70% of that value to calculate the average daily cost in an ALF or RCF- 70% of $250 per day:
$175 per day ($5,250/month)
Now you will use 50% of the Nursing Facility cost to calculate the average daily cost for Home and Community Care, calculating 50% of $250 per day – providing about 6 hours of care per day.
$125 per day
You’ve secured a nice room at the Nursing Home, luxurious RCF/ALF accommodations and enough Home Care benefit to stay home for awhile!
Note: We understand many policies only offer benefits in $10 increments, forcing you to design $250 – $180 – $130.
Remember, Nursing Home claims are projected to represent less than 10% of all LTC Insurance claims. So we’re going to design a plan that provides full protection for 90% of the risk and provides partial protection for the remaining 10% of the risk.
Yes, it is time to start looking at the nursing home benefit with a co-payment mentality.
Let’s calculate 70% of the nursing home cost of $250 per day – we’ll round up from $175 per day to $180 per day.
Now we’re going to use that dollar amount as the daily benefit amount for all care settings – Nursing Home, RCF/ALF and Home/Community. With this plan design, we can provide:
- Benefits for 8 hours of Home Care per day at $20-$25 per hour and more than cover adult Day Care costs of $69-$77 per day.
- Benefits for RCF/ALF care of $5,400 per month, more than covering the average costs of $3,750 per month plus essential ancillary services that are not included in the basic room and board fees.
- Benefits for approximately 70% of the Nursing Home costs of $260 per day. Yes, you are going to discuss with your client that they will have a co-payment of approximately $80 per day. If, if, if … they are among the less than 10% who need Nursing Home care.
Plan Design Secret # 2
Untether from the Nursing Home Using a Co-Payment Approach and Design Daily Benefits based on 70% of the Nursing Home Costs in Your Area. Design the Daily Benefits to FIT the Costs of Care.
Plan Design: Duration
If you are still selling the catastrophic event of a lengthy stay in a Nursing Home, you may still be recommending 5 Year Plans.
The average benefit duration in LTC Insurance policies sold has declined by less than 15% in the past 25 years, from 5.6 years to 4.8 years. These benefit durations were designed to protect against a lengthy stay in a nursing home.
Let’s look at recent LTC claims payment data:
- 44% of claims last less than one year
- The average length of claims lasting more than one year is 3.9 years
- 14% of claims last more than 5 years
Why is a 5 Year Plan Too Long?
Benefits provided for LTSS in the home are NOT provided every day, and often begin as 2 to 3 days a week. This would extend the duration on a 3 year (1,095 day) policy to 7 to 10 years of coverage!
In addition, the “bag of money” aspect of LTC Insurance policies today provide for benefits lasting much longer when paying small home care claims rather than paying much larger nursing home claims.
We recommend considering three year plans as the optimum plan design, as that length of coverage will provide more than adequate protection for over 80% of potential claimants.
In addition, this approach makes even more sense when selling Partnership plans, given the asset protection aspects of those plans and the at-risk target population it is addressing.
Plan Design Secret # 3
Go SHORT and Design Plans Based on 3 Year Durations, especially when you can use a Partnership Plan for Asset Protection
The Dollars and Duration Journey
Long and Fat
The sales approach of selling the fear of the “dreaded” Nursing Home led to policies that were long on duration and fat on dollars. This also led to premium quotes that were unaffordable and far too often resulted in NO SALE!
Long and Thin or Short and Fat?
As sales declined, many agents began to explore adjusting the duration and dollars? But which one should they choose?
- Should you stay LONG … and go THIN, holding the line on duration and walking down the ladder of daily benefits until they find an affordable premium?
- Should you go SHORT … and stay FAT, reducing the duration and holding the line on daily benefits?
After all, something is better than nothing, right? WRONG!
Agents could not explain how “lengthy stays and high costs in a Nursing Home” coupled with “Long and Thin” or “Short and Fat” benefits made sense in transferring their risks.
The Answer is SHORT and FIT!
Plan Design: Elimination Period
82% of all policies sold have 90 day or greater elimination periods. Why?
We believe it may be because many agents confuse “LTC is care provided for 90 days or more” with the 90 day elimination period. Well, there is no connection of any kind of these two concepts!
The elimination period is the deductible the client pays before receiving benefits. Look at two examples using a 90 day elimination period:
- Let’s say your client needs home care three days per week for four hours per day. In current dollars, their costs are less than $100 per day. Their deductible, paid over a 30-week period before they receive benefits, is $9,000. If they think they will need Long-Term Care, they may be motivated by the lower deductible/elimination period.
- On the other extreme, if your client did enter a nursing home at $260 per day, in three months they will have paid $23,400. Of course, that cost is in current dollars. In future dollars 20 years or more from now, your client’s out of pocket costs could double or more. If they think they will not need Long-Term Care, they may be motivated by the higher elimination period.
Longer elimination periods do result in lower premiums and shorter elimination periods do result in higher premiums, of course. Make sure you describe the elimination period accurately for your clients and help them understand both the premium and deductible implications.
Plan Design Secret # 4
Design Plans with your prospects so they understand both the deductible implications (current & future dollars) and premium impact
Plan Design: Inflation
To Have or Not to Have is NOT the Question!
LTC Insurance is purchased to transfer a future risk of needing care. Considering the average buyer age has dropped to age 56 and the average age for initial claim is 75, that risk could be 20 or more years in the future.
