ca 8hr ltc 2014 - sandi kruise inc · 2015. 3. 4. · i. long-term care (ltc) this course is...

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2014 EDITION

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CA 8HR LTC 2014


Table of Contents I. Long-Term Care (LTC) ................................................................................................................................ 5

A. Introduction (See Introduction to Long-Term Care within Overview) ................................................. 6

1. What is long-term care? .................................................................................................................... 7

2. Why is long-term care important? .................................................................................................... 8

3. Why is long-term care a problem?.................................................................................................... 9

B. Risk Factors Associated with Long-Term Care ...................................................................................... 9

1. Gender .............................................................................................................................................. 9

2. Age .................................................................................................................................................. 10

3. Marital/domestic partner status ..................................................................................................... 11

4. Availability of family caregivers ...................................................................................................... 11

5. Medical history................................................................................................................................ 12

6. Financial factors .............................................................................................................................. 12

C. Long-Term Care Services and Facilities that Provide Care .................................................................. 14

1. Long-term care services .................................................................................................................. 14

2. Facilities that provide care .............................................................................................................. 18

D. Locating Information on Services and Facilities that Provide Long-Term Care .................................. 22

1. Where to obtain information on long-term care services and facilities ......................................... 22

2. How services are provided and funded .......................................................................................... 23

II. Potential Resources for Paying for Long-Term Care Expenses ............................................................. 24

A. Financing/Paying for Long-Term Care ................................................................................................ 24

1. Funding mechanisms for long-term care ........................................................................................ 24

2. Insurance products that contain long-term care benefit options .................................................. 26

3. Medi-Cal (See Attachment I – Medi-Cal Requirements) ................................................................. 28

B. How Medicare Interrelates with Paying for Long-Term Care Expenses ............................................. 42

1. Medicare ......................................................................................................................................... 46

2. Medicare supplements ................................................................................................................... 46

III. Federal Legislation and Long-Term Care (See Attachment II – Tax Treatment of Long-Term Care Insurance and Expenses) ............................................................................................................................ 51

A. Health Insurance Portability and Accountability Act (HIPAA) Definitions that Apply to Long-Term Care Expenses and Insurance .................................................................................................................. 51

1. Qualified long-term care services/chronically ill individual ............................................................ 53

2. Licensed health care practitioner ................................................................................................... 53

3. 90-day certification for activities of daily living .............................................................................. 55

4. Substantial assistance ..................................................................................................................... 56


B. Tax Qualified Long-Term Care Insurance ............................................................................................ 56

1. Benefits ........................................................................................................................................... 66

2. Required consumer protection ....................................................................................................... 67

3. IRS reporting mechanism ................................................................................................................ 67

C. Tax Treatment of Pre-1997 Long-Term Care Insurance Policies ......................................................... 69

1. Definition of “material change” ...................................................................................................... 71

D. Long-Term Care Insurance Premium Deductibility............................................................................. 71

1. Health savings accounts (medical IRA account) .............................................................................. 71

2. Individual deductibility .................................................................................................................... 71

3. Deductibility for the self-employed ................................................................................................ 72

4. Deductibility in closely-held C-corporation ..................................................................................... 72

E. Pension Protection Act of 2006 ........................................................................................................... 73

F. New Trends: Long-Term Care Insurance, Life Insurance, Annuities and Benefit Riders ..................... 76

IV. Long-Term Care Insurance (LTCi) .......................................................................................................... 78

A. Types of Products ............................................................................................................................... 80

1. Stand-alone long-term care products ............................................................................................. 80

2. Products with long-term care riders ............................................................................................... 80

3. Hybrid long-term care policies ........................................................................................................ 86

B. Group Coverage (Section 10231.6 of the CIC) .................................................................................... 92

1. Employer sponsored plan ............................................................................................................... 99

2. Trade/association/discretionary sponsored plan ......................................................................... 101

3. Group policies issued outside California (Section 10232 of the CIC) ............................................ 103

C. Common Policy Benefits ................................................................................................................... 103

1. Coverage for care in a nursing facility (Section 10232.95 of the CIC) ........................................... 104

2. Coverage for care in a residential care facility for the elderly (RCFE) (Section 10232.92(a) of the CIC) .................................................................................................................................................... 105

3. Coverage for home and community care (Sections 10232.9(a) through (c) of the CIC) ............... 106

4. Benefit eligibility triggers and definitions ..................................................................................... 109

5. Contractual methods of payment ................................................................................................. 118

6. Definitions of providers (licensed or not) (Sections 10232.9 and 10232.92 of the CIC) ............... 120

7. Inflation protection ....................................................................................................................... 125

8. Waiver of premium, elimination/waiting period .......................................................................... 148

9. Benefit period ............................................................................................................................... 149

10. Restoration of benefits ............................................................................................................... 150


11. Home modification and other ancillary benefits (Section 10233.2(f) of the CIC) ...................... 151

12. Survivor benefits ......................................................................................................................... 152

13. Return of premium ..................................................................................................................... 153

14. Nonforfeiture (Section 10235.30 of the CIC) .............................................................................. 153

V. California Statutory Policy Provisions, Requirements and Terminology ........................................... 155

A. Company Responsibilities and Prohibitions...................................................................................... 155

1. Application and underwriting ....................................................................................................... 155

2. Reporting requirements ................................................................................................................ 171

3. Required policy definitions ........................................................................................................... 173

4. Consumer protection .................................................................................................................... 178

5. Policy replacement ........................................................................................................................ 181

6. Long-term care personal worksheet with company-specific premium increase information (Section 10234.95(c)(4) of the CIC) ................................................................................................... 185

7. Option to increase coverage ......................................................................................................... 189

8. Requirement to make specimen policy available on website and by request (Section 10237.93(a)(10) of the CIC) ............................................................................................................... 195

9. Insurer must retain records for each agent for replacement sales and lapses (Section 10234.86(a) of the CIC) ......................................................................................................................................... 196

10. Insurer must retain auditable procedures for compliance (Section 10234.93(a)(7) of the CIC) 196

11. Additional insurer obligations (Section 10232.65 of the CIC) ..................................................... 196

12. California Life and Health Insurance Guarantee Association (CLHIGA) (Sections 1067.02(a)(1) and 1067.02(b)(1) of the CIC) ........................................................................................................... 196

B. Agent Responsibilities and Prohibitions ........................................................................................... 197

1. Duty of honesty, good faith, fair dealing (Section 10234.8 of the CIC) ........................................ 197

2. Long-term care training (Section 10234.93 of the CIC) ................................................................ 198

3. Suitability (Section 10234.95 of the CIC) ...................................................................................... 200

4. Replacement ................................................................................................................................. 209

5. Consumer protection .................................................................................................................... 213

6. Replacement of long-term care insurance unnecessarily (Section 10234.85 of the CIC) ............. 220

7. Agent retention of records for five years (Section 10508.5 of the CIC) ........................................ 223

8. Long-term care rate & history guide – www.insurance.ca.gov (Section 10234.6 of the CIC) ...... 223

C. Statutory Rate Stabilization Requirements ....................................................................................... 224

1. Importance of rate stability in long-term care insurance ............................................................. 226

2. Company responsibilities .............................................................................................................. 227

VI. Administration and Enforcement ....................................................................................................... 232


A. Authority to Bring Actions and Assess Penalties (Section 10234.2 of the CIC) ................................ 232

1. authorizes private right of action .................................................................................................. 232

2. authorizes actions by district attorneys, attorney general and city attorneys ............................. 232

3. orders reasonable attorney fees and costs to prevailing party .................................................... 232

B. Violations and Penalties (See Attachment III) ................................................................................... 232

C. Notice and Hearing (Section 10234.5 of the CIC) ............................................................................. 232

VII. Advertising Guidelines and Marketing Practices .............................................................................. 234

A. Advertising Guidelines ...................................................................................................................... 234

1. Advertisements must be filed (Section 10234.9 of the CIC) ......................................................... 234

2. Identify the rules regarding Internet advertisements (Section 1726 of the CIC) ......................... 237

B. Marketing Practices (Section 10234.93 of the CIC) .......................................................................... 237

1. Insurer responsibilities .................................................................................................................. 238

2. Agent responsibilities .................................................................................................................... 239

VIII. California Partnership for Long-Term Care ...................................................................................... 241

A. Introduction to the Partnership (www.dhcs.ca.gov/services/ltc/pages/cpltc.aspx) ........................ 241

1. Partnership product allows dollar-for-dollar offset of benefit with Medi-Cal spend-down recovery .......................................................................................................................................................... 242

2. Special Partnership certification is required in order to sell Partnership product ....................... 243

IX. Attachments ........................................................................................................................................ 244

A. Medi-Cal Requirements – Attachment I ........................................................................................... 244

B. Tax Treatment of Long-Term Care Insurance & Expenses – Attachment II ...................................... 246

1. Provide sample of 1099 LTC form and instructions ...................................................................... 247

2. Provide copy of tax form 8853 ...................................................................................................... 249

C. Applicable Laws & Penalties – Attachment III .................................................................................. 251

I. Long-Term Care (LTC) This course is designed to meet the requirements of the California Insurance Code (CIC) §10234.93(a)(4). It includes all of the topics that must be addressed as part of all 8-hour Tax-Qualified Long Term Care (LTC) Insurance courses for agent training.

The agents and brokers who take this course can make a real difference in the lives of countless persons by helping them to understand the need for Long-Term Care, the costs involved and the methods


available to finance it. However, Long-Term Care Insurance isn’t the solution for everyone. Part of what agents will learn from this course is who should and who should not purchase a policy, and if they should, which of the myriad of choices available are best suited to each individual client.

Long-Term Care services may be necessary at any age. An older adult might gradually find that day-to-day living is becoming increasingly difficult without help, or he or she may develop Alzheimer’s Disease. Someone younger may have a heart attack, a stroke, a disabling accident, or develop a serious chronic illness such as Parkinson’s disease.

Because neither health insurance nor Medicare are primarily designed to pay for Long-Term Care services, Long-Term Care Insurance can help provide a way for people to pay for this care. Long-Term Care Insurance can help people retain assets and income set aside for retirement and can help them remain independent by providing the money to allow them to decide where and how their care will be provided.

A. Introduction (See Introduction to Long-Term Care within Overview) Introduction to Long-Term Care (the Long-Term Care Crisis)

With the aid of technology and today’s advanced healthcare systems, more people are living to age 80, 90 or beyond. This reflects the truth behind the marketing phrase “60 is the new 40”. Now, with on-going scientific programs beginning to offer hope of truly understanding the genetics of aging, we may soon see additional increases in life expectancy. Longer life expectancy increases a person’s need to plan for long-term care.

What is long-term care? Essentially, it is the inability to care for oneself due to a chronic (long-term) medical condition. Every day more than 5,000 people in this country turn 65. More than 2.5 million are 85 or older. And the likelihood of chronic illness increases with age. The chance of a person currently age 65 being confined to a nursing home at some time in the future is now one in three. According to the U.S. Census Bureau, the over-85 population is the fastest growing segment of the U.S. population, and one out of four people in that age group today lives in a nursing home. Approximately 75 percent of nursing home residents are women.

The programs that many believe cover chronic long-term care events are not necessarily designed to do so. Medicare and Medicare Supplements primarily pay for the costs associated with acute (as opposed to chronic) medical conditions. And, while Medi-Cal (Medicaid) does provide long-term care benefits for many senior citizens, they must first exhaust most of their income and assets to qualify. It is no secret that many seniors are paying a growing proportion of their income in out-of-pocket costs for health care and long-term care services at home due to limited or no insurance coverage. Every day people move into Medi-Cal/Medicaid facilities because they have run out of money from paying these out-of-pocket expenses for home health care or assisted living facility care.

The long-term care problem is made even more complex by the ever-rising cost of services. A study conducted by Genworth Financial and published in March 2013 noted that the semi-private nursing facility cost of long-term care in the U.S. is $207 per day or $75,555 per year and the median cost for “hands-off” homemaker services is $18 per hour. Are Americans planning for the costs associated with long-term care? In 2010 Gerontologist Ken Dychtwald (www.agewave.com) conducted focus groups that discovered the following:


• Uninsured medical expenses (including long-term care) are the top financial worry among men and women age 55 and older.

• People are over five times more worried about being a burden on their family than dying. • Almost two-thirds of people will actually require some long-term care, such as home care,

assisted living or nursing home care after they reach age 65, but only 35 percent of people believe they will need such care.

• People greatly underestimate the financial, social and lifestyle impact of caregiving responsibilities.

• When someone needs long-term care, a wide circle of primary caregivers, secondary caregivers, other family, friends and community members often provide the care and are impacted by the responsibilities.

The answer is that consumers are concerned about long-term care issues and are looking for credible guidance from insurance agents, financial advisors and other sources.

Long-Term Care Insurance (LTCi) is a category of coverage designed to address these growing problems. Obviously, the ideal time to purchase long-term care insurance would be the day before you need it, but as we know, life doesn’t work that way. A 2012 study by the Life Insurance Marketing Research Association (LIMRA) indicated that the number one reason people purchase long-term care insurance is for asset and income protection in retirement. Policyholders also obtain peace of mind, secure their independence and preserve their assets by having coverage.

The concepts of long-term care and long-term care insurance are presented in this outline in basic terms as we unfold a story that is important to consumers, insurance agents and financial advisors as well as employers. The reality is that long-term care has become one of the greatest health-care issues for older persons and their families and one of the most common catastrophic health-care expenses.

1. What is long-term care? Long-term care is a type of personal care service that someone might need if they are unable to care for themselves because of an illness, disability, or cognitive impairment like Alzheimer’s disease.

Long-term care is different from traditional medical care. Traditional medical care tries to treat or cure illnesses. Long-term care usually won’t improve their medical condition, but it will help people maintain their lifestyle. It helps with routine daily activities, such as eating, getting around, and bathing. It can also help if they need supervision, protection, or reminders to take medicines or perform other activities.

People can get long-term care services at their own home or in a hospice, adult day care center, nursing home, or assisted living facility.

There are two types of long-term care services:

• Skilled care is for medical conditions that require a medical professional, such as a nurse or a therapist. It’s usually provided in a nursing home or other care center.

• Personal care (sometimes called custodial care) helps people do routine activities. They can get personal care in their home or in a skilled facility.


As a result of physical limitations, cognitive impairments, mental illness, and/or a disabling chronic condition, an individual may need long-term assistance for several months or years. Assistance can include help with completing daily self-care tasks, such as bathing, dressing, or managing prescription medications, and also with completing errands, such as grocery shopping or traveling to doctor appointments. Those with severely disabling chronic conditions often require more extensive acute care and long-term services and supports (LTSS) as they age.

The need for Long-Term Care may begins gradually as an individual finds that they need more and more help with Activities of Daily Living(ADLs), such as bathing and dressing or independent Activities Of Daily Living (IADLs) such as household chores, meal preparation, or managing money. Or they may suddenly need Long-Term Care after a major illness, such as a stroke or a heart attack. They may need care for only a short time or, they may need these services for many months, years or the rest of their life.

• Long-Term Care is primarily concerned with maintaining or improving the ability of elderly people with disabilities to function as independently as possible for as long as possible.

• Long-Term Care also encompasses social and environmental needs and is broader than the medical model that dominates acute care.

• Long-Term Care is primarily low-tech, although it has become more complicated as elderly persons with complex medical needs are discharged to, or remain in, traditional Long-Term Care settings, including their own homes.

• Services and housing are both essential to the development of Long-Term Care policy and systems.

• Most Long-Term Care is personal care, such as help with bathing, eating or dressing that is required over a lengthy period – that’s why it can be very expensive.

• Long-Term care insurance can help people live their lives with dignity and financial independence.

Long-Term Care is the kind of help needed if someone is unable to care for his/herself because of a chronic illness or disability. Section 7702B of HIPPA 1996 defines a Chronically Ill individual as someone unable to perform at least two Activities Of Daily Living for a period of at least 90 days and/or someone who requires “Substantial Supervision” to protect themselves from threats to health and safety due to Severe Cognitive Impairment. Long-Term Care services can range from help with daily activities of living, such as bathing, shopping or dressing, to Skilled Nursing Care in a Nursing Home.

Long-Term Care includes:

• Institutional Care including care in a nursing home, convalescent facility, extended care facility, custodial care facility, skilled nursing facility, or personal care home

• Home Care including home health care, personal care, homemaker services, hospice, or respite care; or

• Community-Based Care including adult day care, hospice, or respite care.

2. Why is long-term care important? Long-Term care has become an important consideration due to:


• Longer Life Expectancies, due to major medical advances. • Unprecedented Senior Population Growth, nationally, the fastest growing segment of the

population is 65 and older, the Baby Boomers are advancing in age and there are 76 million Baby Boomers in America alone.

3. Why is long-term care a problem?

• Fewer Available Caregivers, everyone in the family works and families are increasingly farther away from close relatives.

• Rising Professional Healthcare Costs, in 2001, overall healthcare costs increased 10.3 percent, and prescription costs increased 14.6 percent.

• Weak Social Financing Structure, Medicaid and Medicare are unprepared and overburden, and both have questionable futures.

B. Risk Factors Associated with Long-Term Care Number of Medicare Beneficiaries

The number of Medicare recipients has doubled during the 30 years from 1970 to 2000 and is expected to double again in the 30 years between 2000 and 2030. This year, about 9 million Americans over the age of 65 will need Long-Term Care services, according to HHS. This figure is predicted to rise to 12 million by 2020 and, according to figures from the Family Caregiver Alliance, will soar to 27 million by the mid-century mark. Clearly this issue will affect large numbers of Americans in the very near term. The HHS predicts that 70% of elders over the age of 65 will require some kind of Long-Term Care during the course of their lifetimes.

The American population is growing older, and the group over age 85 is now the fastest-growing segment of the population. The odds of entering a nursing home, and staying for longer periods, increase with age. In fact, statistics show that at any given time, 22 percent of those aged 85 and older are in a nursing home. Because women generally outlive men by several years, they face a 50 percent greater likelihood than men of entering a nursing home after age 65.

An individual’s personal risk of needing Long-Term Care depends on many factors. Some of those are how long they may live, their health history and whether they have a spouse or family members who can provide some of the care they may need.

Other factors contribute to the need for Long-Term Care. Families are geographically scattered. Time, travel expenses and other responsibilities make it nearly impossible to provide the care older family members need. In addition, the primary caregivers in most families are women, and today more women work outside the home.

1. Gender Gender. Women might need long-term care insurance more than men because they usually live longer.


Women are disproportionately affected by Long-Term Care. The reason behind this lies in the fact that women live longer than men and thus, are more likely to develop the functional ailments that require Long-Term Care services. Two-thirds of residents in Long-Term Care facilities are women.

2. Age Life expectancy. The longer someone lives, the more likely they will need long-term care. Consider whether their family has a tendency for long life expectancy.

The U.S. will experience a demographic shift by age in the coming decades as a result of the “Baby Boomers” reaching older adulthood, increased life expectancy, and advances in medicine and medical technology. The majority of Americans aged 65 and over will have long term care needs (70% of “Baby Boomers” can expect to use some form of long-term care during their lives); the population that is most likely to need LTSS- individuals aged 85 and over- is expected to increase by almost 70 percent in the next 20 years (Figure 3).8 In the face of increased demand for LTSS, states and the nation will be challenged to find innovative ways to deliver high quality, person-centered LTSS, reduce unmet long-term care needs and HCBS workforces shortages, increase accessibly and affordable community-based housing options, and strengthen community-based provider and resource networks.

8 A. Houser, W. Fox-Grage, and K. Ujvari. Across the States 2012: Profiles of Long-Term Services and Supports, AARP Public Policy Institute, September 2012, available at: http://www.aarp.org/home-garden/livable-communities/info-09-2012/across-the-states-2012-profiles-of-long-term-services-supports-AARP-ppi-ltc.html.

The need for assistance dramatically increases after age 65. According to the AAHSA, 69% of Americans aged 65 today will need some form of Long-Term Care. Estimates suggest that by 2020, some 12 million older Americans will require Long-Term Care.

Though older people use the most Long-Term Care services, a young or middle-aged person who has been in an accident or suffered a debilitating illness may also need Long-Term Care.

Long-Term Care is becoming an increasingly important concern of our aging population. Due to increased longevity, it is becoming more likely that each of us will need Long Term Care services at some


point in our lives. It might be for a brief period with a full recovery. It might also be required for a number of years. The services provided may be at Home, a Nursing Home or an Assisted Living Facility.

While older people are more likely to need Long-Term Care, the need for Long-Term Care can come at any age. In fact, the U.S. Government Accounting Office estimates that 40 percent of the 13 million people receiving Long-Term Care services are between the ages of 18 and 64.

3. Marital/domestic partner status

Their family situation. If they have a spouse, adult children, or other family members who can care for them at home, they might not need a policy that pays for home health services. Instead, they might want to consider a policy that pays only for nursing home care.

4. Availability of family caregivers Family caregivers have traditionally provided informal assistance with personal care and household chores, but in many cases informal caregiving now includes skilled medical/nursing care tasks such as meal preparation for a special diet, wound care, and care coordination. The majority of family members providing care to people with multiple chronic physical and cognitive conditions were:

• Female (58%) • Age 50 or above (66%) • Caring for a parent (38%) • Providing care for three or more years (44%) • Employed outside of the home (47%) and making less than $50,000 annually (48%)


Most family caregivers are willing to provide care for their family members and friends, but the caregiving experience can be very demanding, leading to undesirable outcomes such as chronic stress or financial strain.2

2 S. Reinhard and C. Levine. Home Alone: Family Caregivers Providing Complex Chronic Care, AARP Public Policy Institute, October 2012, available at: http://www.aarp.org/content/dam/aarp/research/public_policy_institute/health/home-alone-family-caregivers-providing-complex-chronic-care-rev-AARP-ppi-health.pdf.

Currently, the baby boomer couples have more living parents than children. That alone points to a major part of the coming crisis in caregiving for the next 30 to 40 years. The informal caregiver workforce is a fragile, stressed-out group. Vulnerable to the risks of burnout, depression, personal health issues, inadequate personal finances, insufficient support from other family members, lack of respite, and limited community services or resources, the family caregiver simply cannot continue to be the main solution to in-home caregiving needs.

Fewer children per family, more childless couples, higher divorce rates, and adult children residing at greater distances from their parents are just a few factors that directly influence the ability of family caregivers to continue to carry the load they have traditionally.

5. Medical history

Family health history. Someone may have a greater need for long-term care if chronic or debilitating health conditions run in their family.

Increasingly, learning to live with chronic diseases dominates the health concerns of older adults heading to retirement and beyond. As more of the population enters the later years of elderhood, the toll of chronic diseases superimposed on the aging process and physical deconditioning leads to mounting numbers of dependent and disabled persons requiring Long-Term Care.

However, the American healthcare system is not focused on the issues arising from increasing chronic disease and, on the resulting dependency and increasing need for Long-Term Care services. Instead, it is a system that has been built and sustained on a model of addressing all health concerns using cutting-edge, high-tech, acute care interventions.


Meanwhile, the progressive demographics of our aging society bring an ever-increasing number of older adults into the healthcare system. The fastest growing segment—the over-85 group—also has the greatest prevalence of chronic diseases, frailty, and dependency. As a result, in 1995, for the first time, the American healthcare system provided more units of chronic than acute care, and the trend will likely continue.

6. Financial factors Paying for needed LTC is expensive and often burdensome. On average, nursing home care costs over $90,000, assisted living facility care costs over $42,000, home health aide services (at $20/hour, 20 hours/week) cost almost $21,000, and adult day care (at $70/day, 5 days/week) costs about $18,000 annually.3 Thirty-four percent of seniors live below 200 percent of poverty ($22,002 for an individual age 65 or older) (Figure 1).4 Many individuals and families exhaust their assets paying for much needed services and supports, thereby qualifying for financial need-based coverage under Medicaid. In the absence of affordable private insurance coverage options or viable public insurance alternatives, such as national long-term care insurance system or expanded coverage for Medicare beneficiaries, there will be a continued reliance on the Medicaid program.

3 MetLife Mature Market Institute. The 2012 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs, November 2012, available at: https://www.metlife.com/mmi/research/2012-market-survey-long-term-care-costs.html#keyfindings. 4 U.S. Census Bureau. Current Population Survey, 2012 Annual Social and Economic Supplement, available at: http://www.census.gov/hhes/www/cpstables/032012/pov/POV01_200.htm.


C. Long-Term Care Services and Facilities that Provide Care Long-Term Care often involves a progression of evolving care needs and services, from low-intensity services to high-intensity, 24-hour care. Individuals tend to move along this continuum as their functionality lessens, ever higher levels of care and services are needed.

The types of care and services that characterize Long-Term Care range from periodic assistance or Unskilled Care (often provided by family and friends) to highly Skilled Nursing Care.

LEVELS OF CARE ALONG THE LTC CONTINUUM

Another way to define and distinguish Long-Term Care is by the level of care delivered. Generally speaking, the Long-Term Care continuum has three levels of care:

• Custodial care • Intermediate care • Skilled care

Custodial Care, also known as personal care, includes assistance with activities of daily living, such as bathing, dressing, walking, toileting, and eating. Custodial Care can be performed by individuals without professional medical skills. In fact, family members and friends often provide custodial care for elderly family members or friends. This level of care may be provided at home, in a nursing home, or in an assisted living facility. Custodial Care is often administered to a person with a chronic condition, such as Alzheimer’s disease or Parkinson’s disease. In addition, many people require custodial care simply as a result of old age and frailty.

Intermediate Care is medically supervised care that is provided intermittently (daily or a few times a week) for individuals who do not need around-the-clock care but still need medical care or assistance of some kind. Although less specialized than Skilled Nursing Care, Intermediate Care is based on a doctor’s orders and is performed by a registered nurse or licensed therapist. This type of care can be provided at Home, in an Assisted Living Facility, or in a Nursing Home, and is intended to improve or maintain a person’s health.

Skilled Nursing Care is the highest level of care and is available 24 hours a day. It can only be performed by or under the supervision of skilled medical personnel, such as nurses, therapists, and technical personnel. This type of care is based on the orders of a doctor (called a treatment plan) who dictates the type of care to be provided. It is generally provided to patients who need a high level of nursing care, often after a person has received medical treatment for an acute condition. Sometimes, Skilled Nursing Care may be needed for an extended period or for a short time only, until a person can transition to a lower level of care. Skilled care can also be provided at a person’s home.

1. Long-term care services Long-term care policies define benefit limits by how the provider of care is defined. Agents should examine their policies carefully because these are critical components when comparing policies. At one time, LTC policies followed Medicare's definition, but now coverage is included for a broader spectrum of providers. Whether a particular policy or program will provide benefits depends upon the specific


definitions of covered services in the contract or program. Agents need to understand what is meant by various service definitions in order to evaluate what benefits are available and determine unmet needs.

The following are different types of services that comprise the Long-Term Care continuum, from low intensity services through post-acute care:

• Chore services—Volunteers or paid workers who buy groceries, mow laws, run errands, and perform light housework.

• Senior center—Provides social activities, dances, bus tours, dining. • Adult day care—Provides daytime activities, lunches, therapy, and games. • Home health care—In-home services by nurses, physical therapists, dietitians, and others. • Rehabilitation program—Provides extensive physical therapy, occupational therapy, and speech

therapy. • Respite care—Care provided by individuals who relieve primary caregivers. • Retirement housing communities—For independent elderly, these communities offer individual

living, self-contained living units, building security, and social activities. • Continuing care retirement community—Provides a continuum of care ranging from retirement

housing to skilled care. • Assisted living center—Offers medical attention, assistance with eating, bathing, and other

activities of daily living. • Nursing facility/skilled nursing facility—Provides intensive nursing care around the clock. • Acute care—Surgical or hospital care with lengths of stays limited by diagnosis-related group

caps.

Long-Term Care includes a wide variety of settings and services which are available to meet people's special needs. For example, someone recovering from surgery may stay in a sub-acute care facility instead of a hospital. A stroke or accident victim can receive nursing care and speech, physical and occupational therapy at a skilled nursing facility. Someone who requires assistance with activities of daily living such as dressing and bathing, but doesn't need 24-hour nursing, may choose a residential care facility. Other options include respite care and adult day care to ease the burden on family caregivers, special Alzheimer's programs, services for persons with developmental disabilities, mental health care, and home and community based care.

a. home care and community-based services Ongoing home care services, considered to be custodial or supportive care, are usually provided by individuals such as home health aides, homemakers, and companions. Home health aides are trained to provide hands-on care and assistance to people in their homes who need help with ADLs (bathing, dressing, transferring, eating, toileting, or continence). They are also able to help with needed tasks such as cooking, shopping, and laundry.

“Home Care” encompasses a wide range of health and social services. These services are delivered at home to recovering, disabled, chronically or terminally ill persons in need of medical, nursing, social, or therapeutic treatment and/or assistance with the essential Activities of Daily Living (ADL).


Home care includes a multitude of medical and personal services provided in the person’s own home, making it possible to retain a measure of independence and receive care in a comfortable, familiar environment. It encompasses services provided by nurses, therapists and home care aides, including:

• Health care - nursing, social work, physical and rehabilitative therapy, medication monitoring and medical equipment

• Personal care - assistance with personal hygiene, dressing, bathing and exercise • Nutrition - meal planning, cooking and meal delivery • Homemaking - housekeeping, shopping and household paperwork • Social and safety needs - transportation services, companions and a daily telephone check i. home health care

Home Health Care - provides medically-oriented care for acute or chronic illness in the patient's home, usually as a follow-up to acute or other facility care.

Home Health Care may include part-time Skilled Nursing Care, such as occasional visits by registered nurses or licensed vocational nurses. It may include speech, physical or occupational therapy, and part-time services of home health aides. It almost always includes some degree of custodial care, such as assistance with meal preparations, personal hygiene, and taking medications. Advances in medical science have made the delivery of health-related care in the home much easier. Smaller, portable equipment enables respiratory therapy, drug therapy and chemotherapy to be done in the home rather than in the hospital. In addition, hospital beds, power lift chairs, walkers, wheelchairs and monitoring devices are available for rent so that most people can return home sooner.

Home Health Care can be found through State or Area Agencies on Aging, social service agencies, public department of family services, private home care agencies, Red Cross, Visiting Nurses Association, public health department, hospital social services or discharge planning, United Way, and the Yellow Pages.

• Regulation – Licensed and Medicare and Medi-Cal certified by DHS. • Payment – Funded primarily through Medicare, with limited coverage through Medi-Cal,

private insurance and private payments. ii. adult day care Adult Day Care centers can offer a much needed break to caregivers. This type of care provides service at a community-based center for adults who need assistance or supervision during the day but who do not need around-the-clock care. There are a variety of “models” of Adult Day Care programs. All models are intended to offer socialization, supervision and structured activities designed for the individual needs of the participants at the center. Some programs also may provide personal care, transportation, medication management, health-related services, intergenerational programming, social services, meals, personal assistance and therapeutic activities.


iii. personal care Personal Care Services are non-medical services to assist older persons with ADLs and/or IADLs are provided by a skilled or unskilled person under medical direction. They are provided for people who need assistance with daily living but do not require nursing.

• Regulation – No separate license required. • Payment – Primarily funded through In-Home Supportive Services for those eligible. Some

Medi-Cal, for those eligible, and private payments. iv. homemaker services Homemaker Services involve supporting care for the house or environment rather than directly for the care recipient. Services often include yard work, minor household repairs, general maintenance, cleaning or installing ramps or grab bars to make the person’s home more accessible to them. This service makes it possible for people to live in their own homes or to return to their homes by helping complete household tasks that they can’t manage alone. v. hospice services

Hospice care—This is the term used for the care provided to individuals facing a terminal condition, or who have less than six months to live. This care can be provided in home or a facility. vi. respite care Respite care—Care provided by individuals who relieve primary caregivers.

b. public programs Public programs may be available to people in the community, such as those below: i. multipurpose senior service program (MSSP) The Multipurpose Senior Services Program (MSSP) is a care and case management program that helps people to live independently. It links older Medi-Cal eligible individuals, when they need placement in a nursing home, with various health and social services in their community. For more information on the MSSP program, call 1-800-510-2020. ii. in-home supportive services (IHSS) The In-Home Supportive Services (IHSS) program is administered by the county Departments of Social Services under guidelines established by the state. IHSS provides assistance to eligible aged, blind and disabled persons who are unable to remain in their homes safely without assistance. Most people are eligible for IHSS when they meet eligibility criteria for the Supplemental Security Income/State Supplementary Program (SSI/SSP) for the aged, blind, and disabled. The services available through IHSS are domestic services such as heavy cleaning, meal preparation and clean up, laundry services, and reasonable shopping.


iii. program of all-inclusive care for the elderly (PACE) PACE provides an alternative to institutional care for persons age 55 or over who require a nursing facility level of care. The PACE team offers and manages all health, medical, and social services and mobilizes other services as needed to provide preventative, rehabilitative, curative, and supportive care. This care, provided in day health centers, homes, hospitals, and nursing homes, helps the person maintain independence, dignity, and quality of life. PACE functions within the Medicare program as well.

2. Facilities that provide care The LTC continuum includes Nursing Homes; facility-based Long-Term Care including Assisted Living, Continuing Care Retirement Communities, and Board-And-Care Homes. Home- and community-based services including Adult Day service programs, Home Healthcare Aides, Meal Programs, Senior Centers, and Transportation Services.

a. formal care Formal Long-Term Care (the kind of care that is paid for) is most often provided by professional skilled and unskilled workers. Unskilled workers are often supervised by skilled medical personnel such as registered nurses i. nursing homes A Nursing Home is a facility which provides residents with personal care, room and board, supervision, medication, therapies and rehabilitation, as well as Skilled Nursing Care 24 hours a day. Nursing Homes provide care to residents with chronic conditions or for those needing a shorter term acute recovery period after hospitalization. Typically, patients in Long-Term Care facilities require assistance with multiple Activities Of Daily Living (ADLs), which include bathing, dressing, eating, toileting, transferring in and out of chairs or beds, and continence, and/or have cognitive limitations due to Alzheimer’s disease or another form of dementia.

The Nursing Home resident may have a chronic condition, a need for assistance with multiple ADLs, or a Cognitive Impairment requiring a level of care that prevents him or her from living independently or at lower levels of care. Nursing Homes provide a secure environment and an array of services to meet the physical, medical, and social needs of their residents.

Both state and federal authorities regulate Nursing Homes. To make sure the quality of care given in Nursing Homes meets high standards, the state grants licenses and also conducts on site reviews of Nursing Facilities each year. In 1987, the Omnibus Budget Reconciliation Act (OBRA) resulted in national reform of Nursing Homes. Key provisions of this act require:

• Additional nursing home staff, • Higher staff proficiency; • More individualized resident care plans; and • Resident involvement in the care plan.


Although there are different levels of care in nursing facilities, all involve full-time residence and include room and board, monitoring, personal assistance, nursing and other health care for people who are physically or mentally unable to attend to all of their own needs. ii. residential care facilities for the elderly (RCFE) Assisted Living Facilities (referred to as Residential Care Facilities in California) are living arrangements that provide personal care and services for people who may need assistance with ADLs, but who wish to live as independently as possible and who do not need the level of care provided by a nursing home. It’s important to note that assisted living is not an alternative to a nursing home, but an intermediate level of long term care. iii. continuing care retirement communities (CCRC) Continuing Care Retirement Communities offer an innovative and independent lifestyle for single and married older adults. This type of community is different from other housing and care options for older people because it involves a long-term contract that provides for housing, services and nursing care, usually all in one location. CCRCs offer a range of services such as: nursing and other health services; meals; housekeeping; transportation; emergency help; and personal care (help with things like bathing, dressing, going to the bathroom, and more). CCRCs usually also have lots of social and educational activities on site.

• Regulation – Licensed by Dept. of Social Services, Community Care Licensing Division. • Payment – Funded primarily through private payments. iv. adult day care setting

Adult Day Services provide health, social, and therapeutic activities in a supportive group environment for individuals with cognitive and/or functional impairments. Some are freestanding centers or programs; others are affiliated with a facility or organization such as a nursing home, assisted living community, senior center, or rehabilitation facility.

Care can be obtained in a social model, medical/health model, or a specialized model of adult day services. A social-model program provides meals, recreation, and some basic health-related services. A medical/health-model program provides social activities as well as more intensive health and therapeutic services such as nursing services and rehabilitation therapy. A specialized program provides services only to specific populations such as those with diagnosed dementias or traumatic brain injury.

In the State of California, adult day care services are provided in three types of centers:

ADULT DAY CARE (ADC) centers are community-based programs that provide non-medical care to persons 18 years of age or older in need of personal care services, supervision or assistance essential for sustaining the activities of daily living or for the protection of the individual on less than a 24-hour basis. The State Department of Social Services (DSS) licenses these centers as community care facilities.

ADULT DAY HEALTH CARE (ADHC) centers are community-based programs that provide medical, rehabilitative and social services to elderly persons and other adults with functional impairments, either physical or mental, for the purpose of restoring or maintaining optimal capacity for self-care. These centers provide services through an individual plan of care and target adults who are at the institutional


level of care or at risk of institutional placement. ADHC is a Medi-Cal benefit. The California Department of Aging (CDA) administers the program and the centers are licensed by the State Department of Health Services as health care facilities.

ALZHEIMER DAY CARE RESOURCE CENTER (ADCRC) is a community-based program that provides day care for persons in the moderate to severe stages of Alzheimer's disease or other related dementias, and provides various support and educational services for family caregivers and the community at large. ADCRCs identify the psychosocial, mental, functional, and cognitive needs of these participants, and assist participants to operate at the highest level possible within individual degrees of mental and physical capacity. Although the law permits ADCRCs to function without a license, the majority of these programs are located in licensed facilities under an established licensure category. CDA administers the program, and grants state general funds to eligible applicants as authorized by legislation.

b. alternative living settings/arrangements Alternative living arrangements often include Long-Term Care as part of their package of services. These living arrangements can include retirement communities, assisted living arrangements, California VA homes, and even shared housing. These housing alternatives involve moving from a single family home or apartment into one of these congregate living arrangements where care will be provided.

Some offer meals and housekeeping services. Most do not offer assistance with daily living activities, but may provide coordinators to help residents access community-based services in order to remain in the housing complex and function independently. i. retirement home living arrangement Retirement Homes are alternative living arrangements, which can vary from place to place. Some require a large up-front payment and a monthly maintenance fee; others are month-to-month rentals. Some also allow residents to purchase a home or condominium within the retirement community. Some include home and institutional care and allow residents to move from independent living through various levels of care within that living arrangement. Others provide a package of personal care services at extra cost or include those services in their monthly fee, but do NOT provide institutional care.

• Regulation – Dept. of Social Services, Community Care Licensing Division. • Payment – Grants provided through the Federal Government (Housing & Urban Development).

Some funding through SSI/SSP for those eligible.


ii. life care communities Life Care Communities (LCCs) provide housing, recreational activities, and personal and medical care according to one's needs which can be increased as needs change. The concept of “life care” suggests that all needs will be taken care of for as long as a person lives, but consumers need to be cautious when making commitments to these facilities.

Large front-end investments and complex contractual agreements characterize LCCs. The admission fee might be $50,000 to $100,000, or more. There are usually additional monthly fees and separate charges for various types of services.

In some cases, the admission fee cannot be recovered or sold to another person if the original occupant decides to leave. In other cases, a person might be permitted to resell their membership in the community, but for a greatly reduced value. Many elderly people have difficulty understanding the contracts, and might not be aware of hidden fees or other unfavorable provisions.

Another potential risk with these facilities is that they may not be able to deliver the levels of care promised. The staff may not have the necessary expertise, or it may be spread too thin among the population of residents.

If operations are not managed properly, the facility may experience financial problems and begin cutting back on the quantity or quality of services being provided and could even go bankrupt leaving residents without care or return of their money.

Anyone considering the purchase of a life care contract should carefully investigate the facility and would be wise to consult an attorney first. The American Association of Homes for the Aging (1-202-296-5960) may be contacted to determine whether a particular facility is accredited or not. iii. fraternal, religious and union sponsored living arrangements The “life care” concept has also been adopted by some fraternal and religious organizations. Life care communities established by one of these groups may offer some advantages in terms of social activities, because residents are likely to share the same ethnic or religious culture and beliefs. Various types of benefits are usually made available to members who often sign over all of their assets, home equity, etc. in exchange for lifetime care. These organizations frequently reserve the right to assess members for additional amounts when costs exceed the members’ financial resources. Consumers should look into the level and quality of services available, cost structures and admission requirements, contract restrictions, and the organization's financial condition, before enrolling or committing to these communities.

California Veterans Homes may be an option for some veterans and their spouses. Veterans who need nursing home care may also be able to get care through the federal VA system. Call 1- 800-827-1000 to find out if they are eligible to live in one of these California Veterans homes. Numerous veterans groups can also be very helpful in helping to assist veterans to access these benefits. Some of these groups include the American Legion, Disabled American Veterans and the Veterans of Foreign Wars.


iv. family care Informal Long-Term Care is provided by family, friends, volunteers and community services. It includes assistance with daily activities, such as preparing meals, transportation, housework, yard work, grocery shopping, paying bills and companionship. As a care recipient's needs increase, informal care may expand to include assistance with ADLs. While it does not include medical care, persons who may also be receiving medical care frequently may need these types of services.

Family caregivers provide the largest source of Long-Term Care services in the United States. The “informal caregiver workforce,” (unpaid family caregivers), provides 75% to 80% of the care for older adults at home. This represents a huge contribution to Long-Term Care in the country.

D. Locating Information on Services and Facilities that Provide Long-Term Care The local District Office of Community Care Licensing can provide a listing of facilities. Consumers can also inspect facility files that will contain the annual survey report and any citations for poor care.

1. Where to obtain information on long-term care services and facilities Some Ombudsman Programs also have listings, offer pre-placement services, and provide access to licensing reports. Contact the Senior Information and Referral (I&R) Program in their area (1-800-510-2020, statewide elder services locator number) for assistance in contacting the licensing office or the Ombudsman Program.

Source: CANHR

• Residential Care Facilities For The Elderly • Eldercare Locator • Nursing Homes • California Nursing Home Search • County Profiles • Alzheimer's Association

The Eldercare Locator 1-800-677-1116

The Eldercare Locator is a way to find community assistance for seniors. The locator is a nationwide, directory assistance service designed to help older persons and care givers locate local support resources for aging Americans. The Eldercare locator is a public service of the Administration on Aging, U.S. Department of Health and Human Services and is administered by the National Association of Area Agencies on Aging and the National Association of State Units on Aging.


Nursing Facility Locator

To locate a nursing home in California and find a report of any findings on the home from Medicare: http://www.medicare.gov/NHCompare/Include/DataSection/Questions/ProximitySearch.asp?bhcp=1

To access a locator from the California HealthCare Foundation: http://www.calqualitycare.org/

Nursing Home Compare

To locate and compare nursing facilities in their area: http://www.medicare.gov/NHCompare/Include/DataSection/Questions/SearchCriteria.asp?version=default&browser=IE|7|WinXP&language=English&defaultstatus=0&pagelist=Home&CookiesEnabledStatus=True This will help consumers find detailed specifics on particular nursing facilities in their area by County, or City, or zip code or even by facility name, if they know it.

Alzheimer's Association

The Alzheimer's Association provides help in locating Long-Term Care facilities in California. Facilities include: nursing facilities, Residential care Facilities/Assisted Living Facilities, Adult Day Care Centers and In-Home Care agencies.

2. How services are provided and funded There are a number of ways to find home care, or to find nursing homes or assisted living facilities. Start by calling the local Area Agency on Aging office for suggestions, or phone the Eldercare Locator at 1-800/677-1116, 9:00 am - 8:00 pm, E.T., for the names of home health care organizations in the area.


II. Potential Resources for Paying for Long-Term Care Expenses

A. Financing/Paying for Long-Term Care There are many different ways to finance Long-Term Care services and there is no single answer for everyone. Each person's needs and financial situations are different. Most people will use a combination of payment sources, including their own income and assets, to pay for this care.

1. Funding mechanisms for long-term care People pay for Long-Term Care in a variety of ways. Generally, there are four ways to pay for Long Term Care expenses:

• Medicare • Medi-Cal • Personal Assets • Long Term Care Insurance

Medicaid is a state and federal assistance program that pays most long-term care expenses for eligible people with low incomes. To qualify for Medicaid, people must meet income and asset guidelines. Assets are cash and the things they own -- such as cars and stocks -- that they could convert into cash. Many people pay for long-term care with their own money until they become eligible for Medicaid. To learn more about Medicaid eligibility, call the local Area Agency on Aging or the Health and Human Services Commission. There’s a list of phone numbers at the end of this publication.

Medicare may pay some long-term care costs. Medicare is a federal program that pays for health care for people over age 65 and for people under age 65 with disabilities. It covers the cost of some skilled care in nursing homes or possibly in their home. Medicare might also pay for some nonmedical care in their home if they are receiving skilled care.

a. personal savings Individuals and their families generally pay for part or all of the costs of Long-Term Care from their own funds. Many use savings and investments. Some people sell assets, such as their homes, to pay for their Long-Term Care needs.

Many senior Californians have substantial savings set aside for their retirement in the form of passbook savings accounts, IRAs, annuities, CDs, and other investments such as stocks and bonds. For those with $500,000 or more, meeting the needs of Long-Term Care expenses would not probably be a problem. For most seniors,


however, the cost of long-term-care for the average stay of 2½ years could deplete a lifetime of savings.

According to the National Council on Aging, LTC expenses drive about 7 out of 10 senior families into federal poverty levels within four months of beginning institutionalized care.

b. home equity Many older Americans have accumulated significant amounts of equity in their homes but have few other assets. Home equity is frequently an older person's largest asset, and many older Californians are not poor, they just have a “cash-flow” problem.

• 70% of the net worth of elderly Americans is equity in their homes. • 73% of the elderly own a home and 83% of them are free of mortgages.

People who may not have liquidity may be forced to sell property at a loss. i. residential reverse mortgages insured by HUD A Reverse Mortgage is a financial device that allows homeowners to convert the equity in their homes to a regular income stream. Over time, the individual enjoys a stream of installment income payments that may be used without the worry of making payments or having to give up the security and comfort of their own home. The financial institution, on the other hand, ends up owning the home.

Proceeds can be paid all at once, as a regular monthly advance, or at times and in amounts that borrowers choose. The money must be repaid plus interest when they die, sell the home, or permanently move out of the home.

Single family one-unit dwellings are eligible properties for all reverse mortgages. Some programs also accept 2-4 unit owner-occupied dwellings, along with some condominiums, planned unit developments, and manufactured homes. Mobile homes and cooperatives are generally not eligible.

The amount actually received depends on their age, the value of their home, and the cost of the loan. There are various types of home equity loans. Some of which are federally insured, others are not. Reverse mortgages may have tax consequences, affect eligibility for assistance under Federal and State programs, such as Medi-Cal or SSI, and have an impact on the estate and heirs of the homeowner. Before agreeing to spend their home equity, homeowners should have the contract carefully reviewed by an attorney or an accountant.

This program is not the answer for all seniors. There are fees, points and other closing costs involved as well as ongoing charges for mortgage insurance and servicing fees, in addition to the interest. Seniors must attend mandatory HUD counseling prior to taking out the loan to be sure that they understand everything involved.

More information, including a list of approved lenders, can be obtained from their local HUD office, or request the booklet “Home Made Money” from AARP Home Equity Conversion Service, 1900 K Street, NW, Washington, DC 20049 or online at http://www.aarp.org/revmort/. Seniors can find additional information on reverse mortgages through the Senior Information and Assistance Program operating in many counties throughout California.


c. life settlements A Life Settlement contract is an agreement under which the owner of a life insurance policy sells the policy to another person in exchange for a negotiated payment, which is generally less than the expected death benefit under the policy. Although the proceeds of the contract are less than the potential death benefit, the policyowner is able to obtain an immediate payment while still living. The purchase price is generally paid to the policyowner in a lump sum but may be paid in installments. The policyowner may use the cash for medical or other expenses. When death occurs, the viatical company collects the policy's death benefit. i. viatical settlements Viatical Settlements are contracts that pay the insured a discounted price for the “equity” in a person’s life insurance policy when they meet certain criteria. The insured could use the proceeds to pay for Long-Term Care. Viatical companies must be licensed by the California Department of Insurance.

When a Viatical company purchases a policy, it becomes the policyowner and is responsible for paying the premiums. The price for the policies depends on the insured's life expectancy and the cost of future premiums. The National Association of Insurance Commissioners (NAIC) has adopted model guidelines for fair payment. Under these guidelines, insureds receive anywhere from 50 percent to 80 percent of the policy's face value.

Funds received by insureds under Accelerated Benefits and Viatical Settlements are given favorable tax treatment under HIPAA, and are not taxed by the federal government so long as the terminal or chronic illness is defined in a manner that meets the requirements of HIPAA. California was one of the first states to treat accelerated death benefits and viatical settlements as free from state taxes.

2. Insurance products that contain long-term care benefit options Long term care coverage is available as stand-alone LTC policies as well as riders or hybrid policies.

a. stand-alone long-term care insurance products Long-term care insurance provides coverage for long-term services and supports when the insured meets specified disability criteria. Briefly, the following are the important choices that need to be made by consumers or providers to specify a long-term care insurance policy.

• What are the disability-related triggers that allow benefits to be paid? • Over how many years or up to what total dollar amounts will benefits be paid, if triggered? • What amount will be paid on a daily or monthly basis for care (the benefit level)? • Is the amount of benefit a fixed dollar amount (per month, for example), or does it depend on

either actual incurred long-term care costs or the type of place of residence? • Does the level of benefit increase over time (inflation protection)? • How long is the waiting period (elimination period) before benefits will be paid?

Long-term care insurance is primarily sold as either an individual policy or as a group policy through an employer or association. In 2002 roughly two-thirds of policies were sold as individual policies. Over recent years the average age of individual purchasers of long-term care insurance has been decreasing,


to age 60 in 2002, while the average age of policyholders with insurance provided through an employer has remained fairly constant at about age 45.5.

b. policies and annuities with long-term care benefits This can be advantageous for those with significant deferred income in an existing fixed annuity or for those who wish to exit an under-performing or volatile variable annuity account.

Owners retain control of their investment and can always withdraw the invested funds (subject to applicable surrender penalties) at a later date. The accumulated interest is available monthly although most owners tend to reinvest their gains in order to grow the policy each year.

Assuming little or no long term care is needed the owner has an asset that can avoid probate and be passed on to his or her beneficiaries. This policy can be appealing for those who are concerned about paying for traditional long term care insurance that may never be needed.

Long term care annuities can also be appropriate for those with an existing annuity policy. Consumers can exchange existing annuities for a hybrid policy on a tax-free basis through what is referred to as a 1035 tax-free exchange.

c. accelerated death benefits, riders and annuities Life insurance can also be used to finance a person’s Long-Term Care needs through Accelerated Death Benefits riders (also known as Living Needs Riders). Under this approach, the insured can access some or all of the policy’s death benefit while living. This rider is an optional benefit that is attached to the life insurance policy, generally at no charge. To collect benefits under this type of rider, the insured must meet the specific terms of the contract, which vary from policy to policy.

Long Term Care Annuities are a viable alternative to annual-pay traditional long term care policies. The primary advantages of hybrid annuity plans are the absence of ongoing premiums and the leverage gained on the invested dollars.

d. other catastrophic benefits For many years life insurance companies have offered riders to life policies that allow for an early pay-out of benefits if the policy holder is diagnosed with a terminal illness. Some companies are now offering products which allow an early pay-out of benefits if the policy holder becomes “chronically ill.”


3. Medi-Cal (See Attachment I – Medi-Cal Requirements) Since the biggest misconception regarding the payment for LTC is that the Medicaid program will pay fully for all LTC needed and that the property and assets belonging to the care recipient will be able to be transferred to their heirs; we provide a fairly detailed discussion of this subject matter.

We present this material here in an attempt to illustrate the complexity of the choices to finance LTC. This DOES NOT in any way mean that insurance agents should attempt to provide any legal or tax information to their clients based upon the information in this course or otherwise. In fact it is illegal to act in the capacity of an attorney or CPA unless a person has the proper licenses and education to practice the professions of law or accounting. Medi-Cal will pay for Long-Term Care, but only after individuals have spent down most of their savings and income. To qualify, people are required to deplete their assets to be at or below the state's poverty level. Medi-Cal also imposes many restrictions on the type of care, and the choice of facilities and locales.

• Nursing Home (Skilled, Intermediate or Custodial) • Limited Assisted Living or RCF benefits • Limited Home Care benefits


Although most Medi-Cal LTC is spent on Institutional Care, great strides have been made in shifting the delivery of services to home and Community-Based Settings. States have the flexibility to design a Waiver Program and select the mix of services including certain non-medical, social and supportive services to best meet the needs of the population they want to serve in the home or community.

In 31 states, including California, the Personal Care Services Program (PCSP) uses Medi-Cal benefits to provide personal care services at home for those who are eligible. Personal care is assistance with bodily hygiene, personal safety and activities of daily living. Personal care services are an optional Medicaid benefit provided to individuals who are not inpatients or residents of a hospital, nursing facility, intermediate care facility. Personal care services must be:

• Authorized by a physician in accordance with a plan of treatment • Provided by a qualified individual who is not a member of the individual’s family and • Furnished in a home or other location which is not a nursing facility • Services may include a range of human assistance provided to persons with disabilities and

chronic conditions of all ages that enables them to accomplish tasks that they would normally do for themselves if they did not have a disability.

• It may be in the form of hands-on assistance or cueing so that the person may perform ADLs or IADLs.

• Skilled services, which may only be performed by a health professional, are not considered personal care services.


Medi-Cal does not pay for:

• Full-time Home Care • Private Room in Nursing Home • Private Nurse in Nursing Home • Most care in a Residential Care Facility (RCF/RCFE) aka Assisted Living.

Once a resident is admitted to a Medi-Cal certified nursing home, however, he/she cannot be evicted simply because of a change from private pay or Medicare to Medi-Cal.

While Long-Term Care will vary from provider to provider, there are regulations that protect recipients of all Long-Term Care including that paid for by Medicaid. Nursing homes must be licensed by the state and are subject to inspection. Regulations protect recipients of all Long-Term Care including that paid for by Medi-cal. Information regarding nursing homes including their inspections can be found at: www.medicare.gov

a. Medi-Cal eligibility Resource Limitations (Property/Assets)

Medi-Cal classifies property as “exempt” and “non-exempt”. Exempt property does not affect eligibility. If property reserve limits are exceeded by non-exempt property, there is ineligibility, unless the property is spent down for adequate consideration before one calendar month passes or, if owned at the time of application, before the end of the application month.

Income vs. Assets

The Medi-Cal definition of “Income” generally includes anything, such as Social Security or pension payments, that is paid on a one-time or continuing basis. Income will be subject to “Share of Cost”

“Assets” are financial assets such as bank accounts, securities, and real estate other than the home. Anything received in a particular month, that is not spent in that month, becomes an asset.

Exempt vs. Non-Exempt Property

Some property is exempt, meaning it won’t be considered when determining if the person is eligible for assistance, but it will be subject to estate recovery after death. That means the person may be able to keep it while they are alive but won’t be able to pass it on to his or her heirs after death.

SSI and other categorically-related recipients are automatically eligible for Medi-Cal. Others, whose income would make them ineligible for public benefits, may also qualify as “Medically Needy” if their income and resources are within the Medi-Cal limits, (current resource limit is $2,000 for a single individual). This includes:

• Low-income persons who are 65 or over, blind or disabled may qualify for the Aged and Disabled Federal Poverty Level Program

• Low-income persons with dependent children • Children under 21 • Pregnant women


• Medically indigent adults in skilled nursing or intermediate care

Determining eligibility for Medi-Cal is the responsibility of the county Departments of Social Services. The county eligibility worker will look at home much the applicant and each member of the family has in monthly income (wages, dividends), property (real and personal), and assets (savings and CD accounts, investments).

The home the applicant lives in, (equity of $750,000 or less) its furnishings, personal items, a limited amount of jewelry, and one vehicle are not counted as assets and are considered “exempt” for determining eligibility. Eligibility rules are different for single individuals than for married couples.

In order to receive Medi-Cal a person must have less than a certain amount of assets and income. The income and asset limits are subject to change each year and vary from state to state.

When a person applies for Medicaid, all of the financial transactions of the applicant and their spouse, immediately before the application is scrutinized. Under the “name on the instrument rule,” the community spouse may retain any income received in his/her name alone.

Medi-Cal counts the property held in either or both spouses’ names. The entire contents of joint accounts are considered as available to Medi-Cal applicants, unless funds can be clearly traced to an exempt account holder.

Medi-Cal (DHS Form 7077) Notice Regarding Standards for Medi-Cal Eligibility

Pursuant to Welfare and Institutions Code (W&IC) §§14006.3 and 14006.4, which are effective January 1, 2000, counties must provide form DHS 7077 to all Long Term Care (LTC) applicants, their spouses, and/or authorized representatives/agents. The county must provide and review the DHS 7077 during


an assessment or a face-to-face interview. The DHS 7077 must be signed by, and a copy provided to the applicant and his/her spouse, legal representative, or agent, and a copy retained for the case record.

If the applicant is not competent, the DHS 7077 must be reviewed with, signed by, and provided to someone who is competent such as a competent spouse, an attorney and/or agent if such person is present at a face-to-face interview or assessment. If the representative did not attend the face-to-face interview, such as with a public guardian or conservator, the county must mail the form to the representative for his/her signature.

A copy of the DHS 7077 is an attachment to the All County Welfare Directors Letter (ACWDL). It provides information concerning resources for both unmarried and married residents of LTC and deals with transfer of the home for both unmarried and married LTC residents. It notes that a “transfer of the home will not result in a period of ineligibility for nursing facility care in either one of the following two circumstances:

a. The recipient of the transferred home states in writing that the LTC resident would have been allowed to return to the home at the time of transfer if the LTC resident's condition allowed him/her to leave the nursing facility. This provision applies only if the home was exempt because the LTC resident declared an intent to return home.

b. The home is transferred to:

1. the LTC resident's spouse; 2. the LTC resident's minor or disabled child; 3. a sibling of the LTC resident who has an equity interest in the home, and who resided in

the home at least two years before the resident began living in institutions, and who provided care to the LTC resident that permitted him/her to remain at home longer; or

4. an adult son or daughter who resided in the LTC resident's home at least two years before the resident began living in institutions, and who provided care to the LTC resident that permitted him/her to remain at home longer.

This ACWDL also advises that counties are still required to provide the MC 007 to all Medi-Cal applicants including LTC residents whenever a Medi-Cal application is submitted or information is requested regarding Medi-Cal. The MC 007 must be reviewed with the individual at the face-to-face interview or at screening/assessment. “ i. income and asset limits Monthly Income Limits: Single Individuals

If an unmarried person meets the Medi-Cal asset eligibility rules just discussed, then he or she may keep a certain amount of income each month to pay for personal needs. In 2014, the personal allowance amount is $35. The person must then pay a portion of his or her remaining income to the nursing home (known as the share of cost).

Monthly Income Limits: Married Couples

Special rules apply when one spouse is confined to a nursing home and the other remains at home. In this case, the spouse at home may keep all of his or her own income, regardless of the amount.


However, if the stay-at-home spouse’s income is below a certain dollar amount, known as the Minimum Monthly Maintenance Needs Allowance (MMMNA), the spouse in the nursing home may give income to the at-home spouse sufficient to bring his or her income up to the MMMNA. In 2014, the MMMNA is $2,931 (adjusted annually for inflation). The spouse in the nursing home is allowed to keep $35 in monthly income for personal needs. Medi-Cal Spousal Impoverishment

California Law allows the community spouse to retain a certain amount in non-exempt resources available to the couple at the time of application. This Community Spouse Resource Maximum (CSRA) increases every year according to the Consumer Price Index. The 2014 Spousal Resource maximum is $117,240.

Separate property will be counted in the total resources and subjected to the 2014 limit of $117,240. However, only non-exempt resources are counted in the spouses' combined, countable resources at the time of application for Medi-Cal. Thus, an IRAs in the community spouse's name, household goods, personal effects, a car, the house, jewelry, etc. are all totally excluded, regardless of value.

Resources acquired after the spouse is institutionalized and before he/she goes on Medi-Cal are not protected and will be counted at the time of application. However, once the spouse is eligible for Medi-Cal, any resources acquired by the community spouse are protected and will not affect the institutionalized spouse's eligibility. Resources held prior to the spouse's institutionalization may be transferred under certain conditions.

If the community spouse's income in his or her name alone exceeds the CSRA, the community spouse may keep it all, however they will not be entitled to a share of the institutionalized spouse’s income.

• Income is payable in the name of just one spouse, it is considered to belong to that person. • Income is paid jointly to both spouses, the income is considered to belong in equal shares to

each of them.

Income paid to a spouse and someone else, is assigned proportionately to the spouse. If there is no written document establishing ownership of the income, it is considered to belong equally to both spouses. If the income derives from a trust, then the terms of the trust govern assignment of income.

Exempt Property

Under current law, $2,000 of assets is disregarded as “exempt property” in determining a single person’s eligibility for Medi-Cal. The Medi-Cal applicant’s residence can also be disregarded, as well as one car and a limited number of other assets. Additional assets can be retained if an individual is in a nursing home and his or her spouse is living in the community.

