Chapter 7 Long-term care Insurance Flashcards

1
Q

Describe a long term care insurance contract

A

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

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2
Q

What is long term care?

A

All forms of continuing
+personal care or
+nursing care and associated domestic services…

…for people who are unable to look after themselves without some degree of support,

whether provided in
+their own homes,

+at a day centre,

+or in a state sponsored or care home setting.

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3
Q

Describe the optimal outcomes of long term care

A

Long term care aims to treat the result of the condition, not the condition itself.

Ideally we want
+help individual regain independence
+slow down deterioration
+provide necessary care support and environment

Medical care also important aspect of long term care, where physical/mental breakdown requires doctors/nursing staff. Usually expensive!

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4
Q

Describe the 3 types of costs associated with long term care

A

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

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5
Q

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 the qualification of providers

A

Formal care

Care which is provided via a professional services either in
+Own home
+Homes near relatives
+Managed residential homes

Informal care
Care typically provided by spouses/family/relatives, not provided via professional services, usually limited to not more than 4 hours per week.

Often carries indirect cost (lost economic activity)

Influenced by
+Cultural/religious practices

+Attitude towards caring for older generation

+Geographic family dispersion

+Family structure changes (divorces, re-marriage, lower birth rates)

+Proportion of working women

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6
Q

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

A

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

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7
Q

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)

A

Structure may either be:

+Standalone: this is the case most of the time

Rider: added to
+CI: TPD definition changes at age 60 to ‘loss of independent existence’’

+Whole of life: fixed % of benefit accelerated when LTC claim def satisfied

+IP: cover annuities beyond NRA, defs changes from occupation based to activity based

Funding:

+Single premium

+Regular premiums: usually increase with chosen benefit increase rate

Restricted regular premiums:
+up to certain age (NRA?)

+non during specified level of disability e.g. waiver of premium

+Retrospective payment: equity release after sale of home

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8
Q

Pre-funded long term care contracts:

Discuss claims definitions

Claims trigger requirements (3)

A

Claims trigger requires

+insured incapable perform certain number of activities

+without endangering health/well-being of themselves or others

+usually failure of insured to undertake certain # of ADLs unaided

Examples of ADLs (activities of daily living)

Physical incapacity
+feeding, washing, dressing, toileting

+mobility: able to move indoors, room to room, level surface at normal residence

+transfer: able to move from lying position to sitting position in upright chair/wheel chair

Mental incapacity:

\+deterioration/loss of mental capacity from organic cause=> need for care/supervision
organic cause (Alzheimer's, irreversible dementia)

+NOT depression/side effects from other medication

Covers
\+memory
\+knowing who/where they are
\+awareness of time
\+ability to solve simple problems
\+make rational decisions
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9
Q

Pre-funded long term care contracts:

Discuss the benefits provided in terms of 2 key factors for claim definitions (3)

A

Two key factors

Payment depends on claim definition

+single event (depend on level of disability, continuation for a specified period), or multiple set of events

+complex triggers also possible (e.g. need to be disabled and require care during night)

more stringent definition results in cheaper premiums

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10
Q

Pre-funded long term care contracts:

Discuss the benefits provided in terms of

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

A

Benefit depends on
+Level of disability e.g. 50% fail on 2 ADLs and 100% fail on 3+ ADLs

+May depend on residence: own vs nursing; not important if indemnify

Advantages
+Care provided at early age if there’s modest impairment

+Better match customer needs

+Perceived better value

+Novel feature may attract intermediaries

Disadvantages

+Increased admin costs

+Pricing more difficult

+Design more complex=> detailed literature, more effort to sell

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11
Q

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)

A

Benefit forms
+Lump sum
+Annuity certain
+Lifetime benefit (subject to ongoing disability)
+Restricted benefit (maximum period, or maximum total)

Other benefit forms/topics
+Assertive 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

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12
Q

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)

A

Usually some form of impaired life annuity

+Secured by single premium at start of contract…
+…when insured needs care as result of failing ill health

Premium
+Calculated individually, based on health status at purchase

+Premium guarantees not relevant (for single premium policies)

Benefit level
+May increase with pre agree benefit increase rates, with specified nursing home list
+May increase with worsening incapacity

Death benefit may be payable
+gives capital protection of part of single premium
+higher death benefit => less impact of health status on premium
+may be subject to minimum payment period
+usually just amortise single premium

