22.3 Disability Insurance, Long-Term Care Insurance, and Medicare Supplementary Insurance
In this section we elaborate on the following:
- Group and individual short-term and long-term disability income insurance
- Group and individual long-term care (LTC) insurance
- Medigap supplementary insurance
Disability income insurance replaces lost income when the insured is unable to work. Income replacement is especially critical with disability because the individual faces not only the risk of reduced earnings but also the risk of additional expenses resulting from medical or therapeutic services. In Chapter 18 "Social Security", we discussed the Social Security disability program, which covers most employees in the United States. However, qualifying under the Social Security definition for disability is difficult. Workers’ compensation is another source of disability insurance, but only for disability arising from employment-related injury or illness (see Chapter 16 "Risks Related to the Job: Workers’ Compensation and Unemployment Compensation"). Disability income insurance, available on a group or individual basis, closes the coverage gap that arises due to nonoccupational injury or illness interrupting one’s employment.
Group Disability Insurance
Group disability income coverage provides economic security for employees who are unable to work due to illness or injury. An extended disability may result in greater economic hardship for the family than does the premature death of the employee. Employers, however, are less likely to provide group disability insurance than group life or medical expense insurance.
Disability income may be provided on a short- or long-term basis. The uninterrupted flow (without gaps) of coverage of group disability income is shown in Table 22.3 "Individual Health Insurance Option for a Full-Time Male Student, Age Twenty-Two, Residing in Richmond, Virginia, Starting April 1, 2009". Employers used to offer only sick leave and long-term disability, leaving employees without coverage for a period of time. Consultants and employee benefits specialists urge employers to close the gap and provide seamless coverage, as noted in Table 22.6 "Seamless Coverage of Group Disability".
Table 22.6 Seamless Coverage of Group Disability
|Coverage||Salary Continuation/Sick Leave||Short-Term Disability (STD)||Long-Term Disability (LTD)|
|Length of coverage||7 or more days paid time off||From 7 days up to 3, 6, 12 months or 2 years (flexibility)||From expiration of STD to age sixty-five or to lifetime|
|Replacement of income||100% of pay||May be as high as 100% of pay, but 70% is more common||Usually 60% to 70% of pay coordinated with Social Security and workers’ compensation|
|Definition of disability||Inability to do your own job||Inability to do your own job or a job for which you are qualified by education and training, nonoccupational||Inability to do a job for which you are qualified by education and training, or inability to work at all, occupational and nonoccupational|
Group Short-Term Disability Plans
The first step in short-term disability coverage is sick leave plans (also called salary continuation plans). With sick leave plansAllow employees to accumulate leave time that can be used in the event of injury or illness at 100 percent income replacement, typically at a rate of one day per month of work up to a maximum of twenty-six weeks., employees accumulate leave, typically at a rate of one day per month of work up to a maximum of twenty-six weeks. In the event of illness or disability, the employee uses sick leave and receives 100 percent income replacement beginning on the first day of illness or disability. Today, many employers do not offer sick leave separately from vacation. The combined time off is called paid time off (PTO)Consolidates sick leave, personal leave, and vacation leave into a total number of personal days off each year to reduce employee incentive to abuse sick leave and reward those who never use sick leave.. Under PTO, there is less incentive to abuse sick leave and more reward to employees who never use sick leave. PTO consolidates sick leave, personal leave, and vacation leave into a total number of personal days off each year.
Short-term disability (STD) income replacementPays employees between 65-75 percent of salary from three months to two years in the event of nonoccupational injury or illness that interrupts employment. through insured plans generally includes all full-time employees after meeting some probationary period, such as three months. Unlike sick leave, these plans do not pay benefits until after an elimination periodThe one- to seven-day absence from work often required before employees qualify for benefits from short-term disability; in the case of long-term disability, may be the benefit period under short-term disability., typically from one to seven days of absence from work due to disability. The employee may be required periodically to provide medical evidence of continuing disability. These plans pay for the duration stipulated in the employer’s policy, usually ranging from three months to two years (although the majority pays for one year at most). Group short-term disability insurance plans do not provide full income replacement but instead pay 65 to 75 percent of salary. This provision reduces moral hazard and encourages employees to return to work.