Any assets above the property reserve limit of $2,000 or $117,240, in the case of a community spouse or any asset that is not exempt will be counted by Medi-Cal in determining eligibility.

Source: CANHR

Spend Down


All non-exempt property must be used to pay for nursing home costs prior to Medi-Cal providing assistance. This is referred to as “Spend-Down”.

Medi-Cal Treatment of Property Transfers

There are very strict rules regarding transferring property to another person, trusts, annuities, etc. in order to obtain Medi-Cal assistance. Giving resources away or selling them below a fair price may make the person ineligible for nursing facility care under Medi-Cal. It does not matter that there were sound reasons for the transactions. It does not even matter that the person did not know anything about Medi-Cal or had no intention of making a Medi-Cal plan when the transfers were actually made.

A Medi-Cal applicant can give away assets and still be eligible for Medi-Cal depending on when the asset was transferred, the value of the transfer and whether he or she enters a nursing home. The transfer rules are triggered when a person enters a nursing home and applies for Medi-Cal. The Medi-Cal application will ask if the applicant transferred any assets within approximately 3-5 years prior to the date of the application. The transfer rules apply only to non-exempt (countable) assets.

Additional Property Acquired

When a beneficiary acquires additional property after establishing eligibility for Medi-Cal such as the sale of his/her former principal residence, inheritance, etc., the amount of newly acquired nonexempt property must be verified again to determine if it could cause a period of ineligibility until it is “spent-down” to the amount allowed by law. They would essentially have to “go off” Medi-Cal for a period of time until their assets were lower than the amount allowed, then they could “go back on” Medi-Cal.

It is not enough for the Medi-Cal recipient simply to turn down the assets, because part of the Medicaid application is an ongoing promise to collect all funds to which the recipient is entitled, even if doing so leads to termination of Medicaid eligibility.

Medi-Cal Share of Cost

Those who are on Medi-Cal must use their monthly income from Social Security, a pension, etc. to pay for their health and Long-Term Care expenses. Their income will probably not be enough to pay the entire bill, so Medi-Cal will pay the rest of the nursing home bill or any other medical expenses.

They will be allowed to keep a certain amount of their income each month. In 2014, the following is the minimum monthly maintenance needs level:

• Those who are living in the community an individual may keep $600 a married couple $934 or • Those who are in a nursing home may keep $35 in monthly income for personal needs. The

spouse remaining at home (also referred to as the “community spouse”) may keep all the income received in his/her name only, regardless of the amount. If the amount is below $2,931 per month, the institutionalized spouse may allocate income to bring the at home spouse’s income up to the $2,931 per month.

Any remaining amount of the individual income not allocated to the community spouse is used to pay for a portion of the nursing home cost. The community spouse at home can also keep up to $117,240 in resources in 2014, and the spouse in the nursing home can keep up to $2,000. For specific Medi-Cal


eligibility guidelines, contact the county Department of Social Services (DSS) / County Human Service Agency (HSA) office.

In 2005, federal law (DRA) limited a single person’s unencumbered home equity to $500,000 in order to be eligible for Medicaid benefits. California increased this limit to $750,000 in 2008.

California's Medi-Cal Estate Recovery Program

In 1993, California law changed to allow the Department of Health Services' Recovery Unit to expand its efforts to recoup Medi-Cal monies spent on nursing home beneficiaries. Federal laws under OBRA '93 not only mandated recovery in certain instances, but also permitted states to expand the definition of “estate” to include such previously immune assets as joint tenancies, tenancies in common and life estates. (42 U.S.C. 1396p, Welfare & Institutions Code § 14009.5 and 22 CCR § 50960 et. seq.)

If an individual has property (e.g., house, car, etc.) and/or assets that were exempt during the eligibility process the property or assets are NOT protected during estate recovery. Upon their death, the State Department of Health Services (DHS), Medi-Cal Recovery Unit can place a lien and/or claim against the entire estate of the deceased for expenses incurred by the Medi-Cal program to recover those costs paid by the state. If the individual was married, a lien would not be placed until the remaining spouse dies or sells the property.

In accordance with these and other statutes, the person responsible for the administration or disposition of the estate assets is required to notify the Director of DHS of the death of any individual who has or may have received Medi-Cal benefits. This notification must be submitted within 90 days of the date of their death and must include a copy of the death certificate.

Federal Law requires the California DHS to present claims against the estates of deceased Medi-Cal Beneficiaries:

• Anyone who received any nursing home care • Any expenses incurred after age 55

A claim is prepared reflecting these costs and is presented to the party handling the estate. The ultimate collection of the claim is limited to the lesser of the value of the assets in the estate or the amount of Medi-Cal paid services.

Contesting a Claim

An applicant still has a number of options to use in contesting the claim:

• Hardship Waivers: State regulations provide that the applicant (i.e., the dependent, heir or survivor of the decedent) may file for a hardship waiver within 60 days of notice of the claim.

• Estate Hearing: The applicant may challenge the Department's hardship waiver decision by requesting an estate hearing within 60 days of the date of the Department's hardship waiver decision.

• Judicial review: Estate hearing decisions can be appealed judicially by filing a writ of mandate with the appropriate court.

Estate Recovery of the Home


The home, if it has not been previously transferred, is part of the estate against which Medicaid has the right to recover the cost of Medicaid benefits. Recovery will not occur until after the death of the community spouse and/or certain other dependents. The purpose of estate recovery is to replenish the states funds so that the money can be used to help other needy persons, once the Medicaid beneficiary has no further use of the property.

Transfer of Interest in the Home

Contrary to popular myth, there is no “waiting period” for transferring an exempt asset – even a home. In fact, under federal law, title to the principal residence may be transferred to the following persons at any time without affecting Medi-Cal eligibility:

• A spouse; • A son or daughter under age 21 or who is blind or permanently disabled; • A sibling who has equity in the home and who was residing there for at least one year

immediately prior to the individual’s admission to a nursing home; • A son or daughter who was living there for at least two years immediately prior to the

individual’s admission to a nursing home and who provided care which enabled the parent to live at home;

• To anyone, so long as the home was exempt at the time of transfer. Note: even if no one lives in the home, as long as the Medi-Cal applicant checks “yes” on the application concerning intent to return home, the home is exempt and can be transferred. If the home is transferred while the Medi-Cal beneficiary is alive, there is no estate claim on the home.

Transfer of the Home to a Spouse

The law allows transfer of a home to an at-home spouse without affecting Medi-Cal eligibility. This applies whether the transfer occurs prior to or after the spouse enters a nursing home.

However, there is an important timing issue here. For eligibility purposes, an at-home spouse, they is allowed to keep up to $117,240 (as of January 1, 2014) in non-exempt assets. If they sell the home before their spouse applies for Medi-Cal, the proceeds from the sale will count towards that limit, since cash is a non-exempt asset. If they sell the home after their spouse becomes eligible for Medi-Cal, it will have no effect.

Tax Consequences/Legal Advice

Any transfer of real property can have tax consequences that may outweigh a Medi-Cal estate claim. There are a number of legal options (irrevocable life estates, occupancy agreements, and certain types of trusts) available to avoid probate, avoid tax consequences and avoid estate claims, but the tax consequences should be weighed.

Persons should consult with an attorney experienced in Estate Planning for Long Term Care before any transfer is made. Real property transfers usually involve tax consequences, which may outweigh the benefits of the transfer.

Changes made by the Omnibus Budget Reconciliation Act (OBRA) of 1993 make it much more difficult to qualify for Medicaid. Spend down and estate recovery have made an impact on those who transfer assets in order to qualify for Medicaid.


Medi-Cal’s requirements are quite complex, often dependent upon case law interpretations. Failure to obtain advice from a qualified Elderlaw professional before taking actions could be one of the most financially devastating decisions a senior could make. Property Transfers Made During the Medi-Cal Look-Back Period

Transferring property can be a very risky way of attempting to establish eligibility for Medi-Cal benefits.

• The period of ineligibility is calculated by first determining the net fair market value of transferred property which would have resulted in excess property, had an application for Medi-Cal been submitted at the time of the transfer.

• The amount of excess property is divided by the monthly average private pay rate (APPR) and rounded down to the nearest whole number.

• The 2014 APPR used to calculate the period length is $7,628 per month.

Source: California Partnership Website, 2014

Medi-Cal: home and facility care (SB 483 Kuehl, Chapter 379, Statutes of 2008)

Conforms state law regarding eligibility for nursing home care and Long-Term Care (LTC) to changes made by the Federal Deficit Reduction Act (DRA) of 2005.

Specifically, the bill limits Medi-Cal eligibility for home and facility care to individuals with home equity interest in a principal residence of $750,000 or less; requires this newly established home equity limit to be adjusted annually by the consumer price index; establishes a hardship exception and several exclusions from the limit such as when a spouse remains in the principal residence; lengthens the “look-back” period for asset transfers from 30 months to 60 months; and establishes requirements related to the possession of annuities, designated beneficiaries, and California's role as a remainder beneficiary when Medi-Cal pays for LTC.

Home equity limits (Welfare and Institutions Code 14006.15(c))

This section does not apply to an individual if any of the following circumstances exist:

The spouse of the individual or the individual's child, who is under 21 years of age, or who is blind or disabled, as defined in paragraph (3) of subsection (a) of Section 1382c of Title 42 of the United States Code, is lawfully residing in the individual's home.

The individual was determined eligible for medical assistance for home and facility care based on an application filed before January 1, 2006.

The department determines that ineligibility for medical assistance for home and facility care would result in demonstrated hardship on the individual. For purposes of this section, demonstrated hardship must include, but need not be limited to, any of the following circumstances:

• The individual was receiving home and facility care prior to January 1, 2006. • The individual has been determined to be eligible for medical assistance for home and facility

care based on an application filed on or after January 1, 2006, and before the date that regulations adopted pursuant to this section are certified with the Secretary of State.


• The individual purchased and received benefits under a Long-Term Care insurance policy certified by the department's California Partnership for Long-Term Care Program.

• The individual's equity interest in the principal residence exceeds the equity interest limit as provided in subdivision (b), but would not exceed the equity interest limit under that subdivision if it had been increased by using the quarterly House Price Index (HPI) for California, published by the Office of Federal Housing Enterprise Oversight (OFHEO).

• The applicant or beneficiary has been denied a home equity loan by at least three lending institutions, or is ineligible for any one Federal Housing Administration (FHA) approved loan or reverse mortgage.

• The applicant or beneficiary, with good cause, is unable to provide verification of the equity value.

• The applicant or beneficiary meets the criteria set forth in subdivision (b) of Section 14015.1. ii. hardship exception Establishment of hardship exception Sections 14015.1 and 10415.2 of the Welfare and Institutions Code

The department must consider, at initial application or redetermination, whether an undue hardship, as described in subdivision (b), exists prior to finding that an applicant or recipient is subject to a period of ineligibility for medical assistance for home and facility care pursuant to this article. No person must be subject to a period of ineligibility for medical assistance for home and facility care at the time of the initial application or redetermination if the department determines that an undue hardship exists.

An undue hardship must be found to exist under any of the following circumstances:

• The individual has been determined eligible for medical assistance for home and facility care based on an application filed on or after January 1, 2006, and before the date that regulations adopted pursuant or relating to this section have been certified with the Secretary of State.

• The deprivation of medical assistance for home and facility care would cause an endangerment to the life or health of the individual.

• The denial of medical assistance for home and facility care would result in the eviction of the individual from a nursing home.

• The individual is otherwise eligible for the Medi-Cal program and unable to obtain home and facility care without Medi-Cal.

• The denial of medical assistance for home and facility care would cause the individual to be unable to remain at home or in the community and would hasten or cause the individual's entry into a medical or Long-Term Care institution.

• The individual would be deprived of food, clothing, shelter, or other necessities of life.

The department must establish regulations, procedures, and forms that ensure all of the following:

• The department or county provides a notice of the undue hardship process, at the initial request and the annual redetermination, to any individual who requests medical assistance for home and facility care. The notice must inform the individual that undue hardship must be considered before a request for medical assistance for home and facility care is denied.


• A timely and simplified process is established to determine whether an undue hardship exists and an exception will be granted.

• If the issue of undue hardship is considered and found not to apply, the department must provide the individual with a notice of action that states the reasons for the adverse determination. The notice of action must specify how that adverse determination can be appealed. Upon the request of the applicant or beneficiary, or person acting on his or her behalf, undue hardship notices must be provided to the home and facility care administrator in accordance with regulations promulgated by the department.

This section must be implemented pursuant to the requirements of Title XIX of the federal Social Security Act (42 U.S.C. Sec. 1396 et seq.) and any regulations adopted pursuant to that act, and only to the extent that federal financial participation is available.

To the extent that regulations are necessary to implement this section, the department must promulgate regulations using the nonemergency regulatory process described in Article 5 (commencing with Section 11346) of Chapter 3.5 of Part 1 of Division 3 of the Government Code.

It is the intent of the Legislature that the provisions of this section must apply prospectively to any individual to whom the act applies commencing from the date regulations adopted pursuant to this act are filed with the Secretary of State.

In accordance with Section 1917(c)(2)(D) of the federal Social Security Act (42 U.S.C. Sec. 1396p(c)(2)(D)), any of the following may request a fair hearing on the issue of undue hardship:

• An individual requesting or receiving medical assistance for home and facility care. • A personal representative of an individual requesting or receiving medical assistance for home

and facility care. • The facility in which the individual requesting or receiving medical assistance for home and

facility care is residing, with the consent of that individual or the personal representative of that individual.

• An individual with a pending undue hardship appeal who is subject to a period of ineligibility pursuant to this article must receive medical assistance for home and facility care for a maximum of 30 bed-hold days.

• This section does not alter or limit the right of applicants or recipients to obtain a state hearing in accordance with Chapter 7 (commencing with Section 10950) of Part 2.

• This section must be implemented pursuant to the requirements of Title XIX of the federal Social Security Act (42 U.S.C. 1396 et seq.), and any regulations adopted pursuant to that act, and only to the extent that federal financial participation is available.

• To the extent that regulations are necessary to implement this section, the department must promulgate regulations using the nonemergency regulatory process described in Article 5 (commencing with Section 11346) of Chapter 3.5 of Part 1 of Division 3 of the Government Code.

• It is the intent of the Legislature that the provisions of this section must apply prospectively to any individual to whom the act applies commencing from the date regulations adopted pursuant to this act are filed with the Secretary of State. iii. look-back periods


Look-back period (Welfare and Institutions Code 14015(c))

In administering this section, it must presumed that assets transferred by the applicant or beneficiary prior to the look-back period established by the department preceding the date of initial application were not transferred to establish eligibility or reduce the share of cost. These assets must not be considered in determining eligibility.

Establishment of requirements related to annuities, designated beneficiaries, and California’s role as a remainder beneficiary of annuities, Sections 14006.15(a)(2), 14006.41(b), and 14009.6 of the Welfare and Institutions Code

For the purposes of this section, “equity interest” means the lesser of the following:

• The assessed value of the principal residence determined under the most recent tax assessment, less any encumbrances of record.

• The appraised value of the principal residence determined by a qualified real estate appraiser who has been retained by the applicant or beneficiary, less any encumbrances of record.

At the time of the individual's application or redetermination, the department must inform the individual and his or her spouse that, by virtue of its provision of medical assistance for home and facility care to the individual, the state will, by operation of law, become a remainder beneficiary of certain annuities, as described in Section 14009.6.

As a result of providing medical assistance for home and facility care to an individual, the state must, by operation of law, become a remainder beneficiary, to the extent required by Section 1917(e) of the federal Social Security Act (42 U.S.C. Sec. 1396p(e)), of annuities purchased in whole or in part by the individual or his or her spouse in which the individual or his or her spouse is an annuitant, except as provided in Section 14009.7, unless the individual or his or her spouse notifies the department in writing that he or she prohibits the state from acquiring a remainder interest in his or her annuity, in which case subdivision (d) must apply. This section must only apply to the following annuities:

• Those purchased on or after February 8, 2006. • Those purchased before February 8, 2006, and subjected to a transaction that occurred on or

after February 8, 2006.

For the purposes of this paragraph, “transaction” includes, but is not limited to, any action taken by the individual or his or her spouse that changes the course of payments to be made by the annuity or the treatment of the income or principal of the annuity.

For the purpose of this paragraph, “transaction” must not include any of the following:

• Routine changes and automatic events that do not require any action or decision on or after February 8, 2006.

• Changes that occur based on the terms of the annuity that existed prior to February 8, 2006, and that do not require a decision, election, or action to take effect.


• Changes that are beyond the control of the individual or the individual's spouse.

Any provision in any annuity subject to this section that has the effect of restricting the right of the state to become a remainder beneficiary is void.

If an individual or his or her spouse notifies the department in writing that he or she prohibits the state from acquiring a remainder interest in his or her annuity, the purchase of the annuity must be treated as the transfer of an asset for less than fair market value that is subject to Section 14015.

• When the state becomes aware of an annuity in which it has acquired a remainder interest, the department must notify the issuer of the annuity of the state's acquisition of its remainder beneficiary interest.

• The issuer of the annuity must, upon notification by the department, immediately inform the department of the amount of income and principal being withdrawn from the annuity as of the date of the individual's disclosure of the annuity.

• The issuer of the annuity must, upon request by the department or any agent of the department, immediately disclose to the department the amount of income and principal being withdrawn from the annuity.

• The issuer of the annuity must immediately notify the department if there is any change in either of the following:

o The amount of income or principal being withdrawn from that annuity. o The named beneficiaries of the annuity.

Any moneys received by the state pursuant to this section must be deposited into the General Fund.

This section must be implemented pursuant to the requirements of Title XIX of the federal Social Security Act (42 U.S.C. Sec. 1396 et seq.) and any regulations adopted pursuant to that act, and only to the extent that federal financial participation is available.

To the extent that regulations are necessary to implement this section, the department must promulgate regulations using the nonemergency regulatory process described in Article 5 (commencing with Section 11346) of Chapter 3.5 of Part 1 of Division 3 of the Government Code.

It is the intent of the Legislature that the provisions of this section must apply prospectively to any individual to whom the act applies commencing from the date regulations adopted pursuant to this act are filed with the Secretary of State. iv. agents should be aware that the purchase of a long-term care policy will not necessarily ensure that someone will avoid Medi-Cal when they need long term care Agents should also be aware that purchasing a Long-Term Care policy will not necessarily ensure that someone will avoid Medi-Cal when he or she needs Long-Term Care. Even if a person purchases a policy, Medi-Cal may become a person’s safety net if the policy does not pay sufficient benefits to cover expenses. Agents should therefore carefully advise prospects and encourage them to obtain advice from HICAP or another third party before deciding whether to purchase Long-Term Care insurance.


B. How Medicare Interrelates with Paying for Long-Term Care Expenses Medicare is a federal health care program funded by federal tax dollars. Because it is related to the Social Security Program, eligibility is based on a person’s work history or relationship with another individual with a work history (i.e., spouse or dependent child). Medicare was designed to pay for physician and hospital care for people who are elderly or disabled.

• Part A: Hospitalization coverage • Part B: Medical insurance • Part C: Medicare Advantage • Part D: Prescription drug coverage

Participants in the Medicare program are liable for co-payments and deductibles as well as for monthly Premium payments for Part B coverage. Medicare is not based on financial need. Anyone who meets the age and/or coverage requirements is eligible.

Levels of care requirements and implications to LTC

As described in “Taking Care of Tomorrow”, produced by the California Department of Aging, which must be provided by the agent to every consumer at the time of solicitation:

“Most Long-Term Care is furnished in nursing homes to people with chronic, long-term illnesses or disabilities. The care they receive is personal care, often called custodial care. Medicare does not pay for custodial care. Medicare pays less than 10% of all nursing home costs. To qualify for the Medicare nursing home benefit, someone must spend three full days in an acute care hospital within 30 days of their admission to a nursing home. They must also need Skilled Nursing Care seven days a week, and/or rehabilitation services at least five days a week. Medicare will not pay for their stay if they need skilled nursing or rehabilitation therapy only once a week.

The longest nursing home stay that Medicare will pay for completely is 20 days. After the first 20 days, if they still require skilled care, Medicare will pay only a part of the nursing home bill. They will have to pay a co-payment for each day of the next 80 days if Medicare continues to pay for their stay.”

Medicare will pay for care in the home, but only if you meet certain requirements of the Medicare program…Someone must be homebound and require skilled nursing or rehabilitation services. The services they receive must be from a home health care agency that participates in Medicare. You may also receive some personal care services along with the skilled services.

However, Medicare does not pay for general household services such as laundry, shopping or other home care services that are needed primarily to assist people in meeting their personal care needs…”

Coverage for Long-Term Care Under Medicare Part A

Medicare Part A can help pay for up to 100 days of skilled care in a Skilled Nursing Facility (SNF). A SNF is different than a regular nursing home in that it provides skilled nursing and rehabilitation services.

Medicare will not pay for any part of a patient's stay in a SNF or any other facility if the services received are primarily personal care or custodial services, such as assistance with the activities of daily living.


DURATION OF CARE AND CO-PAYMENTS 2014 Benefit Medicare Pays You Pay First 20 Days Approved Costs Nothing Next 80 Days Any Costs Over $152.00/day Beyond 100 Days Nothing Everything

The average time that a person usually meets Medicare’s very strict requirements is 2-3 weeks. Even if they were to qualify for the full 100 days their out of pocket share of cost would be over $11,000, and that is for only a bit over 3 months of LTC.

Medicare Only Pays for LTC Expenses Under These Conditions:

For Medicare to cover Skilled Nursing Care, patients must meet ALL five of the following conditions:

• The patient's condition requires daily skilled care, not merely custodial or basic care • The patient has been hospitalized at least three (3) days in a row • The patient is admitted to a skilled nursing facility within 30 days of leaving the hospital • The patient's care in the skilled nursing facility is for a condition that was treated in the hospital • And a physician certified that the patient needs, and has received skilled nursing services daily

since his or her admission to the hospital Medicare Part A Hospice Care

Terminally ill patients can elect to receive hospice care under Part A, in lieu of other Medicare benefits. Medicare benefits for this care are available for up to 210 days for patients who are considered terminal. This period can be extended, if necessary, as long as a doctor certifies the care is needed. The patient pays 5 percent of the cost of prescription drugs (not to exceed $5 for each prescription) and 5 percent of the cost of respite care (not to exceed five consecutive days or more than the current Part A deductible).

Coverage for Long-Term Care under Medicare Part B

The Medicare Home Health Care benefit may pay for some Long-Term Care services. Medicare pays the approved cost of medically necessary home health visits by a Medicare-approved home health agency but Medicare will not pay for full-time nursing care, meals delivered to the home or homemaker services that are primarily designed to assist the patient in meeting personal care or housekeeping needs. A home health agency is a public or private agency that provides Skilled Nursing Care, physical therapy and other therapeutic services provided on an intermittent or part-time basis, by a visiting nurse, therapist or home health aide. Normally, home health care under these guidelines is only needed for short periods of time.

Intermittent Home Health Care:

• The individual must be “home-bound” which means that they almost never leave the home except to go to medical appointments.

• A doctor must certify that skilled care is necessary • A physician must prescribe and periodically review the need for home health care.


• The care must be intermittent or part-time, no full-time home care is paid for by Medicare. • The care must be provided by a skilled nurse who works for a Medicare-certified home health

care agency. • There is no coverage for custodial care only • Severe cuts due to Balanced Budget Act

THE 2010 HEALTH REFORM LAW AND MEDICARE SPENDING

Medicare spending is projected to increase from $509 billion in 2010 to $914 billion in 2020, taking into account changes to Medicare incorporated in the Affordable Care Act of 2010 (CBO, August 2010). The law is projected to reduce annual growth in Medicare spending over the next decade and beyond, by reducing the growth in Medicare payments to health care providers and Medicare Advantage plans, establishing several new policies and programs designed to reduce costs and improve quality of patient care, and establishing a new Independent Payment Advisory Board to recommend Medicare spending reductions if projected spending exceeds target growth rates. The law also increases the Medicare Part A payroll tax rate for higher-income people, and increases Part B and Part D premiums for higher income beneficiaries.

Medicare Information & Resources

People can also get free, objective counseling on these issues from the state funded Health Insurance Counseling and Advocacy Program (HICAP). To make an appointment with a HICAP counselor call 1-800-434-0222.

Clients should be advised to consult an accountant, financial planner or an Elder Law attorney. They can review consumer information from the California Advocates for Nursing Home Reform (CANHR) (canhr.org). They may also want to seek help from a free legal services program in their area. Contact the State Bar of California’s Lawyer Referral Services for a list of local agencies and attorneys at 1-866-442-2529.


• Medicare Nursing Home Compare: http://www.medicare.gov/Nhcompare/Home.asp • Medicare Helpful Contacts: http://www.medicare.gov/Contacts/home.asp • Medicare Long-Term Care Info: http://www.medicare.gov/Nursing/Overview.asp

The following resources are available on the Medicare website:

• Medicare and You • Medicare MSAs • Medicare and Women • Medicare – Guide to Choosing a Medi-gap policy • Medicare – Guide to Choosing Long Term • Medicare Home Health Compare


1. Medicare Medicare is the federal program that provides hospital and medical insurance to people aged 65 or older and to certain ill or disabled persons. Benefits may be available for Home Health Care, but only if certain conditions are met. Medicare may pay for up to 100 days of care in a Skilled Nursing Facility per benefit period — 100% for the first 20 days (after a three-day hospital stay, provided skilled care is needed).

Then, for days 21-100, Medicare requires a co-payment. To help cover the co-payment, many seniors also have a Medicare Supplement insurance policy. In general, once Medicare stops paying for LTC, the supplement payment will also end.

Medicare does pay for a brief period of Skilled Services or recuperative care lasting no longer than three months, though the benefits decline after the first 20 days. This short period of care comprises about 20% of Long-Term Care service needs, according to HHS. Out-of-pocket payment from family members covers 18.1% of costs, while private insurance covers just 7.2%.

Medicare’s Skilled Nursing Facility (SNF) will pay the cost of some skilled care in an approved nursing home or in the insured’s home, but only in specific situations. The SNF benefit only provides coverage if a medical professional says that the insured needs daily skilled care after they have been in the hospital for at least three days and they are receiving that care in a nursing home that is a Medicare-certified skilled nursing facility. While Medicare may cover up to 100 days of skilled nursing home care per benefit period when these conditions are met, after 20 days beneficiaries must pay a coinsurance fee. In 2014, that coinsurance was $152.00 per day. Medicare covers the costs of care in assisted living facilities.

Medicare does not cover homemaker services. In addition, Medicare doesn’t pay for home health aides to give personal care unless the insured is homebound and also getting skilled care, such as nursing or therapy. The personal care must also relate to the treatment of an illness or injury, and one can only get a limited amount of care in any week.

2. Medicare supplements Medicare Supplement Insurance is private insurance that helps pay for some of the gaps in Medicare coverage, such as hospital deductibles and excess physician charges above what Medicare approves. Medicare supplement policies do not cover Long-Term Care costs. However, some small amount Medicare supplement policies do pay for services to people recovering at home from an illness, injury or surgery. The benefit will pay for short-term, at-home help with activities of daily living. One must qualify for Medicare-covered home health services before this Medicare supplement benefit is available.

Unfortunately, Medicare leaves many gaps in its coverage. Due to limited benefit periods, deductibles, coinsurance and exclusions, the coverage it provides is limited. To help fill these gaps, private insurance companies have developed insurance policies, designed to supplement Medicare's coverage to some extent.

Medicare Supplement Insurance (Medigap) is private insurance that helps cover some of the gaps in Medicare coverage. While these policies help pay the deductible for hospitals and doctors, coinsurance payments, or excess physician charges, they do not cover Long-Term Care.


Many people still believe that their Medicare supplements will cover everything not covered by Medicare. Additionally, many people believe their Medicare supplement will cover their Long-Term Care costs when in fact supplements must follow Medicare guidelines and requirements pay nothing for services Medicare does not approve. Ten standard Medicare supplements allowed to be sold in California.

Even though many supplements will cover the daily co-payment for the 21st through the 100th day of skilled nursing home stays, care in a skilled nursing facility for more than 20 days rarely meets the Medicare's strict requirements for coverage. As is the case with Medicare, this benefit is available only for care in a certified skilled nursing facility following a period of prior hospital confinement, and nothing is payable after the 100th day. No benefits are payable for any insured who was not previously hospitalized, and no benefits are payable for any insured receiving intermediate care, custodial care, community care or home care. Payment is only for care that meets Medicare's definition of skilled care and there is no coverage for custodial care.

An optional coverage may be purchased to provide at home recovery benefits, but is limited to a small amount per visit as well as only a few visits per year. In addition to the dollar and time limitations, this benefit applies only in cases of “recovery” following an illness, injury or surgery. No benefits are payable for any type of care due to a progressive disease or the general effects of aging.

If Medicare doesn’t cover it, neither does the Medicare Supplement, so insureds cannot expect much coverage for personal or custodial care.

a. traditional Medicare supplements (A-K) 2014 Medicare Supplement Insurance Benefit Chart

2014 Medicare Supplement insurance plans come from several highly rated and dependable carriers. When a person becomes eligible for Medicare at age 65 or due to disability, the next step is for them to compare their insurance options. Medicare supplement insurance is only offered from private insurance companies and through licensed insurance agents.

There are ten standardized Medicare Supplement insurance plans to choose from. There are also two variations of Plan F and one of Plan C.


Medigap Plans Medigap Benefits A B C D F* G K L M N

Part A coinsurance and hospital costs up to an additional 365 days after Medicare benefits are used up

Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Part B coinsurance or copayment Yes Yes Yes Yes Yes Yes 50% 75% Yes Yes***

Blood (first 3 pints) Yes Yes Yes Yes Yes Yes 50% 75% Yes Yes Part A hospice care coinsurance or copayment

Yes Yes Yes Yes Yes Yes 50% 75% Yes Yes

Skilled nursing facility care coinsurance No No Yes Yes Yes Yes 50% 75% Yes Yes

Part A deductible No Yes Yes Yes Yes Yes 50% 75% 50% Yes Part B deductible No No Yes No Yes No No No No No Part B excess charges No No No No Yes Yes No No No No Foreign travel exchange (up to plan limits)

No No Yes Yes Yes Yes No No Yes Yes

Out-of-pocket limit** N/A N/A N/A N/A N/A N/A $4,940 $2,470 N/A N/A

* Plan F also offers a high-deductible plan. If you choose this option, this means you must pay for Medicare-covered costs up to the deductible amount of $2,140 in 2014 before your Medigap plan pays anything.

** After you meet your out-of-pocket yearly limit and your yearly Part B deductible, the Medigap plan pays 100% of covered services for the rest of the calendar year.

*** Plan N pays 100% of the Part B coinsurance, except for a copayment of up to $20 for some office visits and up to a $50 copayment for emergency room visits that don't result in inpatient admission.

Most Popular Medicare Supplements Plans F, G, and N

The most commonly purchased Medicare supplement insurance Plans are F, G, and N. Plan F is the most comprehensive plan available and therefore the most popular of the three. Traditional Plan F covers all deductibles, copays, and/or coinsurance not covered by Medicare, but it will also be the most expensive.

Plan G is also popular as it covers everything Plan F does except for the small Part B deductible. For 2014, the annual Part B deductible is only $147. Plan G premiums can be up to $20 a month less than Plan F, which makes Plan G a financially smart choice.

Plan F offers a high deductible version that currently has a $2,140 deductible. This deductible must be met before the High Deductible Plan F supplement will pay benefits, but Medicare will still pay its portion as it normally would.


Some insurance carriers also offer a Select version of Plans C and F. In exchange for lower rates, Select plans require the use of a predetermined network of doctors and hospitals for routine (non-emergency) services. Owners of Select Plans F and C are not restricted to networks for emergency services.

Cost Sharing Medicare Supplement Plans For 2014

Plans K, L, M, and N are supplements with some amount of cost sharing for the insured. They are designed to compete with lower cost Medicare Advantage plans and are similar in that the insured is responsible for more out-of-pocket expenses if they arise.

Plan N is unique in that it is the only Medicare supplement that has a doctor’s office copay. Currently, it will cost the insured $20 for a doctor’s visit and $50 for an emergency room visit. There is no yearly limit to how many times the insured might pay one or both of these copays with Plan N.

Cost sharing supplemental insurance plans are popular for those who want to keep their monthly premiums low while not worrying about the network restrictions associated with Medicare Advantage coverage.

b. Medicare advantage Health Maintenance Organization (H Organization (PPO) plan Medicare Advantage Plans, sometimes called "Part C" or "MA Plans," are offered by private companies approved by Medicare. If the insured joins a Medicare Advantage Plan, they still have Medicare. They get their Medicare Part A (Hospital Insurance) and Medicare Part B (Medical Insurance) coverage from the Medicare Advantage Plan and not Original Medicare.

Medicare Advantage Plans cover all Medicare services. Medicare Advantage Plans may also offer extra coverage.

Medicare pays a fixed amount for patient care each month to the companies offering Medicare Advantage Plans. These companies must follow rules set by Medicare.

However, each Medicare Advantage Plan can charge different out-of-pocket costs and have different rules for how policyholders get services (like whether they need a referral to see a specialist or if they have to go to only doctors, facilities, or suppliers that belong to the plan for non-emergency or non-urgent care). These rules can change each year.


Costs for Medicare Advantage Plans

What policyholders pay in a Medicare Advantage Plan depends on several factors.

Drug coverage in Medicare Advantage Plans

People usually get prescription drug coverage (Part D) through the plan. In some types of plans that don't offer drug coverage, insureds can join a Medicare Prescription Drug Plan.

Policyholders can't have prescription drug coverage through both a Medicare Advantage Plan and a Medicare Prescription Drug Plan. If they're in a Medicare Advantage Plan that includes drug coverage and they join a Medicare Prescription Drug Plan, they will be disenrolled from their Medicare Advantage Plan and returned to Original Medicare.

How Medicare Supplement Insurance (Medigap) policies work with Medicare Advantage Plans

Medigap policies cannot work with Medicare Advantage Plans.

Medicare Part D Prescription Drug Coverage

By rule, there are no longer any Medicare supplement insurance plans that cover prescription drugs. In many cases, prescription drug coverage can be incorporated into a Medicare Advantage plan and sold as a bundle, but that’s not the case with Medicare supplement coverage.

This simply means that Part D drug plans must be purchased on a stand-alone basis and cannot be combined with any supplement plan. Oftentimes, this coverage can be purchased from the same insurance company, but it will always be a separate policy with a separate premium.

It is important to note that some Medicare Advantage plans include prescription drug coverage, but no 2014 Medicare supplement insurance plan will include this benefit in one policy. The insured cannot be enrolled in both a supplement and Advantage plan at the same time.


III. Federal Legislation and Long-Term Care (See Attachment II – Tax Treatment of Long-Term Care Insurance and Expenses) The Health Insurance Portability & Accountability Act of 1996 (HIPAA) Public Law created a framework by which costs incurred for chronic illness would be treated as medical expenses under IRC Sec. 213(d) and by which Long-Term Care insurance policies that meet certain requirements would be considered “tax-qualified” allowing for tax free benefits and tax deductible premiums under certain circumstances

1996, Congress enacted the Health Insurance Portability and Accountability Act (HIPAA). This was the first congressional bill that encouraged Americans to actively plan for their own private Long-Term Care needs. It provides a federal tax deduction for premiums paid for Long-Term Care insurance and also mandates criteria for a new class of Long-Term Care insurance: tax-qualified policies.

A second bill, the Long-Term Care Security Act, was passed in 2000. This act created a federal Long-Term Care insurance plan that is available to federal employees, retirees, and eligible family members.

For more detailed information, please refer to IRS Publication 502 titled, “Medical and Dental Expenses,” If tax advice is required, people should seek the services of a competent professional.

A. Health Insurance Portability and Accountability Act (HIPAA) Definitions that Apply to Long-Term Care Expenses and Insurance 17213. Section 213(d) of the Internal Revenue Code; relating to definitions, is modified to provide all of the following:

The term “Medical Care” includes amounts paid for qualified Long-Term Care services (as defined in Section 7702B(c) of the Internal Revenue Code as added by the Health Insurance Portability and Accountability Act of 1996).

The term “Insurance Covering Medical Care” is modified to include any qualified Long-Term Care insurance contract (as defined in Section 7702B(b) of the Internal Revenue Code as added by the Health Insurance Portability and Accountability Act of 1996).

In the case of a qualified Long-Term Care insurance contract (as defined in Section 7702B(b) of the Internal Revenue Code as added by the Health Insurance Portability and Accountability Act of 1996), only eligible Long-Term Care premiums (as defined in subdivision (d)) must be taken into account in determining the amount paid for medical care.

(1) For purposes of this section and Section 213 of the Internal Revenue Code, the term “Eligible Long-Term Care Premiums” means the amount paid during a taxable year for any qualified Long-Term Care insurance contract services (as defined in Section 7702B(b) of the Internal Revenue Code as added by the Health Insurance Portability and Accountability Act of 1996) covering an individual, to the extent that amount does not exceed the limitation determined under the following table:

(2) (A) In the case of any taxable year beginning in a calendar year after 1997, each dollar amount contained in paragraph (1) must be increased by the medical care cost adjustment of that amount for that calendar year. If any increase determined under the preceding sentence is not a multiple of ten dollars ($10), that increase must be rounded to the nearest multiple of ten dollars ($10).


(B) (i) For purposes of subparagraph (A), the medical care cost adjustment for any calendar year is the percentage (if any) by which the medical care component of the Consumer Price Index for August of the Preceding calendar year exceeds that component for August of 1996.)

(ii) Notwithstanding clause (1), the Franchise Tax Board must utilize the same medical care cost adjustment utilized by the Secretary of the Treasury under Section 213 of the Internal Revenue Code (as modified by Section 322 of the Health Insurance Portability and Accountability Act of 1996).

(e) (1) For purposes of this section and Section 213 of the Internal Revenue Code, an amount paid for a qualified Long-Term Care service (as defined in Section 220 of the Internal Revenue Code as added by the Health Insurance Portability and Accountability Act of 1996) provided to an individual must be treated as not paid for medical care if that service is provided by either of the following:

(A) The spouse of the individual or a relative (directly or through a partnership, corporation, or other entity) unless the service is provided by a licensed professional with respect to that service.

(B) A corporation or partnership which is related (within the meaning of Sections 267(b) or 707(b) of the Internal Revenue Code) to the individual.

(2) For purposes of paragraph (1), the term “relative” means an individual bearing a relationship to the individual that is described in any paragraphs (1) to (8), inclusive, of Section 152(a) of the Internal Revenue Code. This paragraph must not apply for purposes of Section 105(b) of the Internal Revenue Code with respect to reimbursements through insurance.

(f) This section must apply to taxable years beginning on or after January 1, 1997.

Source: Pub 535, www.irs.gov HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996

Public Law 104-191 - 104th Congress

To amend the Internal Revenue Code of 1986 to improve portability and continuity of health insurance coverage in the group and individual markets, to combat waste, fraud, and abuse in health insurance and health care delivery, to promote the use of medical savings accounts, to improve access to Long-Term Care services and coverage, to simplify the administration of health insurance, and for other purposes.


1. Qualified long-term care services/chronically ill individual An individual is chronically ill if they have been certified by a licensed health care practitioner within the previous 12 months as one of the following:

• They are unable for at least 90 days, to perform at least two activities of daily living without substantial assistance from another individual due to loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing and continence, or

• They require substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

To be "qualified," policies must adhere to regulations established by the National Association of Insurance Commissioners. Among the requirements are that the policy must offer the consumer the options of "inflation" and "nonforfeiture" protection, although the consumer can choose not to purchase these features.

The policies must also offer both activities of daily living (ADL) and cognitive impairment triggers, but may not offer a medical necessity trigger. "Triggers" are conditions that must be present for a policy to be activated. Under the ADL trigger, benefits may begin only when the beneficiary needs assistance with at least two of six ADLs. The ADLs are: eating, toileting, transferring, bathing, dressing or continence. In addition, a licensed health care practitioner must certify that the need for assistance with the ADLs is reasonably expected to continue for at least 90 days. Under a cognitive impairment trigger, coverage begins when the individual has been certified to require substantial supervision to protect him or her from threats to health and safety due to cognitive impairment.

Policies purchased before January 1, 1997, are grandfathered and treated as "qualified" as long as they have been approved by the insurance commissioner of the state in which they are sold. Most individual policies must receive approval from the insurance commission in the state in which they are sold, while most group policies do not require this approval.

• “Impairment in activities of daily living” means that the insured needs “Substantial Assistance” either in the form of “hands-on assistance” or “standby assistance,” due to a loss of functional capacity to perform the activity.

• “Activities of daily living” in every policy or certificate intended to be a federally qualified long-term care insurance contract as provided by public law 104-191 must include eating, bathing, dressing, transferring, toileting, and continence; “impairment in activities of daily living” means the insured needs “substantial assistance” either in the form of “hands-on assistance” or “standby assistance,” due to a loss of functional capacity to perform the activity;

• “Hands-on” assistance means the physical assistance of another person without which the individual would be unable to perform the activity of daily living (ADL).

• “Standby assistance” means the presence of another person within arm's reach of the individual that is necessary to prevent, by physical intervention, injury to the individual while the individual is performing the ADL (such as being ready to catch the individual if the individual falls while getting into or out of the bathtub or shower as part of bathing, or being ready to remove food from the individual's throat if the individual chokes while eating.


Conditions Resulting In the Need for Care

Long-Term Care services can become necessary because of a sudden, serious illness or accident, or a slow progression of chronic conditions. Long-Term Care services are needed when a person cannot perform certain “activities of daily living” (ADLs), or is cognitively impaired because of senile dementia or Alzheimer's disease. Most commonly the ADLs used to determine the need for services include bathing, dressing, transferring (getting from a bed to a chair), toileting, eating, and continence. Mental or Cognitive Impairment results in the need for supervision and monitoring.

Measuring the extent of an individual's functional impairment is essential to determine care needs as well as whether or not the insured has met the coverage triggers in LTC policies. Much research has gone into defining minimal components of independent functioning. Both physical and mental measurements are being used in state and federal laws to measure an individual's ability to function independently in the community.

Activities of Daily Living The basis of physical impairment research is a 1963 study by Stanley Katz in which he developed a measurement of physical functioning called Activities of Daily Living (ADLs). ADLs are often used by health care experts to determine whether a person is capable of living independently. ADLs are excellent measures to assess a person's need for nursing home, home health or other LTC services.

Instrumental Activities of Daily Living

Other functions for which persons may require assistance in order to maintain their overall independence and continue to live on their own outside a nursing facility are sometimes called IADLs (Instrumental Activities of Daily Living.) These include cooking, cleaning, doing laundry, household maintenance, transporting themselves, reading, writing, managing money, using equipment such as the telephone, and comprehending and following instructions Cognitive (Mental) Impairment

Cognitive Impairment refers to confusion or disorientation resulting from a deterioration or loss of intellectual capacity that is not related to, or a result of, mental illness, but which can result from Alzheimer’s disease, senility or irreversible dementia. Many seniors with mental impairments can perform all of the ADLs, but they need constant supervision to protect themselves and others while performing them. A great many seniors with mental impairments live in the community. Alzheimer's disease, senility, strokes and other diseases and conditions cause irreversible brain damage that worsens over time.


2. Licensed health care practitioner “Licensed health care practitioner” means a physician, registered nurse, licensed social worker, or other individual whom the Secretary of the United States Department of the Treasury may prescribe by regulation.

A Licensed Health Care Practitioner who is independent of the insurer must certify that the insured meets the federal definition of “chronically ill individual.” The practitioner may not be an employee of the insurer or receive any type of compensation that is linked to the outcome of the certification.

If a health care practitioner determines that an insured does not meet the definition of “chronically ill,” a second assessment by a licensed health care practitioner may be allowed.

The written certification must be renewed every 12 months. The licensed health care practitioner must also develop a written plan of care after personally examining the insured.

The cost of having a licensed health care practitioner certify that an insured meets, or continues to meet, the definition of “chronically ill individual” or to prepare written plans of care may not be applied against any lifetime maximum specified in the policy or certificate.

A licensed health care practitioner must develop a written Plan of Care after personally examining the insured. The costs to have a licensed health care practitioner certify that an insured meets, or continues to meet, the definition of “Chronically Ill Individual,” or to prepare written plans of care must not count against the lifetime maximum of the policy or certificate.

In order to be considered “independent of the insurer,” a licensed health care practitioner must not be an employee of the insurer and must not be compensated in any manner that is linked to the outcome of the certification. The practitioner's assessments should be unhindered by financial considerations. The practitioner may not be an employee of the insurer or receive any type of compensation that is linked to the outcome of the certification.

A licensed health care practitioner means a physician, registered nurse, licensed social worker, or other individual the United States Secretary of the Treasury prescribes by regulation.

3. 90-day certification for activities of daily living Federal law also requires that the insured be certified as needing assistance with activities of daily living for a period of 90 days or longer before benefits may be paid. California law requires only that the insurer obtain a written declaration from a doctor or other independent source that services are needed. This certification is completely subjective in that the physician or other medical professional must, in their best judgment, estimate that the impairment will last 90 days. If it ends up lasting less, the insured does not have to pay back the benefits received. This requirement was designed by Congress to pay for only those stays that are truly long-term, not short-term recuperative stays due to acute illness or injury. This will keep the coverage available for those situations where it is really needed and also help to stabilize the premiums.

“Substantial assistance” (with respect to activities of daily living) means hands-on assistance and standby assistance. This level of assistance must be expected to last at least 90 days


An individual is a chronically ill individual under the ADL Trigger only if a licensed health care practitioner has certified that the individual is expected to (likely to) be unable to perform (without substantial assistance from another individual) at least 2 ADLs for a period of at least 90 days due to a loss of functional capacity. This 90-day requirement does not establish a waiting period (elimination period) before which benefits may be paid.

Under a tax-qualified Long-Term Care Insurance policy, a licensed health care practitioner must certify that the insured is chronically ill and that a Plan of Care, including the qualified Long-Term Care services needed, is in place for them. Being Chronically Ill means that they are unable to perform the requisite number of ADLs, according to their policy, for a period that is expected to last for at least 90 days or they have a severe cognitive impairment.

4. Substantial assistance ‘‘Substantial assistance” means hands-on or standby assistance.

• ‘‘Hands-on assistance” means the physical assistance of another person without which the individual would be unable to perform the ADL.

• ‘‘Standby assistance” means the presence of another person within arm’s reach of the individual that is necessary to prevent, by physical intervention, injury to the individual while the individual is performing the ADL (such as being ready to catch the individual if the individual falls while getting into or out of the bathtub or shower as part of bathing, or being ready to remove food from the individual’s throat if the individual chokes while eating).

a. severe cognitive impairment and substantial supervision ‘‘Severe cognitive impairment” means a loss or deterioration in intellectual capacity that is comparable to (and includes) Alzheimer’s disease and similar forms of irreversible dementia, and measured by clinical evidence and standardized tests that reliably measure impairment in the individual’s short-term or long-term memory, orientation as to people, places, or time, and deductive or abstract reasoning.

B. Tax Qualified Long-Term Care Insurance A person may be able to deduct part of the premium for a tax-qualified long-term care policy from their taxes as a medical expense. They usually don’t have to claim their qualified long-term care policy benefits as taxable income. If they have an indemnity policy, they might have to pay taxes on benefits that exceed their actual cost or $330 per day, whichever is greater.

All policies sold before January 1, 1997, are automatically tax-qualified and policies sold later are either tax-qualified or non-tax-qualified. To determine whether their policy is tax-qualified, look for a statement on the policy similar to this: “This policy is intended to be a qualified long-term care insurance contract as defined by the Internal Revenue Code of 1986, Section 7702B(b).”

They should ask an attorney, accountant, or tax adviser about how buying a long-term care insurance policy will affect their taxes.

Tax Qualified Benefit Eligibility (Triggers) & Definitions, 10232.8(a), 10232.8(b), 10232.8(f) & 10232.8(g) of the CIC


Policies that are tax-qualified meet certain standards as set forth in the Health Insurance Portability and Accountability Act, commonly referred to as “HIPAA,” which Congress passed in 1996. HIPAA ensures that benefits paid from policies that meet its standards are not considered taxable income and that qualified premiums may be deductible as medical expenses if certain thresholds are met. Almost half of all states offer tax incentives for Long-Term Care insurance premiums

Tax Treatment of Long-Term Care Insurance

Congress passed legislation effective in 1997 that established the tax treatment of premiums paid for and the benefits paid/reimbursed by Long-Term Care insurance policies that met certain federal standards. This legislation is called the Health Insurance Portability and Accountability Act or HIPAA. Long-Term Care policies that use the federal standards to cover benefits are labeled as “Federally Tax-Qualified”. Some or all of the premiums for these federally tax qualified policies may be deductible as a medical expense on their federal and California income tax returns (depending on their age and the amount of annual premium).

Tax Treatment of Long-Term Care Expenses

Policies sold as Federally Tax Qualified Long-Term Care Insurance use a standard of eligibility for benefits that may be stricter than the standards established in California for Non-Qualified Policies. It may be easier to qualify for benefits from non-tax qualified policies that use the standards established by California.

People who have questions about the tax status of a policy owned or one they are considering buying, or who have specific questions pertaining to the purchase of tax qualified Long-Term Care insurance should talk to their tax advisor.

TQ or NTQ

There are important differences between “tax-qualified” Long-Term Care insurance policies and those that are “non-tax-qualified.” These differences were created by the Health Insurance Portability and Accountability Act (HIPAA). A federally tax-qualified Long-Term Care insurance policy (qualified policy), offers certain federal income tax advantages. If the consumer has a qualified Long-Term Care policy and itemizes their deductions, they may be able to deduct part, or all, of the premium paid for their policy. They may be able to add the premium to their other deductible medical expenses. They may then be able to deduct the amount that is more than 7.5% of their adjusted gross income on their federal income tax return. The amount depends on their age, as shown in the following table.

Regardless of which policy they choose, make sure that they understand how the benefits and triggers will work and that they are acceptable. For example, benefits paid by a qualified Long-Term Care insurance policy are generally not taxable as income. Benefits from a Long-Term Care insurance policy that is not qualified may be taxable as income.

If a client bought a Long-Term Care insurance policy before January 1, 1997, that policy is probably qualified. HIPAA allowed these policies to be “grandfathered,” or considered qualified, even though they may not meet all of the standards that new policies must meet to be qualified. The tax advantages are the same whether the policy was sold before or after 1997. They should carefully examine the advantages and disadvantages of replacing a grandfathered policy with a new policy. In many cases, it will be to their advantage to keep their old policy.


Long-Term Care Insurance policies that are sold on or after January 1, 1997, as tax-qualified must meet certain federal standards. To be qualified, policies must be labeled as tax-qualified, be guaranteed renewable, include a number of consumer protection provisions, cover only qualified Long-Term Care services, and generally can provide only limited cash surrender values.

Qualified Long-Term Care services are those provided by Long-Term Care providers. These services must be required by Chronically Ill individuals and must be given according to a plan of care prescribed by a Licensed Health Care Practitioner. They are considered Chronically Ill if they are expected to be unable to do at least two Activities of Daily Living without Substantial Assistance from another person for at least 90 days. Another way they may be considered to be Chronically Ill is if they need Substantial Supervision to protect their health and safety because they have a Cognitive Impairment. A policy issued before January 1, 1997, doesn’t have to define chronically ill this way.

Some life insurance policies with Long-Term Care benefits may be Tax-Qualified. They may be able to deduct the premium they pay for the Long-Term Care benefits that a life insurance policy provides. However, a policy holder should be sure to check with a personal tax advisor to learn how much of the premium can be deducted as a medical expense.

The Long-Term Care benefits paid from a tax-qualified life insurance policy with Long-Term Care benefits are generally not taxable as income. Tax-qualified life insurance policies with Long-Term Care benefits must meet the same federal standards as other tax-qualified policies, including the requirement that one must be chronically ill to receive benefits.

FEDERAL STATUTORY CHANGES - HIPAA

Sections 7702B and 4980C, added by §§ 321 and 326 of the Health Insurance Portability and Accountability Act of 1996 (Pub. L. 104–191, 110 Stat. 1936, 2054 and 110 Stat. at 2065)(HIPAA), establish requirements for qualified Long-Term Care insurance contracts and issuers of those contracts. Section 7702B(b)(1)(A) requires a qualified Long-Term Care insurance contract to provide insurance protection only for qualified Long-Term Care services. Generally, § 7702B applies to contracts issued after December 31, 1996, and § 4980C applies to actions taken after December 31, 1996. See HIPAA §§ 321(f)(1) and 327.

Section 7702B(c)(2)(A) defines a ‘‘chronically ill individual’‘ as any individual who has been certified by a licensed health care practitioner as —

• ADL Trigger: being unable to perform without substantial assistance from another individual at least 2 out of 6 activities of daily living listed in § 7702B(c)(2)(B) (ADLs) for a period of at least 90 days due to a loss of functional capacity;

• Similar Level Trigger: having a level of disability similar to the level of disability described in the ADL Trigger as determined under regulations prescribed by the Secretary of the Treasury in consultation with the Secretary of Health and Human Services; or

• Cognitive Impairment Trigger: requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.

The 6 ADLs listed in § 7702B(c)(2)(B) are eating, toileting, transferring, bathing, dressing, and continence. Section 7702B(c)(2)(B) further provides that a contract is not a qualified Long-Term Care insurance contract unless it takes into account at least 5 of these 6 activities in determining whether an


individual is a chronically ill individual. California LTC laws require the use of 6 ADLs for any policy benefit trigger.

Certification by Health Care Practitioner

A licensed health care practitioner who is independent of the insurer must certify that the insured meets the federal definition of “chronically ill individual.”

If a health care practitioner determines that an insured does not meet the definition of “chronically ill,” a second assessment by a licensed health care practitioner may be allowed. Assessment of an insured and any certification must be completed promptly so that benefits are not delayed.

The written certification must be renewed every 12 months. The licensed health care practitioner must also develop a written plan of care after personally examining the insured.

The cost of having a licensed health care practitioner certify that an insured meets, or continues to meet, the definition of “chronically ill individual” or to prepare written plans of care may not be applied against any lifetime maximum specified in the policy or certificate.

All TQ policyholders have the benefit of having a qualified licensed health care professional evaluate their need for care, and, with the policy holder’s input, develop a customized plan of care, necessary to help them maintain as much independence in the most efficient way possible.

Care management agencies usually consist of a multidisciplinary team (such as nurses; health care and social workers whose profession and training include experience and/or expertise in managing and arranging for Long-Term Care services) under medical direction that will accomplish all of the following:

• Determine the degree to which the individual is disabled; • Assess the circumstances in the individual's residence; • Work with the individual to determine the specific services required; • Develop and suggest a Plan of Care that specifies the type and frequency of all services the

individual will require, the service providers, and the estimated cost of services; • Coordinate and monitor services to ensure the individual is care for appropriately.

Plan of Care

Before payment of care will be paid under the policy, a face-to-face assessment (comprehensive evaluation) of each individual's needs, health, social, environmental, financial and support systems should be performed by a care management agency, after which, a plan of care is designed for the individual to fit their needs in regard to level of services and costs.

The plan is monitored to be sure that it is working and to determine if and when changes to the plan are required.

A “Plan of Care” is a written individualized plan of services approved by a health care practitioner that specifies the type, frequency, and providers of all formal and informal Long-Term Care services required for the individual, and the cost, if any, of any formal Long-Term Care services prescribed.


This plan incorporates the services covered by the LTC policy, Medicare, other insurance coverage, community sponsored services and programs, and care available from family and friends, in a way to make the most of the insureds benefit dollars. The assessment is conducted, and plan of care revised, at least every 12 months.

• “Formal Long-Term Care Services” services for which the provider is paid. • “Informal Long-Term Care Services” services for which the provider is not paid.

Changes in the “Plan of Care” must be documented to show that such alterations are required by changes in the clients’ medical situation, functional and/or cognitive abilities, behavioral abilities or the availability of support services.

The insurer will pay for all initial assessments, reassessments and Plans of Care. The cost of these assessments and plans of care will not reduce the policyholder’s “pool of dollars”. They are a separate benefit under the policy.

Claims Denial Information

To be sure that insurers are not denying claims unfairly, every insurer must report the total number of claims denied by each class of business in the state by June 30 each year and the number of these claims denied for failure to meet the waiting period or because of a pre-existing condition as of the end of the preceding calendar year.

The insurer must also provide every policyholder or certificate holder whose claim is denied a written notice within 40 days of the date of denial of the reasons for the denial and all information directly related to the denial. Insurers must annually report to the department the number of denied claims. The department must make available to the public, upon request, the denial rate of claims by insurer. Qualified Long-Term Care Insurance

• Federal Law gives preferential tax treatment to TQ policies • Some persons will receive a tax deduction for all or part of the premium paid • All persons will be relieved from the burden of possible income taxes on the benefits

Taxpayers can include premiums paid on a qualified Long-Term Care insurance contract for themselves, their spouse, or their dependents when figuring their deduction. But, for each person covered, they can include only the smaller of the following amounts.

• The premium paid for that person; or • The amount based on their age 2014 rates. (Use the person's age at the end of the year.)

Qualified Long-Term Care Services

• Necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance and personal care services, and

• Required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.


Section 7702B(c)(1) defines ‘‘qualified Long-Term Care services’‘ as necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services that are required by a chronically ill individual, and provided pursuant to a plan of care prescribed by a licensed health care practitioner.

In addition, §322 of HIPAA amended §213 of the Code. For taxpayers who itemize deductions, §213 generally allows a deduction for expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his or her spouse, and dependents, to the extent that the expenses exceed 7.5 percent of the taxpayer’s adjusted gross income. As amended by HIPAA, §213(d) provides that the term ‘‘medical care” includes (1) eligible premiums paid for any qualified Long-Term Care insurance contract (as defined in §7702B(b)) and (2) amounts paid for qualified Long-Term Care services (as defined in §7702B(c)).

State Tax Benefits. In addition to the federal tax benefits, 29 states and the District of Columbia offer tax deductions and/or credits for policyholders with qualified policies.

California State Tax (SB 38-9/26/96)

A portion of California’s SB 38 (1996) changed the tax and revenue codes to conform to federal law that allows a deduction for medical expenses for the unreimbursed expenses for qualified (TQ) Long-Term Care services provided to the taxpayer, the taxpayer’s spouse or the taxpayer’s dependents if it exceeds 7.5% of adjusted gross income. Long-term care insurance premiums also must be treated as medical expenses based on a graduated scale based on the individual’s age before the close of the taxable year.

The incentive for CA taxpayers is a deduction allowed to the extent provided in the federal IRS Code [Cal. Rev. & Tax Code 17201 (1996)]

Caution: This information is based upon the tax laws in effect at the time of publication. Nothing herein should be construed as legal, accounting or tax advice. We encourage agents to recommend that consumers consult licensed tax and/or legal professionals.

California State law previously required policies to include Seven ADLs, while federal law requires them to include six. The federal and state definitions of what constitutes the inability to perform the ADLs for TQ vs. NTQ (Federal vs. State.) The federal definitions may make it more difficult to qualify for coverage than do the state definitions, especially in regard to short episodes of need for LTC.


CA Nursing Facility Benefit Triggers

In every Long-Term Care policy or certificate that covers care in a Nursing Facility, the threshold establishing eligibility for Nursing Facility care must be no more restrictive than a provision that the insured will qualify if either one of two criteria are met:

• Impairment in two activities of daily living. • Impairment in cognitive ability.

This means that no insurer can require impairment in more than two ADLs for any covered benefit, whether the policy is tax-qualified or non-tax-qualified, home care, assisted living or nursing facility.

The inability to perform activities of daily living, or ADLs, is the most common way insurance companies determine when the policy holder is eligible for benefits. The ADLs are bathing, continence, dressing, eating, toileting and transferring. Typically, a policy pays benefits when the insured cannot do a certain number of the ADLs, such as two of the six or three of the six. The more ADLs they must be unable to do, the harder it will be for them to become eligible for benefits. Federally tax-qualified policies are required to use the inability to do certain ADLs as a benefit trigger. A qualified policy requires that a person be unable to perform at least two ADLs to collect benefits.

Some policies say that one must have someone actually help the policyholder do the activities. That’s known as Hands-On Assistance. Specifying hands-on assistance will make it harder to qualify for benefits than if only Stand-By Assistance is required. The more clearly a policy describes its requirements, the less confusion the policyholder or their family will have when there is a claim.

Long-Term Care insurance policies sold in the past required a hospital stay of at least three days before paying benefits. Companies can no longer sell policies that require a hospital stay.

‘‘Substantial supervision” means continual supervision (which may include cuing by verbal prompting, gestures, or other demonstrations) by another person that is necessary to protect the severely cognitively impaired individual from threats to his or her health or safety (such as may result from wandering).

Under the Cognitive Impairment Trigger a qualified Long-Term Care insurance contract is not required to take any ADL into account for purposes of determining whether an individual is a chronically ill individual and there is no 90 day requirement.

Non-Tax-Qualified Policies

Premiums for non-tax-qualified long-term care policies are not tax-deductible. People might also have to pay taxes on any benefits the policy pays that don’t pay for care.

