Ch 7: Long-term care insurance

Question 1

Describe a long term care insurance contract

8

Answer 1

1. A long term care insurance conctract may provide a cash benefit or indemnify the insured for the cost of long term care
2. Ageing population creates need for LTCI,
3. Aimed at PH whose condition won’t improve, require management, not treatment
4. Disability also covered under LTCI excl accidental disability(RAF,Liab policies,Courts)
5. Costs of care
   
   • Living, food,clothes,heating
   • housing, rent, mortgage
   • personal care costs:
     
     • • in costs of being looked after (not total cost)
     • eg special nursing care
6. intermediate care: after an acute event to minimise dependence on LTC
7. Informal care:
   
   • Provided by spouse/children
   • limited to max hours per week
   • Replacement cost if no longer done
8. Group versions don’t typically exist

Question 2

What is long term care? (7)

Answer 2

1. All forms of continuing
   
   1. personal care or
   2. nursing care and associated domestic services…
2. …for people who are unable to look after themselves without some degree of support,
3. whether provided in
   
   1. their own homes,
   2. at a day centre,
   3. or in a state sponsored or care home setting.

Question 3

Describe

(i) the optimal outcomes of long term care, and (1, 2 ; 1)

Answer 3

1. Long term care aims to treat the result of the condition, not the condition itself. Ideally we want
   
   1. help individual regain independence
   2. slow down detorioration
   3. provide necessary care support and environment
2. Medical care also important aspect of long term care, where physical/mental breakdown requires doctors/nursing staff. Usually expensive!

Question 4

Briefly describe the 2 main ways in which long term care may be provided, in terms of who the providers of care services are, and how qualified these providers are

(1, 3)

(1, 5)

Answer 4

1. Formal care
   
   1. Care which is provided via a professional services either in
      
      1. Own home
      2. Homes near relatives
      3. Managed residential homes
2. Informal care
   
   1. Care typically provied by spouses/family/relatives, not provided via professional services, usually limiited to not more than 4 hours per week.
   2. Often carries indirect cost (lost ecnomic activity)
   3. Influenced by
      
      1. Culural/religious practices
      2. Attituted towards caring for older generation
      3. Geographic family dispersion
      4. Family structure changes (divorces, re-marriage, lower birth rates)
      5. Proportion of working women

Question 5

How does LTCI meet Customer Needs?

4 1,9,2,1

Answer 5

1. Protection against additional costs when unable to look after yourself
2. Customer needs met
   
   1. Finance provision of care/assistance (in old age)
   2. Financial protection (when a person becomes unable to look after self)
   3. Protect from insufficient funds/inadequate state care
   4. Avoid dependence on unpaid care
   5. Provide comfort (for insured, for insured’s relatives/family)
   6. Generally doesn’t indemnify if benefits in cash terms
   7. Uncertainty associated with state provided cover
   8. Inflation protection of care costs (if indemnity)
   9. Advice on care
3. Conflict bet PH and Insurer interests
   
   • PH wants indemnify
   • Insurer wants cash est as indemnification is difficult to forecast.
4. Percieved need for LTCI is high and felt after retirement when cost of cover increases.

Question 6

What are the 2 main types of long term care contracts? (2)

(in terms timing of funding compared to timing of when benefits are paid)

Answer 6

1. Pre funded long term care contracts
   
   • purchased by relatively healthy people to protect them against risk of future disability/morbidity
   • because these contracts provide for future disability, a claims trigger will need to be met to pay benefit. This is not the case for immediate needs long term care contracts
2. Immediate needs long term care contracts
   
   1. Purchased by people already in a state of needing long term care, needing to protect against uncertain survival duration

Question 7

Pre funded long term care contracts: discuss the following:

• structure, in terms of the ‘policy being sold by itself’ vs ‘the policy in addition to other policies’ (5)
• funding/financing for the care required by the policyholder…ie premiums payable (4)

Answer 7

Structure may either be:

1. Standalone: this is the case most of the time
2. Rider: added to
   
   1. CI: TPD definition changes at age 60 to ‘loss of independant existence, failure of ADL’s’
   2. Whole of life: fixed % of benefit accelerated when LTC claim def satisfied. Large SA =>expensive than standalone.
   3. IP: cover continues after ‘retirement’, defs changes from occupation based to activity based