The definition of disabilityDetermines when an employee is eligible for short-term disability insurance benefits, generally stated as the inability of the employee to perform any and every duty of the job; long-term disability definitions are more restrictive. determines when the employee is eligible for benefits. Short-term disability insurance policies generally define disability as the inability of the employee to perform any and every duty of the job. This liberal definition allows disabled workers to qualify for benefits relatively easily when compared with the definition of disability used by most group long-term disability insurance policies. Some STD policies require a more stringent definition of disability, especially those that provide coverage for a year or more. Under this definition, the employee will receive benefits only if unable to perform a job for which he or she is qualified by education and training. Generally, group short-term disability policies pay only for nonoccupational disability, and workers’ compensation benefits cover employees for short-term occupational income loss.
Group Long-Term Disability Plans
The eligibility criteria for group long-term disability (LTD) insuranceAfter satisfying an elimination (generally equivalent to the benefit period in short-term disability), pays employees between 60 and 70 percent of salary for a five to ten years or longer in the event of nonoccupational injury or illness that interrupts employment. are often different from those for short-term insured plans. Unlike short-term insured plans, which generally cover all full-time workers, long-term disability plans usually cover mostly salaried workers after they meet a probationary period lasting from three months to one year. Long-term disability plans also have an elimination period prior to payment of benefits, ranging from three to six months. The elimination period is often equivalent to the benefit period for the short-term disability plan. If the elimination period is longer than the period covered by short-term income replacement, the employee may have a gap in coverage.
The definition of disability used for long-term plans is generally more restrictive than for short-term plans. Most contracts pay only if the employee is unable to engage in the material duties of the job. Under this definition, the employee receives benefits only if he or she cannot perform a job for which he or she is qualified by education, experience, and training. For example, a surgeon who can no longer perform surgery because of a hand injury may be able to manage the surgery room. This employee will not be eligible for LTD.
Some group STD and LTD policies use a dual definition of disability. For example, benefits are payable while the own-occupation definition applies for a relatively short period of time, perhaps two or three years. After that, long-term benefits are paid only if the employee is unable to engage in any reasonable occupation for which he or she is or can become qualified. Use of both definitions provides economic security to the employee and an economic incentive to find reasonable, gainful employment.
The benefit period for LTD policies can vary greatly. Employees may be covered only for five or ten years, or they may be covered until retirement age or for life. Typically, group LTD plans pay no more than 60 to 70 percent of salary to disabled employees. In addition, a maximum dollar benefit amount may apply. Group disability benefits are usually coordinated with other disability income from Social Security or workers’ compensation to ensure that the overall benefits are still below the level earned prior to disability. Employees may be able to obtain additional nongroup disability insurance in the individual market to increase their total amount of protection, although seldom to the level of full income replacement. This ensures that the disabled person has an economic incentive to return to work.
Most group LTD contracts include a rehabilitation provision. This allows insureds to return to work on a trial basis for one or two years while partial long-term disability benefits continue. If disabled employees are unable to perform in the new job, long-term disability benefits are fully restored. By providing this safety net, insurers encourage disabled workers to attempt to return to work through rehabilitative employment. Insurers may also assist with training and rehabilitation costs because these can be far less than continuing benefit payments for those who do not return to work.
LTD benefit amounts may also be affected by supplemental benefits made available to employees through payroll deductions. Cost-of-living adjustments can be added to prevent the erosion of purchasing power of the disability income benefit. Survivors’ benefits can protect an employee’s dependents after the death of the disabled employee.
Group LTD contracts contain several important exclusions. Benefits are not paid unless the employee is under a physician’s care. Benefits are not paid for self-inflicted injuries, and preexisting condition clausesRestrict coverage of named preexisting conditions in the case of disability benefits. may restrict coverage. Generally, benefits are not paid if the employee is gainfully employed elsewhere.
