Reasons Why Tax-Qualified LTCI Policies Are Consumer Friendly

Author: Duane Lipham, CLTC

When the long-term care insurance (LTCI) industry was in its early stages, the policy features and design differed considerably from what we have commonly come to see offered to consumers today.

Since it was a relatively new segment of the insurance industry, there was little history that could be drawn from reliable sources regarding pricing, underwriting procedures and policy design. As a result, it was kind of like the old wild west in that each carrier typically had their own unique offerings that could be completely different from other companies in the LTCI field. You can imagine how confusing and difficult to compare those policies were for the average consumer.

A big change took place in 1996 when Congress passed the Health Insurance Portability and Accountability Act (HIPAA). Essentially, Congress recognized that without some federal guidelines the LTCI industry was headed for trouble. So this legislation helped standardize LTCI policies while providing several consumer friendly features at the same time. Their guidelines also helped bring more rate stability to the LTCI marketplace as well.

Here is a short list of some of the outstanding consumer friendly features that can be found in tax-qualified LTCI policies these days:

1. Elimination of a “medical necessity” benefit trigger. Policyholders who had Alzheimer’s or dementia but had no other obvious need for medical care might not qualify for benefits under this kind of benefit trigger. Modern tax-qualified policies generally contain two benefit triggers. The first is for policyholders who need assistance with at least two activities of daily living (ADLs) for at least a period of 90 days. The second is for those who have Alzheimer’s or dementia to the degree that they could be a danger to themselves or others if left alone.

2. Tax-qualified policies must be guaranteed renewable. This means that insurers cannot cancel or refuse to renew a policy because of age, claims history, or health deterioration, provided of course that you continue to pay the required premium.

3. Policies must include an inflation protection option, and insurance agents must offer and explain this option in their presentation.

4. Policies must also include an unintentional lapse provision that permits a policyholder who misses a premium payment because of a cognitive or physical impairment to reinstate the policy up to five months later.

5. HIPAA also established that LTCI insurers must not practice post-claim underwriting. This is a procedure where the policy is awarded with little or no initial underwriting until the first claim is actually made on the policy. This obviously allows too much room for abuse on the part of the insurer to possibly deny coverage by being overly strict on underwriting when the actual claim is made.

These are just a few of the consumer friendly aspects of modern tax-qualified policies. So in addition to their obvious inherent tax benefits these policies also come with many attractive policy design features for modern consumers as well.