Comparison of Long Term Health Care Insurance Policies

James H. Swisher

Chair, Subcommittee on Health Insurance, SIUC Joint Benefits Committee

August, 2003

Introduction

Many of us have been listening to presentations, reading articles, and receiving sales calls about the need to consider buying long term health care insurance. Regular health insurance policies and Medicare generally cover only skilled nursing care for 100 days after a hospital stay, and nursing home care can easily cost $150,000 for a three-year period. That raises two questions. One is who should and who shouldn’t take out rather expensive insurance policies for long term health care. The other is which insurance company to choose if you decide to take out a policy. At a workshop held here several years ago, it was mentioned that these policies may be too expensive for some people to afford, and well-to-do people may be better off paying directly for care if it is needed. That leaves a relatively large number of people in the middle who can afford the insurance premiums but would have a difficult time paying directly for nursing home or home health care. This same opinion was expressed in an article published in the January/February 2003 issue of Modern Maturity, an AARP publication. In the following sections, the assumption is made that individuals have already decided to pay for insurance coverage and are trying to select the company or agent to provide the policy.

Project Plan

The study was to center around a case study for an SIUC employee and his spouse who have a genuine interest in purchasing long term care insurance. A set of nearly identical letters were sent to several organizations that market this type of insurance in the Carbondale, IL area. The letters mentioned that the current ages of both the employee and his spouse are 60, they are in good health, and do not smoke. A price quote was requested for coverage at $100 per day for both nursing home and home health care. Total coverage for both individuals was to be $250,000, with a 30 day waiting period for benefits. Inflation protection was to be 3% per year, computed as simple rather than compound interest. If the organizations could not meet these specifications exactly, they were asked to quote on a similar policy. They were also asked to provide company ratings from such organizations as A.M. Best, Moody’s, Standard and Poor’s, and Fitch. The letters were signed by the employee, but he will not be identified here for privacy reasons. After all responses were received, the results were to be analyzed, and a report made available to all interested parties. To the best of the author’s knowledge, the only report of this type published before is a Consumer Reports article published in October, 1997. While it is a good article, much of its information is now obsolete, and it is not specific to the Illinois market. It is rather surprising that Consumer Reports has not published a follow-up article by now. For a broad discussion of the subject, readers are referred to the book, Long-Term Care, Your Financial Planning Guide by Phyllis Shelton, published in 2001, Kensington Books, Publisher.

Organizations Contacted

A list, in alphabetical order, of the organizations contacted is given in Table 1. A set of abbreviations is given in the second column, which will be used for brevity in the remainder of the report. Where applicable, the name and phone number of a contact person is given. Otherwise, an 800 number for the organization is listed. In some cases, the organization contacted is not the same as the insurance underwriter, so a list of the underwriters is given in the last column. Quite often, follow-up calls and E-mail correspondence were needed to obtain additional information and to have questions answered. It was found that TIAA-CREF has a calculator on its web site (www.tiaa-cref.org/ltc) and it was used in an important way in the study. Of the providers listed, GE, Hancock 2, Lincoln, NW, and TIAA are individual policies, while the others are all group policies. Hancock 1 is being developed to give State University Annuitants Association (SUAA) members an alternative to the original SUAA program with American United Life Insurance Company. The agent is now accepting applications for the program, but SUAA officers have not approved it yet, and John Hancock does not yet have it listed as an approved group plan. The agent for Hancock 2 states that he can offer the same rates as for Hancock 1 if a group can be formed from an existing association. For the other group policies, the underwriter- association arrangements are in place. The advertised advantages of group policies are discounts generally ranging from a few to ten percent and so-called preferential underwriting. The latter means a simplified application process and less stringent medical requirements.

Table 1. List of Insurance Providers

COMPANY/ ORGANIZATION	ABBREVIATION	CONTACT PERSON	TELEPHONE NUMBERS	INSURANCE UNDERWRITERS
GE Capital	GE	Ronald Vieceli John Forbes	618-303-8189 618-549-5029	GE Capital Assurance Company
Hancock Group 1	Hancock 1	Jim Griffin	800-866-0669	John Hancock Life Insurance Company
Hancock Group 2	Hancock 2	John Forbes	618-549-5029	John Hancock Life Insurance Company
IL State Employees Association/Retirees	ISEA/R	Jim Griffin	800-866-0669	Monumental Life Insurance Company
Lincoln	Lincoln	Ronald Vieceli	618-303-8189	Lincoln Benefit Life Company, Member Allstate Financial Group
Metropolitan Life	MetLife	Elizabeth McAndrews	800-438-6388	Metropolitan Life Insurance Company
National Education Association	NEA	Not Applicable	800-884-2675	Life Investors Ins. Co. of America
Northwest Mutual	NW	Dennis Burd	618-549-2168	Northwest Mutual Life Insurance Co.
State Universities Annuitants Assoc	SUAA	Elsie Eisenmann	866-582-7822	American United Life Insurance Co.
TIAA-CREF	TIAA	Not Applicable	800-223-1200	TIAA-CREF Life Insurance Company

Company Ratings

One of the parameters that should be used in selecting a provider is the financial health of the underwriter. In this context, financial health means there is little risk that the companies will default on claims and/or file for bankruptcy protection. There is no direct tie to the stability of premiums. Ratings of underwriters are given in Table 2 for four rating agencies. The A. M. Best data were obtained from the agency’s web site. Most of the other data were submitted by the providers, the only exception being the Fitch rating for the SUAA program. It was obtained by calling the Fitch agency.