In the past, long-term disability claims experience (both frequency and duration) for hourly workers has been especially unfavorable (relative to salaried employees). This may be because hourly workers are more likely to be in jobs that are monotonous and produce lower satisfaction, factors that do not help keep employees at work or encourage them to return quickly. Disability claim frequency among hourly workers has risen, especially during periods of economic recession, when job security is threatened. Hourly employees may choose to make a disability claim rather than to be laid off with temporary and minimal unemployment benefits. Because of unfavorable claims experience, employers and insurers are reluctant to provide hourly workers with long-term disability insurance.
For salaried workers, too, there has been a shift in long-term disability claims experience in the last few years. The frequency and duration of claims by salaried employees and highly paid professionals, particularly physicians, have increased significantly. The rise in claims among physicians may be due in part to an increasingly litigious environment for practicing medicine and to health care financing reform initiatives that threaten the traditional practice of medicine, factors that can negatively affect physician job satisfaction. Among nonmedical professionals, the increased incidence may be due to a more stressful business environment characterized by firm downsizing, especially among mid- and upper-management employees. Employers and insurers are paying attention to the increased incidence of claims among salaried employees and in some cases are limiting the amount of benefits payable for long-term disability to reduce any potential moral hazard problems.
Whether group disability benefits are taxable income to the employee depends on who pays the premiums. If the employer pays the premiums, the employee is taxed on the benefits. If the employee pays with after-tax income, the employee does not have to pay taxes on the benefits. If the employee pays with before-tax income, the employee pays taxes on the benefits in case of disability. Thus, many employers advise their employees to pay for this coverage themselves with after-tax income through payroll deductions.
Traditionally, disability insurance has never been easy to sell. However, the need for such a product is always clearer during hard times. It is known that financial planners look at the lack of disability coverage as a gap in the complete coverage for a person. A downturn in the economy is actually helpful in pushing the sales of disability income policies.Sadler, Jeff. “Down Economy Can Push DI Sales Up,” National Underwriter, Life & Health/Financial Services Edition, February 25, 2002.
Individual Disability Income Insurance Contracts
Group disability income insurance is an employee benefit less commonly offered than life, medical, and retirement benefits. If it is offered, it may not be sufficient to replace lost income. Individuals may want to purchase disability coverage on their own, in case they are not eligible for Social Security, workers’ compensation, or private employer-sponsored plans, or simply because they want additional protection. Again, it is important to perform a needs analysis to determine whether a layer of individual coverage is necessary over any employer-provided disability and Social Security.
Definition and Cause of Disability
Definitions of disability vary more among individual policies than among group policies. Total disabilityDefinitions vary across different disability policies, but generally: the complete inability to perform “any and every duty” of the individual’s own job; alternatively, the inability to engage in any “reasonable and gainful occupation” for which the individual is (or could become) qualified by education, training, or experience. may be defined as the complete inability to perform “any and every duty” of the individual’s own job. Alternatively, it may be defined as the inability to engage in any “reasonable and gainful occupation” for which the individual is (or could become) qualified by education, training, or experience. Some policies combine these two definitions, with the more liberal (from the insured’s point of view) “own occupation” definition satisfying the requirement for total disability during an initial short-term period (e.g., two years) and the more stringent definition being used thereafter. Partial disability is even more difficult to define than total disability. Partial disabilityUsually measured in terms of the inability to perform some of the important duties of one’s job; paid in some disability policies only if partial disability follows total disability or only if a loss of income results. is usually measured in terms of the inability to perform some of the important duties of the job. Some policies pay partial disability only if partial disability follows total disability, or only if a loss of income results.