Non-TQ Benefit Triggers

In every long-term care policy or certificate that is not intended to be a federally qualified Long-Term Care insurance contract and provides home care benefits, the threshold establishing eligibility for home care benefits must be at least as permissive as a provision that the insured will qualify if either one of two criteria are met:

• Impairment in two out of seven Activities of Daily Living; or


• Impairment of cognitive ability

The policy or certificate may provide for lesser but not greater eligibility criteria. The commissioner, at his or her discretion, may approve other criteria or combinations of criteria to be substituted, if the insurer demonstrates that the interest of the insured is better served

NTQ ADL Definitions

“Impairment in activities of daily living” means that the insured needs “human assistance,” or “continual substantial supervision.”

“Activities of daily living” in every policy or certificate that is not intended to be a federally qualified Long-Term Care insurance contract and provides home care benefits must include Eating, Bathing, Dressing, Ambulating, Transferring, Toileting, and Continence.

The definitions of “activities of daily living” to be used verbatim in policies and certificates that are not intended to qualify for favorable tax treatment under Public Law 104-191 must be the following:

• Eating, which must mean reaching for, picking up, and grasping a utensil and cup; getting food on a utensil, and bringing food, utensil, and cup to mouth; manipulating food on plate; and cleaning face and hands as necessary following meals.

• Bathing, which must mean cleaning the body using a tub, shower, or sponge bath, including getting a basin of water, managing faucets, getting in and out of tub or shower, and reaching head and body parts for soaping, rinsing, and drying.

• Dressing, which must mean putting on, taking off, fastening, and unfastening garments and undergarments and special devices such as back or leg braces, corsets, elastic stockings or garments, and artificial limbs or splints.

• Toileting, which must mean getting on and off a toilet or commode and emptying a commode, managing clothing and wiping and cleaning the body after toileting, and using and emptying a bedpan and urinal.

• Transferring, which must mean moving from one sitting or lying position to another sitting or lying position; for example, from bed to or from a wheelchair or sofa, coming to a standing position, or repositioning to promote circulation and prevent skin breakdown.

• Continence, which must mean the ability to control bowel and bladder as well as use ostomy or catheter receptacles, and apply diapers and disposable barrier pads.

• Ambulating, which must mean walking or moving around inside or outside the home regardless of the use of a cane, crutches, or braces.

TQ Cognitive Impairment Trigger “Impairment of cognitive ability” means deterioration or loss of intellectual capacity due to mental disease, including Alzheimer’s disease or related illnesses, that requires “continual supervision” to protect the insured or others.

The policy or certificate may provide for lesser but not greater eligibility criteria. The commissioner, at his or her discretion, may approve other criteria or combinations of criteria to be substituted, if the insurer demonstrates that the interest of the insured is better served.


California Tax Qualified Benefit Triggers

In every Long-Term Care policy or certificate that is intended to be a federally qualified Long-Term Care insurance contract and provides home care benefits, the threshold establishing eligibility for home care benefits must be that the person be determined to be Chronically Ill. In establishing that the insured is Chronically Ill, either of these two criteria may be used:

• Impairment in two out of six activities of daily living, for a period of at least 90 days; • or severe cognitive impairment

The definitions of “activities of daily living” to be used in policies and certificates that are intended to be federally qualified Long-Term Care insurance must be the following until the time that these definitions may be superseded by federal law or regulations:

TQ Coverage Triggers – ADLs, Cognitive & Similar

The definitions to be used in policies and certificates for Impairment in Activities of Daily Living, “Impairment in Cognitive Ability,” and any Third Eligibility Criterion adopted by regulation must be the verbatim definitions of these benefit eligibility triggers allowed by federal regulations. In addition to the verbatim definitions, the commissioner may approve additional descriptive language to be added to the definitions, if the additional language is

• warranted based on federal or state laws, federal or state regulations, or other relevant federal decision, and

• strictly limited to that language which is necessary to ensure that the definitions required by this section are not misleading to the insured.

TQ Activities of Daily Living (ADLs)

The definitions of “activities of daily living” to be used in policies and certificates that are intended to be federally qualified long-term care insurance must be the following until the time that these definitions may be superseded by federal law or regulations:

• Eating, feeding oneself by getting food in the body from a receptacle (such as a plate, cup, or table) or by a feeding tube or intravenously.

• Bathing, washing oneself by sponge bath or in either a tub or shower, including the act of getting into or out of a tub or shower.

• Continence, the ability to maintain control of bowel and bladder function; or when unable to maintain control of bowel or bladder function, the ability to perform associated personal hygiene (including caring for a catheter or colostomy bag).

• Dressing, putting on and taking off all items of clothing and any necessary braces, fasteners, or artificial limbs.

• Toileting, getting to and from the toilet, getting on or off the toilet, and performing associated personal hygiene.

• Transferring – companies may choose between either one of two different definitions, the second of which is the most liberal:

o Transferring, must must mean the ability to move into or out of bed, a chair or wheelchair, or


o Transferring, which must mean the ability to move into and out of a bed, a chair, or wheelchair, or ability to walk or move around inside or outside the home, regardless of the use of a cane, crutches, or braces.

An “impairment” in ADLs means the insured needs “substantial assistance either in the form of hands-on assistance or standby assistance due to a loss of functional capacity to perform the activity”.

TQ Cognitive Definitions

Under the cognitive impairment trigger, a qualified long-term care insurance contract is not required to take any ADL into account for purposes of determining whether an individual is a chronically ill individual. It is possible that a severely cognitively impaired individual may be able to perform various activities of daily living without assistance but still may need substantial supervision.

“Impairment of cognitive ability” means that the insured needs “substantial supervision” due to “severe cognitive impairment.”

“Severe cognitive impairment” means a loss or deterioration in intellectual capacity that is Comparable to (and includes) Alzheimer's disease and similar forms of irreversible dementia, and Measured by clinical evidence and standardized tests that reliably measure impairment in the individual's:

• Short-term or long-term memory, • Orientation as to people, places, or time, and • Deductive or abstract reasoning.

“Substantial supervision” means continual supervision (which may include cueing by verbal prompting, gestures or other demonstrations) by another person that is necessary to protect the severely cognitively impaired individual from threats to his or her health or safety (such as may result from wandering).

This only applies to a policy or certificate intended to be a federally qualified Long-Term Care insurance contract.

HIPAA left the door open for a third definition that has yet to be determined

If federal law or regulations allow other types of disability to be used, the commissioner must issue emergency regulations to add those other criteria as a third threshold to establish eligibility for benefits. Insurers must submit policies for approval within 60 days of the effective date of the regulations. With respect to policies previously approved, the department is authorized to review only the changes made to the policy. All new policies approved and certificates issued after the effective date of the regulation must include the third criterion. No policy must be sold that does not include the third criterion after one year beyond the effective date of the regulations. An insured meeting this third criterion will be eligible for benefits regardless of whether the individual meets the impairment requirements regarding activities of daily living and cognitive ability.

Policyholder’s Right to Appeal 10235.94


Every policy or certificate must include a provision giving the policyholder or certificate holder the right to appeal decisions regarding benefit eligibility, care plans, services and providers, and reimbursement payments.

Policyholder Entitled To Second Opinion 10232.8

If a health care practitioner makes a determination, pursuant to this section, that an insured does not meet the definition of “Chronically Ill Individual,” the insurer must notify the insured that the insured must be entitled to a second assessment by a licensed health care practitioner, upon request, who must personally examine the insured. The requirement for a second assessment must not apply if the initial assessment was performed by a practitioner who otherwise meets the requirements of this section and who personally examined the insured. The assessments conducted pursuant to this section must be performed promptly with the certification completed as quickly as possible to ensure that an insured's benefits are not delayed. The written certification must be renewed every 12 months. A licensed health care practitioner must develop a written plan of care after personally examining the insured.

1. Benefits Tax Treatment of Benefits

For Tax-Qualified Long-Term Care Insurance policies that pay benefits under an Indemnity Model, benefit payments are subject to a daily dollar cap.

2014 Daily Indemnity(Per Diem) Limit

2013 Daily Indemnity(Per Diem) Limit

2012 Daily Indemnity (Per Diem) Limit

$330 $320 $310 If the individual taxpayer receives Tax-Qualified Long-Term Care Insurance benefits in excess of this annual daily limit, those "excess benefits" will be considered income for tax purposes. However, the taxpayer may exclude from income the "excess benefits" to the extent of the individual's actual unreimbursed Tax-Qualified Long-Term Care expenses. Reporting of Tax Qualified Long-Term Care Benefits Consumer implications

• The 1099 LTC form must be filed by all insurers who pay benefits from an LTC policy, whether tax qualified or not.

• This form asks the insurer to indicate whether this policy was tax-qualified or not and whether benefits were paid on a per-diem or reimbursement basis.

Carrier implications

• If a policy is qualified, and has reimbursement (rather than per-diem) style benefits, nothing further is required of the insured.

• However, if the policy is either TQ and per-diem, or NTQ, they must refer to the 8853 form for instructions.


2. Required consumer protection Under §§ 7702B(b)(1)(F), 7702B(g), and 4980C, qualified Long-Term Care insurance contracts and issuers of those contracts are required to satisfy certain requirements of the Long-Term Care Insurance Model Act (Model Act) and Long-Term Care Insurance Model Regulation (Model Regulation) promulgated by the National Association of Insurance Commissioners (NAIC), as adopted as of January 1993. The requirements for qualified Long-Term Care insurance contracts under §§ 7702B(b)(1)(F) and 7702B(g) relate to guaranteed renewal or noncancellability, prohibitions on limitations and exclusions, extension of benefits, continuation or conversion of coverage, discontinuance and replacement of policies, unintentional lapse, disclosure, prohibitions against postclaims underwriting, minimum standards, inflation protection, prohibitions against preexisting conditions and probationary periods, and prior hospitalization.

The requirements for qualified Long-Term Care insurance contracts under§ 4980C relate to application forms and replacement coverage, reporting requirements, filing requirements for marketing, standards for marketing, appropriateness of recommended purchase, standard format outline of coverage, delivery of a shopper’s guide, right to return, outline of coverage, certificates under group plans, policy summary, monthly reports on accelerated death benefits, and incontestability period.

Sections 7702B and 4980C reference NAIC model provisions that specify exact language (including punctuation), captions, format, and content that must be included in Long-Term Care insurance contracts, applications, outlines of coverage, policy summaries, and notices.

See, e.g., §§ 10, 13, and 24 of the Model Regulation.

In the case of a State that has adopted all or any portion of the Model Act or Model Regulation, compliance with the applicable requirement of State law is considered compliance with the parallel Model Act or Model Regulation requirement specified in § 7702B(g) or § 4980C, and failure to comply with that requirement of State law is considered failure to comply with the parallel Model Act or Model Regulation requirement in § 7702B(g) or § 4980C. For example, if a particular State has adopted Section 6C of the Model Act (relating to preexisting conditions), then, for a contract that is subject to that State’s insurance laws, compliance with that State law is considered compliance with § 7702B(g)(2)(A)(ii)(I) and failure to comply with that State law is considered failure to comply with § 7702B(g)(2)(A)(ii)(I). In accordance with § 4980C(f), in the case of a State that imposes a requirement that is more stringent than the analogous requirement imposed by § 7702B(g) or § 4980C, compliance with the applicable requirement of State law is considered compliance with the parallel Model Act or Model Regulation requirement in § 7702B(g) or § 4980C.

If a State has not adopted a provision of the Model Act or Model Regulation that is specified in § 7702B(g) or§ 4980C (and has not adopted a requirement that is more stringent than the requirement imposed by that provision),the language, caption, format, and content requirements imposed by the Model Act or Model Regulation provision with respect to contracts, applications, outlines of coverage, policy summaries, and notices will be considered satisfied for a contract subject to the law of that State if the language, captions, format, and content are substantially identical in all material respects to those required under that Model Act or Model Regulation provision.

Adjustments to Nonforfeiture Benefits Under Insurance Contracts. Section 7702B(g)(4)(B)(ii) provides that the amount of a nonforfeiture benefit available in the event of a default in premium payments may


be subsequently adjusted only as necessary to reflect changes in claims, persistency, and interest that have been taken into account in a change in the premium rates for contracts issued on the same contract form if the contract form has been approved by the Secretary of the Treasury.

Solely for the purpose of making such adjustments, approval by the State insurance commissioner or other applicable State authority will be treated as approval by the Secretary of the Treasury.

3. IRS reporting mechanism IRS Notice 97-31 establishes requirements for TQ LTCi

This notice provides interim guidance relating to qualified Long-Term Care services and qualified Long-Term Care insurance contracts under §§ 213, 7702B, and 4980C of the Internal Revenue Code. It is effective pending the publication of proposed regulations or other guidance.

SUMMARY

The notice includes interim guidance concerning the definition of a ‘‘chronically ill individual,’‘ including safe harbor definitions of the terms ‘‘substantial assistance,’‘ ‘‘hands-on assistance,’‘ ‘‘standby assistance,’‘ ‘‘severe cognitive impairment,’‘ and ‘‘substantial supervision.’‘

Under the Long-Term Care provisions added to the Internal Revenue Code in 1996, certain payments received on account of a chronically ill individual from a qualified Long-Term Care insurance contract are excluded from income.

In addition, certain expenditures incurred for qualified Long-Term Care services required by a chronically ill individual are deductible as medical care expenses.

The notice also includes an interim safe harbor that allows key provisions in qualified Long-Term Care insurance contracts to be interpreted by an insurance company using the same standards that the company used before 1997 to determine whether an individual is unable to perform activities of daily living or is cognitively impaired. In addition, the notice provides interim guidance on the scope of the statutory grandfather provisions that apply to individual and group Long-Term Care insurance contracts issued before 1997.

The safe harbors are designed to provide standards for taxpayers to use in interpreting the new Long-Term Care provisions and to provide interim guidance to facilitate operation of the insurance market without the need for interim amendment of contracts.

The guidance takes into account comments and information provided by State insurance regulators (including the National Association of Insurance Commissioners), insurance companies offering Long-Term Care insurance, consumer representatives, groups representing individuals with chronic disabilities, the Department of Health and Human Services, health professionals expert in the care and rehabilitation of individuals with chronic illnesses, and others. The notice addresses certain issues identified as those for which interim guidance would be most helpful. The Internal Revenue Service and Treasury Department are continuing to consider these and other issues and welcome further comments.

I. CHRONICALLY ILL INDIVIDUAL


This section of the notice provides interim guidance including safe harbors relating to the determination of whether an individual is a ‘‘chronically ill individual’‘ under § 7702B(c)(2). Taxpayers (including uninsured individuals, insurance companies, employers, policyholders, and certificate holders) may rely on this interim guidance to determine whether an individual is a chronically ill individual under the ADL Trigger or the Cognitive Impairment Trigger for purposes of the definitions of ‘‘qualified Long-Term Care services’‘ in § 7702B(c) and ‘‘medical care’‘ in § 213(d). Services may constitute qualified Long-Term Care services.

II. QUALIFIED LONG-TERM CARE INSURANCE

This section of the notice addresses certain issues relating to the consumer protection provisions of §§ 7702B(b), 7702B(g), and 4980C, rules for adjustments to nonforfeiture benefits under § 7702B(g)(4), and the grandfather rules for certain pre-1997 insurance contracts.

Taxpayers (including insurance companies, employers, policyholders, and certificate holders) may rely on this interim guidance for purposes of the definition of ‘‘qualified Long-Term Care insurance contract’‘ in § 7702B(b) and the requirements of § 4980C.

C. Tax Treatment of Pre-1997 Long-Term Care Insurance Policies A safe harbor applies to post-1996 Long-Term Care insurance contracts (including any pre-1997 contracts not grandfathered under § 321(f)(2) and the grandfather rules in this notice for certain pre-1997 insurance contracts) issued by an insurance company with outstanding pre-1997 Long-Term Care insurance contracts that base eligibility for payments upon the inability to perform any of the ADLs (eating, toileting, transferring, bathing, dressing, and continence) or cognitive impairment. Insurance companies, policyholders, and certificate holders may rely on this safe harbor (as well as the safe-harbor definitions above for the ADL and Cognitive Impairment Triggers) to determine whether an individual is a chronically ill individual under both or either the ADL Trigger and the Cognitive Impairment Trigger for purposes of the definition of a ‘‘qualified Long-Term Care insurance contract,’‘ whether or not the post-1996 contracts generally incorporate the provisions of § 7702B(c)(2). In order to rely on any of these safe harbors for federal tax purposes, contracts are not required to incorporate or refer to the safe harbors.

In applying the ADL Trigger to its post-1996 contracts, an insurance company is permitted to use the same standards that it uses to determine whether an individual is unable to perform an ADL for purposes of eligibility for benefit payments under its pre-1997 contracts (‘‘pre-1997 ADL standards’‘).

If the insurance company makes determinations regarding an individual’s inability to perform an ADL under a post-1996 contract using its pre-1997 ADL standards, the contract will be deemed to satisfy the requirement under the ADL Trigger that an individual is unable to perform (without substantial assistance from another person) that ADL due to a loss of functional capacity.

For example, if an insurance company has outstanding pre-1997 Long-Term Care insurance contracts that provide for benefit payments if the insured is unable to perform at least 2 ADLs (whether or not the contracts refer to substantial assistance), the company may interpret ‘‘Substantial Assistance” for purposes of the ADL Trigger as requiring the same assistance as the company requires under its pre-1997 contracts.


In applying the Cognitive Impairment Trigger to its post-1996 contracts, an insurance company is permitted to use the same standards that it uses to determine whether an individual qualifies for benefits due to cognitive impairment under its pre-1997 contracts (‘‘Pre-1997 Cognitive Impairment Standards”). If the insurance company makes determinations regarding an individual’s cognitive impairment under a post-1996 contract using its pre-1997 cognitive impairment standards, the contract will be deemed to satisfy the requirement under the Cognitive Impairment Trigger that an individual requires substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.

This safe harbor for continuation of pre-1997 insurance standards applies only for purposes of determining whether an individual (1) is unable to perform (without substantial assistance from another person) an ADL due to a loss of functional capacity or (2) requires substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.

This safe harbor does not apply for purposes of the other statutory requirements of § 7702B(c)(2), such as (1) the requirement that an individual’s loss of functional capacity apply to at least 2 of 5 or 6 ADLs, (2) the requirement for a certification by a licensed health care practitioner, and (3) the 90-day requirement. These statutory requirements must be satisfied in order for the individual to be a ‘‘chronically ill individual” under the ADL or Cognitive Impairment Trigger, whether or not similar requirements are imposed under the insurance company’s pre-1997 contracts.

Grandfather Rules for Certain Pre-1997 Insurance Contracts.

Section 321(f)(2) of HIPAA provides that a contract issued before January 1, 1997, is treated as a qualified Long-Term Care insurance contract if the contract met the ‘‘Long-Term Care insurance requirements of the State” in which the contract was sitused at the time it was issued. For this purpose, the ‘‘Long-Term-care insurance requirements of the State’‘ means the State laws (including statutory and administrative law) that are intended to regulate insurance coverage that constitutes ‘‘Long-Term Care insurance’‘ (as defined in § 4 of the Long-Term-Care Insurance Model Act as adopted by the NAIC in December, 1995), regardless of the terminology used by the State in describing the insurance coverage.

For purposes of applying the grandfather rule of § 321(f)(2) to a contract other than a group contract, the issue date of a contract is generally the date assigned to the contract by the insurance company, but in no event earlier than the date the application is signed. However, if the period between the date of application and the date on which the contract is actually placed in force is substantially longer than under the insurance company’s usual business practice, then the issue date is the date the contract is placed in force.

For purposes of applying the grandfather rule of § 321(f)(2) to a group contract, the issue date of the contract is the date the group contract was issued. Insurance coverage under certificates evidencing the addition, on or after January 1, 1997, of individuals to the coverage available under a grandfathered group contract is accorded the same grandfather treatment under§ 321(f)(2) as the preexisting coverage under the grandfathered group contract.

A policyholder’s right to return a Long-Term Care insurance contract within a ‘‘free-look” period following delivery (with a refund of any premiums that have been paid) is not taken into account in determining the issue date of the contract.


Agents need to do a thorough comparison of a grandfathered contract (one sold before 1/1/97) in the event that it is being replaced with another contract. The current policy may have more favorable benefits, benefit triggers or other features that are not in a proposed contract. The standard of CIC §10235.16(d) regarding material improvement should be kept in mind.

Agents should also direct applicants to get tax advice in the event that a premium increase result in the loss of qualified status for a grandfathered contract, whether or not the contract is being replaced. Treasury has recently ruled that a premium increase does result in a material change to the contract and the loss of favorable tax treatment. That decision could change in the future based on the opposition Treasury receives on that issue, but until then the ruling stands.

Agents must be careful to compare the proposed policy with the grandfathered policy. Since the new policy would almost certainly be easier to qualify for benefits and would qualify for tax treatment.

1. Definition of “material change” For purposes of applying the grandfather rule of § 321(f)(2), any material change in a contract will be considered the issuance of a new contract.

This includes any change in the terms of the contract altering the amount or timing of any item payable by the policyholder (or certificate holder), the insured, or the insurance company. For example, for purposes of § 321(f)(2), any change in the terms of a contract altering the amount or timing of benefits (including nonforfeiture benefits) or premiums constitutes a material change that will be considered the issuance of a new contract.

A substitution of the insured under an individual contract, or a change (other than an immaterial change) in the eligibility for membership in the group covered by a group contract, also constitutes a material change that will be considered the issuance of a new contract.

However, the unilateral exercise of an option or right granted to a policyholder under the contract as in effect on December 31, 1996, will not constitute a material change. For this purpose, a unilateral exercise includes only a change that becomes effective without any consent or other non-ministerial action by the issuer of the contract. A contract issued in an exchange after December 31, 1996, for an existing contract is considered a contract issued after that date.

D. Long-Term Care Insurance Premium Deductibility Can add the tax qualified long term care insurance premiums (limited to the chart below) to other medical expenses. Amounts in excess of 7.5% of adjusted gross income (AGI) can be itemized as a medical expense deduction on Schedule A of Form 1040 of your federal income tax return.

1. Health savings accounts (medical IRA account) Taxpayer may pay LTC insurance premiums from an MSA or HSA up to the age based maximum deduction.

2. Individual deductibility


Individuals who purchase and pay for Tax-Qualified Long-Term Care Insurance policies for themselves, their spouses, and their tax dependents may claim the premiums paid as deductible personal medical expenses if the Individual itemizes his or her taxes (See Internal Revenue Code (IRC) Sec. 213(a) and IRC Sec. 213(d)(1)(D)).

However, any Tax-Qualified Long-Term Care Insurance expenses are deductible only to the extent that the individual's total unreimbursed medical care expenses exceed 7.5% of his or her Adjusted Gross Income (AGI).

Further, the amount of the Tax-Qualified Long-Term Care Insurance premiums that may be deducted is subject to the following dollar limits based on the insured's attained age before the close of the tax year (IRC Sec 213(d)(10)).

Age Eligible Premium 2014 Limit

Eligible Premium 2012 Limit

< 40 $370 $350

41 - 50 $700 $660 51 - 60 $1,400 $1,310

61 - 70 $3,720 $3,500 > 70 $4,660 $4,370

3. Deductibility for the self-employed Sole proprietors, partnerships, S-Corps, LLP

LTC premium is treated as a business expense for Medicaid insurance premium subject to the lesser of the actual amount paid or the age based table.

Employees – Applies to individual and group,

Premiums paid by employer are 100% deductible to employer as a business expense and are not taxable income to the employee. This is not limited to age based deduction.

On Behalf of a Partner

A Partnership that purchases Tax-Qualified Long-Term Care Insurance on behalf of a Partner may deduct the premiums paid as an ordinary business expense. This holds true for Tax-Qualified Long-Term Care Insurance purchased for the Partner's spouse or other tax dependent.

On Behalf of an Employee

A Partnership that purchases Tax-Qualified Long-Term Care Insurance on behalf of an Employee may deduct the premiums paid as an ordinary business expense. This holds true for Tax-Qualified Long-Term Care Insurance purchased for the Employee's spouse or other tax dependent.

4. Deductibility in closely-held C-corporation


If owner is a corporate employee, then they are treated as an employee. IRC section 106 (a). IRC section 7702B (a) (3). IRC section 213 (d) (i). IRC section 702B (a) (4).

Premium deductibility through Sec. 125 plan and/or flexible spending arrangement

Premiums become taxable to the employee if paid through a Section 125 plan. – HIPAA 1996, P.L. 4-49L.

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.

ERISA does not cover group health plans established or maintained by governmental entities, churches for their employees, or plans which are maintained solely to comply with applicable workers compensation, unemployment, or disability laws. ERISA also does not cover plans maintained outside the United States primarily for the benefit of nonresident aliens or unfunded excess benefit plans.

Source: http://www.dol.gov/dol/topic/health-plans/erisa.htm

E. Pension Protection Act of 2006 On 1/1/2010, the following important provisions went into effect:

• Linked Benefit Annuity Products: Benefits received for covered long term care expenses are tax-free and internal LTC rider charges are not taxed as distributions.

• Linked Benefit Life Insurance Products: Internal LTC rider charges are not taxed as distributions. • Traditional Long-Term Care Insurance (LTCI) New 1035 exchange rules provide tax free options

to fund a traditional LTCI policy.

The Key Changes to Linked Benefit Annuity products

• Prior to 1/1/2010: Long term care benefit payments were taxable as distributions, to the extent of gain in the annuity contract. Internal charges taken from the account value for the long term care riders were also taxable as distributions, to the extent of gain.

• Key Changes Effective 1/1/2010: Tax qualified LTC insurance riders under a non-qualified Linked Benefit annuity contract will be treated as a separate contract. As a result, tax qualified LTC benefits from these products are tax free. LTC insurance rider charges taken from the Linked Benefit annuity account value are not taxable distributions. However, these charges reduce investment in the contract, but not below zero. This may have tax implications if the contract is surrendered, or at the death of the owner.

Changes to Linked Benefit Life Products

Prior to 1/1/2010, internal LTC insurance rider charges are taxable if the policy is a Modified Endowment Contract (MEC) and there is gain.

• Key Change Effective 1/1/2010, Tax Qualified LTCI Rider Charges are no longer treated as taxable distributions to the policyholder. However, these charges reduce basis in the contract but not below zero. This may have tax implications if the contract is surrendered. The life insurance death benefit would ordinarily be tax free.


• Linked Benefit policies provide opportunities for clients - These policies provide another solution for financial professionals whose clients do not want to purchase traditional long term care insurance, but are still concerned about the impact an extended health care event might have on their retirement portfolios as well as on their families. With regard to Linked Benefit annuity products beginning in 2010, a client would have the opportunity to make a tax-free 1035 exchange of funds from an annuity or life insurance policy with gain into a Linked Benefit annuity product. If the client receives benefits to pay for qualified long term care expenses, those benefits would be tax-free.

• New tax free exchange rules - Beginning in 2010, tax free exchanges will be permitted from a new or existing non-qualified annuity to pay premium on a tax qualified long term care insurance policy. Any gains withdrawn in the 1035 exchange would be tax free.

• Non-qualified annuity - Non-qualified annuities are those that are funded with after-tax money (and from a source other than a qualified plan or account) or a 1035 exchange of a non-qualified account (for example, from another non-qualified annuity contract) and provide tax-deferred growth.

• Client exchange the entire annuity to get this benefit? No, partial exchanges may be permitted. In this case, gain and basis are transferred pro-rata.

• 1035 rules which apply to life insurance as well - the new 1035 rules also allow people to exchange all or part of a life insurance policy for a traditional or Linked Benefit LTCI policy, but suitability must be carefully considered.

Funding traditional Long-Term Care insurance with a non-qualified Single Premium Immediate Annuity (SPIA) Key Change Effective 1/1/2010, a client can assign the SPIA in whole or part to fund LTCI, such that SPIA payments are directed from the annuity issuer to the LTCI company to pay qualified long term care insurance premiums. Using SPIA payments to fund long term care is a strategy used today. However, the portion of the premium that constitutes gain is taxable as ordinary income to the annuity owner. Non-qualified SPIA payments, directly funding LTCI, will be reported as non taxable 1035 exchanges.

• “Self insure” and pay LTC costs from a non-qualified annuity - Partial withdrawals from a deferred annuity are generally taxable as ordinary income to the extent of gain in the contract. Annuitized payments are given an exclusion ratio – meaning that a portion of the payment may represent a tax free return of premium. Those who itemize on their federal income tax return may be able to take a deduction for their long term care costs as unreimbursed medical expenses.

• Advantages of using a Linked Benefit annuity to fund Long-Term Care expenses - Effective 1/1/2010, the withdrawals to pay for qualified long term care expenses from these contracts will be tax free. The IRS is expected to issue guidance on the impact of such payments on the cost basis of the underlying annuity contract. Clients should consult their tax advisors concerning the tax treatment of their annuity contracts.

The long term care riders in these products typically provide a long term care benefit pool from 2 to 3 times the premium placed into the contract.

By utilizing IRC section 1035, a non-qualified annuity may be exchanged for a Linked Benefit annuity, and this would allow the gain in the contract to be received tax free for qualified long term care expenses.


The Pension Protection Act, signed into law in August 2006, created sweeping reforms and expanded opportunities to encourage Americans to plan and save for their futures. Among the many changes this act introduced were two that affect Long-Term Care and Long-Term Care insurance:

Affirms HIPAA

Tax Qualified Long-Term Care Insurance - Congress passed the Health Insurance Portability and Accountability Act in 1996 to ensure that long term care insurance policies receive favorable tax treatment if they meet certain standards. Tax-qualified long term care insurance benefits are federal income tax free and premiums are eligible for income tax deduction, subject to certain limitations. A typical product design for a single premium deferred annuity (SPDA/LTCI) combo product will provide a Long-Term Care benefit that is generally a multiple of the annuity account value. The payout will be delivered over a certain number of months, 24, 36 or 48.

The first money out of the SPDA to pay the Long-Term Care benefit will be the insured’s initial premium to the plan. If the policyholder dies before their contribution is exhausted a beneficiary will receive the difference. Once benefits are paid beyond the initial premium the insurance company will continue to pay benefits until they are exhausted. Since the Long-Term Care benefit under the program qualifies under IRC section 7702B, the cost of the Long-Term Care benefit will not be a taxable event to the insured. Long-Term Care benefit payments will reduce the basis of the annuity for income tax purposes. This may create a larger tax burden on heirs of the annuity owner after death.

Long-Term Care insurance that is included as a rider on life insurance and annuity contracts is now treated for tax purposes as a separate contract. If applicable requirements are met by the Long-Term Care portion of the contract (i.e., if the rider is designed as a tax-qualified rider), amounts received under the rider will be treated as Long-Term Care benefits and will not be subject to taxation.

Immediate annuity may contain qualified chronic illness benefit

Effective January 1, 2010 under the Pension Protection Act (also known as Public Law 109-280), cash value withdrawals from specific annuity contracts to pay for qualifying Long-Term Care expenses or to pay qualified Long-Term Care insurance premiums, are no longer taxable income but now considered as a reduction of cost basis. Benefit payments from Long-Term Care insurance riders will also not be taxable.

“As a reduction of cost basis” means that distributions from the policy are non-taxable and reduce the owner's cost basis in the contract (but not below zero).

The definition of a chronic illness must match that of HIPAA. HIPAA requires that an individual must be receiving care pursuant to a plan of care prescribed by a licensed health care practitioner, and that the individual be certified by a licensed health care practitioner as being “chronically ill” by either being unable to perform at least 2 activities of daily living or requiring substantial supervision due to a severe cognitive impairment.

Source: What you need to know about the Pension Protection Act, annuities and Long-Term Care protection


Internal growth on annuity may be used to pay for LTC benefit without income tax implication to the policyholder

Beginning in 2010, tax free exchanges will be permitted from a new or existing non-qualified annuity to pay premium on a tax qualified long term care insurance policy. This ensures that long term care insurance policies receive favorable tax treatment if they meet certain standards.

Source: FAQs on Pension Protection Act of 2006 (PPA) Long Term Care Insurance Changes Taking Effect 1/1/2010

Allows for 1035 Exchange from annuity without to annuity with benefit

Any non-qualified annuity may be used, subject to limitations set by the transferring company. Surrender charges may apply and should always be considered.

Life insurance and annuity contracts may be exchanged, tax free, for qualified Long-Term Care insurance contracts under expanded Section 1035 rules.

F. New Trends: Long-Term Care Insurance, Life Insurance, Annuities and Benefit Riders Patient Protection and Affordable Care Act (PPACA)

Long-Term Services: Provisions in the new Health Reform Law

Health reform does even more than ensure that all Americans will have access to affordable medical care. It also includes provisions to improve access to affordable Long-Term Care. That’s a critical issue that will become even more pressing as the baby-boom generation ages and the number of Americans over the age of 65 increases dramatically. In the area of Long-Term Care, health reform includes provisions to expand access to home- and community-based care (HCBS) in Medicaid and establishes a new, voluntary Long-Term Care insurance program.

This document outlines our best understanding of key provisions in the new law that affect long-term services. Some of this information may change as program regulations and guidelines are developed.

Key provisions include:

• Community First Choice Option - A new state plan option to provide home- and community-based services that includes an increase in federal matching funds for program costs

• The State Balancing Incentives Payment Program – A temporary program that provides qualifying states with an increase in their federal match for Medicaid Home- and Community-Based Services (HCBS) costs

• Changes to Medicaid’s 1915(i) Option for Home- and Community-Based Care - Improvements to Medicaid’s existing state plan option for providing Home- and Community-Based Services (HCBS), 1915(i)

• The Community Living Assistance Services and Supports (CLASS) Program - A national voluntary program to help people insure against the cost of long-term services


• Expanded Spousal Impoverishment Protection in Medicaid - Requires states to extend the same spousal impoverishment protections that apply to institutional care to home- and community-based care

• Extending Money Follows the Person Demonstration Project - Helps Medicaid-eligible individuals transition from institutions back to the community

• Additional Funding for Aging and Disability Resource Centers - Funding for aging and disability resource centers

Money Follows the Person (MFP) Program

Money follows the Person (MFP) is a state program that helps move people to the community from institutional settings. If a person or their loved one are in a institutionalized setting the Department of Social Services has transition services to assist people based on their individual needs. Even if they don’t qualify for the Money Follows the Person Program, there are other services the Department may offer to assist them.


IV. Long-Term Care Insurance (LTCi) “Long-Term Care Insurance” includes any insurance policy, certificate, or rider advertised, marketed, offered, solicited, or designed to provide coverage for diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services that are provided in a setting other than an acute care unit of a hospital.

Long-Term Care Insurance includes all products containing any of the following benefit types:

• Institutional Care including care in a nursing home, convalescent facility, extended care facility, custodial care facility, skilled nursing facility, or personal care home;

• Home Care coverage including home health care, personal care, homemaker services, hospice, or respite care; or

• Community-Based Care including adult day care, hospice, or respite care.

This insurance is not the same as health insurance, which generally provides coverage for doctor visits and hospital stays. Depending on the type of policy and coverage selected, Long-Term Care insurance can provide coverage for Long-Term Care in many settings: at home, adult day services centers, assisted living communities, and nursing homes.

Long-Term Care insurance can be issued on a group or an individual basis. If it is issued on a group basis, the group sponsor is the policyholder and is issued the policy. The insured will receive a certificate as evidence of coverage. If it is issued on an individual basis, the insured is the policyholder and is issued the policy.

People can buy LTC insurance as an individual, or through a group like the California Public Employees Retirement System (CALPers) or the Federal Employees Long-Term Care Program (FLTCP).

Policies labeled as “Partnership” policies allow people to keep more of their assets if they qualify for Medi-Cal after their policy has paid LTC insurance benefits.

Customers can learn more about these policies by visiting the California Department of Health Care Services website at dhcs.ca.gov/services/ltc/Pages/CPLTC.aspx, More information can also be found in a publication produced by the California Department of Insurance entitled: “Long-Term Care Insurance – Consumer’s Guide”. People can obtain a copy by calling 1-800- 927-HELP (4357), the Consumer Hotline. HICAP counselors can also help them go over their options (1-800-434-0222).

How Much Do Long-Term Care Insurance Policies Cost?

When someone applies for a LTC insurance policy, the premium will depend on a number of variables:

1. Their age; 2. Amount of the daily benefit they select; 3. Length of time they want the company to pay benefits; and 4. Number of days, months, or dollars they pay before the company will begin paying benefits

after they qualify for care.


A long term care insurance policy can be expensive. Premiums can range from hundreds of dollars annually if purchased at 50 years of age to several thousand annually if purchased at age 75 or older.

Long term care insurance policies may not cover the entire cost of care. For example, the policy may cover $110 per day in a nursing home, but the total cost of care may be $150 per day. Policyholders must pay the difference. Remember, medications and therapies will increase their total daily costs for care. The costs of long-term care in their state should influence the amount of coverage they buy and the premiums they will pay. When they buy a long-term care policy, think about how much their income is and how much they could afford to spend on a long term care insurance policy now. Also try to think about what their future income and living expenses are likely to be and how much premium they can pay then. If they don’t expect their income to increase, it probably isn’t a good idea to buy a policy they can barely afford the premium now. People also need to think about whether they could afford a rate increase on their policy sometime in the future. Remember, while a company cannot raise their rates based on their age or health, the company can raise the rates for an entire class of policies. Some states have laws that limit rate increases. Again, it probably isn’t a good idea to buy a policy if someone can barely afford the premium now.

NOTE: Don’t be misled by the term “level premium.” People may be told that their long term care insurance premium is “level.” That doesn’t mean that it will never increase. Many states have adopted regulations that prevent insurance companies use the word “level” to sell guaranteed renewable policies. Companies must tell consumers that premiums may go up. That information must be included on the outline of coverage and the policy’s face page.

Renewability (CIC 10236)

“Guaranteed renewable”

The insured has the right to keep coverage in force if premiums are paid on time. The insurer may not unilaterally change the terms of coverage or decline to renew. The insurer may, according to provisions in the policy and Section 10236.1, change the premium rates for all insureds in the same class. The “class” is determined by the insurer for the purpose of setting rates at the time the policy is issued.

“Noncancelable”

The insured has the right to keep the coverage in force if premiums are paid on time. The insurer may not unilaterally change the terms of coverage, decline to renew, or change the premium rate.

Every Long-Term Care policy and certificate must contain a renewability provision on page one, which must clearly describe the initial term of coverage, the conditions for renewal, and, if guaranteed renewable, the circumstance under which the insurer may change the premium amount.


A. Types of Products Private insurance companies sell Long-Term Care insurance policies. Consumers can buy an individual policy from an agent or through the mail. Or, they can buy coverage under a group policy through an employer or through membership in an association. The federal government and several state governments offer Long-Term Care insurance coverage to their employees, retirees and their families. This program is voluntary, and premiums are paid by participants. People can also get Long-Term Care benefits through a life insurance policy or an annuity.

Many people think that Long-Term Care refers only to services provided in a nursing home. Most Long-Term Care is delivered at home by family and friends. This care is referred to as “Informal Care.” People may need more care than families are able to provide and additional resources are required. Often called “Formal Care,” this care can be provided by a number of Long-Term Care service providers in various locations depending upon the needs of the individual.

Long-Term care encompasses a broad range of help with daily activities that chronically disabled individuals need for a prolonged period of time. These primarily low-tech services are designed to minimize, rehabilitate, or compensate for loss of independent physical or mental functioning. The services include assistance with basic Activities of Daily Living (ADLs), such as bathing, dressing, eating, or other personal care. Services may also help with Instrumental Activities of Daily Living (IADLs), including household chores like meal preparation and cleaning; life management such as shopping, money management, and medication management; and transportation.

The services include hands-on and stand-by or supervisory human assistance; assistive devices such as canes and walkers; and technology such as computerized medication reminders and emergency alert systems that warn family members and others when an elder with a disability fails to respond. They also include home modifications like the installation of ramps and grab bars and door handles that are easy to use.

1. Stand-alone long-term care products Today, most Long-Term Care Insurance policies are standalone policies sold to individuals. Insurance agents sell many of these policies, but companies also sell policies through the mail or by telephone.

2. Products with long-term care riders In recent years, some insurers have started offering Long-Term Care insurance riders that attach to life insurance policies or annuity contracts. The policyholder pays an additional premium for the rider, which is usually less expensive than a stand-alone Long-Term Care policy.

• Life Insurance w/LTC Benefits: policy has a death benefit and a LTC benefit, has underwriting. • Annuity with Long-Term Care benefits: alternative to traditional LTC insurance for those who

are uninsurable, there is no underwriting.

The Long-Term Care rider is available with many fixed deferred annuities. If the insured becomes confined to a nursing home, or is unable to take care of themselves, this rider allows them to access more of their annuity's accumulation value, possibly up to 100%, without paying surrender charges or distribution costs otherwise applicable.


Terminal Illness Rider

This rider, available with both fixed and variable annuities, waives surrender charges otherwise applicable for a portion or all of their annuity's accumulation value if they suffer from a terminal illness with a medical life expectancy of one year or less.

There are basically two approaches to the LTC rider concept. Under the first approach, the LTC rider is independent from the life policy or annuity and the LTC benefits paid to the insured will not affect the policy's face amount or cash value. The second approach deducts the LTC benefits from the life policy (or annuity) face amount and cash value resulting in a corresponding reduction in both of these values.

Life insurance LTC Riders provide benefits very similar to those found in LTC policies. One difference with LTC riders attached to life insurance is the method of determining the LTC benefits. The benefits may be expressed as a specific daily amount, such as $50, $100 or $150 per day or as a percentage of the face amount of the life policy, payable monthly, up to a specified maximum dollar amount. Life insurance policy riders may also include optional benefits for such things as adult day care, cost of living protection, hospice care, and other types of care.

a. life insurance Some companies offer an accelerated benefits rider that they can add to their life insurance policy for an additional premium. This rider allows them to use their death benefit early if they are diagnosed with a long-term, catastrophic, or terminal illness. The amount they withdraw to pay for long-term care will be subtracted from the death benefit that will go to their beneficiaries when they die.

There are also some life insurance policies that offer long-term care insurance as a rider. If their policy includes any of these options, they may be able to pay for long-term care with the proceeds.

Some policies may allow people to withdraw the cash value of their policy to pay for specific conditions and expenses. It is important to remember that if they use money from their life insurance policy to pay for Long-Term Care, it will reduce the death benefit the beneficiary will get. For example, if they buy a policy with a $100,000 death benefit, using $60,000 for Long-Term Care will cut the death benefit of the policy to $40,000. It may also affect the cash value of the policy. If they bought life insurance to meet a specific need after their death, their survivors may not be able to meet that need if they use their policy to pay for Long-Term Care. If they never use the Long-Term Care benefit, the policy will pay the full death benefit to their beneficiary.

Until recently, the only way the insured could access the cash value in a life insurance policy while he or she was living was through a policy loan or policy surrender. Today, recognizing, the needs of the terminally or chronically ill, many insurers offer either LTC riders or living needs/accelerated benefit riders to their life insurance policies and annuities which allow the early payment of some portion of the policy’s face amount.

Some people prefer to purchase a life insurance policy with a LTC rider rather than stand-alone Long-Term Care insurance. If the LTC benefits are never used, the policy will still pay the death benefit when the insured dies. On the other hand, if benefits are used, the face value of the policy will decrease and when the insured dies, there may not be enough in insurance proceeds to meet the needs for which the policy was originally purchased


Life insurance policies with this option can be purchased by paying a single large premium or by paying premiums periodically over time. These policies vary widely and the methods used to pay benefits are very complex. The products may provide an attractive combination of benefits for some people, but because they involve tax issues they should not be purchased without consultation with an accountant, tax attorney, or trusted financial advisor.

One difference between Long-Term Care riders and stand-alone policies involves the method of determining benefits. In some riders, Long-Term Care benefits are expressed as a specific daily amount, such as $150 or $200 per day, as is the case with Long-Term Care indemnity contracts. In other riders, the benefits are expressed as a percentage of the face amount of the life insurance policy.

The impact a Long-Term Care rider has on the life insurance policy’s death benefit. Insurers use two approaches. Under the first approach, the rider is independent from the life insurance policy, which means that if any Long-Term Care benefits are paid to the insured, the life insurance policy’s face amount will not be affected.

Under the second approach, Long-Term Care benefits paid are linked to the life insurance policy’s face amount and cash value. When the insured dies, the beneficiary is paid the life insurance amount, less any amounts the insured collected under the Long-Term Care rider.

This second approach is not recommended when life insurance is needed to provide funds for survivors. The life insurance policy’s death benefit can be significantly reduced or even exhausted to zero if the need for Long-Term Care benefits lasts long enough.

b. annuity Some annuity contracts allow them to withdraw money without a penalty to pay for long-term care services. If their contract includes this option, they may be able to pay for long-term care expenses with their annuity

A Hybrid Annuity contract with a Long-Term Care rider will typically have a maximum monthly benefit based upon the Account Value at the time of the first benefit claim payment.

Long Term Care Annuities, like traditional annuities, have both an accumulation or deferral phase and pay-out phase. Long Term Care Annuities differ is that the pay-out phase can be accelerated when the annuity holder is in need of long term care services. Some important features and factors to consider regarding Long Term Care Life products include:


a) Holders of traditional annuities no longer subject to surrender charges can generally transfer funds to a tax free to long- term care.

b) Purchasers of long term care are not subject to as rigorous of health underwriting as for long term care life or traditional long term care insurance.

c) In addition to accelerating the pay-out of accumulated account value, as increase in the benefit is generally triggered, extending the pay-out period to pay for long term care expenses.

d) Payments made under the long term care benefit may be limited to actual long term care expenses incurred.

There are two types of annuities with long term care benefits. One requires health underwriting and one does not. Both are single premium fixed annuities with a long term care rider designed to cover long term care expenses.

Both annuities can provide someone with financial security and long term care peace of mind with extended care protection. The annuity with underwriting will have better leverage (benefits) than the annuity without underwriting, but if people cannot health-qualify the annuity without underwriting. The annuity with no underwriting provides access to long term care benefits without depleting their principal, they avoid invasive medical questions, and they can pay for in-home care.

Annuities are another type of savings and investment vehicle that can be used to pay for some Long-Term Care expenses. For example, individuals who do not medically qualify for Long-Term Care insurance because of their age or health may consider an annuity as a way to pay for future Long-Term Care needs.

Both immediate and deferred annuities can be used for this purpose. The purchaser of an immediate annuity buys the annuity with a lump sum and receives a series of income payments in return for a set number of years or until a specific event occurs (such as the annuitant’s death). With a deferred annuity, payments do not start immediately but are instead deferred until a specified event occurs, such as retirement or attaining a certain age. Interest is credited to the annuity and paid at a fixed or variable rate, depending on the underlying type of annuity.

Disadvantages of Using Annuities to Cover Long-Term Care

One problem with deferred annuities is that a person may need Long-Term Care well before the annuity is set to begin making payments. In this case, if the annuity owner cashes in the contract, a surrender charge may be imposed, depending on how long the owner has held the annuity. In addition, although the earnings on the money held in the annuity have been growing on a tax-deferred basis, the money will be subject to taxation when withdrawn. Before taking funds from an annuity, owners are therefore advised to consider the possible surrender charges and other penalties or taxes that may be imposed.

Many people also buy annuities because they are the only investment vehicle that guarantees a stream of income they cannot outlive. In some cases, purchasers may assume that such payments will be sufficient to cover the cost of Long-Term Care expenses that may be needed one day. However, because the cost of Long-Term Care is likely to increase each year, annuities that pay a fixed amount will be unable to keep pace with such costs. One option is to buy annuities that offer increasing payments, although this will increase the cost of the annuity.


c. disability insurance Disability insurance, or disability income insurance, provides benefits that are intended to partially replace the income that a person would have earned had he/she not developed a disability that caused him/her to be unable to work. The level of payment depends in part on the degree of disability, the expected duration of disability, and the feasibility of the insured returning to his/her previous line of work, or to any meaningful employment at all. This section focuses on long-term disability insurance, as opposed to short-term disability insurance where the coverage limits are expressed in terms of months, not years.

If a worker purchases his or her own policy, the disability benefits typically are not subject to income taxes. Benefits are taxed, however, if the employer pays for the disability insurance coverage. Most coverage is obtained through employers.

There are many dimensions to a disability insurance policy, including:

• Renewability. A “non-cancelable” (and guaranteed renewable) contract locks in premium rates and benefits. A policy that is just guaranteed renewable guarantees continued insurance, but allows the insurer to change characteristics of the policy, including premiums, for specific reasons. These reasons cannot be related to the specific individual insured, and changes are reviewable at the state level. Conditionally renewable policies are those where the insurer can change conditions or increase premiums at any time.

• Definition of total disability. Definitions of disability are usually phrased in terms of being able to work in one’s usual occupation (at the narrowest) to being able to work in any occupation (at the broadest).

• Residual disability. This coverage option applies if a person experiences a disability but only partially recovers, and is determined to have failed to regain his/her previous level of income or the previous level of hours worked.

• Presumptive disability. Some insurance contracts have a presumptive disability for events specified in terms of the loss of hearing, sight, speech, or the use of limbs.

• Elimination period. This is the length of time (e.g., 90 days) between the development of a disability and when benefit payments can start.

• Recurrent disability. If the disability recurs within a specified time period, then some policies will waive the elimination period. Benefit period. The benefit period is the maximum time over which benefits will be paid under the policy. It can be as short as a few years or can extend until age 65, or even the rest of one’s life. Age 65 is the most common option, which means that the disability payments will cease roughly when aged-based Social Security benefits begin.

• Optional riders. Examples of such riders are cost-of-living adjustments and other options that allow for increases in the level of coverage over time. Also, under some policies the insurer pays for job training or other assistance one may need to return to work, such as modifications to the work environment.

• Policy limitations and exclusions. Some policies may exclude paying for or set lower limits on benefits for specific sources of disability, such as behavioral health.

Because the overwhelming majority of disability insurance policies are obtained through employment, most policyholders do not have the opportunity to tailor all of these options to their individual preferences.


Also, employer-sponsored long-term disability plans are usually integrated with Social Security disability insurance. Those employees who meet the Social Security definition of disability are encouraged or required to apply for Social Security benefits. Long-term employer-sponsored disability benefits are generally reduced by the amount of Social Security benefits.

d. critical illness insurance For purposes of this explanation, we are going to list those illnesses that are covered by critical illness insurance policies. The three primary are cancer, heart attack and stroke.

Critical illness insurance policies may also cover such conditions as:

• Heart transplant • Coronary bypass surgery • Angioplasty • Kidney (Renal) failure • Major organ transplant • Paralysis

Critical illnesses cause financial devastation to millions of individuals and families (even those with health insurance). A product was created that would provide cash at a time it was needed most.

Consider the following: Medical problems contributed to over 60 percent of all bankruptcies in the United States and a 2008 Harvard University study found that more than three-quarters (77.9 percent) had health insurance at the start of the bankrupting illness. This study was performed prior to the current economic downturn and will likely understate the current burden of financial suffering.

Critical illnesses are striking more Americans every single year. Some 1.4 million Americans are diagnosed with cancer (American Cancer Society). An estimated 785,000 Americans will have a first heart attack and some 600,000 Americans will experience their first stroke (American Heart Association). The vast majority will survive.

The financial consequences of surviving a critical illness are something few people are prepared for. Most health insurance policies come with deductibles and co-pays that can be as much as $5,000 a year. Prescriptions are not just costly, they are rarely fully covered.

According to the Harvard study, many families with health insurance found themselves under-insured and responsible for thousands of dollars in out-of-pocket costs. The average out-of-pocket cost was $17,749 for all medically bankrupt families. Because most health insurance is linked to employment, a medical event can trigger loss of coverage. For patients who initially had private coverage but lost it, the family's out-of-pocket expenses averaged $22,568.

In the late 1990s, a new financial product was developed to help consumers cover expenses associated with critical illness. Appropriately, it's called Critical Illness Insurance. This specialized insurance provides a lump-sum, tax-free payment should a policyholder suffer from certain specific critical conditions.

Some 600,000 Americans now have this protection purchased on an individual basis or through a plan offered by their employer.


Types of Critical Illness Insurance

There is Simplified Issue Individual Protection which typically is available in amounts up to $50,000. Generally insurers will only ask a few health questions with these policies. They tend to be affordable and available from individual insurance professionals.

There are Fully Underwritten Individual Plans which are available in higher amounts; up to $500,000. Medical information will be requested by the insurer. These plans are also available from individual insurance professionals.

There are plans available through employers which are generally offered on a voluntary basis (fully paid by the employee).

There are life insurance policies that offer a critical illness insurance benefit often available as a rider to a policy.

e. accelerated death benefit Some insurers let an employee use their life insurance death benefit to pay for specific conditions such as terminal illness or for qualified Long-Term Care expenses such as home health care, assisted living or nursing home care. A life insurance death benefit they use while they are alive is known as an accelerated death benefit. A life insurance policy that uses an accelerated death benefit to pay for Long-Term Care expenses may also be known as a “Life/Long-Term Care” policy. It may be an individual or a group life insurance policy. The company pays the actual charges for care when the policy holder receives Long-Term Care services, but no more than a certain percent of the policy’s death benefit per day or per month. Policies may pay part or all of the death benefit for qualified Long-Term Care expenses. Some companies let a person buy more Long-Term Care coverage than the amount of their death benefit in the form of a rider.

f. other products as they become available in the marketplace Older people commonly want to maintain their independence and “age in place” as long as possible. Advances in technology are anticipated to continue to extend one’s ability to remain at home. However, as chronic illness and general infirmity advance with age, other living arrangement options may be necessary. In addition to nursing homes, many alternative housing arrangements have arisen and more are anticipated as the demand increases.

3. Hybrid long-term care policies Many clients prefer hybrid life plans (and hybrid annuities) as they allow better control of their assets. Additionally, these policies can eliminate the usual worries associated with traditional long term care- like unstable premiums and/or paying for expensive coverage that may never be used.

Some policies allow joint ownership (ideal for spouses who don’t want to purchase two separate policies) while others will only allow one owner. Joint ownership can help couples leverage their dollars even further assuming only one spouse needs the majority of the benefits. This can be more advantageous than having a healthy spouse’s policy sitting idle and unused.


If a client has been turned down (or rated up) for a traditional LTC insurance plan, they still might be a good candidate for a hybrid long term care policy. Between the two types of hybrid platforms, annuities typically require the least amount of underwriting as there is less immediate capital risk to the insurance company.

a. life/long-term care Like traditional LTCi plans, hybrid policies offer leveraged payouts, inflation protection, coverage in any setting (like the patient’s own home, assisted living or a nursing home) and waiting period options. They instantly create a pool of money that will pay benefits for a minimum number of years. Some policies even offer lifetime LTC benefits.

Owners of hybrid life insurance policies will know their daily (or monthly) long term care benefit amounts at onset and as the policy grows. (If less than the daily or monthly benefit amounts are used, then policies will last longer than the designated number of years established at purchase.)

Typically hybrid life insurance is funded with a one-time single premium, but in other cases a policy can be purchased over the course of a set number of years- say $10,000 for ten years. Most policies offer a “return of premium” clause if the insured changes his or her mind after purchase.

A single premium (or defined payment plan) will instantly purchase a death benefit as well as a qualified long term care benefit package. Death benefit amounts can sometimes vary year to year depending on the type of policy (universal or whole life) that is purchased.

Should the owner(s) pass away without accessing the policy, then the death benefit will pay out on a tax-free basis to the named beneficiaries. In the case where only a portion of the policy has been used for LTC before passing, then the remaining amount would pay out to the policy’s beneficiaries. Some plans will offer a small residual death benefit even if the entire policy has been liquidated for long term care expenses.

All long term care plans require some amount of medical underwriting whether they are hybrid or traditional. Hybrid plans are popular as they usually require far less underwriting than their traditional counterparts. Most hybrid life insurance plans only require an application questionnaire and a phone interview. In some cases, medical records will be requested, but not often.

All true hybrid life insurance plans offer inflation protection. If the one being considered does not, it may simply be a life policy with a critical illness or accelerated death benefit rider. If chosen, inflation protection will be built into a plan at onset and require additional premium dollars. Inflation protection riders can be purchased with a single premium, over a defined number of years, or over the life of the policy.

Inflation riders will vary between carriers- some will offer compounding benefits while others will provide simple increases. The most common riders offer 3% or 5% compounding yearly benefits. Each year, the policyholder will receive a statement detailing their policy values and growth should an inflation rider be included.


Hybrids of Long-Term Care Insurance with Life Insurance

One simple type of hybrid of life insurance with long-term care insurance is an accelerated death benefit (ADB), which (if offered) is often an option or rider to a life insurance policy. This benefit permits the owner of the policy to “accelerate” all or part of the death benefit when of certain qualifying events or triggers occur. At the time of acceleration, the death benefit under the policy is reduced—if enough payments are disbursed under an accelerated death benefit, the death benefit may be completely eliminated. Typically, with an ADB one cannot expect substantial insurance payouts for both an expensive long-term care episode and death. The consumer must continue to pay the life insurance premiums while receiving the accelerated benefits.

Accelerated death benefit options arose in the 1990s at the same time that viatical settlements (payments derived from sale of an insurance policy by a terminally ill policy holder) became more common. The option is generally associated with cash value life insurance, but may be available with term insurance. The trigger for an ADB can vary, including combinations of:

• Terminal illness, with death expected within 24 months; • Acute illness, such as acute heart disease or AIDS, which would result in a drastically reduced life

span without extensive treatment; • Catastrophic illness requiring extraordinary treatment, such as an organ transplant; • Long-term care needed because the policyholder cannot perform a number of daily living

activities such as bathing, dressing, or eating; or • Permanent confinement in a nursing home.

Therefore, not all ADB riders can really be considered as long-term care insurance.

In some cases the level of benefits may be restricted to only a specified percentage of the life insurance coverage (e.g., 50 percent). Therefore, if the amount of life insurance is small, the coverage of long-term care may be relatively small compared to the costs of several years of long-term services and supports.

Brown (2005) reported that for five companies that participated in a survey and reported that they offered life insurance policies with an accelerated death benefit:

• The policies varied as to whether the acceleration benefit was an optional rider, or was integrated into the policy itself.

• The waiting period for payment for long-term care services ranged from 60 to 100 days. • The monthly benefit amount ranged from 1 percent to 4 percent of the face value of the life

insurance policy (with a range of maximum benefits and in some cases, other limitations). • Four companies responded that the accelerated death benefit was intended to be federally tax-

qualified, and that there was an additional premium for the accelerated death benefit.

America’s Health Insurance Plans (AHIP), reported in 2004 that there had been little growth since 1996 in the numbers sold of long-term care riders to life insurance policies that met the federal long-term care insurance qualifications of HIPAA (the Health Insurance Portability and Accountability Act). AHIP also reported that “many insurers in this market have significantly decreased their marketing efforts, stopped selling a long-term care rider, or totally left the marketplace.”


Since the 1990s, a few companies have also offered another type of hybrid of life insurance and long-term care insurance. These policies appear to be primarily designed for persons at or near retirement age who have some significant assets that can be invested in a hybrid product. Typically, a person purchases a cash value life insurance policy with a single premium payment (although paying premiums over a fixed number of years or a lifetime is also possible). The policy specifies a guaranteed death benefit, which may be allowed to increase depending on the rate at which the cash value of the policy increases. If the policy holder does not use any long-term care benefits, then the death benefit is paid to the beneficiary when the policyholder dies. If the policyholder needs long-term services and supports, then payment for these services can be made, but these payments reduce, and may eventually exhaust, the death benefit.

An example of this type of policy is as follows:

The investor is a 65-year-old male non-smoker. He makes a single $70,000 premium payment to purchase a universal life insurance plan with a long-term care coverage feature. This will provide him with $118,073 in income tax-free death benefits payable to his beneficiary upon his death. Should the policy-holder need long-term care services, he can receive up to $236,146 in income tax-free benefits for long-term care, which will decrease the amount of the death benefit. In many cases, a small residual death benefit is paid even if all long-term care benefits are exhausted by the policy-holder. If the policy-holder decides to cancel the policy, and if no benefits have been received, or withdrawals or loans made, he will receive back his entire initial premium, possibly plus some of the return on this premium. This plan is available to persons from 30 to 80 years of age, subject to medical underwriting.

As this example indicates, a policyholder needs to have a relatively large amount of funds that he or she is willing to devote to payment to heirs and/or long-term care coverage in order to have a significant level of long-term care insurance coverage using this type of hybrid product.

b. annuity/long-term care Hybrid annuity accounts are part long term care policy and part annuity. They provide leveraged payouts for long term care expenses like traditional LTCi policies, but also offer the advantages of a fixed annuity policy.

Most hybrid annuities are simply a combination of a fixed annuity and a traditional long term care policy. Money grows at a declared interest rate each year, but should the insured need long term care, their invested dollars are leveraged 2-3X over to help pay for LTC expenses.

Most often, hybrid policies are funded with a one-time single premium. In other cases, polices can be funded/purchased over a set number of years.

Hybrid annuity policies from different carriers work in different ways. In general, a hybrid annuity will state what daily or monthly benefits will be available each year for care in their home, assisted living facility, adult daycare, nursing home or hospice setting. If they use less than their allowable LTC benefits, their policy will last longer.

If the policy is never used to pay for long term care expenses, then the policyholder can withdraw their deposit and interest gains for their financial needs. At passing, their annuity proceeds (deposits and growth) will be passed to their named beneficiaries.