Funding:

1. Single premium
2. Regular premiums: usually increase with chosen benefit increase rate (WOP)
3. Restricted regular premiums:
   
   1. up to certain age (NRA?)
   2. stop at a level of disability e.g. waiver of premium
4. Retrospective payment: equity release after sale of home(first in line for proceeds)

Question 8

Pre funded long term care contracts:

Discuss the main benefits provided 4

Claims trigger
Location of benefit
Type of benefit
Limits on benefits

Answer 8

1. Main factor is claims definition
   
   1. payment depends on claim definition
      
      • single event :
        
        • depend on level of disability, ADL’s
        • deferred period selected by PH,
      • multiple set of events
        
        • Additional req need to be met above disability definition
        • eg min age, entry into nursing home
        • more stringent definition => less claims=> cheaper premiums
        • complex triggers also possible (e.g.disabled and require care during night)
   2. Benefits not usually dependent on location of care(cash benefits only)
   3. Can be lump sum, annuity, drawdown, proportional benefits
   4. Financial underwriting removes limit on initial benefits.

Question 9

Pre funded long term care contracts:

Discuss the benefits provided in terms of

Form of benefits (4)

Other benefit forms (4)

What happens on early death (1)

Surrender value and paid up value (2)

Answer 9

1. Benefit forms
   
   1. Lump sum
   2. Annuity certain
   3. Lifetime benefit (subject to ongoing disability)
   4. Restricted benefit (maximum period, or maximum total)
2. Other benefit forms/topics
   
   1. Fixed # monthly benefits : Assistive devices cost
   2. Limited to max % of main monthly benefit, eg stair lift
   3. Aim is to help insured to regain indep to prevent further disability
   4. Independant care advice: at claim, help insured understand choices available and right to state support
3. Return premiums on early death (single premium only , unlikely for reg prem)
4. No surrender benefit
5. Paid up benefit

Question 10

Pre funded long term care contracts:

Discuss proportionate benefits provision

What benefit depends on (2), and the advantages (4) and disadvantages (3) of this

Answer 10

• Benefit depends on
  
  1. Level of disabiliity e.g. 50% fail on 2 ADLs and 100% fail on 3+ ADLs
  2. May depend on residence: own vs nursing; not important if indemnify
• Advantages
  
  1. Care provided at early age if there’s modest imparement
  2. Bettter match customer needs
  3. Percieved better value
  4. Novel feature may attract intermediaries
• Disadvantages
  
  1. Increased admin costs
  2. Pricing more difficult
  3. Design more complex=> detailed literature, more effort to sell

Question 11

Pre funded long term care contracts:

discuss ADL claims definitions

Claims trigger requirements (3)

ADLs (2 key points, 10 subpoints)
2

Answer 11

1. Claims trigger requires
   
   1. insured incapable perform certain number of activities
   2. without endangering health/wellbeing of themselve or others
   3. usually: failure of insured to undertake certain # of ADLs unaided
2. Examples of ADLs (activities of daily living)
   
   1. Physical incapacity
      
      1. feeding, washing, dressing, toileting
      2. mobility: able to move indoors, room to room, level surface at normal residence
      3. transfer: able to move from lying position to sitting position in upright chair/wheel chair
   2. Mental incapacity:
      
      1. deterioration/loss of mental capacity from organis cause=> need for care/supervision
         
         • organic cause (alzheimer’s, irrversible dementia,
         • NOT depression/side effects from other medication
      2. Covers
         
         • memory
         • knowing who/where they are
         • awareness of time
         • ability to solve simple problems
         • make rational decisions
3. Objective scales use dto det incapacity, protection from moral hazard. exploitative claims
4. Policy wording need to make claims trigeer definition clear

Question 12

Product variations for long term care insurance contracts:

What kind of variations are found in terms of the type of benefits on LTCI (4)

Answer 12

Types of variations

1. Guaranteed terms
2. Indemnity benefits
3. Cash benefits
4. Unit-linked

Question 13

Guaranteed terms

Why are premium reviews limited at older ages?

