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Long-Term Care Claims: Marketing Vs. Reality

One of the most important aspects of any long-term care insurance policy or linked benefit rider is the claims payment methodology.

From our perspective as a product wholesaler, the questions most often asked by agents are all about the product’s cost and overall level of benefits.

We rarely get questions about the difference between indemnity versus reimbursement method products, which is ironic because this is where the differences show up when a claim is made.

When it comes to indemnity versus reimbursement products, carriers sell either one type of product or the other, and they do not offer the option of switching from one model to another.

There isn’t any difference in price between a product with a reimbursement model and one under the indemnity model. Carriers’ actuaries use many factors to price their products. 

Those of you who have been selling stand-alone LTCi for decades are probably aware that most, if not all, of those policies follow the reimbursement method of claims payment. This means that when the insured person qualifies for the policy’s benefits by meeting two out of six activities of daily living requirements, the insured’s family will now need to understand how to submit bills for reimbursement of qualifying medical care.

This is not an easy thing to do, and the rules are not easy to understand. An average consumer, with an above-average level of education and competence, would be hard pressed to understand the complexity of the reimbursement claims process, and in almost all cases would need an insurance professional to help them deal with the claims department. I make this statement with a high degree of confidence, having recently handled a claim for an orphan client who was referred to me by one of our LTCi carriers.

Here is what happened to two insureds who called their LTCi carrier to ask for assistance.

Betty And Bob

Betty and Bob live in a retirement community. The facility is divided into a residential side, where residents require little to no assistance, and an assisted living facility, where residents need regular or full-time assistance. Betty and Bob live on the residential side and are strongly resisting moving into assisted care.

Many years ago, Betty and Bob purchased LTCi coverage through the same company at different times. They each own their own policies, which is important, because the claims department will only speak with the agent or the owner.

Although Bob is a mechanical engineer by training and is highly intelligent, he has no experience with insurance contracts and was not interested in dealing with the claims examiners. This made the ownership issue even more acute, as we needed to have the insurance company accept me as the agent of record and give me limited power of attorney to act on his behalf in order to get the claims process moving.

When I first met this couple, Betty was 84 and Bob was 90. Both believed that Bob was at the point in his life where he needed a level of assistance that Betty could no longer provide. Betty thought she wanted to make a claim against Bob’s LTCi policy, but had no idea what benefits would be paid, or if Bob even qualified to receive payments. They did not want to move Bob to the assisted living facility; they just wanted professional help with Bob’s daily living needs.

Bob is mentally healthy, but is having difficulty with showering and other physical activities of daily living that Betty is becoming too old to help him with. Most LTCi claims start this way; a claim made very late in life with a medical situation that can initially be handled by a home health care assistant.

Betty knew Bob’s LTCi policy could potentially ease the financial burden of care, but did not understand the contract and was reluctant to tackle the claims process herself. Because the agent who sold the policies had died, the carrier referred Betty to the nearest general agent for help.

And so I took on the task of coordinating the benefits provided by Bob’s reimbursement model LTCi policy. I thought that one or two calls to the carrier’s claims unit would be sufficient, but I soon learned that it isn’t that simple. The process took more than two hours just to get the carrier to share the policy information with me. Add to that at least another six hours of calls and paperwork to get the claim approved. And that was only the beginning.

Because Bob had not made a claim, or hired outside assistance prior to making a claim, we had to deal with the elimination period, in this case 20 days of service. This proved to be a problem because Bob had not received care from a qualifying nursing service until the claim was made.

This meant that the 20-day waiting period would be satisfied only when Bob had actually received and paid out of pocket for 20 days of services. Because he needed only intermittent care, it took more than 90 days to qualify the 20-day elimination period. Betty and Bob were perplexed by this and never really understood why they could not begin receiving reimbursements once Bob qualified for benefits under the policy.

The bigger and arguably more important issue was coordinating with a local health care provider that could begin providing care during the elimination period. Betty wanted the benefits to be coordinated so that the carrier was paying the provider directly and she would not have to deal with bills and reimbursements.

And while the claims unit was extremely helpful and cooperative, the provider had some issues with coordination of payments that caused me to spend several more hours on the phone untangling the nuances of the contract language.  It seems as though the process was designed to get people to walk away in defeat.