While the rise in Long-Term Care costs certainly fluctuates over time, history does show consistent annual increases in the costs of care. There is no evidence that those increases will subside anytime soon. Of course when costs increase annually, the total costs of care in the future compound. The cumulative affect is significantly higher costs in the future.
Your clients need protection against those rising costs – and it is available to them through a variety of inflation options, including simple interest, compound interest, inflation options indexed to various price indices and even guaranteed purchase options for higher future benefits. (Buyer Beware: GPO = Future Premium Increases!)
Higher inflation protection, of course, has a direct impact on premiums and affordability. The question you need to help your client answer isn’t should they have inflation protection or not – but which type and how much?
With the exception of elderly clients in their mid-to-late 70’s, compound inflation is essential. Does it need to be 5%? No. 2% to 3% or an indexed product should provide adequate increases.
In California, the Partnership plans currently mandate 5% Compound Inflation up to age 69. While we’re confident the Partnership will soon approve less costly inflation options, you may need to recommend a non-Partnership plan for the time being. If you do, make sure you write your business with a carrier that offers Partnership plans in California.
Plan Design Secret # 5
Protect Your Clients from Rising Costs Using Compound Inflation Options, preferably in the 2% – 3% range
Plan Design: Premium
The key is to design LTC Insurance plans that allow your prospects, based on a more informed understanding of both the costs of care and the probabilities of utilization, to choose the premium that provides the right benefits for their risk tolerance … not a premium that is tethered to the Nursing Home!
Will your clients need to use their LTC Insurance? Although no one knows for sure, there is a high probability they will need Long-Term Services and Supports at some point in their lifetime. If they do, the value of their policy is significant. The chart below illustrates the value of the benefits at greater than 10 times the costs in premium.
Source: Who Buys LTC Insurance? LifePlans, 2012
Suitability guidelines suggest premiums should not exceed 7% of your client’s income. No matter how great a job you have done in designing a SHORT and FIT plan for your clients, the policy needs to be affordable.
Plan Design Secret # 6
Demonstrate the value of the benefits when presenting the premium, and ensure your plan is suitable and affordable.
Plan Design: Asset Protection
The purpose of LTC Insurance is to protect your client’s assets and transfer their risk. If they do need Long-Term Care, they have few options:
- Spend their own money to pay for the costs of care
- Become a physical, emotional and financial burden for their spouse and/or family members
- Spend down their assets to qualify for Medicaid
- Shift and shield their assets through an Attorney
But the best choice is transferring their risk using LTC Insurance … and the best choice for asset protection is a Partnership approach.
An important consideration in Partnership policy plan design is determining the amount of Non-Exempt Assets your client needs or wants to protect. Non-Exempt Assets are assets that State Medicaid Programs focus on to determine eligibility and require a client to “spend-down” in order to qualify.
As an example, a 3 year plan (1,095 days) at $180 per day helps your client protect nearly $200,000 in Non-Exempt Assets in today’s dollars. The amount of assets protected will continue to grow when you include an inflation option in your plan design. If they have more or less Non-Exempt Assets to protect, you can adjust the duration and/or daily benefit accordingly.
Pay very close attention to your client’s Non-Exempt Assets, as they reflect your client’s ability to self-insure their LTC risk and provide the basis for the Partnership benefits they should purchase. The state will require the client to spend-down first to become eligible for Medicaid and will pursue these assets to recover their costs if they are not protected by a Partnership plan.
Plan Design Secret # 7
Design Partnership Plans to Protect Your Client’s Non-Exempt Assets on the front end (spend-down) and the back end (recovery)
Seven Secrets of LTC Insurance Plan Design
- Design traditional LTC Insurance with Comprehensive Coverage through Partnership Plans
- Untether from the Nursing Home using a Co-Payment Approach and design Daily Benefits based on 70% of the Nursing Home Costs in Your Area. Design the Daily Benefits to FIT the Costs of Care
- Go SHORT and design plans based on 3 Year Durations (covering more than 80% of the risk), especially when you can use a Partnership Plan for asset protection
- Design plans with your prospects so they understand the deductible implications (current and future dollars) and the premium impact
- Protect your Clients from rising costs using Compound Inflation Options, preferably in the 2% – 3% range
- Demonstrate the value of the benefits when presenting the premium, and ensure your plan is suitable and affordable
- Design Partnership Plans to protect your client’s Non-Exempt Assets on the front-end (spend-down) and the back end (recovery)
Back to the Future
We’ve gone way, way back into the early history of Long-Term Care and LTC Insurance. We’ve dissected the data on “Who Buys (or is Sold) What” and taken a deeper look at not only the prices of Long-Term Services and Supports, but also the cost implications when you consider utilization patterns.
We’ve asked you to “untether” yourself from the Nursing Home and have plan design discussions with your prospective clients from a place of smart planning rather than fear and loathing. We’ve suggested a new approach to plan design that will allow you to present premiums to your prospects that help them buy LTC Insurance that they most likely will use, rather than protection that they buy with the expectation that they will get their money back.
What does the future hold? Where will you take your LTC Insurance sales this year, next year and beyond? What lies ahead for an Aging America in 2025, 2035, 2045 and beyond? What will the world of LTC look like when we go “back to the future” decades from now?
We know your role as LTC Insurance Agents and Financial Planners will be instrumental in protecting people from the devastating costs of long-term care, even if that devastation is no longer in a nursing home!
Learn Even More Secrets of LTC Insurance Plan Design,
attend one of our LTC Continuing Education Courses in Your Area Today!