What impact does provision of guarantees have on pricing of LTC contracts? (2)

What issues arise through the provision of guaranteed terms: for insurer (1) and for policyholder (1)

What ‘tweaks’ may the insurer make to the guaranteed terms offered to help manage the risk? (2)

Answer 13

3. Reviewable premiums at older ages are limited
   
   • small prop PH survive old ages
   • so exp losses from low guar prem decreases as age increases
   • small + in prem older = insig + in tot prem paid in already.
4. May include substanital contingency loadings
   
   • Due to uncertainty and req capital for guarantee
   • Reviewable prem option much cheaper than guaranteed prem
   • …may be attractive to policyholders
   • Locked into high rates if experience is favourable
5. To help manage the risks introduced, guaranteed terms may be
   
   1. Cease age : insurer not seeking further premiums/benefit reductions past given age
   2. limited: protection for 5 or 10 years

Question 14

Indemnity benefits (1)

What are the characteristics of the benefit paid when indemnity cover is given(4)

What important implication does provision of indemnity benefits have on pricing? (1)

What is the common industry practice in terms of provision of indemnity benefits? (1)

Answer 14

1. Indemnify insured=> pay for full cost of treatment/care received by policyholder
2. Benefit
   
   • may be unknown
   • may be paid directly to provider=> extract better provider terms with barganing power
   • subject to policy conditions e..g deferred period, restriction on provider
   • may be subject to overiding maximums, so not full indemnity
3. Uncertainty of future costs=> high margins => prohobitavely expensive
4. Few insurers give true indemnity; simply too much uncertainty => large margins

Question 15

Cash Benefits

what are the forms of cash benefits, and how are they determined (4)

What is the key policyholder advantage of giving cash benefits? (1)

What main issue arises for insurer if cash benefits are provided, and how might this be mitigated? (1)

What policyholder issues may arise with the provision of cash benefits? (3 main points, 3 subpoints)

Answer 15

Cash benefits

1. Cash benefits given either in form of lump sum, or, more usually, an income the level of which is specified in contract
2. Benefit level chosen
   
   1. to meet expected cost/assistance level needed at time of need
   2. and based on PH exp income at time of need

Key policyholder advantage of cash benefits?

1. gives PH choice on where to spend : not necessarily earmarked for particular reasons

Issues for insured

1. risk of windfall payments => need more stringent claims u/w

Issues for the policyholder

1. family exploitation => could leave elderly with inadequate care
2. adequacy to meet needs not guaranteed
3. policyholders have little experience of buying care services
   
   • judging price and quality
   • knowing how state-provided care impacts choices
   • insurers may offer management service

Question 16

Variations for long term care insurance contracts:

No unit fund and unit fund protection(2)

Reasons to purchase UL LTCI (4)

risk charges (2)

Answer 16

1. LTC benefits usually paid out of non-unit fund (represents protection element of fund).
2. Benefits in unit fund at claim time may also be used to pay LTC,or some, or all may be returned to policyholders when fund is protected (representing savings aspect)
3. Aims
   
   1. People want to purchase savings plans w/ single premium. So this also give LTCI
   2. Surrender/death benefit on unit-linked is very attractive so always incl UL
   3. Flexible investment contract w/ LTC benefits
4. Risk charges
   
   1. Monthly risk charges deducted (LTC, risk benefits)
   2. Cover risk exposure for period, which depends on
      
      1. deferred period
      2. level of protection
      3. current age
      4. benefit amount

Question 17

Variations for long term care insurance contracts:

unit linked

guarantees (2, 3)

Answer 17

1. Guarantees
   
   1. As policyholder ages & risk charges increase (accentuated where benefits also escalate), may be concern that without steady investment growth, unit fund depletes.
   2. If fund is less than risk charge and no guarantees were offered, cover lapses unless PH more money put into unit fund.
   3. Different guarantees available:
      
      1. No guarantee single premium sufficient: single prem enough to provide lifetime LTC protection
      2. Protection from fixed age: if fund positive at fixed age, no further risk premiums drawn to cover LTC benefits
      3. Full guaranteed: insurer accepts all risk of fund exhaustion. Investment choice restricted to managed/with-profits fund