Structure:
+could be: pure endowment, purchased life annuities, disability covers

structure should consider
+tax position ( of policyholder and life office)
+regulatory capital required
+benefit flexibility

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13
Q

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)

A

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

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14
Q

Variations for long term care insurance contracts: guaranteed terms

What important need does the provision of guaranteed terms meet/recognise? (2)

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)

A

Recognises:
+policyholders’ intended need for indemnity against all future costs
+can’t take additional risks associated with additional premium/reduced benefit

+May include substantial contingency loading
+leading to far lower reviewed premiums than guaranteed premiums..
+…may be attractive to policyholders

Issues of offering guaranteed terms
+True costs could be extensive
+Uncertainty in pricing basis + additional regulatory capital needed due to guarantee
+Favourable experience may not be passed to customer

To help manage the risks introduced, guaranteed terms may be
+age dependent: insurer not seeking further premiums/benefit reductions past given age
+limited: protection for 5 or 10 years

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15
Q

Variations for long term care insurance contracts:

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 cost? (1)

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

A

Indemnify insured=> pay for full cost of treatment/care received by policyholder

Benefit
+may be unknown
+may be paid directly to provider=> extract better provider terms with bargaining power
+subject to policy conditions e..g deferred period, restriction on provider
+may be subject to overriding maximums, so not full indemnity

Uncertainty of future costs=> high margins => prohibitively expensive

Few insurers give true indemnity; simply too much uncertainty

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16
Q

Variations for long term care insurance contracts:

Define what we mean by cash benefits, and how they’re 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)

A

Cash benefits

Cash benefits given either in form of lump sum, or, more usually, an income the level of which is specified in contract

Benefit level chosen
+to meet expected cost/assistance level needed at time of need
+in accordance with policyholder’s meant to pay

Key policyholder advantage of cash benefits?

gives choice: not necessarily earmarked for particular reasons

Issues for insured

risk of windfall payments => need more stringent claims assess

Issues for the policyholder

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

17
Q

Variations for long term care insurance contracts:

unit linked (2)

aims (4)

risk charges (2)

A

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

Risk charges
\+Monthly risk premium deductions
\+Cover risk exposure for period, which depends on
deferred period
level of protection
current age
benefit amount
18
Q

Variations for long term care insurance contracts:

unit linked

guarantees (2, 3)

A

Guarantees

As policyholder ages & risk charges increase (accentuated where benefits also escalate), may be concern that without steady investment growth, unit fund depletes.

If fund is less than risk charge and no guarantees were offered, cover lapses unless more money put into unit fund.

Different guarantees available:

No guarantee single premium sufficient: single premium enough to provide lifetime LTC protection

Protection from fixed age: if fund positive at fixed age, no further risk premiums drawn to cover LTC benefits

Full guaranteed: insurer accepts all risk of fund exhaustion. Investment choice restricted to managed/with-profits fund

19
Q

Variations for long term care insurance contracts:

unit linked

claim triggers (6)

A

Claim triggers

Often choice’

Protect fund (all benefits paid from non unit fund, and unit fund returned to policyholder as lump sum).

Risk charges higher to pay benefits

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 amount selected

Allowing fund exhaustion (use unit fund to initially pay benefits, then move onto non-unit fund)

Different periods (protection choice=> varying deferred period)

Differed period (chosen at outset by policyholder)

Benefit paid from unit fund protection

Benefits paid from non-unit fund

What kind of risks are faced by insurers who

20
Q

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

A

Transfer probabilities

Claim inception probabilities

Transfers between states if multiple states exist under contract

The need to use a typical multiple state model
Healthy; needing own home care; needing residential care; needing nursing home care; withdrawn; dead

Data shortages

Difficult to price, underwrite, etc

Need to adjust date for different/differences in
populations; behaviour; environment; policy wordings; social attitudes

Exploitative claims

ADLs don’t always offer enough protection

Difficulty to assess impact of disability

Depends on contract design, underwriting, claims procedures

Anti-selection
Selective withdrawals
Investment risk (significant reserves built up before claim inception)
Expense risk
Financial risk (negative asset share; withdrawal benefit > asset share)
Marketing risk
policyholder expect benefits sufficient to cover eventual cost care)
bad for public image, and future business

21
Q

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

A

Comparable to investment contracts e.g.
endowment: premiums paid and benefit paid when premiums stop

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