After six months of meetings with the clients and calls to the carrier, Betty and Bob are finally receiving the benefits they paid for. And unfortunately, those benefits will be insufficient to cover all of the costs this couple will incur while Bob is alive, something every potential insured needs to wrestle with at the time of purchase.

Most Claims Begin And End At Home

An indemnity model policy or rider would have been far more beneficial for Betty and Bob. Most LTC claims start with an in-home caretaker, usually a family member (in this case Betty), then transition to an outside professional providing in-home services and then into an assisted living facility as the condition progresses over an average of six years.

Most reimbursement model policies will not pay family members, and even if they do, they require the elimination period (the vast majority of which is 90 days) to be met out-of-pocket before the policy pays any benefits. According to the American Association for Long-term Care Insurance, “Most long-term care insurance claims begin and end at home.”

Coincidentally, while this situation was playing out, another one occurred. One of our close friends, a life insurance agent, was in the process of losing his wife to cancer. He had a stand-alone long-term care policy issued by a major mutual company. For some reason, he waited until his wife was home from a long hospital stay to make a claim. The policy had a 60-day waiting period, and his wife died on the 59th day.

Two things stand out about this: First, he should not have waited to make a claim, something agents should know; and second, there is no recovery of costs. His LTCi policy expired worthless. This does not have to be the case, as many linked benefit products provide a full death benefit.

The facts are changing due to improvements in home care and the resistance of most cognitively healthy insureds to being placed in a full-time care facility. And that dynamic is likely to continue to evolve toward more home-based care options as the health care system changes and medical solutions improve.

A recent sales piece from an insurer that offers indemnity-based payments makes the point:

A client, age 60, purchases an LTCi policy with a $5,000 monthly maximum benefit, a six-year benefit period, and a 5% compound interest inflation benefit. At the age of 80, the client needs care and initiates a claim.

Service is provided by informal care for the first two years, home health care for two years after that, and then the client spends two years in assisted living, after which they die.

Under these typical circumstances, the total amount of payments the reimbursement model policy would pay equals $262,583. The cash indemnity model policy pays $1,082,850. And, the cash indemnity model does not require the client to submit bills once they are qualified. So, virtually no interaction with the claims department. Which would you prefer?

It’s entirely too easy to rely on carrier illustrations and sales material that showcase the cost of a policy without regard for the client’s ability to actually collect the benefits they pay for. Having any coverage at all is better than none. But coverage that you can actually manage and collect on when you are an octogenarian in need is another thing altogether.

If you have an option, do your clients the ultimate favor and make sure they have indemnity based coverage. There are many new options and product types that will ultimately provide more value and less stress to policy owners and insureds. Take the time to investigate these products and emphasize the benefits of limited interaction with the claims department. Your clients deserve the benefit of this knowledge.

Reimbursement Model Vs. Indemnity Model

A reimbursement plan pays for the actual cost of care while an indemnity plan pays the maximum daily or monthly benefit.

Under the reimbursement model for long-term care insurance, the policy pays for the actual daily or monthly cost of care. For example, if the selected daily benefit is $100 and the actual cost of care received is $90, the policy will pay $90. Any excess daily benefit remains for future care needs. If the cost of care is $120 daily, the policyholder will receive $100 per day and must pay the excess amount.

A potential advantage to the reimbursement model is that the benefits can last for a longer period of time if the actual cost of care is less than the daily benefit.

Under the indemnity model for long-term care insurance, the policy pays the selected daily benefit as soon as the policyholder qualifies for benefits.

The policyholder receives this amount regardless of the actual cost of care. For example, a policyholder may incur a lower cost of care during the early stages of home care due to more limited needs. Or a spouse could provide some care during the early stages of home care, resulting in lower care costs.

A potential advantage to the indemnity model is that a policyholder could receive more money each month than they incur in care expenses.

Tricia Pilone is the president of CPI Companies, a life insurance brokerage general agency specializing in the design and sale of insurance products for high-net-worth individuals and corporate clients. Tricia advises agents and clients on product suitability, implementation, and policy management. Tricia may be contacted at tricia.pilone[email protected] [email protected].

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