Some contracts provide income benefits for disability caused by accident only, others for both accident and sickness. It is necessary to distinguish between losses caused by accident and those caused by sickness because the benefits can differ. Some policies provide that income losses resulting from injuries due to accident must start within ninety days after the injury. Losses resulting from injuries that begin after the ninety-day period are deemed to have resulted from sickness. A loss is not considered caused by accident unless it results “directly and independently of all other causes.” This provision is designed to eliminate from the definition of accidental bodily injury those income losses actually caused by illness. For example, a person who suffers a heart attack and is injured when falling to the ground would not qualify for accident benefits but would qualify for sickness benefits.
The debate about the definition of disability is an old one. It is not always clear which definition best serves the individual policyholder. In reality, it is desirable to have a true needs assessment of the individual in this market.
As with group insurance, both short-term disability and long-term disability policies are available for individuals. Short-term disability (STD) policies are those with benefits payable up to two years. Short-term plans may restrict benefits to periods as short as thirteen or twenty-six weeks. Individual STD plans may limit benefit duration to six months for the same cause of disability, sometimes requiring the insured to return to work for up to ninety days before establishing a new maximum benefit period for disability from the same cause.
Long-term disability (LTD) policies are those that pay benefits for longer periods, such as five years, ten years, until a set retirement age, or for life. Long-term disability policies often assume that the insured will become eligible for retirement benefits from Social Security or private retirement plans at age sixty-five. To coordinate benefits, the disability policy defines the maximum duration as age sixty-five. LTD benefits for any shorter period would expose the insured to a potentially devastating income loss because neither disability nor retirement income would be provided for this period.
Long-term benefits do not cost proportionately more than short-term coverage. From the consumer’s point of view, the longer term policy is a better buy. It protects against an unbearable risk: the long-term loss of income. This is a good example of the large loss principle, where an insurance purchase should be governed by the potential severity of loss rather than the frequency of loss. The large loss principle should govern disability income insurance purchases even though most disabilities are of relatively short duration.
Policies pay benefits after an elimination or waiting period. The elimination period, like a deductible in medical insurance, reduces moral hazard. For STD policies, the elimination period typically extends from a few days to two weeks; for LTD policies, the period extends from one month to one year. Here, as in group coverage, the insured may be covered during the LTD waiting period by benefits from the STD policy or a salary continuation plan (such as sick leave).
Individual contracts generally state the amount of the benefit in terms of dollars per week or month, unlike group policies that state benefits as a percentage of the insured’s basic earnings. In either case, the insurer is wary of having the benefit equal to anything approaching full earnings. Typically, the amount is limited to about two-thirds of earned income because benefits under individual disability policies are typically not taxable. The benefits are not taxable because the premiums are paid from after-tax income. As with group disability, the purpose of this limitation is to reduce moral hazard by providing an economic incentive for employees to return to work.
Benefits may differ for disabilities resulting from accident rather than sickness. Benefits for sickness are not as generous as those for accidents. For example, a policy may provide benefit payments for five years if disability is caused by accident but only two years if caused by sickness. Some long-term policies pay to age sixty-five for sickness but for life when the cause of disability is accidental. Benefits for partial disability, which are more likely to be provided by individual contracts rather than group contracts, are often only for disability caused by accident. Some policies pay no benefits if the sickness or accident is work-related and the employee receives workers’ compensation benefits. Such policies are called nonoccupational. Others supplement workers’ compensation benefits up to the point at which the insured gets the same payment for occupational and nonoccupational disabilities. Some individual policies specify a maximum combined benefit for Social Security and the private policy. The insured can purchase a plan with a social insurance substituteDisability policy provision that replaces Social Security benefits if the individual does not qualify under the strict definition of disability in Social Security., which replaces Social Security benefits if the individual does not qualify under their strict definition of disability.
