Chapter 7 - Long-term care insurance Flashcards
Describe a long term care insurance contract
- A long term care insurance contract may provide a cash benefit or indemnify the insured for the cost of long term care
- Customer needs met:
+Finance provision of care/assistance (in old age)
+Financial protection (when a person becomes unable to look after self)
+Protect from insufficient funds/inadequate state care
+Avoid dependence
+Provide comfort (for insured, for insured’s relatives/family) - Generally doesn’t indemnify
Uncertainty associated with state provided cover - Inflation protection of care costs (if indemnity)
- Advice on care
- Group versions don’t typically exist
Describe the 3 types of costs associated with long term care
living:
* food, clothing, hearing, amenities
* may require special arrangements, and increased cost impact
housing: rent, mortgage payments, council tax)
personal care:
* added costs of being looked after/having body touched (intimacy/personal dignity/confidentiality issues)
* nursing care: needs knowledge/skills of qualified nurse
* intermediary care: focusing on recuperative services acute event (e.g. heart-attack) to reduce hospital admission/minimise dependence on ongoing care
What are the 2 main types of long term care contracts?
- Pre-funded long term care contracts
+purchased by relatively healthy people to protect them against risk of future disability/morbidity
+something else worth noting: 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 - Immediate needs long term care contracts
Purchased by people already in a state of needing long term care, needing to protect against uncertain survival duration
Besides stand-alone, how might LTCI be provided as an optional addition to another policy
3
- Added to CI policy
+normally structured so that definition of TPD changes from occupation-related to the loss of independent existence (i.e failure of ADL’s) - Added to whole life insurance
+pays sum assured on death, or accelerates a fixed percentage of benefit (eg, 2% of sum assured per month) - Added to IP policy
+cover continues beyond NRA
+end of IP term, definition of disability would normally switch from occupation related to one that is activity related (ADL’s)
What are the advantages and disadvantages of a benefit design, where benefit levels vary with the number of ADLs failed?
4/3
Advantages
* if benefits are available on sliding scale, care is provided at an early stage
+provision at early stage may slow down the rate of deterioration
+providing better quality of life with reduced overall costs of care
- benefits may be better match for many customers’ needs
- customers may see product as better value, as it seems more likely they will receive some benefits
- may attract more interest from intermediaries
Disadvanteges
* increased administration costs for the insurer
+if premiums are waived when benefits are payable, may increase costs of premium waiver
* pricing will be difficult
* design is more complex
+more detailed sales literature
+more effort required by intermediaries to explain to clients
Pre funded long term care contracts:
Discuss the benefits provided in terms of
Form of benefits (4)
Other benefit forms (2)
What happens on early death (1)
Surrender value and paid up value (2)
Benefit forms
* Lump sum
* Annuity certain
* Lifetime benefit (subject to ongoing disability)
* Restricted benefit (maximum period, or maximum total)
Other benefit forms/topics
* Assitive devices: norm limited to 3 or 6x main monthly benefit
+Independent care advice: at claim, help insured understand choices available and right to state suppose
Return premiums on early death (single premium unlikely for reg premium)
No surrender benefit
Paid up benefit available
Variations for long term care insurance contracts:
What kind of variations may be found in terms of the level of benefits paid (4)
What are the advantages of having these variations (1)
What are the disadvantages of having these variations(2)
Types of variations
- Guaranteed terms
- Indemnity benefits
- Cash benefits
- Unit-linked
Advantages
- increase level of customer demand (extended range of benefits/enhanced quality)
Disadvantages
- May lead to confusion about product suitability
- May be costly for insurers/re-insurers
Variations for long term care insurance contracts:
how does unit linked work (2)
aims of this variation (4)
LTC benefits usually paid out of non-unit fund (represents protection element of fund).
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)
Aims
+People rather purchase savings plan
+Surrender/death benefit on unit-linked is very attractive
+LTC insurance vehicle: lack of death/surrender benefit unattractive
+Flexible investment contract
What are the 3 levels of guarantees offered for unit-linked LTCI contracts
- no guarantee that single premium would be sufficient to provide lifetime long-term care protection
- protection from a fixed age, often 90. providing the fund is positive at age 90, no further risk premiums will be drawn to cover LTCI benefits
- full guarantee - insurer accepts the risk of fund exhaustion
What kind of risks are faced by insurers who sell long term care insurance contracts
8
- like IP contracts, main risk relates to transfer probabilities in the underlying multiple-state model
+of these the most important will be claim inception probabilities - Anti-selection risk
- selective withdrawal risk
- shortage of reliable data due to product being relatively new
- explaotive claims even with the use of ADL’s
- investment risk - as significant reserves built up in advance of claim starting
- expense risk
- marketing risk - as policyholders may expect the benefits to cover the eventual cost of care
Comment on the capital requirements associated with long term care insurance contracts ( 4 )
- Comparable to investment contracts e.g.
endowment: premiums paid and benefit paid when premiums stop - can also be compared to whole life: no fixed latest time at which claim has to be paid
- Depends primarily on
Nature of contract: unit linked, indemnity, cash benefits, etc - Guarantees: requires increased prudence, hence, larger reserves