Whether hybrid or not, all fixed annuities will have a declared interest rate each year. When the annuity grows, so does the LTC benefit pool. In most hybrid accounts, there is an internal cost for the LTC insurance. If overall interest rates are very low, the cost of the LTC rider and the declared interest rate can cancel each other out in any given year.

To guarantee benefit growth, many LTC annuities offer an inflation rider that can be purchased at an extra cost. Sometimes inflation riders are purchased with a lump sum, other times they are paid for over time.

These riders assure that the long term care benefit pool will increase each year by a predetermined percentage – say 5%. Inflation riders can be especially valuable for younger buyers as they will help the policy keep pace with the rising cost of LTC expenses.

Typically long term care annuities require less medical underwriting than traditional LTC plans or hybrid life insurance plans. Someone who has been turned down for traditional long term care might be a good candidate for a hybrid annuity policy.

Hybrid annuities offer significant tax advantages through tax qualified payouts and 1035 exchange rules. The IRS 1035 exchange rule allows annuity owners to move their deferred gains from an existing non-qualified annuity to a hybrid policy on a tax free basis. All payouts from a hybrid annuity for qualified LTC expenses (including old and new interest gains) are not subject to income tax.

If the insured changes their mind about their investment, many long term care annuities allow a full return of premium – without a surrender penalty. Those that do have a surrender penalty will impose this fee on the accumulated value. The usual hybrid annuity surrender period is 10 years.

The most common complaints about traditional annual pay LTC plans are the regular premiums. Most people are reluctant to purchase something that they might not ever use.

Additionally, non-qualified annuity accounts allow for two owners. Couples do not necessarily need to purchase two separate polices as can be the case with traditional long term care. Two people can be insured under one hybrid annuity allowing for less overall investment. This is a distinct advantage LTC annuity policies provide to spouses who are both interested in coverage.

Hybrid life insurance policies offering leveraged long term care payouts are in demand as they provide two important benefits in one package. Typically these policies are purchased more for long term care than for life insurance benefits, but they do serve dual roles.

There is an annual cost for the long term care rider provided by the policy. This cost is subtracted from the declared interest rate each year. Like most annuity policies and long term care riders, interests rates and rider costs can change based on economic conditions, but only within certain reasonable limits outlined in the policy at onset. Clients must prove insurability before they will be able to purchased this hybrid annuity and the policy must be in-force for at least two years before benefits can be accessed for long term care expenses.

The newest entrants into the LTCi marketplace tether benefits to life and annuity policies. These plans are quickly growing in popularity as they offer living benefits to the insured and his or her family in the event that care is unneeded.


Typically these plans are purchased with a lump sum deposit from an existing investment like a bank CD, old annuity, or paid up life policy. The policies leverage the invested dollars several times over in the event long term care is needed. This strategy is sometimes referred to asset based care.

In this way, policyholders have a safe and insured asset that increases in value each year, but also one that will pay benefits several times over their initial investment. Additionally, underwriting a hybrid LTC life or annuity policy is usually easier than with traditional coverage.

Hybrids of annuities with long-term care insurance are available in the marketplace. In some ways they are similar to the life insurance/long-term care insurance hybrids described above. One example is a single-premium deferred annuity that can be used to pay for long-term care expenses. It is offered by a company that states the age range of issue is from 50 to 85, but that the primary market is from 70 to 85. The product is designed to appeal to persons who attempt to “self-fund” for their risks of having long-term care expenses. Some potential sources of appeal, in comparison to other ways to self-fund, might lie in the following characteristics of this product:

• As with annuities in general, the money will compound tax-free within the annuity hybrid. • There is simplified medical underwriting and typically no exams are required. • A higher interest rate is used to calculate the total amount available to pay for long-term care

expenses than the interest rate used in the annuity that determines the cash value that will be paid to the beneficiary.

c. other hybrid products as they become available in the marketplace The logic of an insurance product that combines disability insurance with long-term care insurance is that the policy would protect against the income loss associated with developing a disability as well as the costs of needed services associated with becoming disabled. The two separate products have different focuses, but are related.

Disability insurance provides income (for whatever purpose, including paying for services) that replaces a portion of the income that is lost due to the disability. This is probably why disability payments often end at age 65—on the grounds that retirement (typically at age 65), would result in zero earned income in subsequent years even in the absence of a disability, and that Social Security benefits would start at roughly this age.

Long-term care insurance provides payment for needed long-term care services, starting at the initiation of long-term care service need (whatever the age of the policyholder) and extending until the need ends or the service coverage ends, whichever comes first. Although it is probably correct that an individual who needs long-term care services has a disability, it is not the case that every person with a disability requires significant long-term care.

Because of the partial correlation between income needs that arise from developing a disability and the need for long-term care services and supports, it would seem that there would be no expected cost savings due to offsetting risks from marketing a hybrid product of these two insurance types. Nevertheless, some cost savings for the long-term care insurance portion might result from financial incentives for returning to work contained in the disability insurance portion, as well as from rehabilitation efforts and managed care provisions that may be contained in the disability insurance


portion of the hybrid. Some cost savings also might result from the combined underwriting and administration of these types of insurance.

Some policies exist that offer some aspects of combined disability/long-term care coverage. One example offers disability income insurance where the policyholder can exchange the policy for a long-term care insurance policy without undergoing an underwriting review. The exchange can occur between the ages 60 and 70 if the policyholder is not disabled, or at age 65 or later if the policyholder is disabled and has received the maximum benefits allowable under the disability income policy. The specific level of long-term care insurance premiums is based on the age at the time of conversion. The long-term care insurance policy covers facility care up to a daily benefit amount of $100, and home and community-based care up to 50 percent of that amount. Policies are also offered with five percent compound inflation protection and/or non-forfeiture options. The duration of these benefits is either three or six years, depending on the disability income insurance policy that was purchased.

Two Additional Hybrid-Related Approaches

A few other long-term care services and supports programs can be viewed as hybrid-like. One of these is a viatical settlement, which is the sale of a life insurance policy by an individual who is terminally ill or chronically ill to a third party for an amount equal to a certain percentage of the policy's face value.

Public-private partnership programs can also be considered a type of hybrid. Partnership programs involve selling specific long-term care insurance policies that then permit policyholders to exclude a portion of their assets when determining Medicaid eligibility. This product is in essence a public-private hybrid of long-term care insurance with a version of Medicaid that incorporates a relaxed asset test in its eligibility determination (the income test must still be met).

B. Group Coverage (Section 10231.6 of the CIC) "Group long-term care insurance" means a long-term care insurance policy which is delivered or issued for delivery in this state and issued to any of the following: One or more employers or labor organizations, or a trust or to the trustees of a fund established by one or more employers or labor organizations, or a combination thereof, for employees or former employees or a combination thereof or for members or former members or a combination thereof, of the labor organization.

Any professional, trade, or occupational association for its members or former or retired members, or combination thereof, if that association meets both of the following:

• Is composed of individuals all of whom are or were actively engaged in the same profession, trade, or occupation.

• Has been maintained in good faith for purposes other than obtaining insurance.

An association or a trust or the trustees of a fund established, created, or maintained for the benefit of members of one or more associations. Prior to advertising, marketing, or offering that policy or a certificate within this state, the association or associations, or the insurer of the association or associations, must file evidence with the commissioner that the association or associations have at the outset a minimum of 100 persons and have been organized and maintained in good faith for a primary purpose other than that of obtaining insurance, have been in active existence for at least one year, have


a constitution and bylaws which provide all of the following, and provide evidence that the following have been consistently implemented:

• The association or associations hold regular meetings, not less than annually, to further purposes of the members.

• Except for credit unions, the association or associations collect dues or solicit contributions from members.

• The members have voting privileges and representation on the governing board and committees.

Thirty days after that filing the association or associations must be deemed to satisfy these organizational requirements, unless the commissioner makes a finding that the association or associations do not satisfy those organizational requirements. A group other than as described in subdivisions (a), (b), and (c), subject to all of the following findings by the commissioner:

• The issuance of the group policy or certificate is not contrary to the best interest of the public. • The issuance of the group policy will result in economies of acquisition or administration. • The benefits are reasonable in relation to the premiums charged. • The use of the true or fictitious name of the group, group master policyholder, group policy,

certificate, or any trust or other entity created or used for the marketing of the group policy or certificates is not deceptive or misleading with regard to the status, character, or proprietary or representative capacity of the insurer, group, trust, or other entity.

• The group's main revenue source is not related to the marketing of insurance. • The group's outreach method to obtain new members is not related to the solicitation of

insurance. • The group provides benefits or services, other than insurance, of significant value to its

members. The commissioner must investigate the percentage of members using the other services and the monetary value of those services.

A life care contract provider which has received a certificate of authority in accordance with Chapter 10 (commencing with Section 1770) of Division 2 of the Health and Safety Code. Any life care contract provider which has not received the certificate of authority from the State Department of Social Services must be subject to this chapter.

COVERAGE UNDER GROUP LTC POLICIES

Employees enrolling in a group plan may be guaranteed coverage without providing any medical history, on the condition that employees enroll during the initial enrollment period and are actively at work (not absent due to disability, leave, or illness) on their effective date of coverage. Issuers of individual Long-Term Care insurance policies require that the applicant be medically underwritten before they approve a Long-Term Care insurance policy.

While LTC insurance was initially issued almost exclusively on an individual basis, it is now widely available as a form of group insurance.

Group Long-Term Care policies may be issued on a true group basis the same as for group life or health with the employer or association being the master policyowner and the individual insureds receiving


certificates testifying to their insured status. Another method may be individual policies issued to the members of the group that each member individually owns.

Group LTC is different from most types of group insurance. Most group LTC plans give employers the option of either funding the plan or acting as a sponsor who channels the employees' premiums to the insurer. Typically, employees pay the entire cost of the plan.

Individual and group Long-Term Care policies share many characteristics. Here are some differences that are important in group Long-Term Care coverage.

• One of the potential advantages to group LTC coverage is that eligibility for participation in the group plan may be broader than eligibility for individual policies. Under group plans, eligibility for coverage is often extended to active employees and their spouses, retired employees and their spouses, and the parents of employees and their spouses. Coverage may therefore be available in the group market persons who would not be eligible for coverage in the individual market, or who could not afford individual coverage because of its cost.

• There are also potential disadvantages to group LTC coverage. Strict requirements apply to individual policies in California that do not apply to all forms of group coverage. The same range of benefits (both required and optional) may not be available under group coverage. Most significantly, group coverage may be less secure than individual coverage in terms of cost or continued coverage, because renewal is not guaranteed. A group sponsor has the right to change insurance companies, replace the group policy with another policy, or to terminate the group plan entirely.

Required Disclosures in Certificates

Under California law, a certificate of insurance must be issued to each insured group member, and the certificate must include all of the following:

• A description of the principal LTC benefits and coverage provided by the group policy • A statement of the principal exclusions, reductions and limitations contained in the policy • A statement of the terms under which the policy may be continued or discontinued, including

any reservation of a right to change premiums • A statement that the group master policy, and not the certificate, determines the governing

contractual provisions of the coverage • An explanation of the insured's rights regarding continuation, conversion and replacement

Insured’s Options When a Group Policy Terminates

Every group LTC insurance certificate issued or delivered in California must provide for continuation or conversion of coverage for individual insureds if the group coverage terminates for any reason except:

• Termination due to failure to make a premium payment or contribution, or • Termination due to replacement of the group policy within 31 days by another policy providing

identical benefits, equivalent benefits, or better benefits, and the premium for the replacement coverage is calculated on the insured's age at the time the original certificate was issued


Continuation coverage means the maintenance of coverage under an existing group policy when that coverage would be or has been terminated and which is subject only to continued timely payment of the premium.

Any insured individual whose eligibility for group coverage is based on his or her relationship to another person will be entitled to continuation coverage under the group policy if the qualifying relationship terminates due to death or divorce.

Conversion coverage means an individual policy of Long-Term Care insurance, issued by the insurer of the terminating group coverage, without considering insurability, containing benefits which are identical, or which have been determined by the commissioner to be at least substantially equivalent, to the group coverage which would be or has been terminated for any reason. In determining whether benefits are substantially equivalent, the commissioner must consider, if applicable, the relative advantages of managed care plans that use restricted provider networks, considering items such as service availability, benefit levels, and administrative complexity.

The premium for the converted policy must be calculated on the insured's age at the time the group certificate was issued. If the terminating group coverage replaced previous group coverage, the premium for the converted policy must be calculated on the insured's age at the time the previous group certificate was issued.

Before issuing Conversion Coverage, the insurer may require, if adequate notice is provided to certificate holders in the certificate, that:

• The individual must have been continuously insured under the group policy, or any group policy that it replaced, for at least six months immediately prior to termination in order to be entitled to conversion coverage.

• The insured must submit written application for a conversion policy within a reasonable period after termination of the group coverage, and the premium paid as directed by the insurer, in order that the conversion policy be issued effective on the day following termination of group coverage.

• The conversion policy contains a provision for a reduction of benefits if the insured has existing Long-Term Care insurance, payable on an expense incurred basis, which, together with the conversion policy, would result in payment of more than 100% of incurred expenses. This provision must not be included in the conversion policy unless the reduction in benefits is reflected in a premium decrease or refund.

• The conversion policy contains a provision limiting the payment for a single claim, spell of illness, or benefit period occurring at the time of conversion, to the amount that would have been payable had the group coverage remained in effect.

Group Policies (CIC 10235.52) Every policy must contain a provision that, in the event the insurer develops new benefits or benefit eligibility or new policies with new benefits or benefit eligibility not included in the previously issued policy, the insurer will grant current holders of its policies who are not in benefit or within the elimination period the following rights:


• The policyholder must be notified of the availability of the new benefits or benefit eligibility or new policy within 12 months. The insurer's notice must be filed with the California Department of Insurance at the same time as the new policy or rider.

• The insurer must offer the policyholder new benefits or benefit eligibility in one of the following ways:

o By adding a rider to the existing policy and paying a separate premium for the new benefits or benefit eligibility based on the insured's attained age. The premium for the existing policy will remain unchanged based on the insured's age at issuance.

o By replacing the existing policy or certificate in accordance with Section 10234.87. o By replacing the existing policy or certificate with a new policy or certificate in which

case consideration for past insured status must be recognized by setting the premium for the replacement policy or certificate at the issue age of the policy or certificate being replaced.

• The insured may be required to undergo new underwriting, but the underwriting can be no more restrictive than if the policyholder or certificate holder were applying for a new policy or certificate.

Group Policies Issued Before 1-1-97 (CIC 10232.2)

Group policies issued before to January 1, 1997, must be allowed to remain in force and not be required to meet the requirements of this chapter, as amended during the 1997 portion of the 1997-98 Regular Session, unless those policies cease to be treated as federally qualified Long-Term Care insurance contracts. If such a policy or certificate issued on such a group policy ceases to be a federally qualified Long-Term Care insurance contract under the grandfather rules issued by the United States Department of the Treasury pursuant to Section 7702B(f)(2) of the Internal Revenue Code, the insurer must offer the policy and certificate holders the option to convert, on a guaranteed-issue basis, to a policy or certificate that is federally tax qualified if the insurer sells tax-qualified policies.

Replacement of Group Coverage

Slightly different requirements apply for replacement transactions involving group LTC coverage. When individual insurance is replaced, the law requires disclosure of information and a warning notice to the individual who will make the purchase decision. When group coverage is replaced, it is the group master policyholder who makes the decision for the entire group, so the law protects the individual insured by requiring the replacing insurance company to provide substantially the same benefits without any gaps in coverage.

When a Group LTC Policy is replaced by another group policy issued to the same master policyholder, the replacing insurer is required to do all of the following:

• Provide benefits identical or substantially equivalent to the terminating coverage • Calculate premiums for the new coverage based on each insured's age at the time the group

coverage being replaced was originally issued • Offer coverage to all persons who are covered under the replaced policy on its date of

termination • Not exclude coverage for any preexisting conditions that would have been covered under the

terminating coverage


• Not require new waiting periods, elimination periods, probationary periods, or similar preconditions

• Not vary the benefits or premiums based on an insured's health, disability status, claims experience, or use of LTC services

Generally, premiums for replacement of group coverage must be based on each insured's age when the group coverage was originally issued, even if multiple replacements have been involved. If any group coverage being replaced has replaced previous group coverage, the current premium must be based on the ages of insureds under the original group policy. However, if replacement coverage offers new or increased benefits, any premium for those benefits may be calculated according to each insured's age at the time of replacement.

Tax Treatment of Group LTC Policies

After HIPAA, a number of tax advantages are available for an employer-sponsored qualified LTC insurance contract.

• Employer-paid premiums for employees are tax deductible for the employer. • The employer contributions are excludable from the employee's income.

o However, such premiums are not excludable from an employee's income if they are provided through a cafeteria or other flexible spending arrangement.

• Benefits paid by qualified LTC insurance are not taxable as income to the employee.

These features should help agents to demonstrate the value of qualified LTC insurance to employers and their employees.

Group long-term coverage may not be offered as part of a “cafeteria plan.” Long-term care expenses cannot be reimbursed under a Section 125 flexible-spending plan.

Group vs. Individual LTC Insurance

An individual Long-Term Care insurance policy is a contract between an individual and the insurer. These policies must be approved by the California Department of Insurance (CDI) and have all of the consumer protections required under California law. Individual policies are “guaranteed renewable” and cannot be canceled by the insurance company unless the premium is not paid on time. However, every company has the right to increase the premiums it charges with proper notification and approval from the Department of Insurance.

Group Long-Term Care insurance is a contract between an insurer and a group such as an employer on behalf of its employees or a trade or professional association on behalf of its members. Those who are covered under a group plan receive a “certificate” rather than a “policy” of insurance. Also, many of the policy terms have already been negotiated by the group, and the group (called the “master policyholder”) has the option to terminate the policy at any time. Often, but not always, group insurance is less expensive than individual insurance. If group coverage is terminated, people have the right to continue the coverage or buy a conversion policy depending on the provisions of the policy and other factors. People who purchase group coverage should ask about what options will be available if the group cancels the policy or if they lose their membership or eligibility.


People who are considering buying group insurance should investigate the sponsoring group. They should be sure the group is negotiating in their interest. Some group policies do not need to be approved by the CDI although the company is required to send information about the policy to the CDI for its records. The master policy can be cancelled by the carrier or the sponsoring group at its option.

Policy Similarities

• In order to qualify for benefits, the insured must not be able to perform two of six activities of daily living (dressing, bathing, eating, etc.), or must be suffering from severe cognitive impairment such as dementia.

• A waiting or elimination period must be satisfied before benefits are available. • Both group and individual policies usually offer some type of inflation protection.

Policy Differences

• Group policies may limit or exclude benefits found in individual LTC policies, such as limited or no coverage for home care, assisted living or hospice care.

• Inflation protection must be offered to the group policyholder rather than each insured group member.

Benefits for Employer

• Adding LTC makes for a more attractive employee benefits package, which can help recruit and retain workers and increase morale.

• Employer-paid premiums are tax deductible, with some limitations depending on the type of business entity.

• Employers can select employees for coverage, and offer it as part of a key man or executive benefit package because LTC is a non-qualified employee benefit, and is not subject to ERISA or employee discrimination rules.

Employer Tradeoffs

• Statistically, only 4-5% of eligible employees continually opt for employer-sponsored LTC (U.S. Department of Labor Bureau of Labor Statistics, Long-Term Care Insurance Gains Prominence, 2004).

• Many employees expect the employer to contribute toward the cost of the LTC, which may not be intended by the employer.

• Employers face added administrative costs associated with offering LTC to employees.

Benefits for Employee

• The possibility of lower underwriting standards requiring little or no medical information about the employee/insured makes it easier to get coverage.

• The cost of the employer-sponsored insurance may be lower. • Coverage can include an employee's spouse, partner, parents and in-laws. • The cost of the insurance is usually less expensive than individual LTC.


• Tax-qualified LTC benefits are not taxable as income, even if premiums are paid by the employer. Also, employer payments of premium are not considered income to the employee.

• Premiums paid by the employee may be deductible as a medical expense, subject to the 7.5% AGI rule.

Employee Tradeoffs

• The plan may not be portable, meaning employees can't take it with them if they leave their employer.

• Premiums may increase annually and the coverage can be canceled without notice to employees.

• To get coverage, someone may have to buy it at a younger age than customary. • The employer may not contribute toward the cost of the LTC, or the employee may not be part

of the group of eligible employees offered coverage by the employer. • Group LTC may not be enough to provide coverage needed by your clients. The choice of what

type of coverage, length of coverage, amount of coverage, elimination period and most important whether or not inflation protection is included is up to the employer establishing the plan. Individual employees may have some choices, but those choices are not usually as broad as those in individual policies.

• The cost is not always less expensive, and underwriting is not always more liberal, than an individual program. Employees should be urged to investigate whether or not the group plan best suits their needs by comparing it with what is available to them as individuals.

There has been marked growth in the number of employees caring for aging parents. A 2005 study conducted by the National Alliance for Caregiving and AARP entitled, Caregiving in the US, estimates that 21% of U.S. adults are caregivers. In addition, the need for employees to provide caregiving to others costs employers between $17 billion and $33.6 billion in lost productivity annually (The MetLife Caregiving Costs Study: Productivity Losses to U.S. Business, MetLife MatureMarket Institute in conjunction with the National Alliance for Caregiving, July 2006).

1. Employer sponsored plan Group Policies

An employer might offer a group long-term care insurance plan or offer individual policies at a group discount. Employers that offer plans don’t have to pay premiums, but some do. An employer’s group policy might be similar to what they could buy with an individual policy. An advantage of a group policy is that they usually don’t have to meet any medical requirements or there may be a relaxed screening process. Many employers also offer plans to retirees, spouses, parents, and parents-in-law. Relatives usually go through medical screening and must pay the premium.

Generally, insurance companies must let policyholders keep their coverage after they leave or until they cancel the group plan. In most cases, they will be able to continue their coverage or convert it to another long-term care insurance policy. Their premiums and benefits may change.


Employer Group

One or more employers or labor organizations.

Federal and State Government Policies

Federal and U.S. Postal Service employees and retirees, active and retired service members, and their qualified relatives are eligible to apply for long-term care insurance through the Federal Long-Term Care Insurance Program. People must pay the premiums for this plan, but it’s typically lower than the premiums for an individual policy.

If they or their family member is a state or public employee or retiree, they might be able to buy long-term care insurance under a state government program. The Teacher Retirement System, Employees Retirement System, and several university systems offer group plans for their employees, retires, and some family members. They should ask their employer whether it offers a group plan.

Private Employer

An employer may offer a group Long-Term Care insurance plan or offer individual policies at a group discount. An increasing number of employers offer this benefit, especially since the passage of the Health Insurance Portability and Accountability Act (HIPAA). HIPAA allows employers the same type of federal tax benefit when they pay for their employees’ Long-Term Care insurance as when they pay for their health insurance (except for Section 125 Cafeteria Plans).

The employer-group plan may be similar to what one could buy in an individual policy. If the client is an active employee, one advantage of an employer-group plan is that they may not have to meet any medical requirements to get a policy or there may be a relaxed screening process for active employees. Many employers also let retirees, spouses, parents and parents-in-law apply for this coverage. Relatives must usually pass the company’s medical screening to qualify for coverage and must pay the premium.

Generally, insurance companies must let the consumer keep their coverage after their employment ends or when the employer cancels the group plan. In most cases, one will be able to continue their coverage or convert it to another Long-Term Care insurance policy. The premiums and benefits may change, however.

Federal Government

Federal and U.S. Postal Service employees and annuitants, members and retired members of the uniformed services, and qualified relatives of any of these are eligible to apply for Long-Term Care insurance coverage under the Federal Long Term Care Insurance Program. Private insurance companies underwrite the insurance, and the federal government does not pay any of the premiums. The group rates under this program may or may not be lower than individual rates, and the benefits may also be different.

State Government

If the insured or a member of the insureds family is a state or public employee or retiree, they may be able to buy Long-Term Care insurance under a state government program.


a. true group One master policy with certificates for group members.

b. multi-life individual Each person gets a separate policy at a group discount.

2. Trade/association/discretionary sponsored plan Association Policies

Many associations also offer long-term care insurance to their members. Like other group policies, association policies usually give their members a choice of benefit options. In most cases, policies sold through associations must let members keep or convert their coverage after leaving the association. Most association policies will require applicants to go through the underwriting process. Be careful about joining an association just to buy an insurance policy. Make sure they know their rights if the association decides to stop offering the policy.

Trade Group

Any professional, trade, or occupational association for its members or former or reared members, or combination of these, if that association meets both of the following:

• Is composed of individuals all of whom are or were actively engaged in the same profession, trade, or occupation.

• Has been maintained in good faith for purposes other than obtaining insurance.

Association Group

An association or a trust or the trustees of a fund established, created, or maintained for the benefit of members of one or more associations. Prior to advertising, marketing, or offering that policy or a certificate within this state, the association or associations, or the insurer of the association or associations, must file evidence with the Commissioner that the association or associations have at the outset a minimum of 100 persons and have been organized and maintained in good faith for a primary purpose other than that of obtaining insurance, have been in active existence for at least one year, have a constitution and bylaws which provide all of the following, and provide evidence that the following have been consistently implemented:

• The association or associations hold regular meetings, not less than annually, to further purposes of the members.

• Except for credit unions, the association or associations collect dues or solicit contributions from members.

• The members have voting privileges and representation on the governing board and committees.


Thirty days after that filing the association or associations must be deemed to satisfy these organizational requirements, unless the Commissioner makes a finding that the association or associations do not satisfy those organizational requirements.

These policies are like other types of Long-Term Care insurance and typically require medical underwriting. Like employer-group policies, association policies usually give their members a choice of benefit options. In most cases, policies sold through associations must let members keep or convert their coverage after leaving the association.

Discretionary Group

A group other than as previously described in this section subject to all of the following findings by the Commissioner:

• The issuance of the group policy or certificate is not contrary to the best interest of the public. • The issuance of the group policy will result in economies of acquisition or administration. • The benefits are reasonable in relation to the premiums charged. • The use of the true or fictitious name of the group, group master policyholder, group policy,

certificate, or any trust or other entity created or used for the marketing of the group policy or certificates is not deceptive or misleading with regard to the status, character, or proprietary or representative capacity of the insurer, group, trust, or other entity.

• The group's main revenue source is not related to the marketing of insurance. • The group's outreach method to obtain new members is not related to the solicitation of

insurance. • The group provides benefits or services, other than insurance, of significant value to its

members. The Commissioner must investigate the percentage of members using the other services and the monetary value of those services.

• A life care contract provider which has been authorized to provide services and benefits under the appropriate sections of the Health and Safety Code

The main purpose of this Code section is to make sure that a group offering Long-Term Care insurance is a legitimate group and not just one that has been formed primarily for the purpose of selling and/or obtaining group Long-Term Care coverage. An agent should take care in verifying a group's credentials before undertaking a solicitation for group coverage.

Policies Sponsored by Continuing Care Retirement Communities

Many Continuing Care Retirement Communities (CCRC) offer or require an individual to buy Long-Term Care insurance. A CCRC is a retirement complex that offers a broad range of services and levels of care. One must be a resident or on the waiting list of a CCRC and meet the insurance company’s medical requirements to buy its Long-Term Care insurance policy. The coverage will be similar to other group or individual policies.

a. true group One master policy with certificates for group members.


b. multi-life individual Each person gets a separate policy at a group discount.

3. Group policies issued outside California (Section 10232 of the CIC)

The commissioner must approve a group Long-Term Care policy of an out-of-state insurer that is sold to California residents. At least 30 days before advertising, marketing or offering the policy in the state, the insurer is to file examples of its master policy and certificate, outline of coverage and advertising materials to be used in California. Before the insurer may advertise the policy, it must file evidence with the commissioner that the group to be insured has at least 100 persons, was organized and maintained for a purpose other than to obtain insurance, has actively existed for at least one year, has a constitution and bylaws, and actively performs as a self-governing body.

The materials required to be filed with the commissioner by this section, must be filed with the commissioner for informational purposes only, and not for approval purposes.

C. Common Policy Benefits Services Covered by Long-Term Care Insurance

Long-term care insurance policies may pay for several types of care, including

• Nursing home care in a licensed nursing home. • Assisted living care in a licensed assisted living home. • Home health care services provided by a licensed home health agency. Services may include

skilled nursing care and physical therapy. • Adult day care in a licensed center. Services may include nursing or therapeutic care, social and

educational activities, and personal supervision. • Other services. Some policies will pay for hospice care, respite care (care to allow time off for

family members who are caregivers), care after a hospital stay, help with household chores, or caregiver training for family members.

Applicants might not need a policy that includes all of these services. They should talk to their agent to design a policy that meets their needs. Insurance policies describe what they will cover, what kind of care they will cover, who can provide the care and conditions that need to be met before a company will pay the benefits.

Agents must read and understand when and under what circumstances the policy pays for care. It is also important to know how exclusions and limitations can restrict coverage under the policy, even though LTC is strictly regulated and standardized policies are not all alike. Long term care insurance can cover all types of home and community care including home health care, personal care, homemaker services, adult day care, and other fee based community care. Insurance also covers care at assisted living or residential care facilities, and skilled nursing facilities or nursing homes, including Alzheimer's facilities. Other benefits often included in long term care insurance are:


• An allowance for special equipment or home modifications to make the insured’s home safe. • Couple can qualify for a discount. Others may qualify for a couples discount if they share living

expenses and are the same generation (siblings, partners, friends). • Caregiver training that professionally trains an unpaid caregiver. • Respite care that provides a professional caregiver a few weeks a year to give the unpaid

caregiver a break. • Bed reservation in case someone has to go to the hospital from the facility. • International coverage if people plan to live outside the U.S. • Premiums are waived when on claim. • A professional care coordinator to help set up and manage the insured’s care needs.

Exclusions and Limitations Most Long-Term Care insurance policies usually do not pay benefits for:

• A mental or nervous disorder or disease, other than Alzheimer’s disease or other dementia. • Alcohol or drug addiction. • Illness or injury caused by an act of war. • Treatment the government has provided in a government facility or already paid for. • Attempted suicide or intentionally self-inflicted injuries.

Regulations require insurance companies to pay for covered services for Alzheimer’s disease that may develop after a policy is issued.

Many policies exclude or limit coverage for care outside of the United States.

Where Services Are Covered

The consumer must understand what types of facilities are covered by their Long-Term Care insurance policy. If they’re not in the right type of facility, the insurance company can refuse to pay for eligible services. New kinds of facilities may be developed in the future, and it is important to know whether the policy will cover them.

In California, only 3 categories of Long-Term Care insurance policies can be sold. Each policy is labeled as:

(1) Nursing Facility and Residential Care Facility Only (Institutional care). These policies cover skilled, intermediate or custodial care in a nursing home or similar facility and assisted living care in an RCF/RCFE. Home care is not covered

(2) Home Care Only. These policies are required to cover Home Health Care, Adult Day Care, Personal Care, Homemaker Services, Hospice Services and Respite Care but care in a Nursing Facility or RCF/RCFE is not covered

(3) Comprehensive Long-Term Care. These policies cover nursing facility care, assisted living care in an RCF/RCFE and home and community care.

1. Coverage for care in a nursing facility (Section 10232.95 of the CIC)


According to Section 10232.1(b) of the CIC, Any policy or certificate which limits benefits to institutional care must only be called a “Nursing Facility and Residential Care Facility Only” policy or certificate and the words “Nursing Facility and Residential Care Facility Only” must be prominently displayed on page one of the policy and the Outline Of Coverage. The commissioner may approve alternative wording if it is more descriptive of the benefits.

2. Coverage for care in a residential care facility for the elderly (RCFE) (Section 10232.92(a) of the CIC) Every LTC policy that covers care in a Nursing Facility must also cover care in a Residential Care (Assisted Living) Facility.

The threshold establishing eligibility for care in a residential care facility must be no more restrictive than that for home care benefits, and the definitions of impairment in activities of daily living and impairment of cognitive ability must be the same as for home care benefits.

In California, an Assisted Living Facility means a facility licensed as a Residential Care Facility for the Elderly (RCFE) or as defined in the Health and Safety Code.

Outside California, eligible Assisted Living Facilities include licensed facilities that

• are primarily engaged in providing ongoing care and related services to individuals with impairment in activities of daily living or cognitive ability;

• provide care and services on a 24-hour basis; • have trained employees on duty at all times; • provide three meals a day and accommodate special dietary needs; • ensure that residents receive necessary medical care by a physician or nurse in case of

emergency; and • have procedures to assist residents in managing their prescribed medications.

a. minimum benefit – 70 percent of institutional confinement benefit (Section 10232.92(b) of the CIC) The benefit amount payable for care in a Residential Care Facility must be at least 70 percent of the Nursing Home benefit.

b. all long-term care expenses incurred by insured must be covered up to (but not to exceed) daily maximum (Section 10232.92(c) of the CIC) All expenses incurred by the insured, while in a Residential Care Facility, for Long-Term Care services that are necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, needed to assist the insured with the disabling conditions that cause the insured to be a chronically ill individual be covered and payable, up to but not to exceed the maximum daily Residential Care Facility benefit of the policy or certificate.

Long-Term Care policies may not restrict who provides the service, nor can they require services to be provided by the Residential Care Facility, as long as the expenses are incurred while the insured is in the facility and the reimbursement does not exceed the maximum daily Residential Care Facility benefit in the policy or certificate.


Benefits for Ancillary Supplies and Services CIC 10232.95

Ancillary Supplies and Services (10232.95):

Long term care policies that provide reimbursement for care in nursing facilities must cover and reimburse for per diem expenses as well as ancillary supplies and services up to, but exceeding the lifetime daily facility benefit amount.

Long-term care insurance cannot include an additional benefit for a service with a known market value other than the statutorily required home- and community-based service benefits, the assisted living benefit, or a nursing facility benefit, unless the additional benefit provides for the payment of at least five times the daily benefit and the dollar value of the additional benefit is disclosed in the schedule page of the policy.

Every Long-Term Care policy or certificate that provides reimbursement for care in a Nursing Facility must cover and reimburse per diem expenses, as well as the costs of ancillary supplies and services, up to but not to exceed the maximum lifetime daily facility benefit of the policy or certificate. The insurance code does not specify exactly what is included in covered “Ancillary Services And Supplies” but companies will probably use the Medi-Cal list as a starting place.

It is important to note that, although the policies all pay for ancillary services and supplies, in addition to the daily room and board charges in a facility, charges for these ancillary services (such as physical therapy, speech therapy, audiology, laboratory, as well as charges for patient supplies and prescription drugs) are not included in the calculation of the average daily private pay rate for nursing facilities.

When assisting clients to establish the amount of coverage to purchase agents must be sure that they add in an amount for these charges to the estimated cost for care, then let the insured decide if they want to fully insure this amount or if they plan to use some of their income or assets to pay for these services should they cost more than the policy limit will pay.

For example, if the cost of care in the insured is community is $350 per day and ancillary services and supplies can be estimated at $30-40 per day. The insured could purchase $380 or $390 per day if they wanted the policy to pay virtually all of the expenses. Alternately they could purchase $350 per day and plan to spend the additional $30-40 per day from their income or assets, or perhaps it would be paid for by other family members.

If the insured expects to have an income sufficient to pay the ancillary costs as well as part of the room and board they may save premium by purchasing an even smaller daily benefit. The main thing is that the agent must be sure to explain the options to their client.

3. Coverage for home and community care (Sections 10232.9(a) through (c) of the CIC) California Insurance Code Section 10232.9 defines six types of Home and Community Care. These definitions are helpful for policy holders to understand what different types of care may best meet their future needs. Though each type of care is different, the duties or qualifications of each provider may overlap, so the insurer should explain to the client the focus of each type of care and in what instances it would be best to select this care.


In some cases the policy benefits will pay for both the services provided as well as the housing costs (such as care in Nursing Facility), and in other cases the cost of services are covered but the insured will not be reimbursed for the cost of housing (such as some assisted living facilities, CCRC’s, and home care. In some cases the insured may receive assistance from SSI or other government programs to pay for their housing while the insurance policy benefits can pay for the actual care benefits.

10232.9. c. Use of unlicensed providers to provide personal care

Home care can vary depending on the capabilities and needs of the policy holder and what is available in the community. However, California Insurance law requires that Home Care benefits must not be limited or excluded by any of the following:

• Requiring a need for care in a nursing home if home care services are not provided. • Requiring that skilled nursing or therapeutic services be used before or with unskilled services. • Requiring the existence of an acute condition. • Limiting benefits to services provided by Medicare-certified providers or agencies. • Limiting benefits to those provided by licensed or skilled personnel when other providers could

provide the service, except where prior certification or licensure is required by state law. • Defining an eligible provider in a manner that is more restrictive than that used to license that

provider by the state where the service is provided. • Requiring “medical necessity” or similar standard as a criteria for benefits.

The purpose of these prohibitions is to make benefits available when care is needed and avoid unnecessary levels of care that add to the expense of treatment. This is why skilled care cannot be required before benefits are payable for unskilled care if an unskilled person can provide the necessary care. LTC policies have to provide benefits for care rendered by unlicensed providers if the state has no licensing requirements for that particular service. Some policies pay benefits to family members who give care in the home.

a. services provided Minimum Standards for Home Care, Section 10232.9 of the CIC

Every Long-Term Care policy or certificate that provides benefits for home care or community-based services must provide at least the following benefits.

Policy definitions of these benefits may be no more restrictive than the following: i. home health care 10232.9 (1) “Home health care” is skilled nursing or other professional services in the residence, including, but not limited to, part-time and intermittent skilled nursing services, home health aide services, physical therapy, occupational therapy, or speech therapy and audiology services, and medical social services by a social worker. ii. adult day care 10232.9 (2) “Adult day care” is medical or nonmedical care on a less than 24-hour basis, provided in a licensed facility outside the residence, for persons in need of personal services, supervision, protection, or


assistance in sustaining daily needs, including eating, bathing, dressing, ambulating, transferring, toileting, and taking medications. iii. personal care 10232.9 (3) “Personal care” is assistance with the activities of daily living, including the instrumental activities of daily living, provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. “Instrumental activities of daily living” include using the telephone, managing medications, moving about outside, shopping for essentials, preparing meals, laundry, and light housekeeping. iv. homemaker services 10232.9 (4) “Homemaker services” is assistance with activities necessary to or consistent with the insured's ability to remain in his or her residence, that is provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction.

These services provide assistance with chores or activities that are necessary for an individual to be able to remain in his/her residence and include housekeeping, cooking and grocery shopping. Services may be provided by a skilled or unskilled person when they are required in a Plan of Care developed by a doctor or a care team under medical direction. v. hospice services 10232.9 (5) “Hospice services” are outpatient services not paid by Medicare, that are designed to provide palliative care, alleviate the physical, emotional, social, and spiritual discomforts of an individual who is experiencing the last phases of life due to the existence of a terminal disease, and to provide supportive care to the primary care giver and the family. Care may be provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction.

Hospice Services are provided in an individual’s residence and offer physical, emotional, social and spiritual support for an individual and his/her caregiver and family when a terminal illness has been diagnosed. Hospice Services may be provided by a skilled or unskilled person when they are required in a Plan of Care developed by a doctor or a care team under medical direction. vi. respite care 10232.9 (6) “Respite care” is short-term care provided in an institution, in the home, or in a community-based program, that is designed to relieve a primary care giver in the home. This is a separate benefit with its own conditions for eligibility and maximum benefit levels.

The supervision and care of the insured in the home or out of home while the family or other individuals who normally provide care take short-term leave or rest that provides them with temporary relief from the responsibilities of caregiving. Eligible providers for Respite Care include: a Nursing Facility, a Residential Care Facility, community-based programs such as an Adult Day Health/Social Care provider, persons employed by a Home Health Agency, and a person who is qualified by training and/or experience to provide the care.


b. minimum benefits (Section 10232.9(d) of the CIC) Every comprehensive Long-Term Care policy or certificate that provides for both institutional care and home care and that sets a daily, weekly, or monthly benefit payment maximum, must pay a maximum benefit payment for home care that is at least 50 percent of the maximum benefit payment for institutional care, and in no event must home care benefits be paid at a rate less than fifty dollars ($50) per day. Insurance products approved for residents in continuing care retirement communities are exempt from this provision.

Exchange from NTQ to TQ

Every insurer that offers policies or certificates that are intended to be federally qualified Long-Term Care insurance contracts, including riders to life insurance policies providing Long-Term Care coverage, must fairly and affirmatively concurrently file, offer, and market Long-Term Care insurance policies or certificates not intended to be federally qualified.

All Long-Term Care insurance contracts, including riders to life insurance contracts providing Long-Term Care coverage, approved after the effective date of this section must meet all of the requirements of this chapter.

Until October 1, 2001, or 90 days after approval of contracts submitted for approval whichever comes first, insurers may continue to offer and market previously approved Long-Term Care insurance contracts.

Group policies issued prior to January 1, 1997, must be allowed to remain in force and not be required to meet the requirements of this chapter, as amended during the 1997 portion of the 1997-98 Regular Session, unless those policies cease to be treated as federally qualified Long-Term Care insurance contracts. If a policy or certificate issued on a group policy of that type ceases to be a federally qualified Long-Term Care insurance contract under the grandfather rules issued by the United States Department of the Treasury, the insurer must offer the policy and certificate holders the option to convert, on a guaranteed-issue basis, to a policy or certificate that is federally tax qualified if the insurer sells tax-qualified policies.

It is the intent of the Legislature that the commissioner would approve by July 1, 2001, all accurate and complete contracts submitted for approval. It is the further intent of the Legislature that insurers submit contracts for approval and resolve further outstanding issues in a timely manner in order for the commissioner to approve the contracts by July 1, 2001.

4. Benefit eligibility triggers and definitions Benefit Criteria

Policies have different benefit eligibility criteria (also called triggers) that they must meet before the company will pay benefits. These are based on how many of the six activities of daily living (ADLs) they are unable to perform or whether they have a cognitive impairment. The six ADLs are bathing, eating, dressing, using the bathroom, continence, and moving from place to place.


Tax-qualified policies require that the insured has a cognitive impairment, such as Alzheimer’s, or be unable to perform two of the six ADLs without help for at least 90 days. They must also have a plan of care from a doctor.

Non-tax-qualified policies have different benefit eligibility criteria, but most are based on ADLs and cognitive impairment. Criteria aren’t restricted to two ADLs. Medical necessity or other measures of disability can be benefit triggers.

Coverage Triggers for Home Care Benefits

Long-term care policies that offer home care coverage must base the insured's eligibility to receive benefits on:

• Impairment in two activities of daily living; or • Impairment of cognitive ability.

The threshold establishing eligibility for care in a residential care facility must be no more restrictive than that for home care benefits, and the definitions of impairment in activities of daily living and impairment of cognitive ability must be the same as for home care benefits under the type of policy issued (tax-qualified or nonqualified).

No New Preexisting Conditions on Replacement Policies

If a Long-Term Care policy of certificate replaces another, the replacing insurer must waive any time period applicable to preexisting conditions and probationary periods to the extent that similar exclusions have been satisfied under the original policy or certificate.

No Benefit Reductions Because of Out-of-Pocket Expenditures

LTC policies may not contain a provision that would reduce insurance benefits because of out-of-pocket expenditures by the insured or by another individual on behalf of the insured. That is, policy owners may not be subjected to any form of “means test.”

“Usual and Customary” Standard Prohibited

Policies may not contain a provision that bases payment of benefits on any standard described as “Usual and Customary,” “Reasonable and Customary” or other similar words.

Medical Necessity Not Allowed As Coverage Trigger 10232.9

Unlike older policies, today’s policies are no longer allowed to require medical necessity to cover long term care.

Commissioner may waive any provisions in this article if it is in the best interest of the insureds, Section 10235.20 of the CIC

The commissioner may waive any provision of these statutes regulating individual or group LTC policies if he or she finds that:

• The waiver is in the best interest of the insureds;


• The fundamental purposes of these statutes could not be effectively or efficiently achieved without the waiver; and

• The waiver is needed to develop an innovative and reasonable approach for insuring LTC, or • The policy or certificate is to be issued to residents of a life care community, continuing care

retirement community or some other residential community for the elderly, and the waiver is reasonably related to the needs of the community; or

• The waiver is needed to permit LTC insurance to be sold as part of, or with, another insurance product.

California Guarantee Fund

The California Life & Health Insurance Guarantee Association is a statutory entity created in 1991 when the California legislature enacted the California Life and Health Insurance Guarantee Association Act. The guarantee association is composed of all insurers licensed to sell life insurance, health insurance, and annuities in the state of California. In the event that a member insurer is found to be insolvent and is ordered to be liquidated by a court, the Guarantee Association Act enables the guarantee association to provide protection (up to the limits spelled out in the Act) to California residents who are holders of life and health insurance policies, and annuity contracts, with the insolvent insurer.

Specifically, when a member insurer is found to be insolvent and is ordered liquidated, a special deputy receiver takes over the insurer under court supervision and processes the assets and liabilities through liquidation. The task of servicing the insurance company's policies and providing coverage to California's resident policyholders becomes the responsibility of the guarantee association. The protection provided by the guarantee association is based on California law and the language of the insolvent company's policies at the time of insolvency.

The health insurance protection for which the Guarantee Association may become liable must be the contractual obligations for which the insurer is liable or would have been liable if it were not an insolvent insurer, up to a maximum benefit of $200,000. This maximum limit is subject to increase or decrease based upon changes in the health care cost component of the consumer price index from January 1, 1991 (as of February 1, 2011 the maximum coverage was $465,553,which is the latest information available as of January, 2013). Again, some health coverage, like that provided by managed care organizations and associations, is not protected by the Guarantee Association.

All LTC policies must comply with Chapter 2.6 of the California Insurance Code, section 10233.7 of the CIC

Policies may not be advertised, marketed, or offered as Long-Term Care or nursing home insurance unless they comply with Chapter 2.6 of the California Insurance Code

a. tax qualified (Sections 10232.8(b) and (f) of the CIC) In every Long-Term Care policy approved or certificate issued after the effective date of the act adding this section, that is intended to be a federally qualified (TQ) Long-Term Care insurance contract as described in subdivision (a) of Section 10232.1, the threshold establishing eligibility for home care


benefits must provide that a chronically ill insured will qualify if either one of two criteria are met or if a third criterion, as provided by this subdivision, is met:

• Impairment in two out of six activities of daily living. • Impairment of cognitive ability. i. impairment in two out of six activities of daily living (ADLs) which include eating, bathing, continence, dressing, toileting and transferring

California definitions of the ADL & differences 10232.8 (d)

“Activities of daily living” in every policy or certificate intended to be a federally qualified Long-Term Care insurance contract as provided by Public Law 104-191 must include eating, bathing, dressing, transferring, toileting, and continence; “impairment in activities of daily living” means the insured needs “substantial assistance” either in the form of “hands-on assistance” or “standby assistance,” due to a loss of functional capacity to perform the activity; “impairment of cognitive ability” means the insured needs substantial supervision due to severe cognitive impairment; “licensed health care practitioner” means a physician, registered nurse, licensed social worker, or other individual whom the United States Secretary of the Treasury may prescribe by regulation; and “plan of care” means a written description of the insured's needs and a specification of the type, frequency, and providers of all formal and informal Long-Term Care services required by the insured, and the cost, if any. Impairment in two out of six activities of daily living will qualify an individual for benefits.

Until the time that these definitions may be superseded by federal law or regulation, the terms “substantial assistance,” “hands-on assistance,” “standby assistance,” “severe cognitive impairment,” and “substantial supervision” must be defined according to the safe-harbor definitions contained in Internal Revenue Service Notice 97-31, issued May 6, 1997.

The definitions of “activities of daily living” to be used in policies and certificates that are intended to be federally qualified Long-Term Care insurance must be the following until the time that these definitions may be superseded by federal law or regulations:

• Eating, which must mean feeding oneself by getting food in the body from a receptacle (such as a plate, cup, or table) or by a feeding tube or intravenously.

• Bathing, which must mean washing oneself by sponge bath or in either a tub or shower, including the act of getting into or out of a tub or shower.

• Continence, which must mean the ability to maintain control of bowel and bladder function; or when unable to maintain control of bowel or bladder function, the ability to perform associated personal hygiene (including caring for a catheter or colostomy bag).

• Dressing, which must mean putting on and taking off all items of clothing and any necessary braces, fasteners, or artificial limbs.

• Toileting, which must mean getting to and from the toilet, getting on or off the toilet, and performing associated personal hygiene.

• Transferring, which must mean the ability to move into or out of bed, a chair or wheelchair.

The commissioner may approve the use of definitions of “activities of daily living” that differ from the verbatim definitions of this subdivision if these definitions would result in more policy or certificate holders qualifying for Long-Term Care benefits than would occur by the use of the verbatim definitions


of this subdivision. In addition, the following definitions may be used without the approval of the commissioner:

The verbatim definitions of eating, bathing, dressing, toileting, transferring, and continence in (2) the verbatim definitions of eating, bathing, dressing, toileting, and continence in this subdivision and a substitute, verbatim definition of “transferring” as follows: “transferring,” which must mean the ability to move into and out of a bed, a chair, or wheelchair, or ability to walk or move around inside or outside the home, regardless of the use of a cane, crutches, or braces. ii. impairment of cognitive ability The definitions to be used in policies and certificates for impairment in activities of daily living, “impairment in cognitive ability,” and any third eligibility criterion adopted by regulation must be the verbatim definitions of these benefit eligibility triggers allowed by federal regulations. In addition to the verbatim definitions, the commissioner may approve additional descriptive language to be added to the definitions, if the additional language is (1) warranted based on federal or state laws, federal or state regulations, or other relevant federal decision, and (2) strictly limited to that language which is necessary to ensure that the definitions required by this section are not misleading to the insured. iii. assessment and plan of care An individual must be certified as chronically ill by a licensed health care practitioner to determine the individual’s benefits. The minimum requirement to meet this determination is if a person is unable to perform at least two activities of daily living such as eating, toileting, transferring, bathing and dressing, or requires considerable supervision to protect from crisis relating to health and safety due to severe impairment concerning mind, or having a level of disability similar to that determined by the Secretary of Health and Human Services.

In the case that a health care practitioner makes a determination, pursuant to this section, that an insured does not meet the definition of “Chronically Ill Individual,” the insurer must notify the insured that they are entitled to a second assessment by a licensed health care practitioner who must personally examine the insured.

The requirement for a second assessment does not apply if the initial assessment was performed by a practitioner who meets the requirements of this section and who personally examined the insured. The assessments conducted pursuant to this section must be performed promptly with the certification completed as quickly as possible to ensure that an insured's benefits are not delayed. The written certification must be renewed every 12 months. A licensed health care practitioner must develop a written plan of care after personally examining the insured.

The costs to have a licensed health care practitioner certify that an insured meets, or continues to meet, the definition of “Chronically Ill Individual,” or to prepare written plans of care do not count against the lifetime maximum of the policy or certificate. In order to be considered “independent of the insurer,” a licensed health care practitioner must not be an employee of the insurer and must not be compensated in any manner that is linked to the outcome of the certification. It is the intent that the practitioner's assessments be unhindered by financial considerations. This applies only to a policy or certificate intended to be a federally qualified Long-Term Care insurance contract.


Case management agencies usually consist of a multidisciplinary team (such as nurses; health care and social workers whose profession and training include experience and/or expertise in managing and arranging for Long-Term Care services) under medical direction that will do the following:

• Determine the degree to which the individual is disabled; and • Assess the circumstances in the individual’s residence; • Work with the individual to determine the specific services required; • Develop and suggest a Plan of Care that specifies the type and frequency of all services the

individual will require, the service providers, and the estimated cost of services; and • Coordinate and monitor services to ensure the individual is cared for appropriately.

(A) definition of a licensed health care practitioner (LHP) (Section 10232.8(c) of the CIC) A licensed health care practitioner, independent of the insurer, must certify that the insured meets the definition of "chronically ill individual" as defined under Public Law 104-191. For the purposes of long-term care insurance as defined in Section 10231.x, an insurer must not impose a certification requirement of longer than 90 days. If a health care practitioner makes a determination, pursuant to this section, that an insured does not meet the definition of "chronically ill individual," the insurer must notify the insured that the insured must be entitled to a second assessment by a licensed health care practitioner, upon request, who must personally examine the insured. The requirement for a second assessment must not apply if the initial assessment was performed by a practitioner who otherwise meets the requirements of this section and who personally examined the insured. The assessments conducted pursuant to this section must be performed promptly with the certification completed as quickly as possible to ensure that an insured's benefits are not delayed. The written certification must be renewed every 12 months. A licensed health care practitioner must develop a written plan of care after personally examining the insured. The costs to have a licensed health care practitioner certify that an insured meets, or continues to meet, the definition of "chronically ill individual," or to prepare written plans of care must not count against the lifetime maximum of the policy or certificate.

(1) independent of the insurer In order to be considered "independent of the insurer," a licensed health care practitioner must not be an employee of the insurer and must not be compensated in any manner that is linked to the outcome of the certification. It is the intent of this subdivision that the practitioner's assessments be unhindered by financial considerations. This subdivision must apply only to a policy or certificate intended to be a federally qualified long-term care insurance contract.

California definition of LHP & relationship to insurance carrier

A licensed heath care practitioner, independent of the insurer must certify that the insured meets the definition of “chronically ill individual” as defined under Public Law 104-191 licensed health care practitioner” means a physician, registered nurse, licensed social worker, or other individual whom the United States Secretary of the Treasury may prescribe by regulation;

b. non-tax qualified (Sections 10232.8(a) and (g) of the CIC) In every long-term care policy or certificate that is not intended to be a federally qualified Long-Term Care insurance contract and provides home care benefits, the threshold establishing eligibility for home


care benefits must be at least as permissive as a provision that the insured will qualify if either one of two criteria are met:

• Impairment in two out of seven activities of daily living. • Impairment of cognitive ability.

The policy or certificate may provide for lesser but not greater eligibility criteria. The commissioner, at his or her discretion, may approve other criteria or combinations of criteria to be substituted, if the insurer demonstrates that the interest of the insured is better served. i. impairment in two out of seven activities of daily living (ADLs) which include eating, bathing, dressing, ambulating, transferring, toileting and continence “Activities of daily living” in every policy or certificate that is not intended to be a federally qualified Long-Term Care insurance contract and provides home care benefits must include eating, bathing, dressing, ambulating, transferring, toileting, and continence; “impairment” means that the insured needs human assistance, or needs continual substantial supervision . Impairment in two out of six activities of daily living will qualify an individual for benefits.

The definitions of “activities of daily living” to be used verbatim in policies and certificates that are not intended to qualify for favorable tax treatment under Public Law 104-191 must be the following:

• Eating, which must mean reaching for, picking up, and grasping a utensil and cup; getting food on a utensil, and bringing food, utensil, and cup to mouth; manipulating food on plate; and cleaning face and hands as necessary following meals.

• Bathing, which must mean cleaning the body using a tub, shower, or sponge bath, including getting a basin of water, managing faucets, getting in and out of tub or shower, and reaching head and body parts for soaping, rinsing, and drying.

• Dressing, which must mean putting on, taking off, fastening, and unfastening garments and undergarments and special devices such as back or leg braces, corsets, elastic stockings or garments, and artificial limbs or splints.

• Toileting, which must mean getting on and off a toilet or commode and emptying a commode, managing clothing and wiping and cleaning the body after toileting, and using and emptying a bedpan and urinal.

• Transferring, which must mean moving from one sitting or lying position to another sitting or lying position; for example, from bed to or from a wheelchair or sofa, coming to a standing position, or repositioning to promote circulation and prevent skin breakdown.

• Continence, which must mean the ability to control bowel and bladder as well as use ostomy or catheter receptacles, and apply diapers and disposable barrier pads.

• Ambulating, which must mean walking or moving around inside or outside the home regardless of the use of a cane, crutches, or braces. ii. impairment of cognitive ability

“Impairment of cognitive ability” means deterioration or loss of intellectual capacity due to organic mental disease, including Alzheimer's disease or related illnesses, that requires continual supervision to protect oneself or others.


iii. other criteria at commissioner’s discretion The policy or certificate may provide for lesser but not greater eligibility criteria. The commissioner, at his or her discretion, may approve other criteria or combinations of criteria to be substituted, if the insurer demonstrates that the interest of the insured is better served.

c. flexible benefit mandated Other criteria must be used in establishing eligibility for benefits if federal law or regulations allow other types of disability to be used applicable to eligibility for benefits under a Long-Term Care insurance policy. If federal law or regulations allow other types of disability to be used, the commissioner must promulgate emergency regulations to add those other criteria as a third threshold to establish eligibility for benefits. Insurers must submit policies for approval within 60 days of the effective date of the regulations. With respect to policies previously approved, the department is authorized to review only the changes made to the policy. All new policies approved and certificates issued after the effective date of the regulation must include the third criterion. No policy must be sold that does not include the third criterion after one year beyond the effective date of the regulations.

An insured meeting this third criterion must be eligible for benefits regardless of whether the individual meets the impairment requirements in paragraph (1) or (2) regarding activities of daily living and cognitive ability.

Coverage Amounts

A policy may pay different amounts for different types of long-term care services. Be sure applicants understand how much coverage they have and how it covers services in different settings.

Daily, Weekly, and Monthly Benefit Limits

Policies usually pay benefits by the day, week, or month. For example, a policy that pays with the expense-incurred method might pay a daily nursing home benefit of up to $200, a weekly benefit of up to $1,400, or a monthly benefit of up to $6,000.

If a policy covers home care, the benefit is usually a percentage of the benefit for nursing home care. For example, if they have a policy with a $200 a day benefit for nursing home care, their home care benefit might be $100 a day. Some policies, however, pay the same benefit amounts for care at home and care in a nursing home.

Consumers can often choose the benefit amounts they want. It’s important to know how much skilled nursing homes, assisted living homes, and home health care agencies charge before they choose the benefit amounts. Check prices at centers in the area where they are likely to receive care. i. policy lifetime maximum must be stated in single dollar amount (Section 10232.93 of the CIC) Maximum Benefit Limit


Most policies limit the total benefit they will pay over the life of the policy. Some policies state the maximum benefit limit in years (one, two, three, or more, or lifetime). Other policies state the maximum benefit limit as a total dollar amount. The maximum benefit limit may be called a maximum lifetime benefit or a total plan benefit.

Most nursing home stays are short, but illnesses that last several years could mean longer nursing home stays. Consumers will have to decide if they want protection for long stays. Policies with longer maximum benefit periods cost more. Make sure clients understand the total amount of coverage the policy provides.

Pool of Dollars

10232.93. Every long-term care policy or certificate must define the maximum lifetime benefit as a single dollar amount that may be used interchangeably for any home- and community-based services defined in Section 10232.9, assisted living benefit defined in Section 10232.92, or institutional care covered by the policy or certificate.

d. prohibited practices There must be no limit on any specific covered benefit except for a daily, weekly, or monthly limit set for home- and community-based care and for assisted living care, and for the limits for institutional care. Nothing in this section must be construed as prohibiting limitations for reimbursement of actual expenses and incurred expenses up to daily, weekly, and monthly limits. i. “usual and customary” standard (Section 10233.2(d) of the CIC) Long-term care insurance may not provide for payment of benefits based on a standard described as "usual and customary," "reasonable and customary," or words of similar import. ii. medical necessity (Section 10232.9(c)(7) of the CIC) Home care benefits must not be limited or excluded by requiring "medical necessity" or similar standard as a criteria for benefits. iii. prior hospital/institutional stay requirement (Section 10232.5 of the CIC) In California, no Long-Term Care policy or certificate can be field issued. All applications must be submitted to the insurer for underwriting and a copy of the application must be delivered to the applicant with the policy. Requiring insurers to complete medical underwriting and resolve any questions prior to the issue of a policy means that an insurer has the right to deny or restrict coverage to individuals who do not meet its underwriting standards. However, when a policy is issued, the insurer cannot rescind it nor deny an otherwise valid claim unless there is clear and convincing evidence of misrepresentation or fraud by the applicant.

Field issued is defined as offering an insurance contract which has not been checked by the insurance company. Though this practice is accepted for other types of insurance offerings, the details and lengthy planning for long term care insurance requires that the agent communicate with his or her company and send the contract for approval before offering it to the client.


e. Insurers may verify necessity with any source of independent judgment (Section 10233 of the CIC) Precedent to the payment of benefits for any care covered by the terms of the policy, any insurer offering long-term care insurance as described in Section 10231.2 may obtain a written declaration by a physician, independent needs assessment agency, or any other source of independent judgment suitable to the insurer that services are necessary.

5. Contractual methods of payment How Benefits Are Paid

Companies generally pay benefits one of two ways: the expense-incurred method or the indemnity method. It’s important to read their policy information and compare the benefits and premiums.

Policies using the expense-incurred method will pay the cost of the expense or the dollar limit of their policy, whichever is less – to them or their doctor or hospital. Most policies pay benefits using the expense-incurred method.

Policies using the indemnity method pay a set dollar amount up to the limit of the policy regardless of the cost of the service received.

For tax-qualified policies that pay benefits using the indemnity method, people may have to pay taxes on benefits that exceed their actual cost or $330 per day, whichever is greater.

Insurance companies that sell Long-Term Care insurance generally pay benefits using one of three different methods:

• Reimbursement method, • Indemnity method, or • Cash method.