Often, individual policies are not coordinated with other disability income benefits. The relatively few individual policies that coordinate disability benefits use the average earnings provisionCoordinates benefits under different disability policies by providing for a reduction in benefit payments if the total amount of income payments under all insurance policies covering the loss exceeds earnings at the time disability commences or exceeds the average earnings for two years preceding disability, whichever is greater.. This provision addresses the problem of overinsurance, which may occur when a person has more than one policy. (In group insurance, coordination of benefits provisions addresses the problem of overinsurance.) For example, a person whose salary is $2,000 per month may have two disability income policies, each of which provides $1,200 of income benefits per month. In the event of total disability, assuming no coordination provision, the insured loses $2,000 per month in salary and receives $2,400 in benefits. This reduces the incentive to return to work and may lead to benefit payment for a longer time than anticipated when the premium rate was established.
The average earnings clause provides for a reduction in benefit payments if the total amount of income payments under all insurance policies covering the loss exceeds earnings at the time disability commences, or exceeds the average earnings for two years preceding disability, whichever is greater. The amount of the reduction is the proportion by which all benefits would have to be reduced to prevent total benefits from exceeding average earned income. In the example above about the worker whose salary is $2,000 per month, total insurance payments exceeded income by one-fifth, in which case the benefits of each policy containing an average earnings clause would be reduced so that disability benefits do not exceed predisability earnings. A reduction of the payment provided by each policy from $1,200 to $1,000 per month eliminates the excess.
The insured may have policies in place that do not have an average earnings clause, and he or she could receive benefits in excess of predisability earnings. This provides an income advantage during a period of disability. As noted above, a further advantage to the insured is the absence of federal income taxes on disability benefits from individual policies (as well as employee-paid group policies). In addition, the disabled insured has few, if any, work expenses, such as clothing and transportation costs. Insurance underwriters recognize these advantages, as well as the potential for moral hazard, and may be unwilling to issue a large policy when benefits are otherwise available.
Long-Term Care Insurance
Group Long-Term Care Insurance
A significant risk that individuals face later in life is the risk of insufficient resources to pay for nursing home services. This risk applies also to a need for nursing home or skilled nursing facilities in case of an injury that requires lengthy recovery time for any age group, not only the elderly. Generally, wealthy individuals are able to pay these expenses from their private income or savings. Those with few resources may qualify for Medicaid and public assistance. Long-term care services can be very expensive. According to the U.S. General Accounting Office (GAO), the national average annual cost for one’s nursing home care is $55,000 and more in some areas. Nursing home costs are likely to increase dramatically over the next thirty years and are estimated to reach $190,000 annually per person.From TIAA-CREF Web Center, “How Much Does Long-Term Care Cost, and Who Pays for It?” at http://www.tiaa-cref.org/ltc/ltcosts.html. Some people mistakenly think that long-term nursing care is covered by Medicare; as you learned in Chapter 18 "Social Security", Medicare covers only a limited number of days of skilled nursing care after a period of hospitalization. Group long-term care insurance is being offered by an increasing number of employers, but it is still only a small part of the long-term care insurance market. HIPAA (discussed in Chapter 20 "Employment-Based Risk Management (General)") gave tax incentives to employers offering group LTC.
Group long-term care (LTC) insuranceUp to maximum daily benefits, covers the costs of skilled nursing care, intermediate care, custodial care needed to handle personal needs, home health care, and adult day care for individuals whose ability to perform a certain number of activities of daily living is impaired. covers the costs of the following levels of care:
- Skilled nursing care
- Intermediate care
- Custodial care help needed to handle personal needs
- Home health care
- Adult day care
Generally, benefits are expressed as a maximum daily benefit, such as $50 or $100 per day, with an overall policy limit such as five years of benefits or a $100,000 lifetime maximum. Waiting or elimination periods are not uncommon; for example, a policy may not pay the first ninety days of nursing home expenses.
Eligibility for benefits usually is based on the inability to perform a certain number of activities of daily living (ADL)Activities such as bathing, dressing/undressing, eating, and grooming that, once unable to be performed independently, qualifies a person for long-term care insurance., such as getting out of bed, dressing, eating, and using the bathroom. Some LTC policies recognize cognitive impairment. Most cover skilled nursing care, which requires medical professionals to treat the patient on a twenty-four-hour basis under the direction of a physician. Patients typically need this type of attention for a relatively short period of time, immediately after hospitalization or following an acute illness. However, some individuals may require skilled nursing care for longer periods. Skilled nursing care is the most expensive kind of long-term care. Intermediate nursing care is for those not requiring around-the-clock assistance by medical professionals. This type of care typically extends for longer periods than skilled nursing care does.
