Chapter 3: Long-term care insurance

Question 1

Define LTCI

Answer 1

provides cover against the costs of long-term care which includes all types

where care may be provided in the insured’s own home or in a care-home setting

cover is intended for people who are unable to look after themselves without some degree of support

cover can be provided on an indemnity basis, or non-indemnity basis (cash basis)

Question 2

Describe the two forms of long-term care

Answer 2

Informal care:
normallyprovided by thespouse or children
has anindirect costin terms ofeither lost economic activity, or the price of replacing the care should it no longer be provided

Formal care:
can beprovided in many different settings - the person’s own home or retirement home
has adirect cost

Question 3

List the different types of long-term care costs

Answer 3

living costs:
food, clothing, heating
may be linked to general price inflation

housing costs
rent, mortgage payments, property rates
may be linked to general price inflation

personal care costs:
carer
may be linked to wage inflation

other cost:
medical equipment/ hospital staff
that may be linked to medical inflation

Question 4

Explain the2 generic types of LTCI cover: pre-funded plans

Answer 4

purchased by relatively healthy people to protect them against future disability

benefits can be on an indemnity basis or cash benefits
benefit payments require a trigger that can use ADLs with an overriding trigger of severe mental impairment
death/ surrender benefitsare sometimes provided

premiums may be a single premium or regular premium
may stop at a certain age or level of disability
regular premiums typically increase in line with benefit escalation ratesand may be guaranteed or reviewable

underwriting - important to asses claim inception rate

Question 5

Explain the2 generic types of LTCI cover: immediate needs plans

Answer 5

purchased by long-term care claimants to protect them against their uncertain survival duration

single premiumproduct - may be considered equivalent to impaired annuities

cash benefits rather than benefits on an indemnity basis
benefits may increase at a fixed rate or index-linked rate
death benefit often included - return part of the singe premium

underwriting - important to asses longevity

Question 6

Discuss thedifferent periodsandfund exhaustionunderaunit-linked LTCI plan

Answer 6

different periods:

deferred period chosen by the policyholder at the outset
the period (if any) during which long-term care benefits are paid from the unit fund - This will depend on the fund protection level
the period during which long-term care benefits are paid from the non-unit fund

fund exhaustion:

As thepolicyholder ages and the risk charges increase,without a steady (and often) high investment growth,the unit fund may become exhausted

Question 7

Discuss liquidity requirements for pre-funded unit-linked LTCI

Answer 7

need for liquidity arises when the insurer has to fund benefits/ expenses from the non-unit fund

need for liquidity varies depending on:

fund protection level (need for liquidity increases with increases in the fund protection level)
nature of benefit (need for liquidity increases for indemnity benefits as opposed to cash benefit, need for liquidity decreases if benefit is linked to value of units)
timing of benefit (need for liquidity given the uncertainty associated with the benefit trigger)
duration of benefit (need for liquidity increases with more uncertainty from indemnity benefits)
investment guarantees (need for liquidity increases with the size of investment guarantees that may apply to the unit fund)

managed by modelling benefit payment scenarios to make appropriate choice over investment strategy:

not hold too much cash which provide relatively lower returns
reduce the loss from realizing assets at unfavourable market prices