Under the Reimbursement method, the insurance company must decide if one is eligible for benefits and if a claim is for eligible services. The policy or certificate will pay benefits only when the policy holder receives eligible services. Once one has incurred an expense for an eligible service, benefits are paid either to them or their provider. The coverage will pay for the lesser of the expense they incurred or the dollar limit of their policy. Most policies bought today pay benefits using the expense-incurred method.

Under the Indemnity method, the benefit is a set dollar amount. The benefit is not based on the specific services received or on the expenses incurred. The insurance company only needs to decide if they are eligible for benefits and if the services they are receiving are covered by the policy. Once the company decides the person are eligible and they are receiving eligible Long-Term Care services, the insurance company will pay that set amount directly to them up to the limit of the policy.

Under the Cash method, one is only required to meet the benefit eligibility criteria. Once they do, they receive their full daily benefit, even if they are not receiving any Long-Term Care services.

Benefits for LTC Contracts and Other Contract Benefits


Since many LTC policies pay more than one type of benefit (i.e. LTC & Life or LTC & annuity), it is very important to explain the various types of benefits paid under the policy contract. That way the client will understand how and when they are paid as well as the tax ramifications of each type. Clients should consult their tax advisor for more detailed information.

a. reimbursement A “Reimbursement” policy is the most common type of policy currently purchased. To prove benefit eligibility people are required to meet the need for assistance with ADLs or severe cognitive impairment criteria as indicated in their policy. Benefits become available only when eligible services are received; benefits are paid directly to the insured or to the provider. This type of coverage pays for the expense incurred or up to their policy’s monetary limit, whichever is less. With an Expense-Incurred policy, insured’s are reimbursed for actual expenses for covered services received up to a fixed dollar amount per day, week, or month.

Reimbursement LTCi Example 1:

The policy has monthly benefit amount of $4500 and the LTC facility monthly expense is $3800. The insurer will pay the $3800 bill and the remaining $700 will be left in their benefit amount pool.

Reimbursement LTCi Example 2:

The policy has a monthly benefit amount of $4500 and the LTC facility monthly expense is $4700. The insurer will pay up to their benefit amount $4500 and the insured responsible for paying the remaining $200.

b. indemnity In an “Indemnity” Long Term Care insurance policy the insured receives their complete daily benefit amount, regardless of the bill. These policies are usually more expensive than reimbursement policies.

Indemnity LTCi Example 1:

The policy has a daily benefit amount of $200 and the LTC facility bill is $250. Their insured will receive the full daily benefit amount of $200 from their insurer however they will be responsible to pay the remaining $50. i. cash A disability type policy will pay a Flat Dollar Amount on any day that someone is determined to be eligible to receive benefits. Under this plan, provider receipts are usually not needed, and the insurer will often pay the fixed amount they selected, regardless of whether services have been received.

Insureds must be aware that even under TQ policies, “Cash” or “Per Diem” benefits that are not paid in reimbursement of actual LTC expenses, might be subject to income tax if they exceed the amounts allowed by the IRS. Refer to IRS form 8853 for the current amount allowable which is subject to change each year. http://www.irs.gov

Indemnity LTCi Example 1:


The policy has a daily benefit amount of $200 and their facility bill is $170. The insured will receive the full $200 and can keep the remainder ($30).

With a Full Indemnity policy (sometimes called a Flexible Cash Benefit or Cash Model), once they simply require long term care the insurance company pays they a monthly benefit. They receive these payments regardless of their actual expenses. Imagine their policy provides a $6,000 monthly benefit. Regardless of the amount or cost of their care, the insurance company will pay them $6,000 a month. They can pay an unlicensed family member or friend to care for them. They can spend, save or invest the money however they choose. ii. per diem With a “Per Diem” benefit, once the insured actually receives at least one hour of long term care per day they receive a daily benefit. They receive these payments regardless of their actual expenses. Imagine their policy provides a $200 daily benefit. Regardless of the cost of their care, the insurance company will pay them $200 a day. The insured’s actual LTC expenses may be more or less than the benefit.

6. Definitions of providers (licensed or not) (Sections 10232.9 and 10232.92 of the CIC)

Every long-term care policy or certificate that purports to provide benefits of home care or community-based services, must provide at least the following:

• Home health care. • Adult day care. • Personal care. • Homemaker services. • Hospice services. • Respite care.

For purposes of this section, policy definitions of these benefits may be no more restrictive than the following:

• "Home health care" is skilled nursing or other professional services in the residence, including, but not limited to, part-time and intermittent skilled nursing services, home health aid services, physical therapy, occupational therapy, or speech therapy and audiology services, and medical social services by a social worker.

• "Adult day care" is medical or nonmedical care on a less than 24-hour basis, provided in a licensed facility outside the residence, for persons in need of personal services, supervision, protection, or assistance in sustaining daily needs, including eating, bathing, dressing, ambulating, transferring, toileting, and taking medications.

• "Personal care" is assistance with the activities of daily living, including the instrumental activities of daily living, provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. "Instrumental activities of daily living" include using the telephone, managing medications, moving about outside, shopping for essentials, preparing meals, laundry, and light housekeeping.


• "Homemaker services" is assistance with activities necessary to or consistent with the insured's ability to remain in his or her residence, that is provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction.

• "Hospice services" are outpatient services not paid by Medicare, that are designed to provide palliative care, alleviate the physical, emotional, social, and spiritual discomforts of an individual who is experiencing the last phases of life due to the existence of a terminal disease, and to provide supportive care to the primary care giver and the family. Care may be provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction.

• "Respite care" is short-term care provided in an institution, in the home, or in a community-based program, that is designed to relieve a primary care giver in the home. This is a separate benefit with its own conditions for eligibility and maximum benefit levels.

Home care benefits must not be limited or excluded by any of the following:

• Requiring a need for care in a nursing home if home care services are not provided. • Requiring that skilled nursing or therapeutic services be used before or with unskilled services. • Requiring the existence of an acute condition. • Limiting benefits to services provided by Medicare-certified providers or agencies. • Limiting benefits to those provided by licensed or skilled personnel when other providers could

provide the service, except where prior certification or licensure is required by state law. • Defining an eligible provider in a manner that is more restrictive than that used to license that

provider by the state where the service is provided. • Requiring "medical necessity" or similar standard as a criteria for benefits.

Every comprehensive long-term care policy or certificate that provides for both institutional care and home care and that sets a daily, weekly, or monthly benefit payment maximum, must pay a maximum benefit payment for home care that is at least 50 percent of the maximum benefit payment for institutional care, and in no event must home care benefits be paid at a rate less than fifty dollars ($50) per day. Insurance products approved for residents in continuing care retirement communities are exempt from this provision.

Every such comprehensive long-term care policy or certificate that sets a durational maximum for institutional care, limiting the length of time that benefits may be received during the life of the policy or certificate, must allow a similar durational maximum for home care that is at least one-half of the length of time allowed for institutional care.

10232.92. Every long-term care policy or certificate covering confinement in a nursing facility must also include a provision with the following features:

• Care in a residential care facility must be covered. "Residential care facility" means a facility licensed as a residential care facility for the elderly or a residential care facility as defined in the Health and Safety Code. Outside California, eligible providers are facilities that meet applicable licensure standards, if any, and are engaged primarily in providing ongoing care and related services sufficient to support needs resulting from impairment in activities of daily living or impairment in cognitive ability and which also provide care and services on a 24-hour basis, have a trained and ready-to-respond employee on duty in the facility at all times to provide care and services, provide three meals a day and accommodate special dietary needs, have agreements


to ensure that residents receive the medical care services of a physician or nurse in case of emergency, and, have appropriate methods and procedures to provide necessary assistance to residents in the management of prescribed medications.

• The benefit amount payable for care in a residential care facility must be no less than 70 percent of the benefit amount payable for institutional confinement.

• All expenses incurred by the insured while confined in a residential care facility, for long-term care services that are necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, needed to assist the insured with the disabling conditions that cause the insured to be a chronically ill individual as authorized by Public Law 104-191 and regulations adopted pursuant thereto, must be covered and payable, up to but not to exceed the maximum daily residential care facility benefit of the policy or certificate. There must be no restriction on who may provide the service or the requirement that services be provided by the residential care facility, as long as the expenses are incurred while the insured is confined in a residential care facility, the reimbursement does not exceed the maximum daily residential care facility benefit of the policy or certificate, and the services do not conflict with federal law or regulation for purposes of qualifying for favorable tax consideration provided by Public Law 104-191.

• In policies or certificates that are not intended to be federally qualified, the threshold establishing eligibility for care in a residential care facility must be no more restrictive than that for home care benefits, as defined in subdivision (a) of Section 10232.8, and the definitions of impairment in activities of daily living and impairment of cognitive ability must be the same as for home care benefits, as defined in subdivisions (a) and (g) of Section 10232.8. In policies or certificates that are intended to be federally qualified, the threshold establishing eligibility for care in a residential care facility must be no more restrictive than that for home care benefits, as defined in subdivision (b) of Section 10232.8, and the definitions of impairment in activities of daily living and impairment in cognitive ability must be the same as those for home care benefits as defined in subdivisions (b), (c), (d), (e), and (f) of Section 10232.8.

Changes or Improvements to Long-Term Care services and Facilities, Sections 10232.9 and 10232.92 of the CIC

Participant Directed Services - Participant directed services or participant direction is a way to provide services that let those receiving care control which services they receive, who provides them, and how and when those services are delivered. This approach provides them with the information and assistance needed to choose and plan for the services and supports that work best for them.

The participant has the ability to participate or direct the development of the care plan, provide feedback on services and activities and activities, and request changes as needed. The focus of care & coverage is much more consumer driven than in the past. Assisted Living and Home and Community Care have replaced the reliance on institutional care in Nursing Homes (Facilities).

Licensing Requirements of all LTC facilities. Section 10232.92 of the CIC

The Department of Health Services, the Department of Social Services, the Department of Mental Health and the Department of Developmental Services each plays a role in licensing and regulating care providers.


Providers must meet state licensure standards, and in the skilled setting, are also governed by a stringent set of Federal Requirements. In addition, several other Federal, State and Local agencies.

State Agencies

State agencies play a significant role in the oversight of long-term care. The state Health & Human Services agency has primary responsibility over Long-Term Care providers. The various departments under Health & Human Services have specific responsibilities:

(1) The Department of Health Services is responsible for licensing health facilities, home health agencies and hospices, and for general oversight of the services they provide.

(2) The Department of Social Services manages California's integrated social service and income maintenance programs. The Department's Community Care Licensing Division licenses residential care facilities, and its Adult and Family Services Division is responsible for monitoring elder abuse.

(3) The Department of Developmental Services is responsible for services to Californians with developmental disabilities such as mental retardation, cerebral palsy, epilepsy and autism.

(4) The Department of Mental Health sets overall policy for the delivery of mental health services; establishes priorities, standards and procedures within which mental health services operate; assists in planning programs; monitors, reviews and evaluates the actual operation of services; and oversees any changes brought about by the evaluation and review process.

(5) The Department of Aging serves as the focus for community-based services to California's seniors. Its mission is to provide leadership in addressing issues related to aging Californians, and in developing community-based systems of Long-Term Care services throughout the state.

(6) The Ombudsman Program advocates for the rights of all residents of 24-hour Long-Term Care facilities and adult day health care centers in the state.

In addition to the Health & Human Services agencies, other state and local agencies, such as State and County Fire Marshals, Cal-OSHA, and the Department of Consumer Affairs also have roles in the oversight of Long-Term Care in California.

Nursing facilities are subject to an extensive set of standards prescribed in state licensing law and federal Medicare/Medicaid certification requirements. State inspectors spend hundreds of hours each year enforcing these regulations in their annual compliance visits to each of California's Long-Term Care facilities.

Assisted living/RCFE providers are inspected annually by the Department of Social Services.

Community Care Licensing & Requirements

The Responsibilities of Community Care Licensing:

• Approve or deny applications • Enforce licensing laws • Investigate complaints • Revoke licenses, impose fines • Maintain records on provide


Agents should be aware of any state licensing and certification requirements and their relationship to coverages and benefits included in Long-Term Care insurance policies they sell. It is important to remember that the actual contract provisions need to be examined in order to determine which benefits are payable. Many variations are found in the LTC insurance market. In some policies these are optional benefits, while they are included as part of the standard benefit package in other policies. It is important for agents to know the range of services that are covered and not covered by the policies they are selling.

Most types of LTC facilities are required to be licensed by the state. Agents need to be aware of differences between licensed facilities and how benefits may depend upon the type of facility used. In California, the following Long-Term Care providers must be state-licensed:

• Skilled nursing facilities • Intermediate care nursing facilities • Custodial care nursing facilities • Congregate living health facilities • Hospices • Residential Care Facilities • Residential Care Facilities for the Elderly • Respite care facilities • Home health care agencies

Understanding the various kinds of Long-Term Care providers allows the agent to explain policy coverages designed to meet the different levels of care that an individual might require and to make it clear that an individual may require different levels of care at different times.

Effective January 1, 1993, LTC insurance policies issued in California are required to provide benefits for care rendered by unlicensed providers if the state has no licensing requirements for that particular service and the policy covers that type of service. A policy cannot limit coverage to services provided by licensed practitioners when it covers services for which a license is not required. Non-medical care, whether provided at adult day care centers or in the home, may be provided by a variety of unlicensed individuals. This category of care may include personal care; help with housecleaning and shopping, transportation, and other services that do not require skilled personnel. The intent is to allow lower-cost, unlicensed providers to perform personal care services, thereby maximizing the daily indemnity benefit to allow the person to remain at home for the longest period possible. It is important to remember that the actual delivery of services could occur outside of California, and the policy must cover the services of an unlicensed provider if no licensing requirement for that service exists in the state where it is provided. A Board and Care home usually cares for fewer persons than an Assisted Living Facility. As long as the facility is licensed by the State of California and the client meets the coverage triggers under the policy. An Assisted Living Facility in California is licensed as a Residential Care Facility for the Elderly (RCFE.)


7. Inflation protection Inflation Protection

It may be years before someone needs long-term care services. During that time, long-term care costs could go up. Inflation protection helps to keep up with the rising cost of services.

The younger someone is, the more important inflation protection may be. The cost of inflation protection is based on their age at the time they buy the policy.

Be careful not to give up benefits they might need in the future for a lower premium today. If they buy a partnership policy and are under age 76, they must buy and maintain inflation protection to ensure that they won’t lose their policy’s partnership status.

Policies must offer inflation protection in at least one of the following ways:

• Benefits automatically increase by 5 percent or more each year, compounded annually. • The original benefit amount increases by 5 percent or more compounded each year on the

policy’s renewal date. If they don’t want the increase, they must reject it in writing within 30 days after the policy renewal date.

• The policy covers a certain percentage of actual or reasonable charges for as long as they own it, with no maximum daily limit or policy limit.

The company must give consumers a graphic comparison of benefits on a policy with and without inflation protection over a 20-year period. If they don’t want inflation protection, they must reject it in writing.

LONG-TERM CARE INFLATION

California Nursing Home rates increased at an average rate of over 5% per year during the past twenty years and are likely in the future to continue to increase by at least 5% per year. A 5% annual increase means a year of care that costs $50,000 today will cost twice that amount in 14 years, or $100,000 a year!

Long-term care Insurance benefits are a safeguard against Long-Term Care costs, but if benefits don't keep pace with costs, the result could be devastating.

Since most policyholders will not need protection for 15 to 20 years or more, agents need to be sure that the policy will provide meaningful coverage in future years.

Protecting a policyholder’s benefits against inflation is one of the most important decisions a person can make when purchasing a Long-Term Care Insurance Policy. Inflation Protection adds significantly to a policy's cost, but owning a policy whose benefits have not kept pace with the increasing cost of services provides a false sense of security.

Without Inflation Protection, a benefit that would be adequate today will have much less buying power in the future. For example, 20 years from now at 3% inflation, $100 of daily benefit today would only have the buying power at 3% inflation of $55. At 5% annual inflation, $100 would only be worth $38 in today's dollars 20 years from now.


Long-Term Care costs are likely to increase over time, and Long-Term Care Insurance can help to offset the increasing costs. The NAIC Model Act and The California Insurance Code require all insurers to offer a way to increase benefits. Including inflation protection in a Long-Term Care policy, however, will increase the cost of the policy, but applicants may reject the offer after careful explanation by the agent.

The cost of nursing home care has been rising at an annual rate of 5% for the past several years. This means that a nursing home that cost $150 a day in 2000 will cost $398 a day in 20 years, if inflation is 5% a year. Obviously, the younger one is when they buy a policy, the more important it is for consumers to think about adding inflation protection.

Applicants can usually buy inflation protection in one of two ways: automatically or by special offer.

These graphs show compound and simple inflation increases over a 20-year period:


Compound Interest Simple Interest

Effect of Inflation on Daily Rates for Nursing Home Care

Increase in Nursing Home Rates vs. Consumer Price Index

The increase in nursing home care costs has almost always surpassed the increase in the Consumer Price Index (CPI) indicating that nursing home care costs are going up at a greater rate than the general

costs of living. Even at a modest rate of inflation, the cost of nursing home care is likely to become more and more expensive as time goes along. For people on a fixed income, including many retirees, this rise

in cost should be of special concern.

Average Annual Percent Increase in Nursing Facility Private Pay Rate Since 1980

Time Period Years Spanned Average Annual Increase 1980-1989 10 7.5% 1990-1999 10 4.3%

1980-1999 20 5.8% 1980-2014 35 5.4% 1995-2014 Most Recent 20 Years 4.6% 2010-2014 Most Recent 5 Years 3.2%

The average Daily Private Pay Rate (ADPPR) for nursing facility care is the actual statewide average private pay rate for the year shown in the graph. The rates are extracted from the Office of Statewide Health Planning and Development’s LTC Annual Financial Data Profile report. The rates for the years 2013-2014 are estimated as specified in California Code of Regulations, Title 22, Section 58002. NOTE: Partnership approved policies and certificates issued in 2014 must include a daily benefit (per diem) for nursing facility care of no less than $180.

Various Inflation Protection Methods

One of the things consumers should consider is adding a Benefit Increase Rider to their policy. This Rider will allow their benefits to increase each year, helping to keep up with future increases in the cost of care. There are generally three options available: Compound, Simple and Guaranteed Purchase Option (GPO), which is based on the Consumer Price Index.

$0

$150

$300

$450

$600

$750

2000 2005 2010 2015 2020

5%

6%

7%

8%$0

$150

$300

$450

2000 2005 2010 2015 2020

5%

6%

7%

8%


The Guarantee Purchase Option (GPO) typically provides a periodic offer to increase the Daily Benefit by a percentage based on the Consumer Price Index. The frequency of the offer varies from company to company, usually every three years. Normally, if the insured declines a certain number of increases, the rider will no longer be offered.

Future Purchase Option - an inflation protection usually offered by the Long Term Care Insurance company every three years with an existing policy. If they turn down the option to increase their benefit, they may not be offered the option again. If they accept the option, the amount of coverage increase will be based on their current age (not policy purchase date). The Simple Benefit Increase Rider provides an automatic increase in their Daily Benefit on each policy anniversary. The increase will be 5% of the original Daily Benefit. For example, if they had a $320 Daily Benefit, their benefit would increase by $16.00 each year. So, on their 1st policy anniversary, the benefit would increase to $336.00 per day. On the 2nd anniversary, it would increase to $352.00 per day. With the Simple Benefit Increase Rider, the Daily Benefit would double in 20 years.

Simple (Equal) Inflation Protection - the benefit increases by the same dollar amount each year. A $100 daily benefit increasing 5% per year will increase by $5/day per year and become a $200 daily benefit in 20 years. Here's the math: $100 base + ($5 x 20 years) = $200.

The Compound Benefit Increase Rider provides for an automatic increase of the Daily Benefit on each policy anniversary of an amount equal to 5% of the previous year's Daily Benefit. For example, if someone had a $320 Daily Benefit, on their 1st policy anniversary, their benefit would increase to $336.00 per day. On the 2nd anniversary it would increase 5% of $336.00, which would be $352.80 per day. The benefit would continue compounding over the life of the policy. With the Compound Benefit Increase Rider, their Daily Benefit would double in 15 years.

5% Compound Inflation Protection - the benefits increase each year by a higher dollar amount than simple. A $100 daily benefit, for example, will become a $265 daily benefit in 20 years. Compound inflation protection can make a big difference in the amount of benefit they can receive over the years. If their life expectancy is beyond 15 years, it is typically better to go with 5% compound inflation protection. However, if their life expectancy is 15 years or less, they might want to consider 5% simple or equal inflation protection because it will be less expensive.

Inflation Protection - the most important option to have in a Long Term Care Insurance policy. This benefit increases the daily or monthly benefit amount over time to keep pace with inflation and increased cost of expenses. Even though their benefits are increasing each year, their premium does not automatically increase.


Year 2014 Average Daily Private Pay Rate for Nursing Facility Care

Alzheimer’s Disease and Long-Term Care

Currently there is no cure for Alzheimer’s Disease. In fact, Alzheimer’s now ranks as the fifth leading cause of death across all ages in the U.S. Because the duration of the disease generally can range from four to eight years after a diagnosis, to as long as 20 years, the need for long term care support is critical. Indeed, 43% of total claims in payment, and 49% of all claims dollars, are due to dementia, including Alzheimer’s.

In addition to the significant cost of paid care, unpaid caregivers — primarily family members — provided 17 billion hours of unpaid care valued at more than $202 billion, in 2014 alone. The Alzheimer’s Association also projects that the cost of care related to Alzheimer’s, including health care, long term care and hospice, will reach $1.1 trillion by 2050. This astronomical figure might further deplete the financial reserves of families along with the nation’s Medicare funds and our states’ Medicaid funds.

Summary of 2014 Findings Nationwide

Homemaker Services Hourly Rates (Licensed)

Minimum Hourly Rate

$8

Maximum Hourly Rate

$39

Median Hourly Rate

$19

Median Annual Rate

$43,472

Five-Year Annual Growth

1%

Home Health Aide Services Hourly Rates (Licensed)

Minimum Hourly Rate

$9

Maximum Hourly Rate

$39

Median Hourly Rate

$20

Median Annual Rate

$45,188


1%

Adult Day Health Care Daily Rates

Minimum Daily Rate

$12

Maximum Daily Rate

$215

Median Daily Rate

$65

Median Annual Rate

$16,900


3%


Assisted Living Facility Monthly Rates (One Bedroom/Single Occupancy)

Minimum Monthly Rate

$750

Maximum Monthly Rate

$10,412

Median Monthly Rate

$3,500

Median Annual Rate

$42,000

Five -Year Monthly Growth

4%

Nursing Home Daily Rates (Semi-Private Room)

Minimum Daily Rate

$94

Maximum Daily Rate

$800

Median Daily Rate

$212

Median Annual Rate

$77,380

Five -Year Annual Growth

4%

Nursing Home Daily Rates (Private Room)

Minimum Daily Rate

$104

Maximum Daily Rate

$954

Median Daily rate

$240

Median Annual Rate

$87,600


4%

California

Homemaker Services Hourly Rates (Licensed)

Minimum Hourly Rate

$11

Maximum Hourly Rate

$36

Median Hourly Rate

$22

Median Annual Rate

$43,472


1%

Home Health Aide Services Hourly Rates (Licensed)

Minimum Hourly Rate

$11

Maximum Hourly Rate

$36

Median Hourly Rate

$23

Median Annual Rate

$52,624


2%


Adult Day Health Care Daily Rates

Minimum Daily Rate

$40

Maximum Daily Rate

$150

Median Daily Rate

$76

Median Annual Rate

$19,830


0%

Assisted Living Facility Monthly Rates (One Bedroom/Single Occupancy)

Minimum Monthly Rate

$987

Maximum Monthly Rate

$9,000

Median Monthly Rate

$3,750

Median Annual Rate

$45,000


5%

Nursing Home Daily Rates (Semi-Private Room)

Minimum Daily Rate

$136

Maximum Daily Rate

$800

Median Daily Rate

$238

Median Annual Rate

$86,815


5%

Nursing Home Daily Rates (Private Room)

Minimum Daily Rate

$136

Maximum Daily Rate

$800

Median Daily Rate

$285

Median Annual Rate

$104,025


5%

Current nursing home average daily rates in California

The year 2014 average daily private pay rate (ADPPR) for nursing care has increased to $285.

The average cost of NH care in California shown on surveys does not include the cost of ancillary supplies and services which average $30-35 per day. LTC insurance will cover these costs if the policy limits are high enough.


Current nursing home daily rates in various California communities


Data Table End Notes

1. Homemaker Services annual rates are based on 44 hours/week multiplied by 52 weeks. 2. Represents the compound annual growth rate based on Genworth Cost of Care Survey data

from 2010-2014. 3. Home Health Aide Services annual rates are based on 44 hours/week multiplied by 52 weeks. 4. Assisted Living Facility annual rates are based on monthly rate multiplied by 12 months. 5. Nursing Home annual rates are based on daily rates multiplied by 365 days.


Future Nursing Home Costs - With the enormous increases in longevity over the past 50 years, a purchaser age 65 can easily be subject to 25, 30 or more years of inflation. In 1940 only 7% of 65 year olds could expect to see their 90th Birthday, in 1960 it was only 14%, by 1980 it had risen to 25%, but by 1995 it was almost 50%!

Source: Boettner Center of Financial Gerontology, 1998

At age 70, for example, an average female has about 20 years of life remaining. At an annual increase of only 5%, her costs for Long-Term Care could triple during her remaining lifetime.

A policy written without inflation protection would leave her without the coverage she needs causing her to either have to spend-down the assets she sought to protect with the purchase of the LTC policy, or she will have to settle for a standard of care below what she would prefer, or possibly both. With built-in inflation protection her benefits would triple but her premium would remain the same.

The chart below is important because it shows that even at relatively advanced ages, people have enough years of life remaining (on average) for considerable increases in LTC costs to occur due to inflation. The average number of remaining years of life for different ages -- using California data

Age Today* Life Expectancy Projected Annual Cost of Care in Last Year**

50 31 yrs to age 81 $472,069 55 27 yrs to age 82 $388,372 60 23 yrs to age 83 $319,515 65 19 yrs to age 84 $262,865 70 15 yrs to age 85 $216,260 75 12 yrs to age 87 $186,813 80 9 yrs to age 89 $161,376

*Source: California Department of Health Care Services, Center for Health Statistics, Life Tables for California 2009, 2014. ** Cost Data: Based on 2014 $240 average daily cost of nursing home care and 5% annual inflation. Half will live longer and half less than the average, but persons healthy enough to qualify for LTC insurance are expected to live longer than average.


Inflation – Annual NH Cost

Daily and annual out-of-pocket expenditures between policies with a daily benefit equal to the average NH cost but without inflation protection and 5 percent compounded annual increases

Daily and annual out-of-pocket expenditures between policies without inflation protection and 5 percent simple annual increases

Inflation Escalator and Benefit Increases and Illustrations


Long term care insurance agents must provide prospective purchasers an illustration of the effect of inflation on the cost of care and how the benefits of a policy with and without inflation protection compare to the cost of care over time. Agents should use illustrations provided by their insurers which have been approved by the state.

Group policy offering, Section 10237.2 of the CIC

The policy owner, which is usually the employer or other group owner, is generally the representative of the group in selecting a group policy; the offer is made to the policy owner. The group owner must make the decision regarding inflation protection for the group policy.

If the policy is issued to a group, the required offering of inflation protection must be made to the group policyholder; except that if the policy is issued to a group as defined in subdivision (d) of Section 10231.6, other than to a continuing care retirement community, the offering must be made to each proposed certificate holder.

The insurer of a group Long-Term Care Insurance policy must offer the holder of the group policy the opportunity to have the inflation protection extended to existing certificate holders, but the insurer is relieved of the obligations if the holder of the group policy declines the insurer's offer.

Accelerated benefits and expense incurred plans are exempt, Section 10237.3 of the CIC

The offer is not required of any of the following:

• Life insurance policies or riders containing accelerated Long-Term Care benefits • Expense incurred Long-Term Care insurance policies. For purposes of this subdivision, “expense

incurred” does not include policies paying a certain percentage of reasonable and customary charges up to a specified, indemnity-type maximum amount.

No limits on Inflation Protection (age, claim status, claim history, policy term), Section 10237.4(a) of the CIC

Inflation protection benefit increases must continue without regard to an insured's age, claim status or claim history, or the length of time the person has been insured under the policy.

Percentage of charges - Covers a specified percentage of actual or reasonable charges and does not include a maximum specified indemnity amount limit.

Insurer must offer level premiums if offering automatic increases, Section 10237.4(b) of the CIC

An offer of inflation protection that provides for automatic benefit increases must include an offer of a premium that the insurer expects to remain constant. The offer must disclose in a conspicuous manner that the premium may change in the future unless the premium is guaranteed to remain constant.

Each year, the insured will receive a notice from the insurer showing the new amounts of their coverage similar to the statement they receive from their bank showing the growth of their savings account.

The daily, weekly and lifetime benefit amount increase on each anniversary of the policy's effective date just like the way money grows in a savings account. The benefit increases will occur on each policy anniversary date for the lifetime of the policy, even when the insured is receiving benefits.


No Reduction of Inflation benefit increase due to payment of claims, Section 10237.4(c) of the CIC

The inflation protection benefit increases under a policy or certificate that contains an inflation protection feature must not be reduced due to the payment of claims.

• Prior to SB 870, some insurers deducted the amount paid in claims from the “pool of dollars” before applying the inflation percentage.

o Even though this didn’t affect the increase in the daily or monthly benefits, it resulted in a much lower overall lifetime maximum than insurers who credited the inflation percentage to the original coverage amount. This meant the benefits would run out sooner.

• After SB 870, it was mandatory that all insurers increase the lifetime maximum without regard to the amount of claims paid.

o This also made it much easier to compare LTC policies and premiums.

Outline of Coverage Must Include Inflation Information 10237.6

Part of the agent’s responsibility during the sales process is to carefully explain the inflation charts which are required by California Law and included in the outline of coverage which must be provided to the client with the application. Agents should take the time to fully explain this important benefit to their client.

Not only is this a requirement of the insurance code, but agents should be aware that there is a high risk of errors & omissions claims for agents who sell policies without inflation protection or with inadequate inflation protection. Be sure to carefully document all activities in this regard.

An insurer must include the following information in or with the Outline of Coverage:

Expected premium increases to pay for IP

A graphic comparison of the benefit levels of a policy that increases benefits at a compounded annual rate of not less than 5 percent over the policy period with a policy that does not increase benefits. The graphic comparison must show benefit levels over at least a 20-year period as any expected premium increases or additional premiums to pay for automatic or optional benefit increases.


The Effect of 5% Inflation over 20 years

Policy Year No Inflation Simple 5% Compound 5% Out of Pocket

1 $ 3000 $ 3000 $ 3000 $ 0

5 $ 3000 $ 3600 $ 3646 $ 646

10 $ 3000 $ 4350 $ 4653 $ 1653

15 $ 3000 $ 5100 $ 5939 $ 2939

20 $ 3000 $ 5850 $ 7580 $ 4580

An insurer may use a reasonable hypothetical or graphic demonstration for purposes of this disclosure.

INFLATION PROTECTION INCREASES THE DAILY BENEFIT ANNUALLY.

Example: Daily benefits starting at $150/day with a 3-year (1095 day) plan does not require an increase in premium.

Compound Inflation Protection Simple Inflation Protection

Years Daily Benefit

Benefit Account

1 $150 $164,250 7 $211 $231,045

10 $244 $267,180 15 $311 $340,545

Years Daily Benefit

Benefit Account

1 $150 $164,250 7 $202 $221,190

10 $225 $246,375 15 $262 $286,890

• If applicant chooses 5 percent Simple Inflation Protection, their benefit will increase by 5

percent each year, over the original amount.


• If they choose 5 percent Compound Inflation Protection, their benefit will increase by 5 percent of the previous year’s benefit amount.

Compound inflation protection increases their maximum benefit at a much faster rate than Simple inflation protection. Selecting either of these options at the time of purchase will result in initially higher premiums, but they will also provide an “automatic” yearly increase in benefits without an increase in premium. Purchasing Higher Amounts of Coverage with No Inflation Protection

One strategy often recommended by agents is to buy more benefit than needed and over time the larger benefit will compensate for inflation.

No Inflation Protection

Persons who do not buy inflation protection may find that despite years of premium payments, they do not have enough coverage for the type of care they want when the need arises. To help the benefits of the policy keep up with the annual increase in the cost of care due to inflation, every insurer is required to offer Inflation Protection and applicant must refuse it in writing.

The Short - Fat LTC Concept

It may be better to purchase shorter coverage with inflation protection than longer coverage without inflation coverage. With a “short-fat” policy the insured has a high benefit limit per day or month, but a short benefit period and built-in inflation protection.

Under the pool of dollars concept the insured does not have to use the total amount of the benefit that is available. Whatever is not used will remain available for use later and will make coverage last longer. This will result in adequate coverage even during periods of high inflation but coverage can be stretched out by not using entire benefit available per day or month if less will cover the insured’s costs.

a. requirement for offer (Section 10237.1 of the CIC) The rules listed below regarding inflation protection apply to all Long-Term Care insurance policies delivered or issued for delivery in California on or after January 1, 1991.

California insurers must offer Compound Automatic Inflation Protection to every applicant and obtain a signed statement from them if the applicant wants another type of inflation protection or does not want to buy any inflation protection at all.

Insurers cannot deliver or issue a Long-Term Care insurance policy or certificate in California unless the insurer offers each policyholder the option to purchase a Long-Term Care insurance policy that provides for benefit levels and benefit maximums which increase to account for reasonably anticipated increases in the costs of Long-Term Care services covered by the policy.


Mandated Offer for Group Coverage 10237.1

When the policy is issued to a group, the offer to increase benefits and protect against inflation is made to the group policyholder. However, if the group policyholder is not an employer, professional, trade or other such association, the insurer must tender the offer to each proposed certificate holder.

Clients who buy Long-Term Care insurance through a group, like an employer, or an association may not be able to purchase the option if the group master policyholder didn’t choose to offer it to their members.

Insurers must offer each policy owner, at the time of purchase, (or to the group policy owner) the option to purchase a Long-Term Care insurance policy containing an inflation protection feature that is no less favorable than one or more of the following:

b. other methods of providing inflation protection Agents have several options to offer Inflation Protection to consumers. Though age is the most significant factor in choosing the best option, agents should discuss all of the possibilities with a client, keeping in mind their income level and choice of LTCi.

There are several options that may help protect people against the increased costs of care in the future. Below are some common examples.

Automatic Inflation Protection - increases the daily benefit annually on the policy's anniversary. The amount of increase is normally based on a predetermined rate, usually 5 percent.

Automatic Inflation Protection helps keep pace with the future cost of care without an additional premium or any further action by the insured. Choosing an Automatic Compound Inflation Option will result in a higher DBA than the Automatic Simple Inflation Option.

The cost of the automatic increase riders is built into the policy's original premium. Insured’s are prepaying for future benefits. The annual premium for a policy that includes automatic will be more expensive in the beginning than other methods of inflation protection; however, it is the least expensive overall.


Types of Automatic Inflation Protection

Source: CPLTC, 2014

i. compound inflation

Insurer must offer 5 percent compounded unless applicant signs rejection, Section 10237.5(a) of the CIC

Increases benefit levels annually in a manner so that the increases are compounded annually at a rate of not less than 5 percent.

Applicant must sign statement refusing 5 percent annual compounded adjustments

Unless an insurer obtains a rejection of inflation protection signed by the policyholder, an inflation protection provision that increases benefit levels compounded annually at a rate not less than 5 percent must be included in a Long-Term Care Insurance policy.

Rejection statement must be verbatim, Section 10237.5(b) of the CIC

The rejection, to be included in the application or on a separate form, must state:


“I have reviewed the outline of coverage and the graphs that compare the benefits and premiums of this policy with and without inflation protection. Specifically, I have reviewed the plan, and I reject 5 percent annual compound inflation protection.

_______________________________ __________________

Signature of Applicant Date”

Compound Inflation typically adds 5% to the benefit annually so the benefit doubles in 15 years.

Each year, the daily maximum and lifetime maximum both increase by 5% of the previous year's amounts. Compounding the rate each year provides larger annual increases and costs a little more than the simple increase.

• Compounding means adding 5% of the previous year's amount and adding it on. • Simple adds 5% of the original amount.

For example: 5% simple on a $100 daily benefit adds $5 per year. In 10 years the simple increase has pushed $100 to $150. In 20 years, $100 becomes $200. On the other hand, 5% compound has pushed $100 to $163 in 10 years and to $265 in 20 years.

• Compounding increases will double the benefit amount approximately every 15 years while • Simple increases take about 20 years to double. ii. simple inflation

Another option would be to offer Simple Inflation. This usually adds between 40% and 60% to the premium. Simple inflation increases the original daily benefit by 5% every year automatically. Under this option the benefit will double in 20 years. Each year, the daily maximum and lifetime maximum both increase by 5% of their original amounts.

Daily Benefit Amount Increases at Simple and Compound Rates (5%)

Year Simple Compound Difference

0 $100 $100 $0 10 $150 $163 $13 15 $175 $208 $33 20 $200 $265 $65 25 $225 $339 $114 30 $250 $432 $182


iii. consumer price index (CPI) One last type of inflation protection for Long Term Care Insurance offered by a few carriers within the past couple of years is the Consumer Price Index, or CPI inflation protection. Inflation protection will increase their Long Term Care Insurance benefits at the actual CPI Index, computed by the US Government. Over the past 30 years it has averaged around 4.2%. The biggest risk to the consumer is that medical costs may rise more quickly than inflation as a whole. iv. periodic increases

There are different types of optional inflation features. Common names are Periodic Inflation Protection, Future Purchase Option, or Guaranteed Purchase Option. With these options, the company periodically offers the opportunity to increase coverage by a certain percentage or amount at predetermined intervals without providing evidence of good health. The offers may be given annually or every few years. In some policies, these offers may stop if the increases are declined for a certain number of years. In this instance, people may need to provide proof of good health to receive future offers.

Benefit Increase Option - Guarantees the insured the right to periodically increase benefit levels without providing evidence of insurability or health status so long as the option for the previous period has not been declined. The amount of the additional benefit must be no less than the difference between the existing policy benefit and that benefit compounded annually at a rate of at least 5 percent for the period beginning with the purchase of the existing benefit and extending until the year in which the offer is made.

This option allows the insured to pay an additional premium to increase the benefit coverage amounts at stated intervals during the life of the policy (may be referred to as Guaranteed Insurability or Future Purchase Options). There are usually a limited number of increase options offered over the life of the


policy. Those who decide not to exercise this option one or more times when it is offered, will lose any chances to increase the benefits in the future. v. defined number of years Some companies offer policies that allow the policyholder to increase their coverage at certain intervals of time without proof of good health. vi. defined age They may not be able to increase coverage after they have reached a certain age.

8. Waiver of premium, elimination/waiting period Waiver of Premium - Allows people to stop paying premiums when they are receiving policy benefits. Companies may waive the premium as soon as they make the first benefit payment or after a specified time, usually 60 to 90 days after the first payment. This provision may only apply to certain benefits (nursing home, or home health care, for instance).

Some insurers only provide WP for facility care and others provide it for both facility and home care benefits. Many Waiver Of Premium provisions have their own Waiting Period before they “kick-in” which can be months after the insured goes on benefit.

Joint Waiver of Premium. Some long term care insurance policies include or provide the option to add a joint waiver of premium benefit. The insurance company waives the premium payments each month they or their spouse or partner are receiving care (as defined by the policy). The waivers begin after they or their spouse has satisfied the elimination period if any, of the policy.

Source: http://www.skloff.com/Articles/WaiverOfPremium-LTCU-021510.pdf Elimination Period - works like a deductible stated in time rather than dollars. The insured will not receive benefit payment for a certain number of days at the beginning of a period of care, even though they may be receiving services defined by the policy. Elimination periods for nursing home and home health care may be different, or there may be a single elimination period that applies to any covered service.

The insured has a choice of how many days “deductible” they want on their policy, and the number of days has a direct impact on the policy premium. The longer the elimination period, the lower the premium. However, each day of the elimination period the insured will have to pay out of pocket for their care. Most companies offer elimination periods ranging from 0-365 days, with 30, 60 & 90 being the most common.

Long-term care policies in California cannot contain a provision establishing a new waiting period in the event existing coverage is converted to, or replaced by, a new policy with the same insurer, except when there is an increase in benefits voluntarily selected by the policy owner.


Service Days vs. Calendar Days

An important point to remember is that insurance companies define elimination periods differently. The elimination period is typically measured in either calendar days or service days. Under both scenarios the insured must meet the eligibility criteria to receive benefits before the elimination period begins.

Under a Calendar Day definition for the elimination period, once the insured has been certified as being chronically ill, each calendar day counts towards the elimination period, regardless of whether formal Long-Term Care services are received. After the elimination period has been satisfied, payment or reimbursement of benefits can begin.

In a Service Day elimination period, in most instances, they need to receive a covered service for any day to count toward their elimination period. For instance, if their elimination period was 30 days of service and they were receiving home care services three days per week, it would take approximately 10 weeks to satisfy the 30-day elimination period. Some companies may count days differently. For instance, a company may say that if they receive at least one day of service in a given week, the entire 7 days will be applied to their elimination period.

Some policies require only one elimination period; once met, it does not have to be satisfied again if the policyholder has future claims. Other policies, however, require the policyholder to meet the elimination period for each claim. An elimination period that may be satisfied only once during the lifetime of the policy is preferable to one that requires that the elimination period be re-satisfied every time the insured files a claim.

The plan's definition of the elimination period may specify consecutive days or it may allow the insured to accumulate days over a period of time. The longer the amount of time given to accumulate days towards the elimination period, the more liberal the plan. Some policies do not impose a waiting period for home and/or community care whereas other policies impose the waiting period before any covered benefits are payable.

9. Benefit period Benefit Period and Benefit Amount

Prior to 1997, insurers could sell policies with separate benefits, for example, 4 years facility care and 2 years home care. An insured that only used 1 year of home care then transferred to a facility, would lose the unused 1 year of home care and could not use its value to increase the amount of facility care.

In all Comprehensive Policies in California, the Overall Lifetime Maximum Benefit Amount can be used interchangeably between the various covered Home and Community Care, Nursing Facility and/or Residential Care Facility benefits as outlined in the policy. The policyholder could use all of the coverage for facility care, all for home care, all for RCF care or any combination of the three

• When paying for Institutional Care, the policy will usually pay a certain amount per day. • When paying for Home and Community Care, the policy pays a certain amount per day, week

or month.


Agents need to keep in mind that “Maximum Lifetime Benefit” refers to the lifetime of the policy rather than the lifetime of the insured.

The amount of long term care insurance benefits someone will have available is based on how much is in their Pool of Dollars and not on their benefit period. When someone applies for insurance they choose the benefit term or number of years they want coverage for 2, 3, 4, 5, or more years. Insurance companies use a multiple of days to determine how much insurance the person is buying. 2 years = 730 days, 3 years = 1095 days, etc. This does not mean that the coverage will only last for that time period.

For example a policy with coverage of $150 per day for 3 years would have a long term care insurance Pool of Money of $150 x 1095 = $164,250. If the person went on claim right after buying the policy they would have $164,250 available to them and if they used the entire $150 per day it would last 1095 days or 3 years, if they only used $100 per day they would have $50 left over every day, then the $164,250 would last longer than 1095 days – 1642 days in fact.

Most people buy inflation protection which increases the daily benefit on the anniversary of the policy and the most common increase is 5%. With compound interest the daily benefit doubles in about 14.5 years and with simple interest it doubles in 20 years. This means that the Pool of Money also increases every year. The $150 doubles to $300 per day in 14.5 years so in 14.5 years they would have $300 x 1095 = $328,500 in their Pool of Money and if they used $300 a day it would last 3 years and if they used less than $300 a day it would last longer.... if they only used $150 out of $300 a day then the $328,500 would last 6 years.

It is important for applicants to know how much Skilled Nursing Homes, Assisted Living Facilities, and Home Health Care Agencies charge for their services BEFORE choosing the benefit amounts in a Long-Term Care insurance policy. Applicants should check the facilities in the area where they think they may be receiving care, whether they are local, near a grown child, or in a new place where they may retire.

10. Restoration of benefits Some policies restore benefits to the original maximum amounts if they don’t need long-term care services for a specified period, usually 180 days. For example, assume the policy has a maximum benefit period of three years and they were in a nursing home for a year. If they don’t require additional long-term care services for at least six months after leaving the nursing home, their benefit period would automatically be restored to the original three years.


Policy Without Restoration of Benefits Policy With Restoration of Benefits Initial Pool of Money $300,000 Less Amount Used for a Claim -200,000 Remaining Pool of Money $100,000 Less Amount Used for a Claim -100,000 Remaining Pool of Money $ 0 Total Benefits Paid by Policy $300,000

Initial Pool of Money $300,000 Less Amount Used for a Claim -200,000 Remaining Pool of Money $100,000 Plus 1st Restoration of Benefits $200,000 New Remaining Pool of Money $300,000 Less Amount Used for a Claim -100,000 Remaining Pool of Money $200,000 Plus 2nd Restoration of Benefits $100,000 New Remaining Pool of Money $300,000 Less Amount Used for a Claim -300,000 Remaining Pool of Money $ 0 Total Benefits Paid by Policy $600,000

Source: http://skloff.com

11. Home modification and other ancillary benefits (Section 10233.2(f) of the CIC)

Home Modification

Sometimes a ramp, lift, handrails, grab bars, wider doors, special bed or other items and devices can increase accessibility and help an individual stay at home and prolong the time before facility care is required. In accordance with the Plan of Care, the company will pay the expenses incurred for purchase or rental of supportive equipment. The lifetime maximum for this benefit will vary by company.

Examples of home modifications include: installation of ramps accessibility modifications. Home modification do not typically include: hot tubs, swimming pools, home repair or maintenance; or other modifications. Home Modifications can be expensive.

Many LTC policies allow insureds to use portions of their benefits to make these modifications and for the use of other ancillary supplies and services up to, but exceeding the lifetime daily facility benefit amount. Typical Home Modifications Modifications can make a home or apartment safer and allow residents to stay there longer. Typical changes needed as a person ages include:

• Entryway ramps to accommodate wheelchairs or walkers • Bathroom safety grip bars and walk-in or roll-in showers • Medical alert system • Lever style door and sink handles • Improved lighting and night lighting • Handrails • Wider doorways for wheelchair access • Stairway chair lifts


Assistive Technology

Assistive devices are tools, products, or equipment that can help them perform daily tasks and activities independently in their home and community. Some of the simplest assistive devices are kitchen and self-care tools such as a reacher (a tool that helps them get objects that are out of their reach).

Other devices are designed to help people communicate, such as:

• Voice amplification tools • Voice recognition tools • Cueing and memory aids • Software such as word prediction programs

Tools that help people move or walk are called mobility assistive devices and include:

• Walkers • Wheelchairs • scooters

ANCILLARY SUPPLIES AND SERVICES

Some long-term care policies provide reimbursement for care in a nursing facility and reimburse for per diem expenses, as well as the costs of ancillary supplies and services. It is important, therefore, when the client is considering how much of a daily benefit to purchase, that they take into consideration the additional costs of ancillary supplies and services and purchase a limit high enough to cover both the room and board and these ancillary expenses. These expenses can easily add $10 to $30 per day, or more, above the cost of room and board

Both federal and state laws require certain disclosures be provided by the issuing insurance company to the applicant. The Agent is required to provide the client with several items, at the original solicitation, before they may even begin to complete an application for insurance. The California Insurance Code requires that the checklist be signed by both the applicant and the agent. The original is to be returned to the insurer with the application and a copy is to be retained by the applicant.

12. Survivor benefits 10 Year Survivorship Benefit - the insurance company permanently waives the premium for the surviving spouse or partner when the other spouse or partner passes away. The benefit is based on three requirements:

• Each continuously had long term care insurance coverage in force on the date of death • They each had their policies in force for at least 10 years • Neither of them were paid benefits for the first 10 years of the policy


Seven Year Survivorship Benefit - the insurance company permanently waives the premium for the surviving spouse or partner when the other spouse or partner passes away. The same key criteria apply as the, but with the basic version they must only wait 7 years for the benefit to be utilized.

13. Return of premium Some insurers may offer a “return of premium” nonforfeiture benefit. They pay back to the insured all or part of the premiums that they paid in if an insured drops their policy after a certain number of years. This is generally the most expensive type of nonforfeiture benefit.

• Return of Premium - the insurance company pays someone’s heirs all the premium payments they have made, less any long term care benefits paid against the policy. Some return of premium benefits are included in the policy if they pass away prior to age 65.

• Enhanced Return of Premium - Some long term care insurance policies allow someone to purchase a rider that enhances their built-in return of premium benefit, beyond the age of 65. With the enhanced return of premium benefit, heirs receive a benefit equal to your total premiums paid, less any long term care benefits paid against the policy, regardless of age.

• Graded Return of Premium – this rider will return a percentage of the premium paid, less any claims paid against the policy. The percentage is dependent upon their age when they pass away. It starts at 100% and begins decreasing by 10% each year after the age of 65, until at age 75, when the percentage decreases to zero.

• 10-Year Return of Premium - some riders will return all of the premiums paid, less any claims paid against the policy, if they have been insured for at least 10 years when they pass away, and they have never filed a claim, the insurance company will return their full premium paid. If they have filed a claim, the insurance company will return their premium paid less any claims paid against the policy.

14. Nonforfeiture (Section 10235.30 of the CIC) Nonforfeiture Benefit - The policyholder has the option to add a nonforfeiture benefit if they’re buying a tax-qualified policy. The “Return of Premium” nonforfeiture benefit, the “Reduced Paid-Up Policy” and the “Shortened Benefit Period Policy” may be available options under a tax-qualified policy if they drop the policy. Clients should consult a tax advisor to see if adding a nonforfeiture benefit would be good for them.

Companies must guarantee that the insured will receive some of the benefits they paid for, even if they cancel their policy or lose coverage. This guarantee is called a nonforfeiture benefit. The longer they pay premiums, the larger the nonforfeiture benefit will be. A nonforfeiture benefit will generally pay the greater of

• the total amount of all premiums paid • 30 times the daily nursing home benefit at the time the policy lapsed.

Policies with nonforfeiture benefits are usually more expensive than policies without them. If they don’t want the benefit, they’ll have to reject it in writing and the company will explain its contingent nonforfeiture benefit.


The contingent nonforfeiture benefit is triggered when an insurance company increases their rates to a certain level. The insured can either choose a reduced benefit amount to prevent premium increases or to convert their policy to a paid-up status. If they don’t choose within 120 days of the due date of the premium increase, the company can change their policy to a paid-up status. People who buy limited premium payment policies that are paid in full within a certain time will also get a contingent nonforfeiture benefit during the payment years with different qualifying conditions.

They’ll also get an explanation of the nonforfeiture and contingent nonforfeiture benefit if the policy lapses. They can buy a nonforfeiture benefit for an additional premium that will guarantee that they will receive some of the benefits they paid for if they cancel their policy or lose coverage. Most policies offer an option called “nonforfeiture” which preserves a part of their benefits even if they stop paying premiums.

If, for whatever reason, policyholders drop their coverage, those who have a nonforfeiture benefit in their policy will receive some benefit value for the money they have paid into the policy. Without this type of benefit, they get nothing, even if they’ve paid premiums for 10 or 20 years before dropping the policy.


V. California Statutory Policy Provisions, Requirements and Terminology What California did to implement HIPAA

Because so many elderly individuals rely on Medicaid (Medi-Cal) to pay long-term expenses, state governments have been struggling for years with the burden of such costs. Medicaid is a joint state-federal program; about half of the Medicaid payments come from state taxes. To lessen the financial burden, many states are actively encouraging their residents to privately plan for their Long-Term Care needs. The reason for this is simple: if someone has Long-Term Care insurance, he or she is less likely to turn to Medicaid. Today, about half of the states offer tax credits or tax deductions for Long-Term Care insurance. Many states, including California, also provide additional incentives, such as Long-Term Care partnership programs to encourage residents to purchase Long-Term Care insurance.

A. Company Responsibilities and Prohibitions Terms and Conditions, Sections 10235 through 10236.15 of the CIC

Policy terms, Section 10235.2 of the CIC - Long-Term Care insurance policies delivered or issued for delivery in California must use the terms below, unless the terms are defined in the policy and the definitions satisfy these requirements:

“Medicare” - the “Health Insurance for the Aged Act,” Title XVIII of the Social Security Amendments of 1965. Medicare is Federal health insurance program for people who are age 65 or older, certain younger people with disabilities, and people with a terminal illness.

“Skilled Nursing Care,” “intermediate care,” “home health care,” all definitions to be based on services, facilities, licensure 10235.2 - “Skilled Nursing Care,” “Intermediate Care,” “Home Healthcare,” and other services must be defined in relation to the level of skill required, the nature of the care and the setting in which care is required to be delivered. The definition may require that the provider be appropriately licensed or certified.

This applies to all Long-Term Care insurance policies delivered or issued for delivery in California on or after January 1, 1990.

1. Application and underwriting Companies use a process called underwriting to decide whether to sell applicants a policy. Companies will review their health status and history and will sell them a policy only if they meet their guidelines. Each type of insurance contract is underwritten based on risk. The insurance industry keeps statistics on the different types of policies so that they may measure the risk involved. Life insurance policies suffer different types of risk than would a casualty policy. Therefore, underwriting is based on the level of risk that each particular policy would be subjected to. Some companies ask only a few questions about the applicant’s health. Others may ask for more details, examine their medical records, ask for a statement from their doctor, or require them to take a medical exam. Answer all health questions truthfully and thoroughly. If a company later learns they gave incomplete or false information on an application, it could cancel their policy or refuse to pay their claim.


When they apply for insurance, the insurance agent will complete a personal worksheet with them to determine whether a long-term care policy is right for them. The applicant must answer all questions truthfully and thoroughly. The agent will also give them the company’s long-term care premium rate increase history for the past 10 years. An insurance company can increase their premium rates in the future, but only if it increases the rates for policies similar to theirs.

Disclosure: Tax Qualified or Not Tax Qualified on policy, Outline of Coverage and Application 10232.1 - Using the following terms ensures that the contract holder understands the nature of the contract he or she is signing. Key to this is providing a clear definition of the terminology on the title page, the details of what this contract provides in comparison with other types of contracts.

• Every policy that is intended to be tax qualified Long-Term Care insurance by Public Law 104-191 must be identified by prominently displaying and printing on page one of the policy form, the outline of coverage and the application the following words: “This contract for Long-Term Care insurance is intended to be a federally qualified Long-Term Care insurance contract and may qualify you for federal and state tax benefits.”

• Every policy that is not intended to be a qualified Long-Term Care insurance by Public Law 104-191 must be identified by prominently displaying and printing on page one of the policy, the outline of coverage and in the application the following words: “This contract for Long-Term Care insurance is not intended to be a federally qualified Long-Term Care insurance contract.”

• Any policy or certificate in which benefits are limited to institutional care must be called a “Nursing Facility and Residential Care Facility Only” policy or certificate and the words “Nursing Facility and Residential Care Facility Only” must be prominently displayed on page one of the policy and the outline of coverage. The commissioner may approve alternative wording which is more descriptive of the benefits.

• Any policy or certificate in which benefits are limited to the provision of home care services, including community-based services, must be called a “home care only” policy or certificate and the words “Home Care Only” must be prominently displayed on page one of the policy and the outline of coverage. The commissioner may approve alternative wording which is more descriptive of the benefits.

• Only policies or certificates that provide benefits for both institutional care and home care may be called “Comprehensive Long-Term Care” insurance.

a. applications must ask “yes” or “no” health questions (Section 10232.3(a) of the CIC) Applications must ask ‘yes or no’ health questions. Warning on application that misstatements may result in rescission, Sections 10232.3 (a)(b)(c) of the CIC

Today’s applications have clear questions that require a yes or no answer. The wording of the questions is mandated by California. Each question must be clear, unambiguous, short, and simple to avoid any confusion for the applicant . The application may ask for limited additional information, such as a list of medications being taken and names and addresses of attending physicians for any medical condition. A mistake in that information cannot be used as a basis for the denial of a claim or the rescission of a policy. It is up to the insurer to resolve any discrepancies before issuing the policy rather than waiting for a claim to occur (post-claims underwriting).


b. warning on application that misstatements may result in rescission (Sections 10232.3(b) of the CIC) The following warning must be printed conspicuously and in close conjunction with the applicant's signature block: “Caution: If your answers on this application are misstated or untrue, the insurer may have the right to deny benefits or rescind your coverage.”

While no agent wants to offend a new applicant, it would be wise to point out the importance of this statement prior to obtaining the consumers signature on the application. Even though it is the responsibility of the insurer to resolve any discrepancies before issuing the policy, if the insured lied or concealed information on the application, the company would not have been able to underwrite the policy correctly and has the right to deny benefits after the claim has occurred.

c. insurer must have, use and apply suitability standards (Section 10234.95(f) and (h) of the CIC) Long-term care insurance is not suitable for everyone. It is to everyone’s benefit if the right and suitable LTC policy is purchased and it is to everyone’s benefit if an unsuitable LTC policy is not purchased by a customer. No one wins when a client buys something that is unsuitable for them both in the short and long terms. There are a number of considerations that should always be examined along with the client to determine if and how much and why they should buy protection. Companies and agents marketing, selling, and issuing LTC insurance are required to make reasonable efforts to determine the suitability of the LTC policy for their clients and customers. If a company decides that the applicant does not meet its financial suitability standards, or if the applicant declined to provide the information, the company can reject the application. In the event that an application is rejected, a letter similar to the “Long-Term Care Insurance Suitability Letter” contained in the Long-Term Care Model Regulations of the National Association of Insurance Commissioners must be sent to the applicant. However, if the applicant has declined to provide financial information, the issuer may use some other method to verify the applicant's intent. Either the applicant's returned letter or a record of the alternative method of verification must be made part of the applicant's file.


d. company must resolve all underwriting issues submitted on application – no post claim underwriting (Section 10232.3(d) of the CIC) Post-claims underwriting is the practice of accepting the applicant for coverage without first performing the necessary underwriting functions, then, at the time of a claim, deciding whether or not the insured is covered. This type of business practice is highly unethical and is illegal in California and most other states in regard to Long-Term Care insurance.

e. every application must include a checklist (Section 10232.3(c) of the CIC)

Every application for long-term care insurance must include a checklist that itemizes each of the specific documents that the applicant must receive at the time of solicitation, which include:

1. Important Notice Regarding Policies Available 2. The Outline of Coverage (OOC) 3. The HICAP notice 4. The long-term care insurance California Shoppers Guide 5. The Long-Term Care Insurance Personal Worksheet 6. The Notice to Applicant Regarding Replacement of Accident and Sickness or Long-Term Care

Insurance. 10232.3(c) The format of these documents is mandated by the state and must be filed with, and approved by, the state before they are used.

Each of these documents will be discussed in detail over the next few pages.


i. important notice regarding policies available

IMPORTANT NOTICE

THIS COMPANY OFFERS TWO TYPES OF LONG-TERM CARE POLICIES IN CALIFORNIA: (1) LONG-TERM CARE POLICIES (OR CERTIFICATES) INTENDED TO QUALIFY

FOR FEDERAL AND STATE OF CALIFORNIA TAX BENEFITS. AND

(2) LONG-TERM CARE POLICIES (OR CERTIFICATES) THAT MEET CALIFORNIA STANDARDS AND ARE NOT INTENDED TO QUALIFY FOR FEDERAL OR STATE

OF CALIFORNIA TAX BENEFITS BUT WHICH MAY MAKE IT EASIER TO QUALIFY FOR HOME CARE BENEFITS.

1) POLICIES INTENDED TO QUALIFY FOR TAX BENEFITS

2) POLICIES NOT INTENDED TO QUALIFY FOR TAX BENEFIT

(A) ELIGIBILITY FOR BENEFITS (A) ELIGIBILITY FOR BENEFITS

You will not be paid for any home care services you need until: You are unable to do 2 out of 6 ADL’s (Activities of Daily Living) Which include:

• Bathing • Dressing • Continence • Toileting • Transferring • Eating

You will not be paid for any home care services you need until: You are unable to do 2 out of 7 ADL’s (Activities of Daily Living) which include:

• Bathing • Dressing • Continence • Toileting • Transferring • Eating or • Ambulating (this added ADL may make it

easier to qualify for home care benefits) OR

You need help due to Severe Cognitive Impairment

(Please see the outline of coverage for a definition of each of the above ADL terms)

OR

You need help due to Cognitive Impairment

(Please see the outline of coverage for a definition of each of the above ADL terms)

A health care practitioner must certify that the insured will need assistance with Activities of Daily Living for at least a period of 90 days.

No 90-day certification requirement.

Some policies may provide benefits for serious illnesses of less than 90 days.

(Please see the outline of coverage for your policy provisions.)

In general, no policy benefits can be paid for services covered by Medicare or be applied to


pay for Medicare deductibles or copayments. In general, there are no limitations regarding the use of Policy benefits for Medicare-related services.

(B) FEDERAL AND STATE TAX TREATMENT (C) FEDERAL AND STATE TAX TREATMENT

Premiums are intended to be deductible as a medical expense if you itemize deductions on your tax returns.

• Medical expenses must exceed 7.5% of your adjusted gross income.

• The amount you can deduct is capped, based on your age and adjusted gross income.