Custodial care provides individuals with assistance in activities of daily living, such as bathing, dressing, and eating. Medical staff is not required. Although it is the least intensive kind of care, custodial care is often needed for the longest period of time and thus can be the most costly care overall. Coverage of custodial care varies across policies. Some contracts cover custodial care only if a doctor states that it is medically necessary. Others cover it only if the insured is unable to perform a certain number of activities of daily living.
Group LTC insurance typically covers skilled, intermediate, and/or custodial nursing care in a nursing home facility. Some group policies also cover home health care, in which all or a portion of these services are provided in the insured’s own home. Coverage of home health care is becoming increasingly common because insureds generally prefer to be at home and total costs may be lower than if care is provided in a medical facility.
If an employer offers group LTC, eligibility may be restricted to active employees and their spouses, although sometimes retired employees up to age eighty are included. In most cases, employers do not pay for or contribute to this benefit, and the premiums paid by the employee cannot be included in a cafeteria plan or flexible spending account (explained in Chapter 20 "Employment-Based Risk Management (General)"). Thus, the premiums cannot be paid with before-tax income. But HIPAA provides some tax relief if the group plan meets stringent qualification with regard to the benefits. If the employer pays the premiums, the amount is not taxable to the employees because the premiums for health insurance are not included in taxable income. Under the act, the benefits are tax-free, as are the benefits of health insurance, as long as the benefit payment per day does not exceed a certain amount. At the time of enactment of HIPAA, the amount per day was limited to $190. The qualification requirements, according to HIPAA, are that the group LTC policies cover only what is considered LTC service, benefits are paid to chronically ill people who cannot perform two out of five or six daily living activities, and the services of an LTC facility is required because of substantial cognitive impairment. These factors make the group LTC policies that qualify for the tax break very stringent and undesirable. These factors may be the main reason for the slow growth of the group LTC market. Individual LTC policies are not so limiting in the definition of the qualified recipient of the benefits.
Individual Long-Term Care Insurance
Long-term care insurance is one type of coverage that is more prevalent in the individual market because a greater number of older people are interested in such coverage than are younger working individuals. As noted previously, the inability to perform the regular daily living activities are never covered by health insurance or Medicare. The gap in coverage is closed by the development of LTC policies.
The American Association of Retired Persons (AARP) helps to promote long-term care and provides information regarding the coverage on its Web site. The site notes, “Typically, policies reimburse the insured for long-term care expenses up to a fixed amount, such as $100 per day for nursing home care and $50 per day for home care. To receive benefits, however, the insured must meet the policy’s disability (long-term care) criteria. For example, some policies require the individual to be severely cognitively impaired or to need help in performing two ‘activities of daily living’ (such as bathing and dressing).” Other policies will pay benefits based on the loosely defined term “medical necessity.”AARP, http://www.aarp.org/research/longtermcare/insurance/, accessed April 22, 2009.
Long-term care insurance began as a basic form of nursing care insurance in the 1960s, and it expanded into custodial and home care in the 1980s. During the 1990s, the product began developing into today’s LTC insurance. Contemporary policies expand the coverage and differentiate themselves.Mary Madigan and Cheryl McNamara, “Insuring an Independent Lifestyle,” Best’s Review, April 1, 2002, http://www3.ambest.com/Frames/FrameServer.asp?AltSrc=23&Tab=1&Site=bestreview&refnum=16718, accessed April 22, 2009. Today’s LTC policies include favorable changes, such as the following:
- Adding assisted living facility (ALF) coverage to policies that had nursing home and home care coverage
- Broadening the definitions of activities of daily living to include stand-by assistance
- Expanding bed reservation coverage to include reasons beyond hospitalization
- Lowering existing premiums
- Removing restrictions such as three-day prior hospitalization as well as inorganic mental and nervous exclusions
- Adding home care coverage and assisted living facility coverageClaude Thau, “Surveying Industry Practices on Changes to In-Force LTCI Policies,” National Underwriter, Life & Health/Financial Services Edition, March 29, 2002.