Table 2. Underwriter Ratings

PROVIDER	A.M. BEST	MOODY’S	FITCH	STANDARD AND POOR’S
GE	A+	Aa2	AA	AA
Hancock 1	A++	Aa3	AA	AA
Hancock 2	A++	Aa3	AA	AA
ISEA/R	A+	Aa3	AA+	AA+
Lincoln	A+	Aa2	Not Rated	AA+
MetLife	A+	Aa2	AA+	AA
NEA	A+	Aa3	AA+	AA
NW	A++	Aaa	AAA	AAA
SUAA	A	A2	AA-	AA
TIAA	A++	Aaa	AAA	AAA

Top Five Ratings for Each Agency

A.M. Best A++ A+ A A- B++

Moody’s Aaa Aa1 Aa2 Aa3 A1

Fitch AAA AA+ AA AA- A+

Standard and

Poor’s AAA AA+ AA AA- A+

Examination and interpretation of the data shows that the ratings range from good to excellent. Companies with poorer reputations probably would not have been approved by the State of Illinois as providers in the State. It should be noted, however, that differences between underwriters are as high as four rankings by A. M. Best, Moody’s, and Fitch, and three rankings by Standard and Poor’s.

Premiums

In the letters sent to each provider, it was requested that a premium be quoted for certain specified benefits or a similar policy. The responses were found to vary so much in coverage that it was very difficult to make cost comparisons. The biggest problem was with inflation protection. The approximate cost of providing 5% compound inflation protection doubled the basic premium. The incremental cost of providing 3% simple inflation protection was about 30%. A lesser problem was that some of the providers did not offer policies with a 30 day elimination period

(waiting time for benefits to start). Because of these problems, it was decided to ask the providers to resubmit their quotes with all riders for inflation protection removed. Also, a set of correction factors was derived from the TIAA web site calculator. They are given in Table 3. The corrections based on the TIAA program are assumed to give a reasonable estimate for adjusting premiums in the other programs. The first three of the factors were used one or more times, but it was unnecessary to use the last one on inflation protection. The reason for making the adjustments was to allow for comparison of premium estimates for the same coverage.

Table 3. Conversion Factors Obtained from TIAA Calculator

TO CONVERT FROM	TO	MULTIPLY BY
5 Years of Benefits	3 Years of Benefits	0.807
90 Day Elimination Period	30 Day Elimination Period	1.155
Monthly Payments	Annual Payments	0.975
5% Compounded Inflation Protection	No Inflation Protection	0.411

The premiums adjusted this way are given in Table 4. For MetLife, coverage for assisted living facility care is $80 instead of $100/day, and home health care coverage is $50/day. There was no premium adjustment made for these differences. None of the other policies have such restrictions. In the NEA program, promises were given twice that information would be provided, but it never came. For the others, it can be seen that the premiums vary by almost a factor of two. The highest premium is for NW. NW makes no apology for its higher premium, claiming it has the best company and best program; so many customers are willing to pay more for its products. The lowest premiums are for Hancock 1 (now awaiting approval) and Lincoln. It should be mentioned again that policies with the terms listed below the table are not available from all of the providers. For example, GE will write policies with elimination periods of 50 or 100 days, but not 30 days. For this program, the amount of the adjustment was an increase of $52 or 4.5% for converting from 50 to 30 days.

Table 4. Adjusted Premiums Using TIAA Calculator

PROVIDER	ADJUSTED PREMIUM * ($/YR)
GE	1,209
Hancock 1	896
Hancock 2	938
ISEA/R	1,007
Lincoln	897
MetLife	1,155
NEA	No Response
NW	1,655
SUAA	1,276
TIAA	1,206

*For husband and spouse. Both age 60 in good health. $100/day for nursing home and home health care. Three year benefit period. Thirty day elimination period. No inflation protection.

All of the providers state that rates will never be raised for individuals, only classes of individuals. From the rumor mill, it is sometimes heard that companies with the lowest premiums are likely to raise them soon. No evidence for that has been found to date. GE, John Hancock, and Monumental, for example, have had the same basic rates for more than ten years. However, John Hancock has recently reduced its group discount from 10% to 5%. In the original SUAA program, the first underwriter was the Trustmark Insurance Company. When it ran into difficulty, it sold the business to American United, and the rates were kept the same. The Illinois State Office of Insurance was asked about consumer protection against rate increases by companies having low premiums. The answer is that, as of January 1, 2003, it is illegal for new companies issuing policies in Illinois to offer low premiums, than raise them. There is no protection, however, against companies approved by the State before that date.

Other Policy Features

There are many details which differ from one policy to another. It is not feasible to cover all of these, but some examples will be given. Also, the literature provided on the various programs varies from skimpy to extensive, so complete data are not currently available for review. It appears that all policies grant waivers on premium payments after a person starts to receive benefits. Many of the other special features relate to home health care. There are provisions in Hancock 1 and 2, ISEA/R, GE, SUAA, Met Life, and TIAA policies for allowances of $3000 to $5000 for the purchase of items like equipment needed for home health care. The elimination period for home health care is waived or reduced compared to facility care for Hancock 1 and 2, ISEA/R, GE, and SUAA. ISEA/R is apparently the only program in which family care givers can be compensated for home health care. For facility coverage of $100/day, this compensation would be $1000/month. The initial premiums are guaranteed for periods of 3 or 5 years by ISEA/R and SUAA. The same contact person is listed in Table 1 for ISEA/R and Hancock 1. He states that while the premium is lower for Hancock 1, other policy features offered by ISEA/R make the two fully competitive. A final comment on special features is that all providers list policy riders which add features at additional cost.

Concluding Remarks