Premiums are not intended to be deductible on your tax returns.

Benefits paid under the policy are not intended to be taxed as Income.

Benefits paid under the policy may or may not be taxed as income.

Should the IRS treat these benefits as taxable income, the costs you pay for care may or may not be eligible as an offsetting tax deduction

Neither federal law, nor the IRS, has taken a position on these issues.

If you have further questions regarding your choice of policies, you may wish to contact your local Health Insurance Counseling and Advocacy Program (HICAP) office which provides Long-Term Care insurance counseling free of charge. Your insurance agent or insurer is required to provide you with the name, address and telephone number of your local HICAP office. The statewide HICAP telephone number is 1-800-434-0222.

If you have questions about the potential tax impacts of these two types of policies, you may wish to consult a TAX ADVISER before deciding which type of policy you wish to purchase.

Your agent or insurer is required by law to provide you with this form which displays the major differences between these two types of policies. Before signing this disclosure form and your application, please discuss with your agent or insurer the above side-by-side comparison information regarding these two types of policies.

Applicant__________________________ Agent or Insurer ___________________________

Date:_____________________ Date:_____________________ A copy of this form is to be given to the applicant.


ii. outline of coverage (OOC) (Section 10233.5 of the CIC)

In order to best serve the consumer, the Code requires that the outline of coverage be delivered at the initial solicitation of business. It may not contain any advertisements. The attention of the buyer must be directed to the outline in order to understand and recognize its purpose. An agent must provide the prospective purchaser with the outline before they begin any application or enrollment form. If the sale is by mail or other direct solicitation, the outline of coverage must be presented in conjunction with the application or enrollment form.

The outline must follow the sequence shown below. Any text which is CAPITALIZED or underscored may be emphasized by other means which provide comparable prominence as capitalization or underscoring.

The outline of coverage must be in the following form:

• The name, address and phone number of the insurance company • The type of policy and title of the coverage being outlined • Purpose of the outline - a statement that the outline provides a brief description of the

important policy features, is only a summary of coverage and not an insurance contract, and that if the coverage is purchased the insured should “Read Your Policy or Certificate Carefully!”

• A brief description of an insured's right to return a new policy within 30 days and receive a full refund of premium (this is known as a 30-day free look provision)

• A statement that the policy either does or does not provide for a refund or partial refund of premium if the insured dies or surrenders the policy in mid-term

• A statement that the policy is not Medicare supplement insurance, and that neither the insurer nor its agents represent Medicare or the federal or state government

• A statement that Long-Term Care coverage is designed to provide benefits for one or more necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services provided in a setting other than an acute care unit of a hospital, such as in a nursing home, in the community, or in the insured's home

• If the policy is an indemnity contract, a statement that coverage is provided in the form of a fixed dollar indemnity benefit, subject to any policy limitations, waiting periods and coinsurance requirements (this statement must be modified if the policy is not an indemnity contract - for example, if it is an expense incurred contract)

• A summary of covered services and any related deductibles, waiting periods, elimination periods, and benefit maximums; institutional benefits provided, by skill level; and institutional benefits provided, by skill level

• A description of limitations, exceptions and exclusions, including preexisting conditions, noneligible facilities or providers, and noneligible levels of care such as care provided by other family members

• A statement that the policy may not cover all LTC needs and that because costs for services will likely increase overtime, the applicant should consider whether and how benefits may be adjusted

• The outline must indicate whether the policy is not subject to benefit increases, whether automatic benefit adjustments are provided, whether a guaranteed option to buy future benefit increases is provided and, if so, the frequency and amounts of the upgrade options

• A summary of terms under which the coverage may be continued or terminated, including renewability provisions, continuation and conversion provisions for group coverage, waiver of


premium provisions, and whether the insurer has a right to change the premium (if so, the circumstances under which premium may be changed must be stated)

• A statement that the policy provides coverage for insureds clinically diagnosed as having Alzheimer's Disease or related degenerative and dementing illnesses

• The total annual premium for the policy and, if the premium varies with choices among benefit options, the portion of the premium that corresponds to each benefit option

• A summary of any additional important policy features, such as whether medical underwriting is used. iii. health insurance counseling and advocacy program (HICAP) notice (Section 10234.93(a)(8) of the CIC)

Every insurer must provide to a prospective applicant, at the time of solicitation, written notice that the Health Insurance Counseling and Advocacy Program (HICAP) provides health insurance counseling to senior California residents free of charge. Every agent must provide the name, address, and telephone number of the local HICAP program as well as the statewide HICAP number, 1-800-434-0222. iv. long-term care insurance shoppers guide (Taking Care of Tomorrow – provided by insurer) (Section 10234.93(a)(9) of the CIC) Every insurer of long-term care in California must provide a copy of the long-term care insurance shoppers guide “Taking Care of Tomorrow” developed by the California Department of Aging to each prospective applicant prior to the presentation of an application or enrollment form for insurance. v. long-term care insurance personal worksheet (Section 10234.95(c)(4), (d) and (e) of the CIC) Before an insurer can consider an applicant to be suitable for coverage, the applicant must complete and return a personal worksheet. Worksheet information must be kept confidential by the insurer and cannot be used to solicit other types of insurance or other products or services. The personal worksheet is not required for employer group long-term care insurance certificates.

Every year insurers must report the total number of LTC applications they receive to the commissioner. A new personal worksheet must be filed and approved by the commissioner each time a rate increase is approved in California and each time a new policy form is filed. The new personal worksheet must disclose the amount of the rate increase in California and all prior rate increases in California as well as in any other state. The insurer must use the new personal worksheet within 60 days of approval. vi. notice to applicant regarding replacement of accident and sickness for long-term care insurance (Sections 10235.16 and 10235.18 of the CIC) All Long-term care insurance application forms must include a question specifically asking if the policy being sold will replace a policy that was previously purchased. If policy replacement is taking place, the selling agent has certain responsibilities, including giving the consumer a notice regarding replacement. This is called a replacement notice. One copy must be retained by the applicant and an additional copy signed by the applicant must be retained by the insurer.

Upon determining that a sale will involve replacement, an insurer, other than an insurer using direct response solicitation methods, or its agent must furnish the applicant, prior to issuance or delivery of a


policy or certificate, a notice regarding replacement of accident and sickness or long-term care coverage. One copy of this notice must be retained by the applicant and an additional copy signed by the applicant must be retained by the insurer. The required notice must be provided in the following form:

NOTICE TO APPLICANT REGARDING REPLACEMENT OF ACCIDENT AND SICKNESS OR LONG-

TERM CARE INSURANCE According to (your application) (information you have furnished), you intend to lapse or otherwise terminate existing accident and sickness or long-term care insurance and replace it with long-term care insurance coverage to be issued by (company name) Insurance Company. Your new coverage provides thirty (30) days within which you may decide, without cost, whether you desire to keep the coverage. For your own information and protection, you should be aware of and seriously consider certain factors which may affect the insurance protection available to you under the new coverage. (1) Health conditions which you may presently have (preexisting conditions), may not be immediately or fully covered under the new coverage. This could result in denial or delay in payment of benefits under the new coverage, whereas a similar claim might have been payable under your present coverage. (2) You may wish to secure the advice of your present insurer or its agent regarding the proposed replacement of your present coverage. This is not only your right, but it is also in your best interest to make sure you understand all the relevant factors involved in replacing your present coverage. (3) If, after due consideration, you still wish to terminate your present coverage and replace it with new coverage, be certain to truthfully and completely answer all questions on the application concerning your medical health history. Failure to include all material medical information on an application may provide a basis for the company to deny any future claims and to refund your premium as though your coverage had never been in force. After the application has been completed and before you sign it, reread it carefully to be certain that all the information has been properly recorded. The above "Notice to Applicant" was delivered to me on: _______________________________________________ (Date) _______________________________________________ (Applicant's Signature)" (c) For group coverage not subject to the 30-day return provision of Section 10232.7, the notice must be modified to reflect the appropriate time period in which the policy may be returned and premium refunded. (d) The replacement notice must include the following statement except when the replacement coverage is group insurance as described in subdivision (a) of Section 10231.6:


COMPARISON TO YOUR CURRENT COVERAGE: I have reviewed your current long-term care coverage. To the best of my knowledge, the replacement of insurance involved in this transaction materially improves your position for the following reasons: ____ Additional or different benefits (please specify) ______. ____ No change in benefits, but lower premiums. ____ Fewer benefits and lower premiums. ____ Other (please specify) ______. __________________________________ (Signature of Agent and Name of Insurer) __________________________________________ (Signature of Applicant) __________________________________ (Date)

Insurers using direct response solicitation methods must deliver a notice regarding replacement of accident and sickness or long-term care coverage to the applicant upon issuance of the policy or certificate. The required notice must be provided in the following form:

NOTICE TO APPLICANT REGARDING REPLACEMENT OF ACCIDENT AND SICKNESS OR LONG-

TERM CARE INSURANCE According to (your application) (information you have furnished), you intend to lapse or otherwise terminate existing accident and sickness or long-term care insurance and replace it with the long-term care insurance coverage delivered herewith issued by (company name) Insurance Company. Your new coverage provides thirty (30) days within which you may decide, without cost, whether you desire to keep the policy or certificate. For your own information and protection, you should be aware of and seriously consider certain factors which may affect the insurance protection available to you under the new coverage. (1) Health conditions which you may presently have (preexisting conditions), may not be immediately or fully covered under the new coverage. This could result in denial or delay in payment of benefits under the new coverage, whereas a similar claim might have been payable under your present coverage. (2) You may wish to secure the advice of your present insurer or its agent regarding the proposed replacement of your present policy coverage. This is not only your right, but it is also in your best interest to make sure you understand all the relevant factors involved in replacing your present coverage. (3) (To be included only if the application is attached to the policy or certificate). If, after due consideration, you still wish to terminate your present coverage and replace it with new coverage, read the copy of the application attached to your new coverage and be sure that all questions are answered fully and correctly. Omissions


or misstatements in the application could cause an otherwise valid claim to be denied. Carefully check the application and write to (company name and address) within thirty (30) days if any information is not correct and complete, or if any past medical history has been left out of the application. ______________________________ (Company Name)"

For group coverage not subject to the 30-day return provision the notice must be modified to reflect the appropriate time period in which the policy may be returned and premium refunded.

The commissioner may waive a specific provision or provisions of this article with respect to a specific long-term care insurance policy or certificate upon making written findings as follows:

• The waiver would be in the best interest of the insureds. • The underlying purposes of this article could not be effectively or efficiently achieved without

the waiver. • Any of the following:

o The waiver is necessary to the development of an innovative and reasonable approach for insuring long-term care.

o The policy or certificate is to be issued to residents of a life care or continuing care retirement community or some other residential community for the elderly and the waiver is reasonably related to the special needs or nature of such a community.

o The waiver is necessary to permit long-term care insurance to be sold as part of, or in conjunction with, another insurance product.

The commissioner may condition any waiver upon compliance with alternative requirements to achieve the purposes of this article.


f. definition of preexisting condition (Section 10232.4(a) of the CIC) A preexisting condition is a medical condition that existed prior to the effective date of insurance coverage. Some types of insurance will not cover any claims related to preexisting conditions. Otherwise people would never buy insurance until after they were already sick or injured. The price of insurance would be astronomical, if it was available at all, and many insurers would go bankrupt.

Usually, two time periods apply to a preexisting condition provision:

• The time prior to the effective date of the policy during which a “condition” qualifies as a preexisting condition

• The period of time after the effective date during which a “preexisting condition” is not covered

In California the , no long-term care insurance policy or certificate (other than an employer’s group policy) may define preexisting condition more restrictively than:

"A condition for which medical advice or treatment was recommended by or received from a health care services provider, within six months preceding the effective date of coverage of an insured person."

The definition of preexisting condition does not prohibit an insurer from using an application form designed to elicit the complete health history of an applicant, and on the basis of the answers on that application, from underwriting in accordance with that insurer's established underwriting standards. Unless otherwise provided in the policy or certificate a preexisting condition, regardless of whether it is disclosed on the application, need not be covered until the waiting period expires.

Unless the commissioner has specifically approved a waiver or rider, no Long-Term Care insurance policy or certificate may exclude or use waivers or riders of any kind to exclude, limit, or reduce coverage or benefits for specifically named or described preexisting diseases or physical conditions beyond the waiting period.

g. no new preexisting conditions on replacement policies (Section 10235.18(a)(1) of the CIC) Long-term care policies cannot exclude any specifically named or described diseases or physical conditions after the policy has been in force for at least six-months. This is referred to as a “waiting period”. When replacing one LTC policy with another Agents must be certain to explain to a consumer that health conditions which he or she may presently have (preexisting conditions), may not be immediately or fully covered under the new coverage. This could result in a denial or delay of payment of benefits under the new coverage, whereas a similar claim might have been payable under existing coverage.

Insurers using direct response solicitation methods must deliver a notice regarding replacement of accident and sickness or long-term care coverage to the applicant upon issuance of the policy or certificate. The required notice must be provided in the following form:


NOTICE TO APPLICANT REGARDING REPLACEMENT OF ACCIDENT AND

SICKNESS OR LONG-TERM CARE INSURANCE According to (your application) (information you have furnished), you intend to lapse or otherwise terminate existing accident and sickness or long-term care insurance and replace it with the long-term care insurance coverage delivered herewith issued by (company name) Insurance Company. Your new coverage provides thirty (30) days within which you may decide, without cost, whether you desire to keep the policy or certificate. For your own information and protection, you should be aware of and seriously consider certain factors which may affect the insurance protection available to you under the new coverage. (1) Health conditions which you may presently have (preexisting conditions), may not be immediately or fully covered under the new coverage. This could result in denial or delay in payment of benefits under the new coverage, whereas a similar claim might have been payable under your present coverage.

h. contestability period is two years (Section 10232.3(f) of the CIC) The period of time during which the insurer has the right to rescind coverage or deny benefits based on misrepresentation or fraud, the contestability period, is limited to two years. Every year, the insurer is required to report to the commissioner the number of rescissions it made during that year.

After two years from the date of issue of this policy, no misstatements, except fraudulent misstatements, can be used to void the policy or to deny a claim for loss incurred or disability (as defined in the policy) commencing after the expiration of the two-year period.

The contestability period is a window of time after the purchase of the policy in which the policy can be still be challenged on the grounds of fraudulent misstatements. After the policy has been in force for a period of two years during the lifetime of the insured (excluding any period during which the insured is disabled), it must become incontestable as to the statements contained in the application

The contestability also addresses pre-existing conditions. No claim for loss incurred or disability (as defined in the policy) commencing after two years from the date of issue of this policy can be reduced or denied on the ground that a disease or physical condition had existed prior to the effective date of coverage of this policy

i. completed application must be delivered with policy (Section 10232.3(g) of the CIC) California Insurance Code states that the insured must receive a copy of their completed application at the same time as the policy or certificate is delivered. Giving a copy of the application to the insured allows them to review the information on their application.


Insurers must file rescission annually 10232.5 - Every insurer must maintain a record of all policy or certificate rescissions, both state and countrywide. Copies of all completed rescissions must be filed annually with the commissioner, including the reason for rescission, the length of time the policy or certificate was in force, and the age and gender of the insured person. The commissioner may, by request, make public the aggregate data collected under subdivision. By examining these numbers, the commissioner may identify patterns of rescission and address them in an annual review and revision of insurance laws.

Eliminates Prior Hospital Stay Requirement 10232.5 - On or after January 1, 1990, Long-Term Care insurance policies cannot be delivered or issued for delivery in this state which conditions payment of benefits on prior hospitalization or other institutional care.

j. protection against unintentional lapse (Section 10235.40 of the CIC) No individual long-term care policy or certificate can be issued until the applicant has been given the right to designate at least one individual, in addition to the applicant, to receive notice of lapse or termination of a policy or certificate for nonpayment of premium. The insurer must receive from each applicant one of the following: A waiver signed and dated by the applicant electing not to designate additional persons to receive notice. i. applicant may designate another to receive notice of lapse – the insurer must receive either: No individual Long-Term Care policy or certificate can be issued until the applicant has been given the right to designate at least one individual, in addition to themselves, to receive notice of lapse or termination of a policy or certificate for nonpayment of premium. The insurer must receive from each applicant one of the following:

(A) information on designee, or A written designation listing the name, address, and telephone number of at least one individual, in addition to the applicant, who is to receive notice of lapse or termination of the policy or certificate for nonpayment of premium.

(B) verbatim waiver signed and dated A waiver signed and dated by the applicant electing not to designate additional persons to receive notice. The required waiver must read as follows:


“Protection Against Unintended Lapse.

I understand that I have the right to designate at least one person other than myself to receive notice of lapse or termination of this Long-Term Care insurance policy for nonpayment of premium. I understand that notice will not be given until 30 days after a premium is due and unpaid. I elect not to designate any person to receive the notice.

______________________________ _________________

Signature of Applicant Date

ii. insurer must offer right to change designee no less often than once every two years The insurer must notify the insured that they have the right to change the written designation, at least once every two years. iii. insurer must mail notice 30 days before termination Policy holders who pay their premium by a payroll or pension deduction plan do not need to assign a third party to receive notice until 60 days after the certificate holder is no longer on that deduction payment plan. In all other cases, the policy holder must receive notice of the unintentional lapse at least 30 days prior to termination of the contract. Additionally, the party denoted by the policy holder must also be notified within 30 days of the termination. The insurer must contact the parties via first-class United States mail, and may also contact them via other methods such as phone or email. iv. policy and certificate must include five-month reinstatement In the event of lapse, each Long-Term Care insurance policy or certificate must reinstate coverage, if the insurer is provided with proof of the insured's cognitive impairment or the loss of functional capacity. This option must be available to the insured if requested within five months after termination and must allow for the collection of a past due premium, where appropriate. The standard of proof of cognitive impairment or loss of functional capacity must not be more stringent than the benefit eligibility criteria on cognitive impairment or the loss of functional capacity contained in the policy certificate.


k. inflation protection An insurer must include the following information in or with the outline of coverage: i. requirement for illustration (Section 10237.6 of the CIC)

A graphic comparison of the benefit levels of a policy that increases benefits at a compounded annual rate of not less than 5 percent over the policy period with a policy that does not increase benefits. The graphic comparison must show benefit levels over at least a 20-year period as well as any expected premium increases or additional premiums to pay for automatic or optional benefit increases. An example of acceptable illustrations can be found on page 126 & 191 .

An insurer may use a reasonable hypothetical or graphic demonstration for purposes of this disclosure. ii. requirement for waiver (Section 10237.5 of the CIC)

An inflation protection provision that increases benefit levels annually in a manner so that the increases are compounded annually at a rate not less than 5 percent must be included in a long-term care insurance policy unless an insurer obtains a rejection of inflation protection signed by the policyholder.

The rejection, to be included in the application or on a separate form, must state:

I have reviewed the outline of coverage and the graphs that compare the benefits and premiums of this policy with and without inflation protection. Specifically, I have reviewed the plan, and I reject 5 percent annual compound inflation protection. _______________________________ __________________ Signature of Applicant Date

2. Reporting requirements The state of California requires insurers to file lists of their appointed LTC agents at least every six months. The list must include all agents and representatives authorized to sell individual Long Term Care insurance in California. It is a violation of the Long-Term Care insurance statutes for an agent to solicit LTC insurance if they are not listed by their insurer as authorized to sell coverage on their behalf.

a. insurers must file rescission annually (Section 10232.3(h) of the CIC) Anytime a policy is cancelled or rescinded , the insurer must maintain a record of it. This record, which must include the reason for cancellation, the duration the policy was in force, and the age and gender of the insured, must be submitted to the commissioner at least once a year. This allows the insurer as well as the state to keep track of the number of, and the reasons for, cancellation, and how it might impact consumers and insurers as well.


b. insurers must report the number of replacement sales and lapses (Section 10234.86 of the CIC) In order to review agent activities regarding the sale of long-term care insurance, every insurer must maintain records of each agent’s replacement sales, total annual sales, and the number of long-term care insurance policies that have lapsed. The report must be submitted to the state Department of insurance each year by June 30, including the following information:

• Each agent’s replacement sales as a percent of the agent’s total annual sales • Each agent’s number of lapses of LTC policies sold as a percent of the agent’s total annual sales • The top 10% of the insurer’s agents in California with the greatest percentage of lapses and

replacements • The insurer’s number of lapsed policies as a percent of its total annual sales in the state, total

number of policies in force in the state, and total number of each policy form in the state, at of the end of the preceding calendar year

• The insurer’s number of replacement policies as a percent of its total annual sales in the state, total number of policies in force in the state as of the end of the preceding calendar year

The reports are designed for the purpose of more closely reviewing agent activities regarding the sale and replacement of long-term care insurance. Reported replacement and lapse rates do not alone constitute a violation of insurance laws or imply wrongdoing. They merely provide information so that the Department of Insurance can more easily target it’s investigation and enforcement activities toward agents who are involved in the most high-risk policy transactions.

c. insurers must annually report the number of applicants who refused to complete the personal worksheet and the number that did not meet the suitability requirements (Section 10234.95(i) of the CIC) The insurer must report annually to the commissioner:

• The total number of applications received from residents of CA • The number of those who declined to provide information on the personal worksheet • The number of applicants who did not meet the suitability standards • The number who chose to conform after receiving a suitability letter

The requirements listed here do not apply to accelerated benefits for long-term care under life insurance policies.

d. insurers must file personal worksheet upon each rate increase (Section 10234.95(c)(4) of the CIC) Every time a LTC rate is increased in California or a new LTC policy is filed for approval by the department of insurance, insurers must update their “personal worksheet” for customers. Before the personal worksheet can be issued to prospective clients, it must be filed and approved by the commissioner.

The new personal worksheet must disclose the amount of the rate increase in California and all prior rate increases in California, as well as all prior rate increases and rate increase requests or filings in any


other state. The new personal worksheet must be used by the insurer within 60 days of approval by the commissioner in place of the previously approved personal worksheet.

e. insurers must file commission structure for replacement coverage (Section 10234.97(c) of the CIC)

In order to ensure fair practice, LTC insurers are required to file their commission structure or justification of the insurer's compensation plan with the commissioner. Future modifications must be filed with the commissioner's office before they are implemented by the insurer.

f. insurers must semiannually file all agents authorized to sell long-term care insurance (Section 10234.93(a)(3) of the CIC) A list of all agents or other representatives allowed to solicit long-term care insurance must be submitted to the commissioner by every long-term care insurer in California at least semiannually.

g. insurers must file initial premium rates (Section 10236.11 of the CIC) Before a policy may be offered, sold, issued, or delivered to a California resident, the premium rate schedule for the policy, individual and group, must be filed with and receive prior approval from the commissioner.

h. insurers must file all rate increase requests for approval (Section 10236.13 of the CIC) To protect consumers, insurers are not allowed to increase the premium for either an individual or group long-term care insurance policy or certificate approved for sale under this chapter of the law without getting prior approval for the increase from the commissioner.

3. Required policy definitions No long-term care insurance policy delivered or issued for delivery in this state must use the terms set forth below, unless the terms are defined in the policy and the definitions satisfy the following requirements:

a. Medicare (Section 10235.2(a) of the CIC) "Medicare" must be defined as the "Health Insurance for the Aged Act," Title XVIII of the Social Security Amendments of 1965 as then constituted or later amended, or Title I, Part I of Public Law 89-97, as enacted by the 89th Congress of the United States of America and popularly known as the Health Insurance for the Aged Act, as then constituted and any later amendments or substitutes thereof, or words of similar import.

b. skilled nursing care (Section 10235.2(b) of the CIC) Skilled Nursing Facilities provide daily nursing and rehabilitative care performed by, or under the supervision of, skilled medical professionals or technical personnel. Basic Skilled and Custodial Care for “Activities Of Daily Living” are delivered in addition to one or more of the following: specialized


rehabilitation programs, respiratory therapy services, ventilator care, tracheotomy care, IV services for hydration/pain management, hospice services, respite care services, Alzheimer's and dementia units.

• Regulation – Licensed and Medi-Cal and/or Medicare certified by the California Department of Health Services (DHS).

• Payment – Funded primarily by Medi-Cal. Some funding provided through Medicare, managed care and private payment.

c. intermediate care (Section 10235.2(b) of the CIC) Intermediate Care Nursing Facilities provide 24-hour supportive care and nursing supervision, but not continuous nursing care. They are for individuals with chronic conditions who are unable to live independently, but do not need constant intensive care. The focus is on rehabilitation that enables individuals to retain, or regain, functions of daily living with the hope of returning to a home setting.

• Regulation – Licensed and Medi-Cal and/or Medicare certified by DHS. • Payment – Funded primarily by Medi-Cal. Some funding through Medicare and private payment

Intermediate Care facilities provide assistance needed for stable conditions that require daily, but not 24-hour, nursing supervision. Such care is ordered by a physician and supervised by registered nurses. It is less specialized than Skilled Nursing Care, often involves more personal care, and is generally needed for a long period of time.

This type of facility accepts individuals who are relatively independent but who may need assistance with ADLs like bathing, dressing, getting out of bed, etc. Some nursing care is provided but not continual nursing services or supervision. They are usually lower in cost than skilled nursing facilities.

d. home care (Sections 10232.9(b)(1 through 6) of the CIC) For purposes of this section, policy definitions of these benefits may be no more restrictive than the following:

• "Home health care" is skilled nursing or other professional services in the residence, including, but not limited to, part-time and intermittent skilled nursing services, home health aid services, physical therapy, occupational therapy, or speech therapy and audiology services, and medical social services by a social worker.

• "Adult day care" is medical or nonmedical care on a less than 24-hour basis, provided in a licensed facility outside the residence, for persons in need of personal services, supervision, protection, or assistance in sustaining daily needs, including eating, bathing, dressing, ambulating, transferring, toileting, and taking medications.

• "Personal care" is assistance with the activities of daily living, including the instrumental activities of daily living, provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. "Instrumental activities of daily living" include using the telephone, managing medications, moving about outside, shopping for essentials, preparing meals, laundry, and light housekeeping.

• "Homemaker services" is assistance with activities necessary to or consistent with the insured's ability to remain in his or her residence, that is provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction.


• “Hospice services" are outpatient services not paid by Medicare, that are designed to provide palliative care, alleviate the physical, emotional, social, and spiritual discomforts of an individual who is experiencing the last phases of life due to the existence of a terminal disease, and to provide supportive care to the primary care giver and the family. Care may be provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction.

• "Respite care" is short-term care provided in an institution, in the home, or in a community-based program, that is designed to relieve a primary care giver in the home. This is a separate benefit with its own conditions for eligibility and maximum benefit levels.

e. residential care facility for the elderly (RCFE) (Section 10232.92 of the CIC) Every long-term care policy or certificate covering confinement in a nursing facility also include a provision with the following features:

Care in a residential care facility must be covered. "Residential care facility" means a facility licensed as a residential care facility for the elderly or a residential care facility as defined in the Health and Safety Code. Outside California, eligible providers are facilities that meet applicable licensure standards, if any, and are engaged primarily in providing ongoing care and related services sufficient to support needs resulting from impairment in activities of daily living or impairment in cognitive ability and which also provide care and services on a 24-hour basis, have a trained and ready-to-respond employee on duty in the facility at all times to provide care and services, provide three meals a day and accommodate special dietary needs, have agreements to ensure that residents receive the medical care services of a physician or nurse in case of emergency, and, have appropriate methods and procedures to provide necessary assistance to residents in the management of prescribed medications.

The benefit amount payable for care in a residential care facility must be no less than 70 percent of the benefit amount payable for institutional confinement.

All expenses incurred by the insured while confined in a residential care facility, for long-term care services that are necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, needed to assist the insured with the disabling conditions that cause the insured to be a chronically ill individual as authorized by Public Law 104-191 and regulations adopted pursuant thereto, must be covered and payable, up to but not to exceed the maximum daily residential care facility benefit of the policy or certificate. There must be no restriction on who may provide the service or the requirement that services be provided by the residential care facility, as long as the expenses are incurred while the insured is confined in a residential care facility, the reimbursement does not exceed the maximum daily residential care facility benefit of the policy or certificate, and the services do not conflict with federal law or regulation for purposes of qualifying for favorable tax consideration provided by Public Law 104-191.

In policies or certificates that are not intended to be federally qualified, the threshold establishing eligibility for care in a residential care facility must be no more restrictive than that for home care benefits, as defined in subdivision (a) of Section 10232.8, and the definitions of impairment in activities of daily living and impairment of cognitive ability must be the same as for home care benefits, as defined in subdivisions (a) and (g) of Section 10232.8. In policies or certificates that are intended to be federally qualified, the threshold establishing eligibility for care in a residential care facility must be no more restrictive than that for home care benefits, as defined in subdivision (b) of Section 10232.8, and the


definitions of impairment in activities of daily living and impairment in cognitive ability must be the same as those for home care benefits as defined in subdivisions (b), (c), (d), (e), and (f) of Section 10232.8.

Assisted Living Facilities provide housing for those who need help in day-to-day living, but who do not need the round-the-clock level of Skilled Nursing Care found in nursing homes. Many communities, however, have nurses on staff and provide health care monitoring.

Oversight of Assisted Living Facilities is primarily in the hands of state governments rather than under federal regulation. In 2007, several states strengthened existing standards or implemented new standards for communities with residents with Alzheimer’s disease or other forms of dementia. Some states increased training requirements for staff or added disclosure requirements to prospective residents.

Some communities, particularly Continuing Care Retirement Communities (CCRC) offering multiple levels of care from independent living through nursing home care, also charge a one-time entrance fee and have additional fees for items such as meal delivery to living quarters, dementia care, or extra transportation services. A growing number of states have begun covering Assisted Living costs for those low-income individuals who qualify through Medicaid Waiver Programs, although most residents pay privately or through a Long-Term Care insurance policy. Twenty percent of the communities surveyed are part of a CCRC, and 1% charge an entrance fee.

Average Assisted Living Base Rate for Alzheimer’s and Dementia Care* $4,937 Monthly $59,250 Annually

*Of Assisted Living Communities that report a different rate for individuals with Alzheimer’s or dementia. Base Rates

The 2012 Market Survey of Long-Term Care Costs reports on monthly base rates, therefore it is important to know what services are included when choosing a community. Additional services may be offered on an a la carte basis, thus impacting the overall cost of care once someone actually resides in the community. As residents age, they may experience a reduction in their capacities and require additional services over time that were not required when they entered the community.

Fees for additional services can vary considerably by community size. Regardless of size, base rate fees often cover only some of the total costs of needed Assisted Living Services. Communities will vary on the number of services that are included in the base rate.

Beginning in 2008, information on 12 services provided by Assisted Living Communities was collected and analyzed based on the number of services covered in the monthly base rate, or services which are available on-site at the community.

Communities were first categorized by the number of services included in the base rate. Communities that include five or fewer services in their base rate were characterized as “Basic,” those that provide six to nine services in their base rate were characterized as “Standard,” and those including 10 or more services in their base rate were considered to be “Inclusive.”


Of those surveyed in 2012, 4% of communities were in the Basic category, 65% were in the Standard category, and 31% were in the Inclusive category.

Monthly Base Rate costs typically increase as more services are included. In 2012 communities

• in the Basic category cost an average of $2,751, a 10.9% decrease from 2011. • in the Standard category cost an average of $3,486, a 2.2% increase over 2011. • in the Inclusive category cost an average of $3,789, an increase of .4% over 2011.

Although a community in the “Basic” category might cost $2,751 monthly, if additional services are needed, the monthly cost might rise above what a community in the “Standard” or even “Inclusive” category would charge for the same amount of services. The following table shows average monthly costs for common services offered at Assisted Living Communities.

Average Monthly Charge for Services not Included in the Base Rate*

Bathing assistance $181

Dressing assistance $236

Other personal care (i.e., transferring, toileting, continence care, eating) $504

Medication management $347

*Of Assisted Living Communities who report an additional monthly charge for services above. Assisted Living/Residential-Care Facilities For The Elderly (RCFEs) - These facilities provide personal care and safe housing for people who may need supervision for medication and assistance with daily living but who do not require 24-hour nursing care.

Monthly private-pay base rates, which are defined as room and board and typically include at least two meals per day, housekeeping, and personal care assistance for one-bedroom apartments or private rooms with private baths in Assisted Living Communities.

Basic services include three meals a day in a common dining area, housekeeping and laundry services, recreational activities, and 24-hour supervision. Staff members can supervise medications that residents self-administer and may help with simple chores, such as scheduling appointments. Assistance with bathing, grooming, dressing, mobility and other activities of daily living may be available. Some homes may have a nurse available, while others may assist residents in arranging for community-based services when necessary. Residential Care Homes may also offer respite care services.

Residents pay monthly fees that vary by the community and the type of room chosen. Some communities allow residents to use government assistance to pay for their care.

Those who need care beyond what they can receive at home but not requiring the level of care provided by a nursing home may find that they can receive the help they need in Assisted Living or other Residential Care Facilities. Some are structured so that individuals have their own apartments and often provide a more homelike atmosphere. At the same time, residents can receive assistance with


housekeeping, meals and personal care. They also can receive help with daily activities such as eating, bathing and dressing. Staff is available to assist 24 hours a day.

LTC policies will only pay benefits in a facility licensed as a RCF or an RCFE. There are special conditions determining when LTC policies will pay for services outside of California in unlicensed facilities.

Residential Care Facilities for the Elderly (RCFE) provide room, board, housekeeping, supervision, and personal care assistance with basic activities like personal hygiene, dressing, eating, and walking. Facilities usually centrally store and distribute medications for residents to self-administer.

Supervision and assistance are provided for residents with minor medical problems or who need assistance with such things as bathing, grooming, dressing and meals (ADLs & IADLs). Most of these communities offer private, semi-private rooms, or efficiency apartments with or without kitchenettes. They typically provide common living areas (card/games room, library, lounge, social activities, and central dining room), housekeeping, linens (towels and sheets), from one to three meals, and transportation. Since these communities are licensed by the State Department of Social Services, Community Care Licensing Division as Residential Care Facility for the Elderly (RCFE), they can also supervise and distribute medications to residents.

Residential Care Facilities for the Elderly or Assisted Living Facilities must meet care and safety standards set by the State and are licensed and inspected by the Department of Social Services, Community Care Licensing (CCL).

4. Consumer protection California has a long list of consumer protections, some of which are listed here. According to CIC Section 10234.93 (a) Every insurer of Long-Term Care in California must:

• Establish marketing procedures to assure that any comparison of policies by its agents or other producers will be fair and accurate.

• Establish marketing procedures to assure excessive insurance is not sold or issued. • Submit to the commissioner within six months of the effective date of this act, a list of all agents

or other insurer representatives authorized to solicit individual consumers for the sale of Long-Term Care insurance. These submissions must be updated at least semiannually.

• Display prominently on page one of the policy or certificate and the outline of coverage: “Notice to buyer: This policy may not cover all of the costs associated with Long-Term Care incurred by the buyer during the period of coverage. The buyer is advised to review carefully all policy limitations.”

• Inquire and otherwise make every reasonable effort to identify whether a prospective applicant or enrollee for Long-Term Care insurance already has accident and sickness or Long-Term Care insurance and the types and amounts of any such insurance.

• Every insurer or entity marketing Long-Term Care insurance must establish auditable procedures for verifying compliance with this subdivision.

• Every insurer must provide to a prospective applicant, at the time of solicitation, written notice that the Health Insurance Counseling and Advocacy Program (HICAP) provides health insurance counseling to senior California residents free of charge. Every agent must provide the name, address, and telephone number of the local HICAP program and the statewide HICAP number, 1-800-434-0222.


• Provide a copy of the Long-Term Care insurance shoppers guide developed by the California Department of Aging to each prospective applicant prior to the presentation of an application or enrollment form for insurance.

Qualified Long-Term Care insurance policies are required to meet specific consumer protection guidelines of the 1993 National Association of Insurance Commissioners Model Act and regulations for Long-Term Care Insurance. Many of the consumer protections in the NAIC Models had already been adopted in California with the passage of Senate Bill 1943, Chapter 1132, Statutes of 1992, that included protections related to the following: guaranteed renewal or non-cancellation of the policy; prohibitions on exclusions and limitations; extension of benefits and conversions; replacement; unintentional lapse; post-claim underwriting; requirement to offer inflation protection and rejection by consumer; restrictions on preexisting conditions and probationary periods; disclosure; and, nonforfeiture provisions.

a. shortened benefit period (Section 10235.30 of the CIC) In order to solicit or issue Long-Term Care policies in California, insurers must offer every insured the option to purchase a shortened benefit period nonforfeiture benefit with all of the following features at the time they apply for the policy:

• Eligibility must begin after 10 years of premium payments are made. • The lifetime maximum benefit is the dollar equivalent of three months of care at the nursing

facility per diem benefit in the policy or the amount of the premiums paid, whichever is greater.

• The same benefits covered in the policy and any riders at the time eligibility begins are payable for a qualifying claim.

• The lifetime maximum benefit may be reduced by the amount of any claims already paid. • Cash back, extended term, and reduced paid-up forms of nonforfeiture benefits are not

allowed. • The lifetime maximum benefit amount increases proportionally with the number of years of

premium payment. • This does not apply to life insurance with accelerated benefits for Long-Term Care.

Even though the premium may have seemed suitable at the time the insured purchased their policies, as the years go by, things can change and sometimes policyholders may not be able afford to pay the LTC policy premium anymore. Instead of letting the policy lapse, people who cannot afford to continue paying the same amount of premiums for the coverage they purchased have the right to reduce their benefits in return for a lower premium. Companies must, at a minimum, allow insureds to reduce the daily benefit or change the number of years the company will pay benefits therefore the lower premium is more affordable.

b. distinguish between groups and individual disclosure in certificates Distinguish Between Groups and Individual Disclosure in Certificates

• Individual policies must be guaranteed renewable • Group policies cannot be guaranteed renewable


c. 30-day free look (Section 10232.7 of the CIC) A buyer will have 30 days from delivery date to review the policy and return it if they find that it does not meet their needs, and all the money they paid will be refunded to them. This period of time is called the “free look period”. Group coverage is not subject to the 30-day free look.

d. right to reduce coverage and lower premiums (Section 10235.50 of the CIC) Step-Down (CIC 10235.50) - Every policy or certificate must include a provision giving the policyholder or certificate holder the rights to reduce coverage and lower premiums.

Any time after the first year, the right to retain a policy or certificate while lowering the premium in no fewer than these three ways:

• Reducing the lifetime maximum benefit. • Reducing the nursing facility per diem and reducing the home-and community-based service

benefits of a home care only policy and of a comprehensive Long-Term Care policy. • Converting a “comprehensive Long-Term Care” policy or certificate to a “Nursing Facility Only”

or a “Home Care Only” policy or certificate, if the insurer sells those policies or certificates in California.

The premium for the reduced coverage will be based on the issue age and the rate applicable at the original issue date.

The new or converted policy will have a premium based on the insured as of the original issue date. If the original contract had provisions for cost-of-living/cost-of-care increases, then the new policy will reflect the same. If a policy is on the verge of lapsing, the insurer must provide written notice to the insured of their options. Additional options may be included. The notice will give the insured at least 30 days in which to elect to reduce coverage and the policy must be reinstated without underwriting if the insured chooses to reduce coverage. In the event of a premium increase, the insured must be given the option to reduce coverage and lower premiums.

e. right to increase coverage (Section 10235.51 of the CIC) Step-Up (CIC 10235.51)

Every policy or certificate must provide the insured the option to elect, at least on each anniversary date after the policy or certificate is issued, to pay an extra premium for one or more riders that increase coverage in any of the following ways:

• Increase the amount of the per diem benefits. • Increase the lifetime maximum benefit. • Increase the amount of both the nursing facility per diem benefit and the home- and

community-based care benefits of a comprehensive Long-Term Care insurance policy or certificate.


The premiums for the increased coverage may be based on the attained age of the insured. The premium for the original policy or certificate will continue to be based on the insured's age when the original policy or certificate was issued.

To qualify for the increased coverage, the insurer can require the insured to qualify by undergoing new underwriting, as well as paying an additional premium. The insurer can also set a maximum age for issuance of additional coverage as well as the aggregate amount of additional coverage to the maximum age and coverage the insurer allows when issuing a new policy or certificate. i. insurer may require insured to undergo new underwriting (Section 10235.51(c) of the CIC) The insurer may require the insured to undergo new underwriting, in addition to the payment of an additional premium, to qualify for the increased coverage. The insurer may restrict the age for issuance of additional coverage as well as the aggregate amount of additional coverage to the same as that for similar new policies.

5. Policy replacement Replacing a Policy

If someone is considering replacing a long-term care policy, compare all of their current policy’s benefits to the benefits in the new policy. Policies issued before 1992 might have fewer or more restricted benefits than a newer policy. A new policy with better benefits will probably cost significantly more than their current policy. In addition, if someone bought their current policy before January 1, 1997, it is tax-qualified. A new policy might not be. The agent must ascertain if they are buying a long-term care policy to replace another one. The agent must give they a notice explaining how replacing the policy will affect them. If they decide to replace their policy, don’t cancel their current policy until the new one is in effect.

a. premium credits for replacement policies (Section 10234.87 of the CIC) Current policyholders can obtain replacement credit for conversion of older to newer policies, within the same insurer. i. five percent of prior annual premium (not to exceed 50 percent) The premium on the new policy will be reduced by 5% for each year that the previous policy was in force, not to exceed 50% of the new premium. No credit will be allowed if the new premium is not higher than the previous premium. Remember this credit applies to each year's premium for the new policy, not one time only!

Note: This section does not apply to life insurance policies that accelerate benefits for Long-Term Care.

b. replacement policy conversions (Section 10236.5 of the CIC)


If group coverage terminates, the insurance policy must provide for continuation or conversion coverage for each policy holder who is part of the group insurance. However, there are exceptions to this, as listed below.

Every certificate of group insurance issued or delivered in California must provide for continuation or conversion coverage for the certificate holder if the group coverage terminates for any reason except the following reasons:

• The termination of group coverage resulted from the insured's failure to make any required payment of premium or contribution when due.

• The terminating coverage is replaced not later than 31 days after termination by new group coverage effective on the day following the termination and the replacement coverage meets both of the following criteria:

o The replacement coverage provides benefits identical to, or benefits determined by the commissioner to be substantially equivalent to or in excess of, those provided by the terminating coverage.

o The premium for the replacement coverage is calculated on the insured's age at the time of issue of the group certificate for the coverage which is being replaced. If the coverage being replaced has itself replaced previous group coverage, the premium for the newest replacement coverage is calculated on the insured's age at the time the previous group certificate was issued.

“Continuation coverage” means the maintenance of coverage under an existing group policy when that coverage would be or has been terminated and which is subject only to continued timely payment of the premium.

Any insured individual whose eligibility for group coverage is based on his or her relationship to another person, must be entitled to continuation coverage under the group policy if the qualifying relationship terminates by dissolution of marriage or death.

“Conversion coverage” means an individual policy of Long-Term Care insurance, issued by the insurer of the terminating group coverage, without considering insurability, containing benefits which are identical, or which have been determined by the commissioner to be at least substantially equivalent, to the group coverage which would be or has been terminated for any reason.

In determining whether benefits are substantially equivalent, the commissioner must consider, if applicable, the relative advantages of managed care plans which use restricted provider networks, considering items such as service availability, benefit levels, and administrative complexity.

The premium for the converted policy must be calculated on the insured's age at the time the group certificate was issued. If the terminating group coverage replaced previous group coverage, the premium for the converted policy must be calculated on the insured's age at the time the previous group certificate was issued. Before issuing conversion coverage, the insurer may require, if adequate notice is provided to certificate holders in the certificate, that:


• The individual must have been continuously insured under the group policy, or any group policy which it replaced, for at least six months immediately prior to termination in order to be entitled to conversion coverage.

• The insured must submit written application for a conversion policy within a reasonable period after termination of the group coverage, and the premium paid as directed by the insurer, in order that the conversion policy be issued effective on the day following termination of group coverage.

• The conversion policy contains a provision for a reduction of benefits if the insured has existing Long-Term Care insurance, payable on an expense-incurred basis, which, together with the conversion policy, would result in payment of more than 100 percent of incurred expenses. This provision must not be included in the conversion policy unless the reduction in benefits is reflected in a premium decrease or refund.

• The conversion policy contains a provision limiting the payment for a single claim, spell of illness, or benefit period occurring at the time of conversion, to the amount that would have been payable had the group coverage remained in effect.

c. exchange from group non-tax qualified to tax qualified (Section 10232.2(d) of the CIC) Group policies issued before to January 1, 1997, must be allowed to remain in force and not be required to meet the requirements of this chapter, as amended during the 1997 portion of the 1997-98 Regular Session, unless those policies cease to be treated as federally qualified Long-Term Care insurance contracts. If such a policy or certificate issued on such a group policy ceases to be a federally qualified Long-Term Care insurance contract under the grandfather rules issued by the United States Department of the Treasury pursuant to Section 7702B(f)(2) of the Internal Revenue Code, the insurer must offer the policy and certificate holders the option to convert, on a guaranteed-issue basis, to a policy or certificate that is federally tax qualified if the insurer sells tax-qualified policies.

Slightly different requirements apply for replacement transactions involving group LTC coverage.

• When individual insurance is replaced, the law requires disclosure of information and a warning notice to the individual policyholder who will make the purchase decision.

• When group coverage is replaced, it is the group master policyholder who makes the decision for the entire group, so the law protects the individual insureds by requiring the replacing insurance company to provide substantially the same benefits as the previous policy without any gaps in coverage.

When a Group LTC Policy is replaced by another group LTC policy issued to the same master policyholder, the replacing insurer must do all of the following:

• Provide benefits identical or substantially the same as those of the terminating coverage • The premiums for the new coverage must be calculated based on each insured's age at the time

that the group coverage being replaced was originally issued • Offer to cover everyone who was covered under the replaced policy on the date it terminated • Provide coverage for any preexisting conditions that would have been covered under the

terminating coverage • New waiting periods, elimination periods, probationary periods, or similar preconditions must

not be required


• The benefits or premiums must not vary based on an insured's health, disability status, claims experience, or use of LTC services

Generally, premiums for replacement of group coverage must be based on each insured's age when the group coverage was originally issued, even if multiple replacements have been involved. If any group coverage being replaced has replaced previous group coverage, the current premium must be based on the ages of insureds under the original group policy. However, if replacement coverage offers new or increased benefits, any premium for those benefits may be calculated according to each insured's age at the time of replacement.

Tax Treatment of Group LTC Policies

Due to HIPAA, a number of tax advantages are available for an employer-sponsored qualified LTC insurance contract.

• Employer-paid premiums for employees are tax deductible for the employer. • The employer contributions are excludable from the employee's income.

o However, such premiums are not excludable from an employee's income if they are provided through a cafeteria plan or other flexible spending arrangement.

• Benefits paid by qualified LTC insurance are not taxable as income to the employee.

These features should help agents to demonstrate the value of qualified LTC insurance to employers and their employees.


6. Long-term care personal worksheet with company-specific premium increase information (Section 10234.95(c)(4) of the CIC) The insurer, and/or the agent, must make reasonable efforts to obtain the information on the “Long-Term Care Insurance Personal Worksheet,” contained in the Long-Term Care Insurance Model Regulations of the National Association of Insurance Commissioners. The personal worksheet used by the insurer must contain, at a minimum, the information in the NAIC worksheet in not less than 12-point type. The insurer may request the applicant to provide additional information to comply with its suitability standards.

a. in California A copy of the insurer's personal worksheet must be filed and approved by the commissioner. A new personal worksheet must be filed and approved by the commissioner every time a rate is increased in California. The revised personal worksheet must show the amount of the rate increase in California and all prior rate increases in California as well as all prior rate increases and rate increase requests or filings in any other state. The insurer must use the new personal worksheet within 60 days of approval by the commissioner in place of the previously approved personal worksheet.

• An agent who obtains information through the personal worksheet must return it to the insurer before the insurer considers the applicant for coverage.

• Neither the agent nor the insurer may sell or disclose the information in the worksheet outside the company or agency.

• The insurer then applies the information from the worksheet to its suitability standards to determine whether or not it should issue an LTC policy to the applicant.

• Agents must use the suitability standards developed by the insurer when they are marketing Long-Term Care insurance.

As an alternative, the insurer must send the applicant a letter similar to the “Long-Term Care Insurance Suitability Letter” contained in the Long-Term Care Model Regulations of the National Association of Insurance Commissioners. However, if the applicant has declined to provide financial information, the insurer may use some other method to verify the applicant's intent. Either the applicant's returned letter or a record of the alternative method of verification must be made part of the applicant's file.

The insurer must report all of the following to the commissioner annually:

• the total number of applications received from residents of this state, • the number of those who declined to provide information on the personal worksheet, • the number of applicants who did not meet the suitability standards, and • the number who chose to conform after receiving a suitability letter.

Life Insurance riders providing LTC insurance are exempt from this section.


b. filed in any other state The new personal worksheet must disclose all rate increases, including prior rate increases, in California as well as all rate increases, including prior rate increases, or filings in other states.

7. Option to increase coverage No insurer may deliver or issue for delivery a long-term care insurance policy or certificate in this state unless the insurer offers to each policyholder and certificate holder, in addition to any other inflation protection, the option to purchase a long-term care insurance policy or certificate that provides for benefit levels and benefit maximums to increase to account for reasonably anticipated increases in the costs of long-term care services covered by the policy.

a. insurer must offer inflation protection (Section 10237.1 of the CIC) Insurers must offer to each policyholder and certificate holder, at the time of purchase, the option to purchase a long-term care insurance policy or certificate containing an inflation protection feature which is no less favorable than one that does one or more of the following:

• Increases benefit levels annually in a manner so that the increases are compounded annually at a rate of not less than 5 percent.

• Guarantees the insured individual the right to periodically increase benefit levels without providing evidence of insurability or health status and without regard to claim status or history so long as the option for the previous period has not been declined. The amount of the additional benefit must be no less than the difference between the existing policy benefit and that benefit compounded annually at a rate of at least 5 percent for the period beginning with the purchase of the existing benefit and extending until the year in which the offer is made.

• Covers a specified percentage of actual or reasonable charges and does not include a maximum specified indemnity amount limit.

• The insurer of a group long-term care insurance policy as defined in subdivision (a), (b), or (c) of Section 10231.6, must offer the holder of the group policy the opportunity to have the inflation protection pursuant to this section extended to existing certificate holders, but the insurer is relieved of the obligations imposed by this section if the holder of the group policy declines the insurer's offer.

California insurers, through their agents, must offer the option to purchase Compound Automatic Inflation Protection to every applicant. If the applicant wants another type of inflation protection (such as simple inflation protection) or does not want to purchase any inflation protection at all, agents must obtain a signed statement (like the one on the next page) from the customer and forward it to the insurer along with the application.

Every Long-Term Care insurance policy or certificate issued in California must include benefit levels and maximums which increase to compensate for reasonably anticipated increases in the costs of Long-Term Care services covered by the policy. This is why insurers sell policies with levels of coverage that will provide reasonable benefits that will cover a majority of the client’s needs rather than deceptively cheap coverage that provides only the illusion of protection.

Listed below are detailed requirements for offering inflation protection to the insured:


i. five percent compounded annually unless applicant signs rejection (Section 10237.5(a) of the CIC) The Inflation protection provision must increase benefit levels annually in a manner so that the increases are compounded annually at a rate of not less than 5 percent. If the applicant does not want to purchase 5% compound inflation protection, they must sign a form rejecting it.

Unless an insurer obtains a rejection of inflation protection signed by the policyholder, an inflation protection provision that increases benefit levels compounded annually at a rate not less than 5 percent must be included in a Long-Term Care Insurance policy.

(A) rejection statement must be verbatim (Section 10237.5(b) of the CIC) The rejection, to be included in the application or on a separate form, must state:

I have reviewed the outline of coverage and the graphs that compare the benefits and premiums of this policy with and without inflation protection. Specifically, I have reviewed the plan, and I reject 5 percent annual compound inflation protection. _______________________________ __________________ Signature of Applicant Date

b. mandated offer goes to group policyholder (Section 10237.1(d) of the CIC) When an LTC policy is issued to a group, the offer to increase benefits and protect against inflation must be made to the group policyholder. There is a difference as to whom the offer of inflation protection must be directed depending on the type of group policyholder:

• Clients who buy Long-Term Care insurance through a group, like an employer, or an association may not be able to purchase the option if the group master policyholder didn’t choose to offer it to their members.

• However, if the group policyholder is not an employer, professional, trade or other such association, the insurer must present the offer to each proposed certificate holder.

c. life insurance with accelerated benefits are exempt (Section 10237.3 of the CIC) Life insurance policies or riders containing accelerated long-term care benefits as well as expense incurred long-term care insurance policies are exempt from 10237.1. "Expense incurred" in this case does not include policies paying a certain percentage of reasonable and customary charges up to a specified, indemnity-type maximum amount.

d. no limits on inflation protection Inflation protection that provides for automatic benefit increases must include an offer of a premium expected to remain constant. The offer must state conspicuously that the premium may chance in the future unless it is guaranteed to remain constant. Benefit increases under a policy or certificate that contains an inflation protection feature is not to be reduced due to the payment of claims.


i. regardless of age, claim status, claim history or policy term (Section 10237.4(a) of the CIC) Inflation protection benefit increases are to be unaffected by an insured’s age, claim status or claim history, or the length of time a person has been insured under the policy. ii. no reduction of inflation benefit increases due to payment of claims (net of claims issues) (Section 10237.4(c) of the CIC) The benefit increases under a policy or certificate with an inflation protection feature must not be reduced due to the payment of claims. This was not always so.

• Prior to the passage of SB 870, some insurers deducted the amount paid in claims from the “pool of dollars” before applying the inflation percentage. o Even though this didn’t affect the increase in the daily or monthly benefits, it resulted in a

much lower overall lifetime maximum than insurers who credited the inflation percentage to the original coverage amount. This meant the benefits would run out sooner. o Example: a policy has $100,000 of coverage and at the policy’s anniversary date the

insurer would credit 5% inflation coverage ($5,000) totaling $105,000. During the next year the insured files a claim for $10,000 leaving a total of $95,000 in the ‘Pool-of-Dollars’. At the anniversary of the policy the insurer would credit 5% of $95,000 (S4,750) totaling $99,750 in the policy limit.

• After the passage of SB 870, it was mandatory that all LTC insurers must increase the lifetime maximum without regard to the amount of claims paid. o This also made it much easier to compare LTC policies and premiums.

o Example: a policy has $100,000 of coverage and at the policy’s anniversary date the insurer would credit 5% inflation coverage ($5,000) totaling $105,000. During the next year the insured files a claim for $10,000 leaving a total of $95,000 in the ‘Pool-of-Dollars’. At the anniversary of the policy the insurer would credit 5% of $105,000 (S5,250) totaling $110,250 in the policy limit.

o It is easy to see how this magnifies the difference of coverage due to this new law!

e. insurer must offer level premiums if offering automatic increases (Section 10237.4(b) of the CIC) An offer of inflation protection that provides for automatic benefit increases must be subject to a premium that the insurer expects to remain constant. The offer must disclose in a conspicuous manner that the premium may change in the future unless the premium is guaranteed to remain constant.

Each year, the insured will receive a notice from the insurer showing the new amounts of their coverage similar to the statement they receive from their bank showing the growth of their savings account. Most people expect that whenever coverage on an insurance policy increases, they will experience a rate increase. Policyholders are delighted, even amazed, to find that the coverage on their policies increases year after year, but the premium remains the same.

The daily, weekly and lifetime benefit amount increase on each anniversary of the policy's effective date just like the way money grows in a savings account. The benefit increases will occur on each policy anniversary date for the lifetime of the policy, even when the insured is receiving benefits.


Year Daily Benefit Monthly Benefit Lifetime Maximum

1998 $127 $3876 $46,515

1999 $134 $4071 $48,850

2000 $141 $4275 $51,300

2001 $148 $4489 $53,865

2005 $179 $5456 $65,466

f. outline of coverage must include: Mandatory Outline of Coverage Form 10233.5

One of the most useful documents available to consumers in connection with solicitations for Long-Term Care insurance is the Outline of Coverage. An outline of coverage provides summary information about the insurance company and the product being offered. The Insurance Department prescribes the language to be used in the outline, although minor changes are permitted. In many places the appropriate information, such as the benefits to be provided, limitations and exclusions, renewal and termination provisions, and the premium, must be inserted for the particular policy being proposed. The outline must specify whether the proposed policy is an individual or group contract. The outline of coverage must be a freestanding document, the information must be presented in no smaller than 10-point type, and it must not contain any material of an advertising nature. A sample outline of coverage can be found in the appendix.

Part of the agent’s responsibility during the sales process is to carefully explain the inflation charts which are required by California Law and included in the outline of coverage which must be provided to the client with the application. Agents should take the time to fully explain this important benefit to their client.

Not only is this a requirement of the insurance code, but agents should be aware that there is a high risk of errors & omissions claims for agents who sell policies without inflation protection or with inadequate inflation protection. Be sure to carefully document all activities in this regard.

An insurer must include the following information in or with the Outline of Coverage:

• The name, address and phone number of the insurance company • The type of policy and title of the coverage being outlined • Purpose of the outline - a statement that the outline provides a brief description of the

important policy features, is only a summary of coverage and not an insurance contract, and that if the coverage is purchased the insured should “Read Your Policy or Certificate Carefully!”

• A brief description of an insured's right to return a new policy within 30 days and receive a full refund of premium (this is known as a 30-day free look provision)

• A statement that the policy either does or does not provide for a refund or partial refund of premium if the insured dies or surrenders the policy in mid-term

• A statement that the policy is not Medicare supplement insurance, and that neither the insurer nor its agents represent Medicare or the federal or state government

• A statement that Long-Term Care coverage is designed to provide benefits for one or more necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care


services provided in a setting other than an acute care unit of a hospital, such as in a nursing home, in the community, or in the insured's home

• If the policy is an indemnity contract, a statement that coverage is provided in the form of a fixed dollar indemnity benefit, subject to any policy limitations, waiting periods and coinsurance requirements (this statement must be modified if the policy is not an indemnity contract - for example, if it is an expense incurred contract)

• A summary of covered services and any related deductibles, waiting periods, elimination periods, and benefit maximums; institutional benefits provided, by skill level; and non-institutional benefits provided, by skill level

• A description of limitations, exceptions and exclusions, including preexisting conditions, noneligible facilities or providers, and noneligible levels of care such as care provided by other family members

• A statement that the policy may not cover all LTC needs and that because costs for services will likely increase overtime, the applicant should consider whether and how benefits may be adjusted

• The outline must indicate whether the policy is not subject to benefit increases, whether automatic benefit adjustments are provided, whether a guaranteed option to buy future benefit increases is provided and, if so, the frequency and amounts of the upgrade options

• A summary of terms under which the coverage may be continued or terminated, including renewability provisions, continuation and conversion provisions for group coverage, waiver of premium provisions, and whether the insurer has a right to change the premium (if so, the circumstances under which premium may be changed must be stated)

• A statement that the policy provides coverage for insureds clinically diagnosed as having Alzheimer's Disease or related degenerative and dementing illnesses

• The total annual premium for the policy and, if the premium varies with choices among benefit options, the portion of the premium that corresponds to each benefit option

• A summary of any additional important policy features, such as whether medical underwriting is used. i. 20-year graph contrasting inflation protection with no inflation protection (Section 10237.6(a)(1) of the CIC )

An insurer must include the following information in or with the outline of coverage:

• A graphic comparison of the benefit levels of a policy that increases benefits at a compounded annual rate of not less than 5 percent over the policy period with a policy that does not increase benefits. The graphic comparison must show benefit levels over at least a 20-year period.

Examples:

INFLATION PROTECTION

The Effect of 5% Inflation over 20 years

Policy Year No Inflation Simple 5% Compound 5% Out of Pocket

1 $ 3000 $ 3000 $ 3000 $ 0


5 $ 3000 $ 3600 $ 3646 $ 646

10 $ 3000 $ 4350 $ 4653 $ 1653

15 $ 3000 $ 5100 $ 5939 $ 2939

20 $ 3000 $ 5850 $ 7580 $ 4580 ii. expected premium increases to pay for inflation protection (Section 10237.6(a)(2) of the CIC ) Any expected premium increases or additional premiums to pay for automatic or optional benefit increases must be included in the outline of coverage. iii. illustration must be reasonable (Section 10237.6(b) of the CIC) An insurer may use a reasonable hypothetical or graphic demonstration for purposes of this disclosure.

g. other optional forms of inflation protection Inflation protection is the most important option to have in a Long Term Care Insurance policy. This benefit increases the daily or monthly benefit amount over time to keep pace with inflation and increased cost of expenses. Even though their benefits are increasing each year, their premium does not automatically increase. Common choices include the following, in order of popularity:

• 5% Compound Inflation Protection • 5% Simple or Equal Inflation Protection • Future Purchase Option • Consumer Price Index (CPI) • 3% Compound • 4% Compound


i. automatic, simple and compound (USC) Simple (Equal) Inflation Protection - With simple (equal) inflation protection, the benefit increases by the same dollar amount each year. A $100 daily benefit increasing 5% per year will increase by $5/day per year and become a $200 daily benefit in 20 years. Here's the math: $100 base + ($5 x 20 years) = $200. 5% Compound Inflation Protection - With 5% compound inflation protection, the benefits increase each year by a higher dollar amount than simple. A $100 daily benefit, for example, will become a $265 daily benefit in 20 years. Compound inflation protection can make a big difference in the amount of benefit they can receive over the years. If their life expectancy is beyond 15 years, it is typically better to go with 5% compound inflation protection. However, if their life expectancy is 15 years or less, they might want to consider 5% simple or equal inflation protection because it will be less expensive. 3% and 4% Automatic Compound Inflation Protection - Two other types of inflation protection options, 3% and 4% inflation protection, are offered by a few companies in some states. These lower rates, however, are a bit less on premium, but the difference between 5% compounding and 3% compounding will be significant in 25+ years. These types of inflation protection might be a better fit only for people who buy Long Term Care Insurance in their late 60's. ii. consumer price index (CPI) Consumer Price Index (CPI) - One last type of inflation protection for Long Term Care Insurance offered by a few carriers within the past couple of years is the Consumer Price Index, or CPI inflation protection. This inflation protection engine will increase their Long Term Care Insurance benefits at the actual CPI Index, computed by the US Government. Over the past 30 years it has averaged around 4.2%. The biggest risk to the consumer is that medical costs may rise more quickly than inflation as a whole. Inflation Protection is one of the most important feature of an LTC policy, especially for those are 65 or younger, as they hopefully won't use the policy for years to come. iii. future purchase option (FPO) Future Purchase Option - Future purchase option is an inflation protection usually offered by the Long Term Care Insurance company every three years with an existing policy. If they turn down the option to increase their benefit, they may not be offered the option again. If they accept the option, the amount of coverage increase will be based on their current age (not policy purchase date).