- Many of these changes have pricing consequences.
The cost of individual long-term care insurance is based on cohorts of individuals. The factors for the costs are duration of benefits, the length of waiting periods, and the types of triggers of benefits. Compared with group long-term care, the definition of the triggers is not as stringent in individual LTC policies. Many policies provide for inflation protection. Cost factors vary by age, as would be expected.
The passage of HIPAA (see Chapter 20 "Employment-Based Risk Management (General)") also affected individual long-term care policies. Only the more stringent, federally qualified long-term care policies meet the favorable tax treatment of health policies. Those who use these policies can deduct the premiums up to a maximum (provided the taxpayer itemizes deductions and has medical costs in excess of 7.5 percent of adjusted gross income).
In the world of insurance, change and new products are constants. There is a new interest in LTC annuityLife insurance rider that covers the costs of nursing home stays, home health care treatment, and other long-term care services typically covered by stand-alone long-term care insurance policies. products.Chelsea K. Bachrach and Craig R. Springfield, “LTC-Annuities: Two Birds, One Stone,” National Underwriter Life & Health/Financial Services Edition, September 2, 2002. The product is similar to life insurance with an LTC rider. This rider covers the costs of nursing home stays, home health care treatment, and other LTC services typically covered by stand-alone LTC policies.Cary Lakenbach, “Traditional Life: A Chassis for LTC Riders,” National Underwriter Life & Health/Financial Services Edition, September 13, 1999. The tax implications of the portion of the premiums attributed to LTC are not yet determined. The LTC risk and living too long risk are inversely related because those needing LTC are expected to have a shorter life span. This provides the insurer a type of hedge.
LTC Acceleration Life Rider
Like living benefits, accelerated LTC benefits fit well with life insurance. LTC benefits are provided to the needy insureds while still living, like living benefits. Traditional life insurance policies are considered best suited for LTC riders because of the guarantees.
Insurers such as National Life and Interstate entered this market with various universal and variable life insurance products. The development activity is more pronounced in the variable universal life. These integrated VUL/LTC products pose many challenges because LTC requires more guarantees than those provided by universal variable life products. To overcome some of the challenges, the LTC benefits are designed as a percentage of the death benefit or other specified amount.Cary Lakenbach, “Integrated VL/LTCs Pose Some Challenges,” National Underwriter Life & Health/Financial Services Edition, February 21, 2000. Some products provide a minimum death benefit guarantee, and the LTC monthly maximum benefit reflects the death benefit guarantee.
Medicare Supplementary Insurance
Medicare health insurance is provided through the Social Security system for covered persons over age sixty-five, those under sixty-five with kidney disease, and those eligible to receive Social Security disability benefits. Medicare, however, does not completely cover the cost of all medical services needed by elderly people. Private individual health contracts, known as Medigap insurancePrivate individual health contracts used to supplement the coverage provided by Medicare that represent a range of benefits and premiums; ten standard Medigap insurance policies are approved for use., supplement the coverage provided by Medicare. Various Medigap policies are available, representing a range of benefits and premiums. In the past, the wide variety of products, as well as unethical sales practices by agents, made it difficult for consumers to understand policy provisions or compare contracts. Lengthy preexisting-condition requirements limited the protection offered by many policies. Many people purchased duplicate coverage, not realizing that the additional policies provided no extra protection. Many of the policies were not good buys, returning less than 60 cents in benefits for each dollar of premium.