Question 18

Variations for long term care insurance contracts:

unit linked

claim triggers (6)

Answer 18

1. Claim triggers
   
   1. Often choice for fund protection
      
      1. Protect entire fund
         
         • (all benefits paid from non unit fund, and unit fund returned as lump sum).
         • Risk charges higher to pay benefits
      2. Protect initial investment
         
         • (deferred period depends on difference between FV at claim point and fund protection benefit selected (plus minimum deferred period), calculated according to benefit amound selected
      3. Allowing fund exhaustion
         
         • (use unit fund to initially pay benefits, then move onto non-unit fund)
         • Protection contract
         • Fund can be exhausted
2. Different periods (protection choice=> varying deferred period)
   
   1. Deffered period (chosen at outset by policyholder)
   2. Unit period: Benefit paid from unit fund protection
   3. Non- unit period: Benefits paid from non-unit fund
3. Choice of protection = varying deferred period
   
   • Full protection: min deferred period so cover begins sooner, no withdrawals Unit fund needed.
   • Initial protection: Deferred period varies acc to diff bet FV and benefit + min deferred period

eg 265 vary deferred period

Question 19

Immediate needs long term care contracts: discuss the following

Form (2)

Premium and how it’s determined (2)

Benefit level (2)

Death benefit payable (4)

Structure (6)

Answer 19

1. Usually some form of impaired life annuity
   
   1. Secured by single prem at start of contract…
   2. …when insured needs care as result of failing ill health
   3. Premium
      
      1. Calculated individually, based on health status at purchase
      2. Premium guarantees not relevant (for single prem policies)
   4. Benefit level
      
      1. Guaranteed for lifetime
      2. May increase with pre agree benefit increase rates, with specified nursing home list
      3. May increase with worsening incapacity
   5. Death benefit may be payable
      
      1. gives capital protection of part of single premium
      2. higher death benefit => less impact of health status on premium
      3. may be subject to minimum payment period
      4. usually just amortise single premium
   6. Structure:
      
      1. could be: series of pure endowment, purchased life annuities, disability covers
      2. structure should consider
         
         1. tax position ( of policyholder and life office)
         2. regulatory capital required
         3. benefit flexibility
2. Pseudo pension annuities:
   
   • Annuity + LTC Rider
   • • Pension income: paid from tax free lump sum/ ongoing pension income
   • Deferred impaired life annuity

Question 20

What kind of risks are faced by insurers who sell long term care insurance contracts ( 8 )

Answer 20

1. Mis Est of incidence rates and Transfer probabilities
   
   1. Claim inception probs
   2. Transfers between states if multiple states exist under contract
   3. The need to use a typical multiple state model
      
      1. Healthy; needing own home care; needing residential care; needing nursing home care; withdrawn; dead
   4. Transitions
      
      1. Healthy to other
      2. Separately to more intensive home care
         
         1. usually in one direction; needs a state for each level of benefits prudent
      3. Separately to dead
2. Data shortages
   
   1. Difficult to price, underwrite, etc
   2. Need to adjust date for different/differences in
      
      1. populations; behaviour; environment; policy wordings; social attitudes
3. Exploitive claims/ Moral Hazard
   
   1. ADLs don’t always offer enough protection
   2. Difficulty to assess impact of disability
   3. Depends on contract design, underwriting, claims procedures
4. Anti-selection- Selective withdrawals
5. Investment risk (significant reserves built up before claim inception)
6. Expense risk
7. Financial risk (negative asset share; withdrawal benefit > asset share)
8. Marketing risk
   
   1. policyholder expect benefits sufficient to cover eventual cost care)
   2. bad for public image, and future business

Question 21

Comment on the capital requirements associated with long term care insurance contracts ( 4 )

Answer 21

1. Comparable to investment contracts e.g.
   
   1. endowment: premiums paid and benefit paid when premiums stop
   2. whole life: no fixed latest time at which claim has to be paid
2. Depends primarily on
   
   1. Nature of contract: unit linked, indemnity, cash benefits, etc
   2. Guarantees: requires increased prudence, hence, larger reserves