8. Requirement to make specimen policy available on website and by request (Section 10237.93(a)(10) of the CIC) Every insurer of long-term care in California must:

Clearly post on its Internet Web site and provide written notice at the time of solicitation that a specimen individual policy form or group master policy and certificate form for each policy form offered in this state is available to a prospective applicant upon request. The individual specimen policy form or group master policy and certificate form must be provided to a requesting party within 15 calendar days of receipt of a request.


9. Insurer must retain records for each agent for replacement sales and lapses (Section 10234.86(a) of the CIC) Every insurer must maintain records for each agent of that agent's amount of replacement sales as a percent of the agent' s total annual sales and the amount of lapses of long-term care insurance policies sold by the agent as a percent of the agent's total annual sales.

Reporting replacement and lapse rates does not necessarily imply a violation of insurance laws or other wrongdoing. The reports can be used to more closely review agent activities regarding the sale of Long-Term Care insurance.

10. Insurer must retain auditable procedures for compliance (Section 10234.93(a)(7) of the CIC) In order for compliance to be easily confirmed, insurers of long-term care in California must be transparent with their procedures. This is required so that procedures are auditable by the State.

11. Additional insurer obligations (Section 10232.65 of the CIC) Agents may not collect several months of premiums in advance. When an application is submitted for an insurance policy, insurers, and their agents, may only collect one month’s premium with the application (two months if interim coverage is provided). Additional payments may not be collected until the policy is delivered to the applicant.

Within 60 days from the date the insurer, or their authorized representative or producer, receives the application, the applicant must be notified whether or not their application was approved. If the insurer fails to notify the applicant, the insurer must pay interest on judgments under Section 685.010 of the California Code of Civil Procedure, from the date the insurer or their authorized representative or producer received those funds until they are refunded to the applicant or are applied toward the premium.

12. California Life and Health Insurance Guarantee Association (CLHIGA) (Sections 1067.02(a)(1) and 1067.02(b)(1) of the CIC) The California Life & Health Insurance Guarantee Association (CLHIGA) is a legal entity which was created in 1991 by the California legislature. All insurers licensed to sell life insurance, health insurance, and annuities in the state of California are members of the guarantee association. In the event that a member insurer is found to be insolvent and is ordered to be liquidated by a court, the Guarantee Association Act enables the guarantee association to provide protection (up to the limits spelled out in the Act) to California residents who are holders of life and health insurance policies, and annuity contracts, with the insolvent insurer.

Specifically, when a member insurer is found to be insolvent and is ordered liquidated, a special deputy receiver takes over the insurer under court supervision and processes the assets and liabilities through liquidation. The task of servicing the insurance company's policies and providing coverage to California's resident policyholders becomes the responsibility of the guarantee association. The protection provided by the guarantee association is based on California law and the language of the insolvent company's policies at the time of insolvency.


The association is liable to provide benefits to people who are the beneficiaries, assignees, or payees of the insured, regardless of where they live (except for nonresident certificate holders under group policies or contracts). The health policies and contracts covered by the Association include life, health, annuity, and long-term care contracts, including any net cash surrender and net cash withdrawal values. Examples of policies covered under this article include, but are not limited to, basic hospital, medical, and surgical insurance, major medical insurance, disability income insurance, disability insurance, including insurance appertaining to injury, disablement, or death resulting to the insured from accidents, and appertaining to disablements resulting to the insured from sickness, and long-term care insurance, including any net cash surrender and net cash withdrawal values.

B. Agent Responsibilities and Prohibitions To protect the interests of consumers, California's insurance laws provide certain guidelines, procedures and requirements that must be followed by insurance agents, brokers and insurance companies in the marketing, solicitation and sale of Long-Term Care insurance

The conduct of an insurer, agent or broker during the offer and sale of a policy before it is purchased is relevant to any action alleging a breach of these duties. This means that any aspect of the insurance professional's conduct during the solicitation and sale of an LTC policy can be subject to disciplinary review. This includes the requirement that agents and brokers make reasonable efforts to determine the appropriateness of a recommended Long-Term Care policy purchase or replacement and to understand how a particular policy might relate to the applicant's ability to utilize its benefits. A breach of these duties may be used in an Insurance Department Administrative Hearing or in a private cause of action by the policyowner.

In some cases, a Long-Term Care policy may not be the appropriate solution to an individual's needs. It is incumbent on the agent or broker to be familiar with alternatives to Long-Term Care insurance so that its applicability to any given situation can be fairly evaluated.

As legal contracts, insurance policies tend to be lengthy and contain a number of detailed clauses and provisions. Like all legal contracts, LTC policies are open to interpretation. Therefore, every provision must be set forth in clear and definite terms to protect the policyowner's and the insurer's rights. It is essential that the language be as clear and unambiguous as possible. Through the years, court decisions, legislative mandates and individual state governments have played important roles in shaping the language of insurance contracts.

Long-term care policies can include not only nursing home coverage but various types of community coverage such as home care, home health care, adult day care, and so on. When agents review older policies of prospects, great care must be taken to explain the advantages and disadvantages of replacing those policies. A new policy may be an improvement with respect to gaps in coverage, but the premiums may be higher. Being able to explain the policy provisions of older policies and current policies and relate both to the needs of the prospect is fundamental to selling Long-Term Care insurance.

1. Duty of honesty, good faith, fair dealing (Section 10234.8 of the CIC)


Every Long-Term Care insurer and insurance agent owes every applicant and policyholder a duty of honesty, good faith and fair dealing. Among other things, this duty means that advertisements and other marketing materials may not be misleading.

Applicants must be given fair and accurate comparisons of policies. No excessive insurance or inappropriate replacement policies may be sold. High pressure tactics are expressly forbidden.

2. Long-term care training (Section 10234.93 of the CIC) Insurance agents must receive special training in order to sell Long-Term Care insurance.

(a) Every insurer of long-term care in California must: (1) Establish marketing procedures to assure that any comparison of policies by its

agents or other producers will be fair and accurate. (2) Establish marketing procedures to assure excessive insurance is not sold or issued. (3) Submit to the commissioner within six months of the effective date of this act, a list

of all agents or other insurer representatives authorized to solicit individual consumers for the sale of long-term care insurance. These submissions must be updated at least semiannually.

(4) Provide the following training and require that each agent or other insurer representative authorized to solicit individual consumers for the sale of long-term care insurance must satisfactorily complete the following training requirements that, for resident licensees, must count toward the licensee's continuing education requirement, but may still result in completing more than the minimum number of continuing education hours set forth in this section:

(A) For licensees issued a license after January 1, 1992, eight hours of training in each of the first four 12-month periods beginning from the date of original license issuance and thereafter eight hours of training prior to each license renewal.

(B) For licensees issued a license before January 1, 1992, eight hours of training prior to each license renewal.

(C) For nonresident licensees that are not otherwise subject to the continuing education requirements set forth in Section 1749.3, the evidence of training required by this section must be filed with and approved by the commissioner as provided in subdivision (g) of Section 1749.4. Licensees must complete the initial training requirements of this section prior to being authorized to solicit individual consumers for the sale of long-term care insurance. The training required by this section must consist of topics related to long-term care services and long-term care insurance, including, but not limited to, California regulations and requirements, available long-term care services and facilities, changes or improvements in services or facilities, and alternatives to the purchase of private long-term care insurance. On or before July 1, 1998, the following additional training topics must be required: differences in eligibility for benefits and tax treatment between policies intended to be federally qualified and those not intended to be federally qualified, the effect of inflation in


eroding the value of benefits and the importance of inflation protection, and NAIC consumer suitability standards and guidelines.

(5) Display prominently on page one of the policy or certificate and the outline of coverage: "Notice to buyer: This policy may not cover all of the costs associated with long-term care incurred by the buyer during the period of coverage. The buyer is advised to review carefully all policy limitations."

(6) Inquire and otherwise make every reasonable effort to identify whether a prospective applicant or enrollee for long-term care insurance already has accident and sickness or long-term care insurance and the types and amounts of any such insurance.

(7) Every insurer or entity marketing long-term care insurance must establish auditable procedures for verifying compliance with this subdivision.

(8) Every insurer must provide to a prospective applicant, at the time of solicitation, written notice that the Health Insurance Counseling and Advocacy Program (HICAP) provides health insurance counseling to senior California residents free of charge. Every agent must provide the name, address, and telephone number of the local HICAP program and the statewide HICAP number, 1-800-434-0222.

(9) Provide a copy of the long-term care insurance shoppers guide developed by the California Department of Aging to each prospective applicant prior to the presentation of an application or enrollment form for insurance.

(10) Clearly post on its Internet Web site and provide written notice at the time of solicitation that a specimen individual policy form or group master policy and certificate form for each policy form offered in this state is available to a prospective applicant upon request. The individual specimen policy form or group master policy and certificate form must be provided to a requesting party within 15 calendar days of receipt of a request.

(b) In addition to other unfair trade practices, including those identified in this code, the following acts and practices are prohibited:

(1) Twisting. Knowingly making any misleading representation, incomplete, or fraudulent comparison of any insurance policies or insurers for the purpose of inducing, or tending to induce, any person to lapse, forfeit, surrender, terminate, retain, pledge, assign, borrow on, or convert any insurance policy or to take out a policy of insurance with another insurer.

(2) High pressure tactics. Employing any method of marketing having the effect of or tending to induce the purchase of insurance through force, fright, threat, whether explicit or implied, or undue pressure to purchase or recommend the purchase of insurance. (3) Cold lead advertising. Making use directly or indirectly of any method of marketing that fails to disclose in a conspicuous manner that a purpose of the method of marketing is solicitation of insurance and that contact will be made by an insurance agent or insurance company.

a. licensees must meet eight-hour mandatory long-term care training requirement (Section 10234.93(a)(A)(B) of the CIC)


To protect the interests of consumers, agents who sell Long-Term Care insurance in California are required to satisfy continuing education requirements. This helps to assure that agents have general knowledge about LTC product features, and are better prepared to advise consumers about available LTC services and insurance benefits.

Licensees must complete the initial continuing education requirement prior to being authorized to solicit sales of Long-Term Care insurance to individual consumers. Licensees selling Long-Term Care coverage are subject to the following continuing education requirements:

• For licensees issued a license before January 1, 1992, eight hours of education prior to each two-year license renewal.

• For licensees issued a license after January 1, 1992, eight hours of education in each of the first four 12-month periods beginning from the date of original license issuance and thereafter and eight hours of education prior to each license renewal.

The education program must address topics related to Long-Term Care services and insurance, including, LTC facilities, changes or improvements in services or facilities, alternatives to the purchase of private LTC insurance and California regulations and requirements. On or before July 1, 1998, the following additional continuing education topics must be required: differences in eligibility for benefits and tax treatment between policies intended to be federally qualified, the effect of inflation in eroding the value of benefits and the importance of inflation protection, and NAIC consumer suitability standards and guidelines. The CE requirement for LTC is part of, not in addition to, an agent's or broker's regular CE requirement.

California Partnership (if applicable)

In addition to the general LTC continuing education requirement, any agent who wishes to sell certified policies approved by the California Partnership for Long-term Care, must complete 8 hours of approved education prior to marketing Partnership-approved policies. This special training must include eight hours of education on Long-Term Care insurance in general, and eight hours of education specifically dedicated to the California LTC Partnership Program each license period thereafter.

b. non-resident agents must meet eight-hour mandatory long-term care training requirement (Section 10234.93(a)(C) of the CIC)

These requirements apply to ALL agents wishing to transact Long-Term Care insurance in the state of California. Even non-resident agents who are exempt from the requirements because of meeting the CE requirements in their state of residence and agents who are exempt because of attaining the age of 70 and being licensed for at least 30 consecutive years. Currently there is no reciprocity between California and any other state for asset protection or agent training.

3. Suitability (Section 10234.95 of the CIC) Every insurer or other entity marketing long-term care insurance must:

• Develop and use suitability standards to determine whether the purchase or replacement of long-term care insurance is appropriate for the needs of the applicant.

• Train its agents in the use of its suitability standards.


• Maintain a copy of its suitability standards and make them available for inspection upon request by the commissioner.

The agent and insurer must develop procedures that take into consideration, when determining whether the applicant meets the standards developed by the insurer, the following:

• The ability to pay for the proposed coverage and other pertinent financial information related to the purchase of the coverage.

• The applicant's goals or needs with respect to long-term care and the advantages and disadvantages of insurance to meet these goals or needs.

• The value, benefits, and costs of the applicant's existing insurance, if any, when compared to the values, benefits, and costs of the recommended purchase or replacement.

• The issuer, and where an agent is involved, the agent, must make reasonable efforts to obtain the information set out in subdivision (b). The efforts must include presentation to the applicant, at or prior to application, of the "Long-Term Care Insurance Personal Worksheet," contained in the Long-Term Care Insurance Model Regulations of the National Association of Insurance Commissioners. The personal worksheet used by the insurer must contain, at a minimum, the information in the NAIC worksheet in not less than 12-point type. The insurer may request the applicant to provide additional information to comply with its suitability standards.

• In the premium section of the personal worksheet, the insurer must disclose all rate increases and rate increase requests for all policies, whether issued by the insurer or purchased or acquired from another insurer, in the United States on or after January 1, 1990.

• The premium section must include a statement that reads as follows: "A rate guide is available that compares the policies sold by different insurers, the benefits provided in those policies, and sample premiums. The rate guide also provides a history of the rate increases, if any, for the policies issued by different insurers in each state in which they do business, since January 1, 1990. You can obtain a copy of this rate guide by calling the Department of Insurance's consumer toll-free telephone number (1-800-927-HELP), by calling the Health Insurance Counseling and Advocacy Program (HICAP) toll-free telephone number (1-800-434-0222), or by accessing the Department of Insurance's Internet web site (www.insurance.ca.gov)." If the personal worksheet is approved prior to the availability of the rate guide, the worksheet must indicate that the rate guide will be available beginning December 1, 2000.

• A copy of the issuer's personal worksheet must be filed and approved by the commissioner. A new personal worksheet must be filed and approved by the commissioner each time a rate is increased in California and each time a new policy is filed for approval by the commissioner. The new personal worksheet must disclose the amount of the rate increase in California and all prior rate increases in California as well as all prior rate increases and rate increase requests or filings in any other state. The new personal worksheet must be used by the insurer within 60 days of approval by the commissioner in place of the previously approved personal worksheet.

A completed personal worksheet must be returned to the issuer prior to the issuer's consideration of the applicant for coverage, except the personal worksheet need not be returned for sale of employer group long-term care insurance to employees and their spouses and dependents.

The sale or dissemination outside the company or agency by the issuer or agent of information obtained through the personal worksheet is prohibited.


The issuer must use the suitability standards it has developed pursuant to this section in determining whether issuing long-term care insurance coverage to an applicant is appropriate.

Agents must use the suitability standards developed by the insurer in marketing long-term care insurance.

If the issuer determines that the applicant does not meet its financial suitability standards, or if the applicant has declined to provide the information, the issuer may reject the application. Alternatively, the issuers must send the applicant a letter similar to the "Long-Term Care Insurance Suitability Letter" contained in the Long-Term Care Model Regulations of the National Association of Insurance Commissioners. However, if the applicant has declined to provide financial information, the issuer may use some other method to verify the applicant's intent. Either the applicant's returned letter or a record of the alternative method of verification must be made part of the applicant's file.

The insurer must report annually to the commissioner the total number of applications received from residents of this state, the number of those who declined to provide information on the personal worksheet, the number of applicants who did not meet the suitability standards, and the number who chose to conform after receiving a suitability letter.

This section must not apply to life insurance policies that accelerate benefits for long-term care.

a. agents must use company suitability standards Deciding Whether Long-Term Care Insurance Is Right for Someone

Long-term care insurance helps protect someone’s assets against the high cost of extended long-term care. Long-term care insurance usually only makes sense if they have more to protect than a house, car, and a small amount of cash.

Long-term care insurance is probably not a good idea if someone has trouble stretching their income to pay for utilities, food, or medicine. They might have to pay for their care out of pocket until they spend down their assets enough to qualify for Medicaid.

To decide whether long-term care insurance is right for someone, consider their personal risk factors, assets, income, and available alternatives. They can also use the Long-Term Care Insurance Suitability Worksheet to help them decide.

Insurance agents must give them a personal worksheet and a potential rate increase disclosure form along with an outline of coverage. Use these to help decide whether long-term care insurance is right for them.

Financial Considerations

Long-term care is typically less expensive if someone buys it when they’re younger. Consider talking to a trusted financial adviser for help deciding whether long-term care insurance meets their needs. Ask them the following questions about their finances:

• What are their assets (not including their home, car, and $2,000 cash)? Will they change over the next 10 to 20 years? Are their assets large enough to justify the expense of a long-term care policy?


• What is their current annual income? Will it change over the next 10 to 20 years? Will they be able to afford the policy if their income decreases or if the policy premiums go up significantly?

• If they retire, how will retirement affect their ability to pay premiums? • How much does the policy cost? Will they pay the premiums from their income, savings, or

investments? Will their family help with the cost? • How much will the policy premium increase if they wait until they’re older to buy a policy?

The need for Long-Term Care can happen at any time, not just as people age. If someone is single, it is less likely that unpaid care by family members will be readily available. Long-Term Care insurance can help they obtain and pay for the services that they require.

If they are married or live in a multi-member household and they and their partner age together, their day-to-day functions may decline at the same rate. If their adult children live in another location or if their care needs are greater than a family can provide, they may require paid assistance. Also, if certain chronic conditions run in their family—the kind that require some type of daily assistance— Long-Term Care insurance might be important for they to consider.

What is the Right Age to Purchase Long-Term Care Insurance?

In general, Long-Term Care insurance can provide coverage for anyone 18 years of age and older. The younger someone is when they buy Long-Term Care insurance, the greater the chance that their health will be good and they’ll be insurable. Additionally, premiums are based in part on the age at which they initially purchase coverage. The younger they are, the lower their premiums can be for any given amount of coverage from the same carrier.

Who Should Not Purchase Long-Term Care Insurance?

It is important to be able to afford the premiums, not only now, but in the future. If someone is on a fixed income or if they have limited savings, the premiums may be too difficult to pay over the long run. In this situation, they may want to look closely at their needs and resources and perhaps talk with a family member or financial advisor to decide if this is the right purchase for them.

The reason to buy long term care insurance is to protect the insured’s’ assets in case they need to pay for assisted living, home care or a nursing home stay. Long-Term Care Insurance helps pay for these services, which can be very expensive and, over time, can be financially devastating. A policy also ensures that they can make their own choices about what Long-Term Care services they receive and where they receive them in advance.

Benefits of Purchasing Long-Term Care Insurance

If the need for Long-Term Care arises and someone doesn’t have insurance, the associated costs may have to be paid out of personal savings or financed by loved ones. If someone is unable to afford the cost of hiring care providers, family members may be required to assist them, which means; the family member may have to take unpaid leave from work and forgo personal and professional. By purchasing Long-Term Care Insurance, it helps to ensure that any costs associated with the insured’s care are covered, thereby lessening the financial burden on the insured and their family. i. ability to pay


It is important to remember that after retirement, income often does not keep pace with inflation. As people age they may have unexpected medical expenses such as prescription drugs or other medical costs that may not be covered by medical insurance. The loss of a spouse can also result in reduced income. Applicants should select a premium they can comfortably afford, taking into consideration that premiums may increase during the years they own the policy.

One of the most difficult decisions a family can face is to place a spouse, parent or other elderly relative in a nursing home. In addition to the emotional trauma, this decision may cause financial hardship when the family must pay for formal Long-Term Care in a nursing home. As an insurance professional, you can help to ease this burden by providing advice on the various ways of funding Long-Term Care.

It’s important to consider each prospect's individual situation when determining the need for Long-Term Care insurance. Agents should be aware that the purchase of a Long-Term Care policy will not necessarily ensure that an individual will avoid Medi-Cal when he or she needs Long-Term Care. A Long-Term Care insurance policy that doesn't pay sufficient benefits to meet Long-Term Care costs could eventually result in the insured relying on Medi-Cal to pay for Long-Term Care expenses. Agents should make this point clear to prospects and urge prospects to get outside advice from HICAP or other independent sources before making a decision on purchasing Long-Term Care insurance.

The 1996 NAIC Suitability Standards, as incorporated into the California Insurance Code Section 10234.95, are required to be used by every insurer and other entity marketing LTC insurance. Even though it is the carrier's responsibility to develop and use suitability standards and train its agents on their use, agents should have a solid understanding of the basic NAIC Model Requirements and the reasoning behind them.

To protect consumers, every insurer or other entity marketing Long-Term Care Insurance contracts in California is required to:

• Develop and use suitability standards to determine whether the purchase or replacement of Long-Term Care insurance is appropriate for the needs of the applicant

• Train its agents in the use of its suitability standards • Maintain a copy of its suitability standards and make them available for inspection upon

request by the Commissioner

The agent and insurer must develop procedures that take into consideration, when determining whether the applicant meets the standards developed by the insurer, the following:

• The ability to pay for the proposed coverage and other pertinent financial information related to the purchase of the coverage

• The applicant's goals or needs with respect to Long-Term Care and the advantages and disadvantages of using insurance to meet these goals or needs

• The value, benefits, and costs of the applicant's existing insurance, if any, when compared to the values, benefits, and costs of the recommended purchase or replacement

• The issuer, and where an agent is involved, the agent, must make reasonable efforts to obtain the information, including presentation to the applicant, at or prior to application, of the “Long-Term Care Insurance Personal Worksheet,” contained in the Long-Term Care Insurance Model Regulations of the National Association of Insurance Commissioners.


ii. applicant’s goals or needs Whether or not a person should buy a Long-Term Care insurance policy will depend on their age, health status, overall retirement goals, income and assets. For instance, if their only source of income is a Social Security benefit or Supplemental Security Income (SSI), they probably shouldn’t buy Long-Term Care Insurance, as they may not be able to afford the premium. On the other hand, if they have a large amount of assets but don’t want to use them to pay for Long-Term Care, they may want to buy a Long-Term Care Insurance policy. Many people buy a policy because they want to stay independent of government aid or the help of family. They don’t want to burden anyone with having to care for them. However, they should not buy a policy if they cannot afford the premium or aren’t sure they can pay the premium for the rest of their life.

If someone already has health problems that are likely to mean they will need Long-Term Care (for example, Alzheimer’s or Parkinson’s disease), they probably won’t be able to buy a policy. Insurance companies have medical underwriting standards to keep the cost of Long-Term Care Insurance affordable. Without such standards, most people would not buy coverage until they needed Long-Term Care services.

Remember, not everyone should buy a Long-Term Care Insurance policy. For some, a policy is affordable and worth the cost. For others, the cost is too great, or the policy they can afford doesn’t offer enough benefits to make it worthwhile. A person should not buy Long-Term Care Insurance if the only way they can afford to pay for it is by not paying other important bills. One should look closely at their needs and resources, and discuss it with a family member to decide if Long-Term Care Insurance is right for them.

If, after careful consideration, the person decides that Long-Term Care Insurance is right for them, they should check out the company and the agent, if one is involved, before buying a policy. Insurance companies and agents must be licensed in their state to sell Long-Term Care Insurance. Who May Not Be Appropriate For Long-Term Care Insurance?

A Long-Term Care Insurance policy is not for everyone. Buying long-term coverage should not cause financial hardship and force individuals to forego other financial needs. For many people it may not be worthwhile, particularly if their assets are less than $30,000 as a single person and $60,000 as a couple (excluding the value of their home).

• Those whose incomes and assets are near poverty level -- however, they can purchase a policy if a third party pays the premiums.

• Those who are already disabled -- however, a number of the participating insurers offer substandard rates depending on the extent of the disability.

• Those who can self-insure (the wealthy) -- though they may still want to purchase because of the other benefits in the policy such as care coordination.

Who May Be Appropriate For Long-Term Care Insurance?

It is strongly advisable for individuals to consider LTC Insurance when the asset base ranges between $50,000 and $1 million, not counting the home and automobile.


In the category of $1 million and over, Self-Insuring may be a viable option; however clients may want to consider combination life insurance/LTC policies or annuity/LTC policies, possibly with a single premium, since it will pass any money not needed for LTC on to the beneficiary of their choice, heirs, charities, etc.

Even though $500,000 seems like a lot of money to some of us, a couple with $500,000 will spend down to almost nothing in only about seven years, with only one spouse needing Long-Term Care, at the national average of $50,000 a year. If both the husband and wife needed care, it would take less than four years for them to reduce their life savings to zero.

Whether the clients are rich or middle-income, Long-Term Care insurance provides choices, options and services, including care coordination, which they might not have had otherwise. It may be the only thing that keeps people out of nursing homes and keeps families together when the need for LTC occurs.

The Most Appropriate Candidates for LTC Insurance

The most appropriate candidates for LTC insurance are probably those individuals who fall into the middle and upper-middle class economically. Here we often find a substantial risk that may be covered by LTC insurance, the ability to afford the coverage, and a reasonable balance between the cost and the potential benefits. Members of the middle class have a lot at risk and “spending down” for Medi-Cal eligibility would mean drastic reductions in wealth, economic security, and lifestyle.

Certainly people who are wealthy enough to pay for Long-Term Care out-of-pocket or who are poor enough to qualify for Medi-Cal aren't good prospects for Long-Term Care coverage. People who already have Long-Term Care insurance that is adequate for their needs, are also be poor prospects for Long-Term Care insurance. But that still leaves a large number and wide variety of prospects.

When someone is purchasing Long-Term Care insurance, the financial strength, size, and insurance rating of their provider are significant factors to consider. Since the average age for LTC claims is typically in the late 70s, it may be 20 to 30 years before they’ll need to cash in on their policy. So they want to be quite sure that their insurer will still be around when they need it.

Improvement of insured’s position

The main thing to determine is whether the client is better off AFTER implementing the agent’s recommendation. iii. value, benefits and costs of the applicant’s existing insurance Determining the Most Appropriate Means of Funding Long-Term Care

Every person should at least consider the possibility that he or she might someday need Long-Term Care. No one can be sure that accident or illness won't come their way, but to try and sell a Long-Term Care Insurance policy to someone who doesn't need it or can't afford it is contrary to serving the consumer's best interests, and may subject an agent or insurer to penalties.

A sizable portion of the elderly population will at some point require Long-Term Care. But not everyone will, and of those who will require Long-Term Care, not all will need the most expensive type--skilled nursing facility care. Agents must be careful not to overstate the facts to clients in their sales


presentations. Ethical considerations demand that insurance professionals offer advice that is appropriate for each prospective client, whatever that might be. To help determine what is appropriate for each client, agents can imagine parents in various financial and physical conditions and consider what advice they would give them in each circumstance.

For those individuals who have the financial resources to afford it, the use of personal assets may be an appropriate means of funding care. Medi-Cal and, to a lesser extent, Medicare may be the appropriate solution for people of modest or lesser means. LTC Insurance provides the individual with more freedom in selecting how and where Long-Term Care is provided.

For some, a Long-Term Care policy makes sense as an affordable and worthwhile form of insurance. Whether Long-Term Care Insurance is right for a particular client depends on a careful analysis of their situation.

Because Long-Term Care Insurance is a fairly expensive form of protection, an insurance professional must take a long, hard look at who are good prospects. If an individual would be impoverished after a year or so of paying for Long-Term Care, then that person should probably not be considered as someone who can afford an LTC policy premium. Their children or other family members, however, may want to purchase a policy for them.

When Should An Agent Advise Against The Purchase Of Any LTC Policy?

Even a one year Long-Term Care Policy can provide choices and options for an individual that they would not have had without it. It can help to protect their freedom of choice and their dignity at a premium that is affordable for almost anyone. However there are persons for whom even the premium for a one year policy is prohibitive; it may mean going without food or medicine in order to pay the premium. These persons would almost immediately become eligible for assistance from Medi-Cal or one or more of the other state and community programs available for care and should not be solicited under most conditions.

Is Long-Term Care Insurance Right For You?

You should NOT buy Long-Term Care Insurance if: • You can’t afford the premiums • You have limited assets • Your only source of income is a Social Security benefit

or Supplemental Security Income (SSI) • You often have trouble paying for utilities, food,

medicine, or other important needs

You should CONSIDER buying Long-Term Care Insurance if: • You have significant assets and income • You want to protect some of your assets and income • You want to pay for your own care • You want to stay independent of the support of others


Source: CMS

b. personal worksheet The insurer, and/or the agent, must make reasonable efforts to obtain the information on the “Long-Term Care Insurance Personal Worksheet,” contained in the Long-Term Care Insurance Model Regulations of the National Association of Insurance Commissioners. The personal worksheet used by the insurer must contain, at a minimum, the information in the NAIC worksheet in not less than 12-point type. The insurer may request the applicant to provide additional information to comply with its suitability standards.

Carrier rate history on the personal worksheet

In the premium section of the personal worksheet, the insurer must disclose all rate increases and rate increase requests for any prior policies it has sold in any state.

The premium section must include this statement: “A rate guide is available that compares the policies sold by different insurers, the benefits provided in those policies, and sample premiums. The rate guide also provides a history of the rate increases, if any, for the policies issued by different insurers in each state in which they do business, since January 1, 1990. You can obtain a copy of this rate guide by calling the Department of Insurance's consumer toll-free telephone number (1-800-927-HELP), by calling the Health Insurance Counseling and Advocacy Program (HICAP) toll-free telephone number (1-800-434-0222), or by accessing the Department of Insurance's Internet web site (www.insurance.ca.gov).” If the personal worksheet is approved prior to the availability of the rate guide, the worksheet must indicate that the rate guide will be available beginning December 1, 2000.

A copy of the issuer's personal worksheet must be filed and approved by the commissioner. A new personal worksheet must be filed and approved by the commissioner each time a rate is increased in California. The new personal worksheet must disclose the amount of the rate increase in California and all prior rate increases in California as well as all prior rate increases and rate increase requests or filings in any other state. The insurer must use the new personal worksheet within 60 days of approval by the commissioner in place of the previously approved personal worksheet.

• An agent who obtains information through the personal worksheet returns it to the issuer before the issuer considers the applicant for coverage.

• Neither the agent nor the insurer may sell or disclose the information in the worksheet outside the company or agency.

• The issuer then applies the information from the worksheet to its suitability standards to determine whether it should issue an LTC policy to the applicant.

• Agents must use the suitability standards developed by the insurer in marketing Long-Term Care insurance.

Alternatively, the issuers must send the applicant a letter similar to the “Long-Term Care Insurance Suitability Letter” contained in the Long-Term Care Model Regulations of the National Association of Insurance Commissioners. However, if the applicant has declined to provide financial information, the


issuer may use some other method to verify the applicant's intent. Either the applicant's returned letter or a record of the alternative method of verification must be made part of the applicant's file.

The insurer must report annually to the commissioner the total number of applications received from residents of this state, the number of those who declined to provide information on the personal worksheet, the number of applicants who did not meet the suitability standards, and the number who chose to conform after receiving a suitability letter.

Life Insurance riders are exempt from this section.

Agent retention of records for five years, Section 10508.5 of the CIC

It must be the obligation of each life, life and disability, and disability insurance agent and any other agent and insurer to preserve and maintain all applicable records defined in Section 10508 in his or her possession, in addition to those records transmitted to the insurer, at his or her principal place of business for a minimum of five years. The records must be kept in an orderly manner so that the information therein is readily available, and must be open to inspection or examination by the commissioner at all times. i. consumer may decline to provide information (Section 10234.95(h) of the CIC) If the issuer determines that the applicant does not meet its financial suitability standards, or if the applicant has declined to provide the information, the issuer may reject the application. Alternatively, the issuers must send the applicant a letter similar to the "Long-Term Care Insurance Suitability Letter" contained in the Long-Term Care Model Regulations of the National Association of Insurance Commissioners. However, if the applicant has declined to provide financial information, the issuer may use some other method to verify the applicant's intent. Either the applicant's returned letter or a record of the alternative method of verification must be made part of the applicant's file.

4. Replacement Any time long-term care coverage is replaced, the sales commission that is paid by the insurer and that represents the percentage of the sale normally paid for first year sales of long-term care policies or certificates must be calculated based on the difference between the annual premium of the replacement coverage and that of the original coverage. If the premium on the replacement product is less than or equal to the premium for the product being replaced, the sales commission must be limited to the percentage of sale normally paid for renewal of long-term care policies or certificates. Replacement must be contingent upon the insurer's declaration that the replacement policy materially improves the position of the insured, pursuant to Section 10235.16. This provision does not apply to replacement coverage which is group insurance as described in subdivision (a) of Section 10231.6.

a. replacement coverage (Section 10234.97 of the CIC) For purposes of this section, "commission or other compensation" includes pecuniary or nonpecuniary remuneration of any kind relating to the sale or renewal of the policy or certificate including, but not limited to, bonuses, gifts, prizes, awards, and finder's fees.


Every long-term care insurer must file with the commissioner within six months of the effective date of this section, its commission structure or an explanation of the insurer's compensation plan. Any amendments to the commission structure must be filed with the commissioner before implementation. i. definition Replacement is the replacement of an existing policy with a newer one which “materially improves the position of the insured.” ii. basis on improvement of insured’s position The replacement of a long term care insurance policy is contingent upon the insurer’s declaration that the replacement policy “materially improves the position of the insured.” In that regard, any insurer issuing a replacement policy must waive any time limitations in the new policy -- including those applicable to preexisting conditions and waiting periods – to the extent that similar provisions in the original policy were already satisfied. In addition, any insurer issuing a policy to replace a different policy issued by the same insurer must recognize past insured status by granting premium credits. iii. applicability Replacement must be contingent upon the insurer's declaration that the replacement policy materially improves the position of the insured. This provision does not apply to replacement of group insurance. One of the areas in which consumer interests are protected is the amount of commissions available on LTC replacement policies. In the absence of regulation, some unscrupulous agents have been motivated to recommend unnecessary replacements due to the opportunity to earn higher commissions on new business. California law attempts to discourage such unethical activity by limiting the commission payable on replacement policies. iv. restriction on replacement sales commission The law forbids any insurer, broker, agent, or other person to persuade a policyholder to replace a long term care insurance policy unnecessarily. It is also forbidden for an insurer, broker, agent, or other person to cause a policyholder to replace a long term care insurance policy that will result in a decrease in benefits and an increase in premium.

b. replacement of existing insurance notice (Section 10235.16 of the CIC) Long-term care insurance application forms must include a question designed to elicit information as to whether the proposed insurance is intended to replace any other accident and sickness or long-term care insurance presently in force. A supplementary application or other form to be signed by the applicant containing such a question may be used.

Upon determining that a sale will involve replacement, an insurer, other than an insurer using direct response solicitation methods, or its agent must furnish the applicant, prior to issuance or delivery of a policy or certificate, a notice regarding replacement of accident and sickness or long-term care coverage. One copy of this notice must be retained by the applicant and an additional copy signed by


the applicant must be retained by the insurer. The required notice must be provided in the following form:

NOTICE TO APPLICANT REGARDING REPLACEMENT OF ACCIDENT AND SICKNESS OR LONG-TERM CARE INSURANCE

According to (your application) (information you have furnished), you intend to lapse or otherwise terminate existing accident and sickness or long-term care insurance and replace it with long-term care insurance coverage to be issued by (company name) Insurance Company. Your new coverage provides thirty (30) days within which you may decide, without cost, whether you desire to keep the coverage. For your own information and protection, you should be aware of and seriously consider certain factors which may affect the insurance protection available to you under the new coverage. (1) Health conditions which you may presently have (preexisting conditions), may not be immediately or fully covered under the new coverage. This could result in denial or delay in payment of benefits under the new coverage, whereas a similar claim might have been payable under your present coverage. (2) You may wish to secure the advice of your present insurer or its agent regarding the proposed replacement of your present coverage. This is not only your right, but it is also in your best interest to make sure you understand all the relevant factors involved in replacing your present coverage. (3) If, after due consideration, you still wish to terminate your present coverage and replace it with new coverage, be certain to truthfully and completely answer all questions on the application concerning your medical health history. Failure to include all material medical information on an application may provide a basis for the company to deny any future claims and to refund your premium as though your coverage had never been in force. After the application has been completed and before you sign it, reread it carefully to be certain that all the information has been properly recorded. The above "Notice to Applicant" was delivered to me on: ____________________________________________ (Date) ____________________________________________ (Applicant's Signature) For group coverage not subject to the 30-day return provision of Section 10232.7, the notice must be modified to reflect the appropriate time period in which the policy may be returned and premium refunded.

The replacement notice must include the following statement except when the replacement coverage is group insurance as described in subdivision (a) of Section 10231.6:


COMPARISON TO YOUR CURRENT COVERAGE: I have reviewed your current long-term care coverage. To the best of my knowledge, the replacement of insurance involved in this transaction materially improves your position for the following reasons: ____ Additional or different benefits (please specify) ______. ____ No change in benefits, but lower premiums. ____ Fewer benefits and lower premiums. ____ Other (please specify) ______. __________________________________ (Signature of Agent and Name of Insurer) __________________________________________ (Signature of Applicant) __________________________________ (Date)

The advantage of replacing an older policy is that newer policies may offer more desirable benefits and features and fewer restrictions. Assisted living in an RCF/RCFE, home care benefits, inflation protection and no requirement for a prior hospital stay are some of the new benefits and features being offered in current Long-Term Care products. However, just because a policy is newer does not necessarily mean it is better than the one they have. In some instances, the insurer may be required to offer its newer policy but clients may have to undergo new underwriting to obtain the new coverage.

One disadvantage of replacement is that the insurance company will charge higher premiums because the insured is older than they were when they bought the original policy. In addition, if they have any preexisting conditions or are 80 years old or older, companies may refuse to issue new coverage. Those who are still insurable, might consider adding new coverage to the benefits they already have or buying an additional policy to supplement existing benefits.

Before adding benefits to an existing older policy, agents should advise their clients to check with a tax advisor to see if they will lose the grandfathered tax status granted to policies purchased prior to January 1, 1997.

For group coverage not subject to the 30-day return provision, the notice must be modified to reflect the appropriate time period in which the policy may be returned and premium refunded.

NOTE: Agents should be able to interpret older policies and understand why the services may be more restrictive than those described in the newer policies. They should be able to explain this when an older policy is replaced, and be able to accurately identify the reason for replacement and whether it constitutes a material improvement in the agent certification statement on the application, Section 10235.16 of the CIC Insurers using direct response solicitation methods must deliver a notice regarding replacement of accident and sickness or Long-Term Care coverage to the applicant upon issuance of the policy or certificate in the following form:


5. Consumer protection California has a long list of consumer protections some of which are listed here.

According to CIC Section 10234.93. (a) Every insurer of Long-Term Care in California must:


• Establish marketing procedures to assure excessive insurance is not sold or issued. • Submit to the commissioner within six months of the effective date of this act, a list of all agents

or other insurer representatives authorized to solicit individual consumers for the sale of Long-Term Care insurance. These submissions must be updated at least semiannually.

• Display prominently on page one of the policy or certificate and the outline of coverage: “Notice to buyer: This policy may not cover all of the costs associated with Long-Term Care incurred by

“NOTICE TO APPLICANT REGARDING REPLACEMENT OF ACCIDENT AND SICKNESS OR LONG-TERM CARE INSURANCE

According to (your application) (information you have furnished), you intend to lapse or otherwise terminate existing accident and sickness or Long-Term Care insurance and replace it with the Long-Term Care insurance coverage delivered herewith issued by (company name) Insurance Company. Your new coverage provides thirty (30) days within which you may decide, without cost, whether you desire to keep the policy or certificate. For your own information and protection, you should be aware of and seriously consider certain factors which may affect the insurance protection available to you under the new coverage.

• Health conditions which you may presently have (preexisting conditions), may not be immediately or fully covered under the new coverage. This could result in denial or delay in payment of benefits under the new coverage, whereas a similar claim might have been payable under your present coverage.

• You may wish to secure the advice of your present insurer or its agent regarding the proposed replacement of your present policy coverage. This is not only your right, but it is also in your best interest to make sure you understand all the relevant factors involved in replacing your present coverage.

• (To be included only if the application is attached to the policy or certificate). If, after due consideration, you still wish to terminate your present coverage and replace it with new coverage, read the copy of the application attached to your new coverage and be sure that all questions are answered fully and correctly. Omissions or misstatements in the application could cause an otherwise valid claim to be denied. Carefully check the application and write to (company name and address) within thirty (30) days if any information is not correct and complete, or if any past medical history has been left out of the application.

____________________________ (Company Name)”


the buyer during the period of coverage. The buyer is advised to review carefully all policy limitations.”

• Inquire and otherwise make every reasonable effort to identify whether a prospective applicant or enrollee for Long-Term Care insurance already has accident and sickness or Long-Term Care insurance and the types and amounts of any such insurance.

• Every insurer or entity marketing Long-Term Care insurance must establish auditable procedures for verifying compliance with this subdivision.

• Every insurer must provide to a prospective applicant, at the time of solicitation, written notice that the Health Insurance Counseling and Advocacy Program (HICAP) provides health insurance counseling to senior California residents free of charge. Every agent must provide the name, address, and telephone number of the local HICAP program and the statewide HICAP number, 1-800-434-0222.

• Provide a copy of the Long-Term Care insurance shoppers guide developed by the California Department of Aging to each prospective applicant prior to the presentation of an application or enrollment form for insurance.

NAIC Consumer Protection Required for TQ LTCi by HIPAA

‘‘(i) In the case of the model regulation, the following requirements: ‘‘(I) Section 6A (relating to guaranteed renewal or noncancellability), other than paragraph (5) thereof, and the requirements of section 6B of the model Act relating to such section 6A. ‘‘(II) Section 6B (relating to prohibitions on limitations and exclusions) other than paragraph (7) thereof. ‘‘(III) Section 6C (relating to extension of benefits). ‘‘(IV) Section 6D (relating to continuation or conversion of coverage). ‘‘(V) Section 6E (relating to discontinuance and replacement of policies). ‘‘(VI) Section 7 (relating to unintentional lapse). ‘‘(VII) Section 8 (relating to disclosure), other than sections 8F, 8G, 8H, and 8I thereof. ‘‘(VIII) Section 9 (relating to required disclosure of rating practices to consumer). ‘‘(IX) Section 11 (relating to prohibitions against postclaims underwriting). ‘‘(X) Section 12 (relating to minimum standards). ‘‘(XI) Section 14 (relating to application forms and replacement coverage). ‘‘(XII) Section 15 (relating to reporting requirements). ‘‘(XIII) Section 22 (relating to filing requirements for marketing). ‘‘(XIV) Section 23 (relating to standards for marketing), including inaccurate completion of medical histories, other than paragraphs (1), (6), and (9) of section 23C. ‘‘(XV) Section 24 (relating to suitability). ‘‘(XVI) Section 25 (relating to prohibition against preexisting conditions and probationary periods in replacement policies or certificates). ‘‘(XVII) The provisions of section 26 relating to contingent nonforfeiture benefits, if the policyholder declines the offer of a nonforfeiture provision described in paragraph (4). ‘‘(XVIII) Section 29 (relating to standard format outline of coverage). ‘‘(XIX) Section 30 (relating to requirement to deliver shopper’s guide). ‘‘(ii) In the case of the model Act, the following: ‘‘(I) Section 6C (relating to preexisting conditions). ‘‘(II) Section 6D (relating to prior hospitalization). ‘‘(III) The provisions of section 8 relating to contingent nonforfeiture benefits.


‘‘(IV) Section 6F (relating to right to return). ‘‘(V) Section 6G (relating to outline of coverage). ‘‘(VI) Section 6H (relating to requirements for certificates under group plans). ‘‘(VII) Section 6J (relating to policy summary). ‘‘(VIII) Section 6K (relating to monthly reports on accelerated death benefits). ‘‘(IX) Section 7 (relating to incontestability period). ‘‘(B) For purposes of this paragraph and paragraph (1)(C)— ‘‘(i) the terms ‘model regulation’ and ‘model Act’ mean the Long-Term Care insurance model regulation, and the Long-Term Care insurance model Act, respectively, promulgated by the National Association of Insurance Commissioners (as adopted as of October 2000);

a. insurers/agents must provide “Taking Care of Tomorrow” to applicant – which can be accessed on the Department of Aging’s website at www.aging.ca.gov (Section 10234.93(a)(9) of the CIC) Every insurer of long-term care in California must provide a copy of the long-term care insurance shoppers guide developed by the California Department of Aging to each prospective applicant prior to the presentation of an application or enrollment form for insurance.

b. California Department of Insurance’s (CDI) toll free consumer services 1-800-927-HELP Information (CDI’s Toll Free Consumer Services 1-800-927-HELP) and counseling (HICAP location and telephone numbers 1-800-434-0222 and the local HICAP)

c. agents required to provide local HICAP program name, location and telephone number and statewide HICAP telephone number 1-800-434-0222 (Section 10234.93(a)(8) of the CIC)

Health Insurance Counseling and Advocacy Program (HICAP)

www.aging.ca.gov

1-800-434-0222

The Health Insurance Counseling and Advocacy Program (HICAP) is a not-for-profit, volunteer-based program that assists senior with Medicare, Medicare supplement insurance, Long-Term Care insurance, and other health insurance needs. HICAP offers free counseling services at local sites throughout California and provides community education. HICAP serves Medicare beneficiaries (aged 65+ and disabled persons on Medicare), persons about to receive Medicare benefits, planning for retirement, and age 60 or older. HICAP also provides speakers to groups of any age. HICAP volunteer counselors are trained and supervised. They provide objective information and assistance. They do not sell, endorse, or recommend any specific insurance. HICAP serves current Medicare beneficiaries and those planning for future health and long term care needs. HICAP counseling is confidential and free of charge.

HICAP assistance is provided in both individual counseling sessions as well as community seminars Counseling is provided by trained volunteers who must be registered by the California Department of Aging.


HICAP counselors are available for appointments in a wide range of settings such as Area Agencies on Aging, senior centers, senior nutrition sites, libraries, hospitals and community centers. Counselors may also visit homebound individuals unable to come to a site.

Call a local HICAP office Toll-Free: 1-800-434-0222

Agents are required to know the name, address and telephone number of the local program in the area in which they are selling – not just the 800 number

d. HICAP notice on outline of coverage (Section 10232.3(c)(3) of the CIC)

Every application for long-term care insurance must include a checklist that enumerates each of the specific documents that the DOI requires to be given to the applicant at the time of solicitation. The documents and notices to be listed in the checklist include, but are not limited to, the following:

• The HICAP notice.

e. rights to reduce, add or purchase new coverage (Sections 10235.50-10235.52 of the CIC) Downgrade (10235.50-.52) Every policy or certificate must include a provision that gives the policyholder or certificate holder the following rights to reduce coverage and lower premiums:

(a) A right, exercisable any time after the first year, to retain a policy or certificate while lowering the premium in no fewer than the following three ways:

(1) Reducing the lifetime maximum benefit. (2) Reducing the nursing facility per diem and reducing the home- and community-based

service benefits of a home care only policy and of a comprehensive long-term care policy.

(3) Converting a "comprehensive long-term care" policy or certificate to a "Nursing Facility Only" or a "Home Care Only" policy or certificate, if the insurer issues those policies or certificates for sale in the state.

(b) The premium for the policy or certificate that is reduced in coverage will be based on the age of the insured at issue age and the premium rate applicable to the amount of reduced coverage at the original issue date.

(c) If the contract in force at the time a reduction in coverage is made provides for benefit adjustments for anticipated increases in the costs of long-term care services, then the reduced nursing facility per diem, lifetime maximum benefit, and daily, weekly, or monthly home care benefits must be adjusted in the same manner and in the same amount as the contract in force prior to the reduction in coverage.

(d) In the event a policy or certificate is about to lapse, the insurer must provide written notice to the insured of the options in subdivision (a) to lower the premium by reducing coverage and of the premiums applicable to the reduced coverage options. The insurer may include in the notice additional options to those required in subdivision (a). The notice must provide the insured at least 30 days in which to elect to reduce coverage and the policy must be reinstated without underwriting if the insured elects the reduced coverage.

(e) In the event of a premium increase, the insured must be offered the option to lower premiums and reduce coverage.

Upgrade (10235.51)


(a) Every policy or certificate must include a provision that gives the insured the option to elect, no less frequently than on each anniversary date after the policy or certificate is issued, to pay an extra premium for one or more riders that increase coverage in any of the following ways:

(1) Increase the amount of the per diem benefits. (2) Increase the lifetime maximum benefit. (3) Increase the amount of both the nursing facility per diem benefit and the home- and

community-based care benefits of a comprehensive long-term care insurance policy or certificate.

(b) The premiums for the riders to increase coverage may be based on the attained age of the insured. The premium for the original policy or certificate will not be changed and will continue to be based on the insured's age when the original policy or certificate was issued.

(c) The insurer may require the insured to undergo new underwriting, in addition to the payment of an additional premium, to qualify for the additional coverage. The insurer may restrict the age for issuance of additional coverage and restrict the aggregate amount of additional coverage an insured may acquire to the maximum age and coverage the insurer allows when issuing a new policy or certificate.

Upgrade (CIC 10235.52)

(a) Every policy must contain a provision that, in the event the insurer develops new benefits or benefit eligibility or new policies with new benefits or benefit eligibility not included in the previously issued policy, the insurer will grant current holders of its policies who are not in benefit or within the elimination period the following rights:

(1) The policyholder will be notified of the availability of the new benefits or benefit eligibility or new policy within 12 months. The insurer's notice must be filed with the department at the same time as the new policy or rider.

(2) The insurer must offer the policyholder new benefits or benefit eligibility in one of the following ways:

(A) By adding a rider to the existing policy and paying a separate premium for the new benefits or benefit eligibility based on the insured's attained age. The premium for the existing policy will remain unchanged based on the insured's age at issuance.

(B) By replacing the existing policy or certificate in accordance with Section 10234.87.

(C) By replacing the existing policy or certificate with a new policy or certificate in which case consideration for past insured status must be recognized by setting the premium for the replacement policy or certificate at the issue age of the policy or certificate being replaced.

(b) The insured may be required to undergo new underwriting, but the underwriting can be no more restrictive than if the policyholder or certificate holder were applying for a new policy or certificate.

(c) The insurer of a group policy as defined under subdivisions (a) to (c), inclusive, of Section 10231.6 must offer the group policyholder the opportunity to have the new benefits and provisions extended to existing certificate holders, but the insurer is relieved of the obligations imposed by this section if the holder of the group policy declines the issuer's offer.

(d) This section must become operative on June 30, 2003.


Every policy must provide that, in the event the insurer develops new benefits or benefit eligibility or new policies with new benefits or benefit eligibility that are not included in the previously issued policy, the insurer will grant current policy holders who are not in benefit or within the elimination period the following rights:

• The policyholder must be notified that the new benefits or benefit eligibility or new policy are available within 12 months. The insurer's notice must be filed with the department at the same time as the new policy or rider.

• The insurer must offer the policyholder new benefits or benefit eligibility in one of the following ways:

o Adding a rider to the existing policy and paying a separate premium for the new benefits or benefit eligibility based on the insured’s attained age. The premium for the existing policy will remain unchanged based on the insured's age at issuance.

o Replacing the existing policy or certificate. o Replacing the existing policy or certificate with a new policy or certificate. Consideration

for past insured status must be recognized by setting the premium for the replacement policy or certificate at the issue age of the policy or certificate being replaced.

The insured may be required to go through new underwriting, but the underwriting cannot be more restrictive than if they were applying for a new policy or certificate.

The insurer of a group policy must offer the group policyholder the opportunity to have the new benefits and provisions extended to existing certificate holders, but the insurer has no further obligations under this section if the group policy holder declines the issuer's offer.

This section became operative on June 30, 2003.

If a non-Medicaid national or state Long-Term Care program is created through public funding that substantially duplicates benefits covered by the policy or certificate, the policyholder or certificate holder will be entitled to either a reduction in future premiums or an increase in future benefits. An actuarial method for determining the premium reductions and increases in future benefits will be mutually agreed upon by the department and insurers. The amount of the premium reductions and future benefit increases to be made by each insurer will be based on the extent of the duplication of covered benefits, the amount of past premium payments, and claims experience. Each insurer's premium reduction and benefit increase plans must be filed and approved by the department.

10235.95. This section applies to all Long-Term Care policies in force, regardless of their dates of issuance.

Interest must be paid to the claimant at the rate of 10 percent per annum on the amount of any accepted claim beginning on the first calendar day after the day that the payment of the accepted claim is due on or after December 1, 2008.

f. right to choose a paid up benefit (contingent benefit upon lapse) following a rate increase (Sections 10235.35 and 10236.13(e)(3) of the CIC) The commissioner may require the administration by an insurer of the contingent benefit upon lapse, as described in Section 26 (A), (D) (3), (E), (F), (G), and (J) of the Long-Term Care Insurance Model


Regulation promulgated by the National Association of Insurance Commissioners, as adopted in October 2000, as a condition of approval or acknowledgment of a rate adjustment for a block of business for which the contingent benefit upon lapse is not otherwise available.

The insurer must notify policyholders of the contingent benefit upon lapse when required by the commissioner in conjunction with the implementation of a rate adjustment. The commissioner may require an insurer who files for such a rate adjustment to allow policyholders and certificate holders to reduce coverage pursuant to Section 10235.50 to avoid an increase in the policy's premium amount. The commissioner can approve alternative mechanisms filed by the insurer in lieu of the contingent benefit upon lapse.

No insurer may increase the premium for an individual or group long-term care insurance policy or certificate approved for sale under this chapter unless the insurer has received prior approval for the increase from the commissioner.

All proposed premium rate schedule increases must be submitted to the commissioner with the amount of increase after all increases disclosed pursuant to subparagraph (d) of paragraph (1), whether the increase or increases are approved or not approved by the commissioner, triggers the contingent benefit upon lapse, the commissioner must require the administration by an insurer of the contingent benefit upon lapse as a condition of approval of a premium rate schedule increase that is lower than the amount necessary to provide the certification required by paragraph (1) of subdivision (a) or with the initial increase and each subsequent increase in a series of premium rate schedule increases. The commissioner may waive this condition of approval if an insurer demonstrates that the waiver is necessary to protect the financial condition of the insurer, including avoidance of further reductions in capital and surplus.

g. right to request and receive sample policy (Section 10234.93(a)(10) of the CIC) Any entity that offers long-term care in California is required to clearly post on its website and provide written notice at the time of solicitation that a specimen individual policy form or group master policy and certificate form for each policy form offered is available to a prospective applicant upon request. Within 15 calendar days, the individual specimen policy form or group master policy and certificate form must be available to a requesting party.


h. right to appeal contract language (Section 10235.94 of the CIC) Long-term care policies or certificates are to include a provision giving them the right to appeal decisions regarding benefit eligibility, care plans, services and providers, and reimbursement payments.

6. Replacement of long-term care insurance unnecessarily (Section 10234.85 of the CIC) The law forbids any insurer, broker, agent, or other person to persuade a policyholder to replace a long term care insurance policy unnecessarily. It is also forbidden for an insurer, broker, agent, or other person to cause a policyholder to replace a long term care insurance policy that will result in a decrease in benefits and an increase in premium.

“Unnecessary replacement” is defined as the sale of a policy to replace an existing policy that requires that the insured will pay a surrender charge for the policy that is being replaced and that does not confer a substantial financial benefit over the life of the policy to the purchaser so that a reasonable person would believe that the purchase is unnecessary.

In California, it is presumed that any third or greater long term care insurance policy issued to a policyholder in a 12 month period is “unnecessary” except instances in which a policy is replaced solely for the purpose of consolidating policies with a single insurer.

The replacement of a long term care insurance policy is contingent upon the insurer’s declaration that the replacement policy “materially improves the position of the insured.” In that regard, any insurer issuing a replacement policy must waive any time limitations in the new policy -- including those applicable to preexisting conditions and waiting periods – to the extent that similar provisions in the original policy were already satisfied. In addition, any insurer issuing a policy to replace a different policy issued by the same insurer must recognize past insured status by granting premium credits.

According to CIC10235.17 the commissioner must define inappropriate replacement of Long-Term Care insurance in consultation with other interested parties.

Notice to Applicant Regarding Replacement 10235.16

Long-Term Care insurance application forms must include a question designed to elicit information as to whether the proposed insurance is intended to replace any other accident and sickness or Long-Term Care insurance presently in force. Upon determining that a sale will involve replacement, an insurer, other than an insurer using direct response solicitation methods, or its agent must furnish the applicant, prior to issuance or delivery of a policy or certificate, a notice regarding replacement of accident and sickness or Long-Term Care coverage. One copy of this notice must be retained by the applicant and an additional copy signed by the applicant must be retained by the insurer. The required notice must be provided in the following form:


“NOTICE TO APPLICANT REGARDING REPLACEMENT OF ACCIDENT AND SICKNESS OR LONG-TERM CARE INSURANCE

According to (your application) (information you have furnished), you intend to lapse or otherwise terminate existing accident and sickness or Long-Term Care insurance and replace it with Long-Term Care insurance coverage to be issued by (company name) Insurance Company. Your new coverage provides thirty (30) days within which you may decide, without cost, whether you desire to keep the coverage. For your own information and protection, you should be aware of and seriously consider certain factors which may affect the insurance protection available to you under the new coverage.

(1) Health conditions which you may presently have (preexisting conditions), may not be immediately or fully covered under the new coverage. This could result in denial or delay in payment of benefits under the new coverage, whereas a similar claim might have been payable under your present coverage.

(2) You may wish to secure the advice of your present insurer or its agent regarding the proposed replacement of your present coverage. This is not only your right, but it is also in your best interest to make sure you understand all the relevant factors involved in replacing your present coverage.

(3) If, after due consideration, you still wish to terminate your present coverage and replace it with new coverage, be certain to truthfully and completely answer all questions on the application concerning your medical health history. Failure to include all material medical information on an application may provide a basis for the company to deny any future claims and to refund your premium as though your coverage had never been in force. After the application has been completed and before you sign it, reread it carefully to be certain that all the information has been properly recorded.

The above “Notice to Applicant” was delivered to me on:

_______________________________________________

(Date) _______________________________________________

(Applicant's Signature)”

For group coverage not subject to the 30-day return provision of Section 10232.7, the notice must be modified to reflect the appropriate time period in which the policy may be returned and premium refunded.

A comparison is made between the two plans, and the reasons for replacement must be reviewed. This allows the agent to consider the differences between the plans, and specifically how the changes between the previous and the current plan correlate to the reasons provided for requesting a replacement.

Replacement Form includes a comparison of existing and proposed coverage 10235.18


The replacement notice must include the following statement except when the replacement coverage is group insurance as described in subdivision (a) of Section 10231.6:

COMPARISON TO YOUR CURRENT COVERAGE: I have reviewed your current Long-Term Care coverage. To the best of my knowledge, the replacement of insurance involved in this transaction materially improves your position for the following reasons:

____ Additional or different benefits (please specify) ______.

____ No change in benefits, but lower premiums.

____ Fewer benefits and lower premiums.

____ Other (please specify) ______.

(Signature of Agent): __________________________________

(Name of Insurer): __________________________________________

(Signature of Applicant): __________________________________

(Date): __________________________________

Replacement coverage; sales commission; basis on improvement of insured’s position; applicability; definition; filing of commission structure

Any time Long-Term Care coverage is replaced, the sales commission that is paid by the insurer must be calculated based on the difference between the premium of the new coverage and that of the original coverage. If the premium on the replacement product is equal to or less than the premium for the product being replaced, the sales commission must be limited to the percentage of sale normally paid for renewal of Long-Term Care policies of certificates. This serves the purpose of dissuading insurers and agents from recommending replacement policies in order to increase sales and commissions.

Replacement must be contingent upon the insurer's declaration that the replacement policy materially improves the position of the insured. This provision does not apply to replacement of group insurance.