In 1990, legislation required standardization of Medigap policies to make it easier for consumers to understand and compare various policy provisions. Ten standardized policies (developed by the National Association of Insurance Commissioners) are now approved for sale in the individual Medigap market. Preexisting-condition clauses cannot exceed six months. In addition, loss ratios, the ratio of benefits paid to premiums received, are required to be at least 60 percent. Legislation outlawed the sale of duplicate policies, and agents can be fined for deceptive sales practices.
The ten standard Medigap plans range from Plan A to Plan J. Plan A, the least expensive contract, is the basic policy and covers a core of benefits. Benefits increase as one moves toward Plan J, which provides the most coverage and has the highest premium. Comparing the ten standardized policies on the basis of benefits and price is straightforward, and the insured can simply decide what to purchase based on need for coverage and willingness or ability to pay. However, not all insurers selling Medigap coverage sell all of the plans.
Like long-term care insurance, Medigap insurance can provide an important element of economic security for elderly people. Given the current funding shortfalls of Medicare and the national concern with the federal budget deficit (discussed in Chapter 18 "Social Security"), additional public funding of medical care for the elderly is unlikely. Thus, the importance of Medigap insurance is not likely to diminish anytime soon.
Every state provides Medicare supplements booklets to educate the public. The booklets provide rate comparisons and details about the differences among the various policies. Many can be found online at your state’s department of insurance.For examples, see the Texas Department of Insurance Web site at http://www.tdi.state.tx.us/; the North Dakota Department of Insurance Web site at http://www.state.nd.us/; or the Nebraska Department of Insurance Web site at http://www.state.ne.us/. Details are also provided at the AARP Web site at http://www.aarp.org/.
In this section you studied group and individual disability insurance, long-term care insurance, and Medicare supplemental insurance:
Group and individual disability insurance are available to provide short-term (STD) or long-term (LTD) partial income replacement for insureds in the event of nonoccupational illness or injury.
- The definition of disability is usually less stringent in STD than in LTD and varies more among individual policies than group policies.
- Some policies cover disability caused by accidents only; others cover both accidents and sickness.
- In group plans, STD might be offered as a basic coverage, with an option to purchase supplemental LTD coverage; on an individual basis, both are separate policies.
- STD usually provides higher income replacement than LTD.
- Group policies state benefits as a percentage of earnings, while individual contracts state benefits in terms of dollars per week.
- STD may provide coverage for up to a year, beyond which LTD takes over.
- Employees are taxed on disability benefits when employers pay the premiums or when premiums are paid with before-tax income; benefits from individual policies are nontaxable because premiums are paid with after-tax dollars.
- Individual policies are often not coordinated with other disability income benefits.
Group long-term (LTC) care insurance covers skilled nursing care, intermediate care, custodial care, home health care, and adult day care
- Group LTC is much more popular on an individual basis than as a group coverage.
- Group LTC benefits are expressed as a maximum daily limit subject to the overall policy limit.
- Group LTC eligibility is based on an inability to perform a certain number of activities of daily living (ADL); individual LTC eligibility varies widely across different policies.
- Employers rarely contribute to LTC premiums, and premiums cannot be paid with before-tax income by employees.
- HIPAA provides tax-free benefits of group LTC if the coverage meets strict cost requirements and allows deduction of premiums up a maximum for individual policies.
- The cost of individual LTC is based on cohorts of individuals.
- LTC can be added as a rider to individual life insurance policies in various forms.
- Medigap insurance policies are private, individual health contracts that supplement coverage provided by Medicare.
- Ten standard Medigap plans are approved for use, offering basic to broad coverages.
- Why do most group disability insurance plans limit income replacement to no more than 70 percent of salary, even if employees are willing to pay more to get 100 percent coverage?
- In what ways does group disability insurance differ from individual disability insurance?
- Why would someone purchase disability income insurance when Social Security disability and workers’ compensation benefits are available?
- Explain the following statement: “The benefits of a disability income policy are no better than the definition of disability.”
- In what ways does group long-term care insurance differ from individual long-term care insurance?
- What is a LTC annuity?
- What are Medicare Supplement (Medigap) policies? Why are they needed?