One of the areas in which consumer interests are protected is the amount of commissions available on LTC replacement policies. In the absence of regulation, some unscrupulous agents have been motivated to recommend unnecessary replacements due to the opportunity to earn higher commissions on new business. California law attempts to discourage such unethical activity by limiting the commission payable on replacement policies.

Under this section, “commission or other compensation” includes pecuniary or nonpecuniary remuneration of any kind relating to the sale or renewal of the policy or certificate including, but not limited to, bonuses, gifts, prizes, awards, and finder's fees.


Every Long-Term Care insurer must file with the Commissioner its commission structure or an explanation of the insurers' compensation plan. Any amendments to the commission structure must be filed with the Commissioner before implementation. This applies to all Long-Term Care insurance policies delivered or issued for delivery in this state on or after January 1, 1990.

7. Agent retention of records for five years (Section 10508.5 of the CIC) It is the obligation of each life, life and disability, and disability insurance agent and any other agent and insurer to preserve and maintain all applicable records defined in Section 10508 in his or her possession, in addition to those records transmitted to the insurer, at his or her principal place of business for a minimum of five years. The records must be kept in an orderly manner so that the information therein is readily available, and open to inspection or examination by the commissioner at all times.

8. Long-term care rate & history guide – www.insurance.ca.gov (Section 10234.6 of the CIC) The commissioner must annually prepare a consumer rate guide for Long-Term Care insurance. The consumer rate guide for Long-Term Care insurance must include, but not be limited to, the following information:

• A comparison of the different types of Long-Term Care insurance and coverages available to California consumers.

• A premium history of each insurer that writes Long-Term Care policies for all the types of Long-Term Care insurance and coverages issued by the insurer in California.

The rate history portion of the rate guide must contain the following on each policy offered for sale in CA:

• Company name. • Policy type. • Policy form identification. • Dates sold. • Date acquired (if applicable). • Premium rate increases requested. • Premium rate increases approved. • Dates of premium rate increase approvals. • Any other information requested by the department.

The policy comparison portion of the rate guide must contain a standard set of information regarding notes and rate increases for each policy sold. In compiling the policy comparison portion of the rate guide, the department must separate the group policies from the individual policies available for sale.

The consumer rate guide must be distributed using all of the following methods:

• Through Health Insurance Counseling and Advocacy Program (HICAP) offices. • By telephone using the department's consumer toll-free telephone number. • On the department's Internet Web site.


• A notice in the Long-Term Care Insurance Personal Worksheet required by Section 10234.95.

This should assist both agents and clients in comparison-shopping and allow agents to compare their policy coverage and price to those of other carriers.

C. Statutory Rate Stabilization Requirements Long-Term Care Rates

Insurance companies determine long-term care premiums based on several factors. Some of these include:

• Age. The younger they are, the lower their premium will be. • Their health. Their health when they buy the policy will affect the premium. Their premium will

be higher if they have health problems. • Their area. Long-term care costs may be very different from one area to another. Where they

live will affect the cost of their coverage. • Elimination period. The longer they can pay their expenses before the company begins paying

benefits, the lower their premium. • Benefit amount and duration. Rates are higher for policies with higher benefit amounts and

longer payment durations. • Other factors. Optional benefits they decide to add to their policy also will increase their

premiums.

Premium Increases Premiums on most long-term care policies will increase over time. Companies can raise the premiums on policies that don’t have fixed rates, but only if they increase the premiums for everyone with similar rates in their rate class. A company can’t single them out for a rate increase, regardless of any change in their health or the number or amount of claims they’ve made.

Companies can base their rate class on various factors, such as their age, where they live, and their health status at the time they purchased the policy. The company must give them at least 45 days notice of any premium increase.

The cost of a policy is based on such factors as:

• Age at the time the policy was purchased • The type of the policy purchased (a “basic” policy may cost less compared to another from the

same company that offers more features) • The amount of the daily/monthly benefit purchased • The number of “extras” such as riders or options someone may choose to purchase within a

particular benefit level • The total amount of coverage they have available • The type of inflation protection they select • The “elimination period” or “waiting period,” which are the days they must pay for their care

before the plan begins providing benefits


All Long-Term Care insurance policies in California must be Guaranteed Renewable. This means that premiums cannot be raised solely in response to the number of claims an individual has filed, nor can they be raised solely because of age or change in health.

Companies whose policies are Guaranteed Renewable may increase premiums on policies on a class-wide basis, usually only with state approval.

Premium Discounts and Other Premium-Related Benefits - Companies may offer discounts if both spouses purchase Long-Term Care insurance and may provide discounts for those who do not use tobacco products and are healthy. Companies may provide that the policy of the surviving spouse is “paid-up” when the first spouse dies - no further premium payments are required. The policy may also have a “Waiver of Premium” option that relieves the insured of paying the premiums while receiving benefits. Policies may offer rate guarantees for certain time periods for an additional premium.

Benefits under individual Long-Term Care insurance policies issued before new premium rate schedules are approved under Section 10236.11 will be deemed reasonable in relation to premiums if the expected loss ratio is at least 60 percent, calculated in a manner that provides for adequate reserving of the Long-Term Care insurance risk.

Individual Long-Term Care insurance policies issued before new premium rate schedules are approved under Section 10236.11, and for which rate revisions are filed on or after January 1, 2010, benefits must be deemed reasonable in relation to the premium if the premium rate schedules have a lifetime expected loss ratio of at least 60 percent of the premium scale in effect on December 31, 2009, plus 70 percent of premium increases filed on or after January 1, 2010, calculated in a manner that provides for adequate reserving of the Long-Term Care insurance risk.

In evaluating the expected loss ratio, due consideration must be given to all relevant factors, including the following:

• Statistical credibility of incurred claims experience and earned premiums. • The period for which rates are computed to provide coverage. • Experienced and projected trends. • Concentration of experience within early policy duration. • Expected claim fluctuation. • Experience refunds, adjustments, or dividends. • Renewability features. • All appropriate expense factors. • Interest. • Experimental nature of the coverage. • Policy reserves. • Mix of business by risk classification. • Product features, such as long elimination periods, high deductibles, and high maximum limits.

The commissioner may approve an application for a rate revision filed on or after January 1, 2010, based on less than a 70 percent loss ratio, but not less than a 60 percent loss ratio, for the portion attributable to the rate increase if an insurer can demonstrate that the rates are necessary to protect the financial condition of the insurer, including further reductions in capital and surplus.


Rate increases among the top eight insurers (representing about 80% of covered lives) have been modest and infrequent. Some of the earliest experiences with rate increases emerged as a result of poor underwriting practices or deliberate under-pricing to gain market share. Carriers today understand the importance of careful underwriting to ensuring rate stability and, therefore, they invest in the time and technology to do this. Experience studies over time suggest that insurers, for the most part, are pricing correctly with respect to mortality and morbidity experience. In fact, claims experience, for insurers who have invested in the time and technology to underwrite correctly, has been better than expected overall. More recently, however, there has been concern with insurers assumptions about policy lapse rates and interest rates. Premium increases could be necessary if insurers assumptions are wrong about the number of people who will keep or drop their policies over time or about earnings on reserves. Even small differences between actual and expected rates on these critical assumptions are important. With the current down-turn in the economy and lower interest rates, these concerns are even more important.

1. Importance of rate stability in long-term care insurance It is extremely important for consumers to purchase a policy from a company with significant Long-Term Care insurance claims experience and a history of rate stability. Many insurers will readily admit they don't know yet whether their pricing is adequate or not.

Several carriers have had to raise their rates dramatically due to adverse early claims experience. This has led to a national concern with rate stability. Those that price their product much lower than the competition present a potential problem for clients in that rates may increase significantly and companies with very low rates and very lax underwriting may not even be around when it comes time to pay the claims.

Products which are dramatically lower in price than their competitors could mean substantial rate increases in the future. A number of policyholders have been sold under-priced policies that may create serious difficulties in the future.

Inadequate rates and the need to increase are generally more a function of poor underwriting prior to policy issuance than rising Long-Term Care costs. To reduce the risk of this situation occurring, the California Insurance Code requires insurers to engage in proper underwriting before issuing a policy.

Many insurers have never raised their premiums. Those that have been in the LTC business for many years have experience in underwriting, rating and claims administration. These insurers charge premiums commensurate with the exposures so that huge rate increases will not be necessary to keep the coverage in force.

The rate stabilization features of SB 898 were intended to ensure adequate pricing by requiring that insurers certify that initial rates were “sufficient to cover costs under moderately adverse experience,” thereby protecting consumers against the large rate increases that characterized prestabilization LTC policies.

Source: Assembly Bill 999 (Yamada) Long-Term Care Insurance. 4/20/2011


2. Company responsibilities Policies currently available in California from insurers regulated by the CDI are subject to the “rate stabilization” law. This means that premium rates are subject to actuarial review by the DOI and rate increases on these policies are subject to additional review and justification requirements.

According to CIC 10236.12, all actuaries used by the commissioner to review rate applications submitted by insurers pursuant to this chapter who are employees of the department must be members of the American Academy of Actuaries, with at least five years' relevant experience in Long-Term Care insurance industry pricing or alternatively must meet the professional requirements to issue a “statement of actuarial opinion” as required by subdivision (a) of Section 10236.13.

If the department does not have sufficient employees who are actuaries meeting the requirements of this section to perform the volume of work required by this chapter, the commissioner may contract, as necessary, with independent actuaries who must be members of the American Academy of Actuaries with at least five years’ relevant experience in Long-Term Care insurance industry pricing.

If the department has employees who are actuaries and independent actuaries under contract to the department, both meeting the requirements of this section to review rate applications, an insurer may generally choose between having the rate application reviewed by either employees or independent actuaries under contract to the department. The costs and expenses of reviews by independent actuaries under contract to the department must be charged to the insurer. However, the department must have the discretion to require a review by independent actuaries.

Employees of the department who are actuaries and who are otherwise qualified to review rate applications but who do not meet the requirements of this section may assist an independent actuary under contract to the department.

If the commissioner contracts with independent actuaries for purposes of this section, the commissioner must promulgate regulations to maintain the confidentiality of rate filings and proprietary insurer information and to avoid conflicts of interest.

a. submission of new business premiums (Section 10236.11 of the CIC) The premium rate schedules for all individual and group Long-Term Care insurance policies issued in this state must be filed with and receive the prior approval of the commissioner before a policy may be offered, sold, issued, or delivered to a resident of this state.

Before an initial premium schedule can be approved, it has to be certified by the actuary performing the review for the commissioner that it is sufficient to cover all anticipated costs under moderately adverse experience and that the premium rate schedule is reasonably expected to be sustainable over its life with no future premium increases anticipated. The actuary can request an actuarial demonstration that the assumptions the insurer has used are reasonable. The demonstration must include either premium and claim experience on similar policy forms, adjusted for any premium or benefit differences, relevant and creditable data from other studies, or both.

The insurer must submit to the commissioner for approval a rate filing for each policy form that includes at a minimum all of the following information:


• An actuarial memorandum that describes the assumptions the insurer used to develop the premium rate schedule. The actuarial assumptions must include, but not be limited to, a sufficiently detailed description of morbidity assumptions, voluntary lapse rates, mortality assumptions, asset investment yield rates, a description of all expense components, and plan and option mix assumptions. The memorandum must also include the expected lifetime loss ratio and projections of yearly earned premiums, incurred claims, incurred claim loss ratios, and changes in contract reserves.

• An actuarial certification consisting of at least all of the following: o A statement that the initial premium rate schedule is sufficient to cover anticipated

costs under moderately adverse experience and that the premium rate schedule is reasonably expected to be sustainable over the life of the form with no future premium increases anticipated.

o A statement that the policy design and coverage provided have been reviewed and taken into consideration.

o A statement that the underwriting and claims adjudication processes have been reviewed and taken into consideration.

o A complete description of the basis for contract reserves that are anticipated to be held under the form, to include all of the following:

• Sufficient detail or sample calculations provided so as to have a complete depiction of the reserve amounts to be held.

• A statement that the assumptions used for reserves contain reasonable margins for adverse experience.

• A statement that the net valuation premium for renewal years does not increase (except for attained-age rating where permitted).

• A statement that the difference between the gross premium and the net valuation premium for renewal years is sufficient to cover expected renewal expenses, or if that statement cannot be made, a complete description of the situations in which this does not occur and the type and level of change in the reserve assumptions that would be necessary for the difference to be sufficient. An aggregate distribution of anticipated issues may be used as long as the underlying gross premiums maintain a reasonably consistent relationship. If the gross premiums for certain age groups appear to be inconsistent with this requirement, the commissioner may request a demonstration under subdivision (a) based on a standard age distribution.

• A statement that the premium rate schedule is not less than the premium rate schedule for existing similar policy forms also available from the insurer except for reasonable differences attributable to benefits or a comparison of the premium schedules for similar policy forms that are currently available from the insurer with an explanation of the differences.

Premium rate schedules and new policy forms must be filed by January 1, 2002, for all group Long-Term Care insurance policies that an insurer will offer, sell, issue, or deliver on or after January 1, 2003, and for all previously approved individual Long-Term Care insurance policies that an insurer will offer, sell, issue, or deliver on or after January 1, 2003, unless the January 1, 2002, deadline is extended by the commissioner. Insurers may continue to offer and market Long-Term Care insurance policies approved prior to January 1, 2002, until the earlier of (1) 90 days after approval of both the premium rate schedules and new policy forms filed pursuant to this section or (2) January 1, 2003. Insurers that have


filed premium rate schedules and new policy forms by March 1, 2002, may continue to offer and market Long-Term Care insurance policies approved prior to January 1, 2002, until the earlier of (1) 90 days after approval of both the premium rate schedules and new policy forms filed pursuant to this section or (2) June 30, 2003. Nothing in this section must be construed as prohibiting an insurer from filing new group and individual policy forms, or from relieving an insurer of the obligation to file these forms, with the commissioner after January 1, 2003, if the policy form meets all the requirements of this chapter.

b. rate revisions filed on or after January 1, 2010 (Section 10236.1 of the CIC) Benefits under individual long-term care insurance policies issued before new premium rate schedules are approved under Section 10236.11 and for which rate revisions are filed on or after January 1, 2010, benefits shall be deemed reasonable in relation to the premium if the expected loss ratio is at least 60%. The loss ratio is calculated in a manner that provides for adequate reserving of the long-term care insurance risk. In evaluating the expected loss ratio, due consideration must be given to all relevant factors, including the following:

• Statistical credibility of incurred claims • Rate coverage period • Experienced and projected trends • Concentration of experience within early policy duration • Expected claim fluctuation • Experience refunds, adjustments, or dividends • Renewability features • All appropriate expense factors • The discount rate used in the calculation of lifetime expected loss ratios • Experimental nature of the coverage • Policy reserves • Mix of business by risk classification • Product features, such as long elimination periods, high deductibles, and high maximum

limits

c. rate increase subject to CDI approval (Sections 10236.13 through 10236.15 of the CIC) Insurers cannot increase the premium for an individual or group Long-Term Care insurance policy or certificate approved for sale under this chapter unless the insurer has received prior approval for the increase from the commissioner.

To get the approval, insurers submit the proposed increase to the commissioner. The increase must be certified by an actuary. The commissioner may accept the premium rate schedule increase or series of increases without submission of actuarial certification if;

• Accepting the lower premium rate schedule increase or increases is in the best interest of California policyholders.


• The actuarial memorandum discloses to the commissioner the rate increase necessary to provide the certification required by subdivision (a).

• The rate increase filing satisfies all other requirements • The insurer discloses to affected policyholders the approved premium rate schedule

increase or increases, and the amount and timing of any subsequent rate schedule increases

Premium rate schedule increases that have been approved must follow these guidelines:

• For each rate increase that is implemented, the insurer must file to the commissioner updated projections annually for the next three years and include a comparison of actual results to projected values. The commissioner may extend the period to greater than three years.

• If the commissioner determines that the actual results following a rate increase does not adequately match the projected experience and that the current projections under moderately adverse conditions demonstrate that incurred claims will not exceed proportions of premiums specified, the commissioner may require the insurer to implement any of the following:

• Premium rate schedule adjustments. • Other measures to reduce the difference between the projected and actual

experience. • If the commissioner proves that an insurer has persistently filed inadequate premium

schedules, the commissioner can also prohibit the insurer from filing and marketing comparable coverage for up to five years or from offering all other similar coverages, and may limit marketing of new applications subject to recent premium rate schedule increases after the insurer is afforded proper notice and due process.

• This section does not apply to life insurance policies and certificates that accelerate benefits for Long-Term Care.

• The provisions of this section are applicable to all individual and group policies issued in this state on or after July 1, 2002.

d. explain what rates are stabilized Premiums are designed to remain level over the life of the coverage, based on an individual’s age at the time they buy coverage. This provides an incentive for people to buy at younger ages, while they are still healthy (and insurable) and when their premiums are lower than if they waited until they were older to buy.

While premiums are designed to remain level over the lifetime of the policy, the insurance company does have a limited right to increase premiums on a class basis, if actuarially justified based on the claims experience of an entire group of insureds. No individual can be singled out for a premium increase based on age, health, or their use of benefits. States require insurers to file a request for rate increase which is reviewed to ensure that it is actuarially justified before the rate increase action is approved.


The National Association of Insurance Commissioners (NAIC) has adopted model rate stability guidelines which do the following:

• Require insurers to disclose to prospective buyers any prior rate increases they have made. • Make it more difficult for insurers to obtain a rate increase, including imposing fines and

penalties, as a means of encouraging more conservative assumptions for initial pricing. • Require insurers to certify that their premiums will be adequate under moderately adverse

circumstances.

e. contingent non-forfeiture In California, if the applicant doesn’t accept the offer of a nonforfeiture benefit, a company is required to provide a “contingent benefit upon lapse.” This means that when premiums increase to a certain level (based on a table of increases), the “contingent benefit upon lapse” will take effect. For example, if they bought the policy at age 70 and did not accept the insurance company’s offer of a nonforfeiture benefit, if the premium rises to 40% more than the original premium, the policy holder will be offered the opportunity to accept one of the “contingent benefits upon lapse.” The options are:

• a reduction in the benefits provided by the current policy so that premium costs stay the same; or

• a conversion of the policy to paid-up status with a shorter benefit period. • One may also choose to keep their policy and continue to pay the higher premium.

Shortened Benefit Period – Non-forfeiture 10235.30

Insurers may not deliver or issue Long-Term Care policies in this state unless the insurer offers at the time of application an option to purchase a shortened benefit period nonforfeiture benefit with the following features:

• Eligibility must begin no later than after 10 years of premium payments. • The lifetime maximum benefit is the dollar equivalent of three months of care at the nursing

facility per diem benefit in the policy or the amount of the premiums paid, whichever is greater.

• The same benefits covered in the policy and any riders at the time eligibility begins are payable for a qualifying claim.

• The lifetime maximum benefit may be reduced by the amount of any claims already paid. • Cash back, extended term, and reduced paid-up forms of nonforfeiture benefits are not

allowed. • The lifetime maximum benefit amount increases proportionally with the number of years of

premium payment. • This does not apply to life insurance with accelerated benefits for Long-Term Care.

People who cannot afford to continue paying the same amount of premiums for the coverage they bought have the right to reduce their benefits in return for a lower premium. Companies must, at a minimum, allow insureds to reduce the daily benefit or change the number of years the company will pay benefits so the lower premium is more affordable.


VI. Administration and Enforcement

A. Authority to Bring Actions and Assess Penalties (Section 10234.2 of the CIC) In addition to all other powers and remedies vested in the commissioner by law, the commissioner has administrative authority to assess the penalties prescribed in this article for violation of any provision in this chapter against insurers, brokers, agents, and other entities which have been determined by the commissioner to be engaged in the business of insurance.

1. authorizes private right of action If any violations which require any civil action occur, a court can evaluate the penalties recommended in this article. The court must award reasonable attorney’s fees and costs to the winning plaintiff who establishes a violation of this chapter.

2. authorizes actions by district attorneys, attorney general and city attorneys Courts also have power to institute other sanctions as prescribed by the code. Legal authorities representing the State (Attorney General, district, county, or city attorneys) can seek remedy for violations. Such action would include injunctive relief, penalties, damages, restitution or other remedies in law or equity (Section 10234.2 of the CIC).

3. orders reasonable attorney fees and costs to prevailing party Upon a showing of a violation of the Insurance Code in any civil action, a court may also assess applicable penalties. The court shall award reasonable attorney's fees and costs to a prevailing plaintiff who establishes a violation of this chapter.

B. Violations and Penalties (See Attachment III)

C. Notice and Hearing (Section 10234.5 of the CIC) Any broker, agent, insurer, or other entity within the jurisdiction of the department who is charged with a violation of this chapter must be afforded due process through proper notice and public hearing, if requested, before a penalty may be assessed under Section 10234.3, an order issued under Section 10234.4, or other remedy imposed by the commissioner.

Written notice, served by registered mail, must include:

• A summary of the facts establishing reasonable cause • Citation of the code section or other standard allegedly violated • A statement of the commissioner's intent to assess a penalty including the amount of the

penalty, or to seek another remedy • A statement of the respondent's right to elect any of the following:

o To accept assessment of the penalty or other remedy as stated in the notice o To respond to the charge in writing, after which the commissioner may issue a final

order or set a hearing


o To request, within 10 days of receipt of the notice, a public hearing

If a hearing results, it must be held within 30 days after the notice is served. Within 20 days after the hearing, the administrative law judge must issue findings of fact and a proposed order. The commissioner must issue his or her final order or the proposed order must become the final order of the commissioner within 30 working days after the hearing unless reconsideration is granted for good cause by the administrative law judge. If the notice issued to the respondent assessed a penalty of one hundred thousand dollars ($100,000) or more and the respondent has timely requested, the hearing must be conducted in accordance with Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code, and the commissioner must have all the powers granted therein.

The final order of the commissioner can contain one or more remedy. The amount of any penalty assessed does not need to be limited to the amount stated in the notice to the respondent. In addition to the penalties set forth in this section and any other penalties provided by law, the commissioner may suspend an insurer's certificate of authority under Section 704 or assess a penalty under Section 704.7.


VII. Advertising Guidelines and Marketing Practices

A. Advertising Guidelines The items listed below are also discussed throughout the course.

Before any policy can be advertised, marketed or offered for sale in California long-term care insurance, it must be in compliance with all the provisions of the state code and regulations. Any insurer offering Long-Term Care insurance must submit the following to the department of insurance:

• Specimen individual policy form or group master policy and certificate forms; • The corresponding outline of coverage; and • Representative advertising materials that will be used in California.

These materials will be conveyed by the Department of Insurance to the Department of Aging (HICAP).

California now requires all health insurers to provide translations of certain documents to meet the needs of people who are not proficient in English. The determination of the language or languages into which these documents are to be translated is based on the size of the company’s insured population and the languages that are predominant among that population. Upon request, an insurer must provide written translation of a requested document within 21 days.

The following documents are subject to this regulation:

• applications • consent forms • letters containing important information regarding eligibility or participation criteria • notices pertaining to the denial, reduction, modification, or termination of services and benefits • notices pertaining to the right to file a complaint or appeal • notices that provide information about the availability of free language assistance and other

outreach materials

Translated documents must not include an insurer's explanation of benefits or similar claim processing information unless the document requires a response by the insured.

If an insured requests a translated document, all timeframes and deadlines related to the document must not begin to run until the insurer’s issuance of the translated document.

1. Advertisements must be filed (Section 10234.9 of the CIC) Every insurer providing long-term care coverage in California must provide a copy of any advertisement intended for use in California to the commissioner for review at least 30 days before dissemination. The advertisement must comply with all laws in California. In addition, the advertisement must be retained by the insurer in accordance with Section 10508 for at least three years.

An advertisement designed to produce leads must prominently disclose that "an insurance agent will contact you" if that is the case.


An agent, broker, or other person who contacts a consumer as a result of receiving information generated by a cold lead device, must immediately disclose that fact to the consumer.

Insurers who provide Long-Term Care coverage in California must provide a copy of any advertisement intended for use in California to the commissioner for review at least 30 days before dissemination. The advertisement must comply with all laws in California. In addition, the advertisement must be retained by the insurer for at least three years.

a. provide copy of advertisement to the commissioner 30 days before dissemination Agents running their own ads saying that they sell LTC insurance must also submit these ads to their issuing companies for submission to the approval process. If run independently of an insurer, then these should also be filed with the state for approval.

The ad must be submitted to their issuing company for approval prior to the running of the ad. If the ad is run independently of an issuer, then these should also be filed with the state for approval.

Agents should use only advertising materials provided by their insurers. Insurers develop and obtain approval of sales materials for their agents to use.

Advertising for LTC products must be provided to the commissioner for review at least 30 days before publication. In addition to conformity with all applicable law, the advertising copy must be retained by the insurer for three years. Ads designed to produce leads must contain the following statement prominently displayed; "An insurance agent will contact you." If some sort of cold lead device causes an insurance company representative to contact a consumer for the purpose of soliciting business, this fact must be immediately disclosed to the consumer. (Sec. 10234.9 of the CIC) i. advertisement must comply with all laws in California Rules governing agent designations

On September 26, 2008, Assembly Bill 2150 (Berg, Chapter 327, Statutes of 2008) was signed into law and took effect on January 1, 2009. This new law, which adds Section 787.1 to the California Insurance Code (CIC), prohibits insurance agents and brokers from using a “senior designation” unless the designation has been approved by the California Department of Insurance (CDI).

A senior designation is defined as any degree, title, credential, certificate, certification, accreditation, or approval, that expresses or implies that a broker or agent possesses expertise, training, competence, honesty, or reliability with regard to advising seniors in particular on finance, insurance, or risk management.

A word, phrase, acronym, or logo constitutes a senior designation if it contains the word “senior,” “Medicare,” “Medi-Cal,” “retire,” “mature,” “gerontology,” or “elder,” or any variation or synonym of one of these words within several words of the word “certified,” “chartered,” “registered,” “adviser,” “specialist,” “consultant,” “agent,” “broker,” “insurance,” “planner,” “professional,” “enrolled,” “accredited,” “analyst,” or “fellow,” or any variation or synonym of one of these words. A word, phrase, acronym, or logo may also constitute a senior designation even if it does not contain one of these words.


The use of a senior designation means utilizing a word, phrase, acronym, or logo, in any oral or written communication from which a sale of insurance to a senior may directly or indirectly result, that states or suggests, alone or in context, that a broker or agent holds a senior designation. A broker or agent may not use a senior designation in a manner that misleads a person as to the significance of the senior designation. In addition, a broker or agent may not use a senior designation unless:

• The broker or agent has been granted the right to use the designation by the organization that issues the designation and the broker or agent is currently authorized by the organization to use the designation;

• The designation has been approved by the commissioner for use by brokers and agents in the sale of insurance to seniors; and Insurers, Agents, Brokers and Other Interested Parties

• The broker or agent has been licensed for at least four years to sell the types of insurance with which the designation is used.

An advanced academic degree, such as a Ph.D., M.B.A., or M.S., may be used without meeting these requirements if the degree was awarded by an institution of higher education that has been accredited by an organization that is on the United States Department of Education's list entitled “Accrediting Agencies Recognized for Title IV Purposes.”

However, no general exemption exists for a job title. Therefore, an agent may not use a title such as “Senior Insurance Advisor,” even if the word “senior” refers to seniority within a producer organization, rather than to senior citizens.

When a broker or agent uses a senior designation on a business card, price quotation, or advertisement distributed exclusively in California, that writing must contain the words “California” or “CA” next to “Insurance Agent” or “Insurance Broker-Agent” and “License,” and these words must be located immediately prior to the agent’s or broker’s license number, in type that is in the same font and at least the same size as the type used for the senior designation. For example: “John Doe, Registered Senior Consultant, California Insurance Agent License #0A12345.” ii. insurer will retain advertisement for at least three years (Section 10508 of the CIC) Every insurer in California who is authorized to transact life or disability insurance, or both, must maintain certain records. The original or certified copies must be submitted to the commissioner within 30 days. The records may be maintained in original, carbon, facsimile, microfilm, or electronic data form and must include the original application, record of premiums received, production records, commissions paid, any other agent involved, any other agent not compensated, all correspondence, comparison of benefits, and outline of coverage.

The records must be maintained for a minimum period of three years following the actual delivery of the insurance policy or contract to which each pertains, or, if no policy or contract was issued, for a minimum period of three years after the date of the application therefor.

b. advertisement designed to produce leads must contain specific language Cold lead advertising. Making use directly or indirectly of any method of marketing which fails to disclose that a purpose of the marketing is to solicit insurance and that contact will be made by an insurance agent or insurance company.


i. “an insurance agent will contact you” if that is the case An advertisement designed to produce leads must prominently disclose that “an insurance agent will contact you” if that is the case.

c. information generated by a cold lead device must be immediately disclosed to the consumer Agent must disclose cold lead source. An agent, broker, or other person who contacts a consumer as a result of receiving information generated by a cold lead device, must immediately disclose that fact to the consumer.

2. Identify the rules regarding Internet advertisements (Section 1726 of the CIC)

(a) A person who is licensed in this state as an insurance agent or broker, advertises insurance on the Internet, and transacts insurance in this state, must identify all of the following information on the Internet, regardless of whether the insurance agent or broker maintains his or her Internet presence or if the presence is maintained on his or her behalf:

(1) His or her name as it appears on his or her insurance license, and any fictitious name approved by the commissioner.

(2) The state of his or her domicile and principal place of business. (3) His or her license number.

(b) A person must be deemed to be transacting insurance in this state when the person advertises on the Internet, regardless of whether the insurance agent or broker maintains his or her Internet presence or if it is maintained on his or her behalf, and does any of the following:

(1) Provides an insurance premium quote to a California resident. (2) Accepts an application for coverage from a California resident. (3) Communicates with a California resident regarding one or more terms of an agreement

to provide insurance or an insurance policy.

B. Marketing Practices (Section 10234.93 of the CIC) Every insurer of long-term care in California must:


• Display prominently on page one of the policy or certificate and the outline of coverage: "Notice to buyer: This policy may not cover all of the costs associated with long-term care incurred by the buyer during the period of coverage. The buyer is advised to review carefully all policy limitations."

• Inquire and otherwise make every reasonable effort to identify whether a prospective applicant or enrollee for long-term care insurance already has accident and sickness or long-term care insurance and the types and amounts of any such insurance.

• Provide a copy of the long-term care insurance shoppers guide developed by the California Department of Aging to each prospective applicant prior to the presentation of an application or enrollment form for insurance.

• Clearly post on its Internet Web site and provide written notice at the time of solicitation that a specimen individual policy form or group master policy and certificate form for each policy form


offered in this state is available to a prospective applicant upon request. The individual specimen policy form or group master policy and certificate form must be provided to a requesting party within 15 calendar days of receipt of a request.

1. Insurer responsibilities The state of California has established very specific standards for the marketing and solicitation of Long-Term Care policies to protect the consumer's best interests.

a. establish marketing procedures for agents Every LTC insurer must adhere to these standards and develop auditable procedures to verify compliance:

b. submit to the commissioner a list of long-term care insurance agents, updated every six months Every insurer offering LTC products in this state is required to furnish the Insurance Commissioner with a list of all agents or other representatives who are authorized to solicit individual consumers for the sale of Long-Term Care insurance. This list must be updated at least semiannually. Solicitations by agents or other representatives whose names do not appear on an insurer's authorization list is a violation of the Long-Term Care insurance statutes.

c. provide continuing education training Insurers must provide training and require that each agent or other insurer representative authorized to solicit individual consumers for the sale of long-term care insurance must satisfactorily complete the following training requirements that, for resident licensees, must count toward the licensee's continuing education requirement, but may still result in completing more than the minimum number of continuing education hours set forth in this section:

• For licensees issued a license after January 1, 1992, eight hours of training in each of the first four 12-month periods beginning from the date of original license issuance and thereafter eight hours of training prior to each license renewal.

• For licensees issued a license before January 1, 1992, eight hours of training prior to each license renewal.

• For nonresident licensees that are not otherwise subject to the continuing education requirements set forth in Section 1749.3, the evidence of training required by this section must be filed with and approved by the commissioner as provided in subdivision (g) of Section 1749.4.

• Licensees must complete the initial training requirements of this section prior to being authorized to solicit individual consumers for the sale of long-term care insurance.

• The training required by this section must consist of topics related to long-term care services and long-term care insurance, including, but not limited to, California regulations and requirements, available long-term care services and facilities, changes or improvements in services or facilities, and alternatives to the purchase of private long-term care insurance. On or before July 1, 1998, the following additional training topics must be required: differences in eligibility for benefits and tax treatment between policies intended to be federally qualified and those not intended to be federally qualified, the effect of inflation in eroding the value of


benefits and the importance of inflation protection, and NAIC consumer suitability standards and guidelines.

Provide Long-Term Care continuing education and require that each of its authorized LTC agents and representatives satisfactorily complete the continuing education requirements.

If any licensee subject to these requirements does not satisfactorily complete any portion of the required LTC education courses, that person's name will be removed from the LTC authorization list. Any solicitation of LTC insurance by a person whose name has been removed from the list will be considered a violation of the law.

d. notice on page one of the policy: “this policy may not cover all costs associated with long-term care incurred by the buying during the period of coverage” Display prominently on the first page of the policy or certificate and on the outline of coverage the following statement:

Notice to Buyer: This policy may not cover all of the costs associated with Long-Term Care incurred by the buyer during the period of coverage. The buyer is advised to review carefully all policy limitations.

e. written notice identifying local HICAP Every insurer must provide written notice to prospective applicants, at the time of solicitation, that the Health Insurance Counseling and Advocacy Program (HICAP) provides health insurance counseling to senior California residents free of charge. Every agent must provide the name, address, and telephone number of the local HICAP program and the statewide HICAP number, 1-800-434-0222.

Provide all LTC applicants with the name, address and phone number of the local HICAP program in addition to the hot-line telephone number, (800) 927-HELP f. establish auditable procedures Establish auditable procedures for verifying the insurer's compliance with these rules;

2. Agent responsibilities The Insurance Code specifically identifies and prohibits a number of general practices (such as misrepresentations, false advertising, and unfair discrimination) which are classified as “unfair or deceptive acts or practices” in the business of insurance.

In addition to other unfair trade practices, the following acts and practices concerning Long-Term Care insurance are prohibited:

Twisting. Knowingly making any misleading representation or incomplete or fraudulent comparison of any insurance policies or insurers to induce any person to lapse, forfeit, surrender, terminate, retain, pledge, assign, borrow on, or convert any insurance policy or to take out a policy of insurance with another insurer.


High-pressure tactics. Employing any method of marketing tending to induce the purchase of insurance through force, fright, threat, explicit or implied, or undue pressure to purchase or recommend the purchase of insurance.

Cold lead advertising. Making use directly or indirectly of any method of marketing that fails to disclose in a conspicuous manner that a purpose of the method of marketing is solicitation of insurance and that contact will be made by an insurance agent or insurance company.

a. fair and accurate comparisons Establish marketing procedures to ensure that any comparison of policies by its agents or other producers is fair and accurate;

b. no excessive insurance Establish marketing procedures to ensure that excessive amounts of insurance are not sold or issued;

c. determine applicant’s existing coverage Make every reasonable effort to determine whether a prospective Long-Term Care applicant or enrollee has an existing health insurance or LTC policy and the type and amount.

d. provide California Department of Aging shoppers guide prior to application The California Department of Aging publishes a booklet on Long-Term Care called “Taking Care of Tomorrow” that provides more in-depth information on a broad spectrum of Long-Term Care issues. Agents must give a copy of it when they attempt to sell a Long-Term Care insurance policy. That booklet is also available from the local HICAP project. The National Association of Insurance Commissioners (NAIC) also publishes a booklet called “A Shopper's Guide to Long-Term Care Insurance.” It is available by calling the California Department of Insurance at 1-800-434-0222. There are detailed worksheets in the NAIC publication that may help choose the coverage needed. This is often confused with the NAIC Guide to LTC, which some insurers also require their agents to provide to the applicant.


VIII. California Partnership for Long-Term Care

Partnership Laws

Agents are sometimes surprised to find that the laws regarding the Partnership are not found in the Insurance Code but instead are in the Welfare and Institutions Code. The detailed day-to-day rules for the Partnership are found in the regulations.

Since Partnership policies are still LTC policies, they are also governed by most, but not all, sections of the California Insurance Code.

Partnership Programs

There are a growing number of states that have or are considering Partnership Programs. The Part-nership Programs are joint efforts by state governments and the private Long-Term Care insurance industry to create an option to help individuals plan to meet their future Long-Term Care needs without depleting all of their assets to pay for care.

Features of the Partnership Program generally vary by state but function in a similar way. All Partnership policies must be federally tax-qualified. These policies may also allow someone to retain all or a portion of the assets they would otherwise have had to “spend down” to qualify for Medicaid if Partnership Long-Term Care insurance had not been purchased. However, they will have to contribute income they receive to the cost of any Long-Term Care services provided under Medicaid in accordance with the regulations in their state. Consult the Partnership Program in their state for further information about how its Partnership Program operates

A. Introduction to the Partnership (www.dhcs.ca.gov/services/ltc/pages/cpltc.aspx) Long-Term Care Insurance

Long Term Care insurance helps pay for the insured’s care and protect their assets by paying them benefits for covered expenses up to the amounts set forth in their policy. Depending upon the type of policy they choose, this insurance can pay for a wide variety of home, community-based and facility care services, and can offer care options that may not be covered through government programs.

Many states participate in the Long-Term Care Insurance Partnership Program (“Partnership Program”). This program is similar but not exactly the same in all states. At the time this book was written, the California Partnership is not reciprocal with other states; however most of the other states are reciprocal with each other. In order for the program to work seamlessly, it will probably be


necessary for ALL states, including California to come to an agreement regarding reciprocity on a nationwide basis.

The Partnership Program is designed to encourage individuals to plan for their long term care needs by allowing them to retain more assets than would otherwise be allowed under state Medicaid eligibility requirements. As a result, policyholders are able to retain assets they would otherwise have to spend down prior to qualifying for Medicaid benefits. Generally, individuals can participate in their state’s Partnership Program by owning a long term care insurance policy that meets the requirements for the Partnership Program. Policies qualifying under the Partnership Program generally do not cost more than non-qualified policies with similar benefits.

Long Term Care Insurance Partnership Programs In recent years, several new types of LTCi products have been developed that are more advantageous to the consumer including partnership programs. If a partnership qualified plan is purchased, the state will preserve matching benefit amounts in their estate once the policy benefits are exhausted. In this case, the insured would not need to spend down all of the assets in his or her estate if their policy benefits had been depleted. For example, if someone purchases $200,000 in LTCi benefits, then the state allows them to shelter a matching $200,000 that would be free from government attachment – or claw back provisions. As Medicaid benefits cut into fiscal budgets, states are offering partnership insurance plans to encourage the purchase of LTC insurance. These programs (where offered) promote the purchase of LTCi in order to reduce the size of the insured(s) attachable estate. Newer LTCi policies are much more flexible than those of just a few years ago. The advent of hybrid coverage and several new benefit packages allow for choices that can account for most situations. Additionally, some policies offer a “return of premium” option to consumers after several years of payments, while others allow people to share their policy credits with their spouse if he or she ultimately needs all of the combined benefit. Many LTCi products will pay for care provided in the insured’s own home, an assisted living facility or within an adult day care center, as well as a nursing home setting. A family member who serves as their primary care giver within their own home may also qualify for payment under some LTCi policies.

1. Partnership product allows dollar-for-dollar offset of benefit with Medi-Cal spend-down recovery The Long-Term Care Partnership Program helps educate about planning for clients’ long-term care needs. The partnership is a joint effort between private insurers and the state. Insurers must follow state and federal guidelines, and agents must complete training to sell partnership policies. Partnership policies are tax-qualified plans that also include an asset disregard benefit and inflation protection. The asset disregard benefit is useful if someone need to apply for Medicaid to pay for long-term care expenses. Partnership policies don’t guarantee they’ll be accepted into Medicaid. They still have to meet


income, medical, and other eligibility criteria. With the asset disregard benefit, every dollar of long-term care benefits a partnership policy pays will equal one dollar of countable assets that will be disregarded to determine whether they’re eligible for Medicaid assistance. This means they can keep assets above the normal limit and they won’t need to spend down their assets to qualify for Medicaid. In addition, the assets that were disregarded in the Medicaid eligibility process will not be subject to Medicaid liens and recoveries after they die. Inflation protection helps a policy continue to pay long-term care benefits as costs rise. Partnership policies require different levels of inflation protection based on their age:

• Age 60 and younger: The insurance company must offer the option to buy 5 percent compound annual inflation protection. If they decline the 5 percent offer, the insurance company must offer them another form of compound inflation protection and they must purchase and keep that protection until they reach age 61.

• Age 61 to 75: They must buy and keep some form of inflation protection until they turn 76. • Age 76 and older: Companies must offer inflation protection, but they don’t have to buy it or

keep it.

If someone is considering a long-term care policy, ask their insurance company or agent whether a partnership policy meets their needs. If they bought a long-term care policy on or after February 8, 2006, ask their agent about exchanging their policy for a partnership policy. Note: Partnership policies have a disclosure statement that says the policy is a long-term care partnership policy. If they make any changes to their partnership policy, they could lose their partnership policy status. Their agent can tell them what changes will result in a status change.

2. Special Partnership certification is required in order to sell Partnership product Prior to selling Long Term Care Partnership policies, agents must first complete the initial long term care training, as well as an 8 hour in-person Partnership seminar every renewal period.


IX. Attachments Legislative Overview

California Partnership for Long-Term Care The Partnership Policies (Title 22, Division 3, Subdivision 1, Chapter 8 of the California Code of Regulations).

Must use State Standardized Section on Partnership

The California Partnership for Long-Term Care (the Partnership), a program of the California Department of Health Services (DHS), is an innovative partnership among consumers, the State of California and a select number of insurance companies, plus the California Public Employees Retirement System (CALPERS). These insurers offer a special type of Long-Term Care insurance policy, commonly called “Partnership” policies, that must meet certain requirements set by the DHS. Insurance companies participating in the Partnership program must have their Partnership policies approved by both the Department of Insurance and the DHS. Additionally, only insurance agents who have received special training are able to sell Partnership policies and to advise clients as to whether the Partnership program is suitable.

Each Partnership-approved policy includes insurance benefits to cover the care that may be needed and automatic inflation protection to ensure that the benefits keep pace with the rising cost of care. Partnership policies also have other important features that are not required in other Long-Term Care insurance policies. To learn more about these policies and the companies that are approved to sell them, call the Partnership for free brochures at 800-CARE445 (800-227-3445).

A. Medi-Cal Requirements – Attachment I APPENDIX A — Medi-Cal Property and Asset Limitations

There are property/asset limits for the Medi-Cal program. If their property/assets are over the Medi-Cal property limit, they will not get Medi-Cal unless they lower them according to the program rules.

The county looks at how much they and their family have each month. If their allowable property/assets are below the limit at any time during that month, they will get Medi-Cal, if otherwise eligible. If they have more than the limit for a whole month, they will be discontinued until they are once again below the limits.

The home they live in, furnishings, personal items, and one motor vehicle are not counted.

A single person is allowed to keep $2,000 in property/assets, the limit is higher if they are married or have a family.

For detailed information concerning Medi-Cal exempt assets, please contact your local county welfare office (usually the Department of Health or Social Services) for a form called “Medi-Cal General Property Limitations for all Medi-Cal Applicants” (MC Information Notice 007).

APPENDIX B — Medi-Cal Property and Asset Limitations for Married Couples When One Spouse is in a Nursing Home


If one spouse (husband or wife) goes into a nursing home, and the other spouse is still at home, the spouse at home may keep up to $117,240 while the institutionalized spouse may keep $2,000 (this is the amount allowed in 2014; the amount is adjusted by the annual increase of the Consumer Price Index).

In 2014, the spouse at home may keep all of the couple’s income he/she receives in his/her own name. If this amount is under $2,931 per month, a monthly allocation may be made from the institutionalized spouse to the at-home spouse to bring the at-home spouse’s income up to at least $2,931 per month. This is referred to as the at-home spouse’s “monthly maintenance needs allowance.” (This amount is also adjusted annually by the cost of living increase.)

The at-home spouse may retain additional income or assets through a “fair hearing,” or by court order. The spouse in the nursing home is permitted to keep $35 a month for personal needs.

APPENDIX C — Medi-Cal Share of Cost

If someone is on Medi-Cal, they may need to use some portion of their monthly income from Social Security, a pension, etc. to pay for their health and long-term care expenses. Their income will probably not be enough to pay the entire bill, so Medi-Cal will pay the rest of their nursing home bill or any other medical expenses they may have.

People will be allowed to keep a certain amount of their income each month. In 2014, they may keep the following “Maintenance of Need” amount:

• If they are living in the community, an individual may keep $600*, a married couple $934*; or • If they are in a nursing home, an individual may keep $35 for personal needs. If he or she has a

spouse at home, the at-home spouse may keep all of the couple’s income he/she receives in his/her name. If this amount is under $2,931 per month, a monthly allocation may be made from the institutionalized spouse to the at-home spouse to bring the at-home spouse’s income up to at least $2,931 per month.

In determining their share of cost, Medi-Cal will calculate the applicant’s/ institutionalized spouse’s total monthly income. This figure is their net income. The county will subtract the allocation to the at-home spouse, if applicable. Then the “Maintenance of Need” amount is subtracted from your net income. The remaining amount is their monthly share of cost— the amount they would have to spend on medical or long-term care before Medi-Cal begins payment.

For more detailed information on how the Medi-Cal share-of-cost is calculated, contact the county Department of Social or Human Services (also known as the county welfare office).

*There may be other adjustments allowed based on individual circumstances.


B. Tax Treatment of Long-Term Care Insurance & Expenses – Attachment II A copy of tax form 8853 can be found in the Appendix of this book.

Tax Form 8853 is used to report the amount of taxable LTC benefits when a policyholder files their tax return. It has instructions regarding reporting both benefits from TQ policies which are per diem benefits above the amount allowed by law and reporting benefits from policies which are not tax-qualified. Please review this form carefully, but do not attempt to provide legal or tax advice to your clients unless you are licensed to do so.

Agents must be very cautious about discussing the tax implications of TQ and non-TQ policies, and should avoid venturing into the profession of being a tax adviser. Agents should recommend that applicants for Long-Term Care insurance seek the advice of a professional tax adviser concerning the differences between TQ and NTQ policies, how their own circumstances might affect their tax situation, and what tax consequences might result from any contemplated policy changes.

The IRS can be contacted by telephone at (800) TAX-FORM (1-800-829-3676) or on the World Wide Web at www.irs.gov.

The top half of form 8853 refers to per-diem benefits received from TQ policies that are over the allowed cap which increases each year. This does not apply to insureds with reimbursement benefits. The caution statement tells tax payers what to do with the benefits received from NTQ policies.

Please note: All of the forms and publications supplied in this course are for instructional purposes only.

HIPAA also allows life insurance contracts to pay an accelerated benefit in the event the insured suffers a chronic illness. HIPAA requires that an individual must be receiving care pursuant to a plan of care prescribed by a licensed health care practitioner, and that the individual be certified by a licensed health care practitioner as being “chronically ill” by either being unable to perform at least 2 activities of daily living or requiring substantial supervision due to a severe cognitive impairment.

IRC Section 101(g)(1)

For more information about IRC Section 1010(g)(1), please see the Appendix at the back of this book.

HIPAA requires that Long-Term Care insurance policies comply with its guidelines to be considered “qualified” Long-Term Care insurance. Policies that do not meet these requirements are considered to be non-qualified Long-Term Care insurance policies. Premiums paid for a non-qualified policy are not presumed to be deductible as accident and health insurance. However, HIPAA was silent as to the tax treatment of benefits received from non-qualified policies issued after January 1, 1997. To date, the Department of the Treasury has not issued an opinion on this conflict and Congress has not taken the matter up again leading to continued speculation about the tax implications of these benefits.


1. Provide sample of 1099 LTC form and instructions

Instructions for Policyholder

A payer, such as an insurance company or a viatical settlement provider, must give this form to you for payments made under a long-term care insurance contract or for accelerated death benefits. Payments include those made directly to you (or to the insured) and those made to third parties.

A long-term care insurance contract provides coverage of expenses for long-term care services for an individual who has been certified by a licensed health care practitioner as chronically ill. A life insurance company or viatical settlement provider may pay accelerated death benefits if the insured has been certified by either a physician as terminally ill or by a licensed health care practitioner as chronically ill.

Long-term care insurance contract. Generally, amounts received under a qualified long-term care insurance contract are excluded from your income. However, if payments are made on a per diem basis, the amount you may exclude is limited. The per diem exclusion limit must be allocated among all policyholders who own qualified long-term care insurance contracts for the same insured. See Pub. 525 and Form 8853, and its instructions for more information.

Per diem basis. This means the payments were made on any periodic basis without regard to the actual expenses incurred during the period to which the payments relate.

Accelerated death benefits. Amounts paid as accelerated death benefits are fully excludable from your income if the insured has been certified by a physician as terminally ill. Accelerated death benefits paid on behalf of individuals who are certified as chronically ill are excludable from income to the same extent they would be if paid under a qualified long-term care insurance contract.

Policyholder's identification number. For your protection, this form may show only the last four digits of your social security number (SSN), individual taxpayer identification number (ITIN), or adoption taxpayer identification number (ATIN). However, the issuer has reported your complete identification number to the IRS and, where applicable, to state and/or local governments.


Account number. May show an account or other unique number the payer assigned to distinguish your account.

Box 1. Shows the gross benefits paid under a long-term care insurance contract during the year.

Box 2. Shows the gross accelerated death benefits paid during the year.

Box 3. Shows if the amount in box 1 or 2 was paid on a per diem basis or was reimbursement of actual long-term care expenses. If the insured was terminally ill, this box may not be checked. *If Box 3 is marked Reimbursed Amount and you have a Tax Qualified Contract, then the amounts received can generally be excluded from your income. A tax qualified contract qualifies for favorable federal income tax treatment. If the policy only pays benefits that reimburse you for qualified long term care expense you will not owe federal income tax on these benefits, however we are still required to report to the IRS the amount of tax-free long term care insurance benefits that you have received under your insurance contract. Please contact the IRS to obtain additional information or consult with a tax advisor for additional guidance.

*If Box 3 is marked Reimbursed Amount and you have a Non-Tax Qualified Contract, then some or all of your benefits may be taxable. On a yearly basis, we are required to report to the IRS on Form 1099-LTC the gross amount of long term care benefits issued under your insurance contract. Since your contract is not tax qualified, some or all of your benefits may be taxable. You will need to determine the taxable portion of non-qualified long term care benefits for purposes of your individual income tax return. Please contact the IRS to obtain additional information or consult with a tax advisor for additional guidance.

*If Box 3 is marked Per Diem (Indemnity) then the amount you may exclude from your income is limited. Because your benefits were paid on a per diem (indemnity) basis, without regard to the actual long term care expenses incurred, the amount of benefits you may exclude from your income is subject to a daily maximum amount. If you exceed this per diem (indemnity) limitation, part of the benefits you received may be taxable. All relevant forms and instructions for determining the taxable portion, if any, of long term care benefits paid on a per diem (indemnity) basis are available by contacting the IRS at 1-800-829-3676 or online at www.irs.gov or from local libraries and post offices. For further assistance, please contact the IRS directly or consult with a tax advisor.

Box 4. May show if the benefits were from a qualified long-term care insurance contract.

Box 5. May show if the insured was certified chronically ill or terminally ill, and the latest date certified.

Future developments. For the latest developments related to Form 1099-LTC and its instructions, such as legislation enacted after they were published, go to www.irs.gov/form1099ltc.


2. Provide copy of tax form 8853


C. Applicable Laws & Penalties – Attachment III The Insurance Commissioner has the administrative authority to issue new regulations, and to assess various penalties against insurers, agents, brokers and others engaged in the insurance business for violation of any of the statutory provisions concerning long-term insurance. Upon showing that a violation has occurred in any civil action, the court may also assess penalties, including an award of reasonable attorney's fees and costs to a prevailing plaintiff who establishes that a violation has occurred.

Administration and Enforcement, Sections 10234 through 10234.7 of the CIC

Each year, the insurance commissioner must submit an annual report to the Legislature, creating the content for a consumer rate guide for Long-Term Care insurance that must include a comparison of different types of long term care insurance and a premium history of each insurer. This must be compiled in consultation with a task force designated by the commissioner for this purpose, which must include insurance industry representatives, other individuals deemed appropriate by the commissioner, and one or more representatives from each of the following

• The Health Insurance Counseling and Advocacy Program. • The California Health Policy and Data Advisory Commission.

The commissioner has the responsibility, in consultation with the task force, to develop analytic methods and to select indicators for evaluation of the impact of Long-Term Care insurance on the public share of costs for Long-Term Care. The consumer rate guide must be published each year no later than December 1st and must be distributed via telephone, the department’s website and through HICAP offices.

Authority to Bring Actions, Assess Penalties, Section 10234.2 of the CIC

In order to enforce the state's laws and regulations regarding Long-Term Care insurance, the Commissioner of Insurance has the authority to assess prescribed penalties for any violation.

Authorizes private right of action; orders reasonable attorney fees to prevailing party

The commissioner has the ability to authorize private right of action as opposed to public action.

In addition to all other powers and remedies, the commissioner has the administrative authority to assess the penalties in this article against insurers, brokers, agents, and other entities engaged in the insurance.

In any civil action, upon a showing of a violation of this chapter a court may also assess the penalties in this article. The court will award reasonable attorney's fees and costs to a prevailing plaintiff.

Authorizes actions by district attorneys, attorney general, city attorneys

In addition to the commissioner and the court, a city attorney on behalf of the people of the State of California, the attorney general, and a district attorney may take actions for injunctive relief, penalties prescribed in this article, damages, restitution, and all other remedies in law or equity.


A prevailing plaintiff who establishes a violation of this chapter law will be awarded reasonable attorney fees and costs by the court.

Commissioner Regulatory Authority, Section 10234 of the CIC

The Commissioner has the primary authority and responsibility to adopt reasonable regulations, amendments and additions to these laws, as are necessary to administer the laws.

Penalties, Section 10234.3 of the CIC - paid to the Insurance Fund

Agent

Brokers, agents, or other entities determined by the commissioner to engage in the insurance business, except insurers, who violate this chapter are liable for an administrative penalty of:

• At least $250 for agent’s first violation • At least $1,000 for agent’s subsequent or knowing violation • No more than $5,000 for inappropriate replacement • No more than Maximum $25,000 per violation

Insurer

Insurers that violate this chapter are liable for an administrative penalty of:

• At least $5,000 for insurer’s first violation • At least $10,000 for insurer’s subsequent or knowing violation • No more than $10,000 to $500,000 for insurer’s general business practice

These penalties must be paid to the Insurance Fund.

Other remedies Section 10234.4 of the CIC

In addition to assessing penalties and other applicable remedies, the commissioner may take the following actions upon determination that a violation has occurred.

Suspend or revoke the license of any broker, agent, or other producer licensed by the department.

Suspend an insurer's certificate of authority to transact disability insurance.

Order to cease marketing or cease other activity

Order any broker, agent, insurer, or other entity engaged in the business of insurance, to cease marketing in California Long-Term Care insurance or to take necessary actions to comply.

Notice and Hearing Section 10234.5 of the CIC

Any broker, agent, insurer, or other entity within the jurisdiction of the department who is charged with a violation of this chapter must be given due process if requested, before a penalty may be assessed an order issued or other remedy imposed by the commissioner.

Requirement for written notice to respondent


Written notice, served by registered mail, must include:

• A summary of the facts establishing reasonable cause that a violation has occurred. • Citation of the code section or other standard allegedly violated. • A statement of the commissioner's intent to assess a penalty including the amount of the

penalty, or to seek another remedy. • A statement of the respondent's right to elect any of the following:

o To accept assessment of the penalty or other remedy as stated in the notice. o To respond to the charge in writing, after which the commissioner may issue a final

order or set a hearing. o To request, within 10 days of receipt of the notice, a public hearing.

Administrative Law Bureau hearing within 30 days

If timely requested by the respondent or ordered by the commissioner, a public hearing before the Administrative Law Bureau of the department must be held within 30 days after the notice is served.

Within 20 days after the hearing, the administrative law judge must issue findings of fact and a proposed order.

The commissioner must issue his or her final order or the proposed order must become the final order of the commissioner within 30 working days after the hearing unless reconsideration is granted for good cause by the administrative law judge.

If the notice issued to the respondent assessed a penalty of one hundred thousand dollars ($100,000) or more and the respondent has timely requested, the hearing must be conducted in accordance with Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code, and the commissioner must have all the powers granted therein.

Contents of final order

The final order of the commissioner may contain one or more of the remedies set forth in this article. The amount of any penalty assessed need not be limited to the amount stated in the notice to the respondent.

In addition to the penalties set forth in this section and any other penalties provided by law, the commissioner may suspend an insurer's certificate of authority under Section 704 or assess a penalty under Section 704.7 if the commissioner finds, after notice and hearing, that the insurer has violated this chapter or regulations adopted pursuant to this chapter or that the insurer has knowingly permitted any person or entity to do so.

CDI retains rights for Administrative Procedures Act hearing

Lapse & replacement data, purpose of reporting is close review of agent activities, Section 10234.86 of the CIC

Reporting replacement and lapse rates does not necessarily imply a violation of insurance laws or other wrongdoing. The reports can be used to more closely review agent activities regarding the sale of Long-Term Care insurance.


Insurers must calculate data for each agent & maintain records

Every insurer must maintain records of each agent's replacement sales as a percent of the agent's total annual sales and the amount of lapses of Long-Term Care insurance policies sold by the agent as a percent of the agent’s total annual sales.

Replacement sales relative to annual total sales

Every insurer must report by June 30 of each year the 10 percent of its agents in California with the greatest percentage of lapses and replacements.

Lapses relative to total annual sales

Every insurer must report by June 30 of each year the number of lapsed policies as a percent of its total annual sales as a percent of its total number of policies in force in the state, and as a total number of each policy form in California as of the end of the preceding calendar year.

June 30th report: agents with greatest lapse & replacement rate

Every insurer must report by June 30 of each year the number of replacement policies sold as a percent of its total annual sales in California and as a percent of its total number of policies in force in the state as of the end of the preceding calendar year.

• June 30th report: percentage of lapsed policies • June 30th report: percentage of replacement policies


Accelerated benefits, 26 Appeal, 66 Assets, 24, 30 Association, 16, 21 Automatic, 144 Average, 106 Capacity, 53, 63 Changes, 60 Claims, 60 Commissioner, 101, 102, 204, 224, 240, 254 Community, 19, 20, 22, 123, 124, 149, 178 Conditions, 43, 54 Consideration, 9 Consumer, 33, 52, 124, 127 Consumer Price Index, 33, 52, 127 Consumers, 21 Continuation, 95 Contract, 53, 62, 65 Control, 64 Conversion, 25, 95 CPI, 127 Dealers, 123 Deterioration, 63 Discharge, 16 Disclosures, 94 Eligibility, 25, 31, 62 Employees, 99 Equity, 25 Estate, 35, 36, 37 Ethical, 207 Expenses, 43, 106 Fire, 124 Government, 11, 20 Health care, 16 Homemaker, 108 HUD, 25 Income, 17, 30, 33 Increase, 127 Individual, 65, 94, 97, 99 Inflation, 139, 140, 141, 143, 144, 145 Insured, 53, 62, 63, 65, 94 Insurer, 236 Interest, 36 Internal Revenue Code, 51, 52, 96, 183 Investigate, 124 IRA, 33 IRS, 120, 249 Law, 33, 35, 53, 60, 64, 141, 192 Legal, 36

Level, 30, 56 Life insurance, 81, 140 Limitations, 30 Limited, 28 Long-term, 6, 8, 14, 54, 61, 80, 97, 110, 126, 148, 198,

200, 207 Loss, 53, 63 LTC, 6, 14, 25, 29, 43, 54, 60, 61, 66, 81, 93, 94, 96, 97,

99, 107, 110, 111, 120, 124, 125, 138, 143, 183, 184, 185, 193, 197, 200, 204, 206, 207, 209, 223, 227, 240, 241, 242, 243, 244, 249

Mandatory, 192 Medical, 110 Mental, 54, 63, 123 Mobile home, 25 Money, 25 NAIC, 26, 126, 185, 200, 204, 208, 243 National Association of Insurance Commissioners, 26, 205 Needs, 53, 63, 65 Options, 94 Partnership, 37, 200, 244 Policies, 64, 95, 96, 97, 106, 107, 110, 184 Primary, 123 Private, 30, 106 Professional, 9 Provision, 62 Rates, 127 Real property, 37 Recovery, 35, 36 Replacement, 96, 223 Residential, 30, 105, 124, 149, 177, 178 Safety, 65, 102 Security, 17 Short-term, 65 Social Security, 30, 42 Spouse, 36 State, 16, 17, 19, 20, 25, 35, 61, 107, 123, 124, 125, 178,

236 Suitability, 204 Term, 9, 24, 37, 43, 44, 45, 53, 60, 62, 64, 65, 97, 106,

123, 205, 206, 207, 236 Termination, 94 Transfer, 36 Treasury, 52, 55, 71, 96, 183 Unit, 35 Used, 64 Viatical settlements, 26 You, 43, 45 Your, 192

ca 8hr ltc 2014 - sandi kruise inc · 2015. 3. 4. · i. long-term care (ltc) this course is...

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