Long-term care replacement, lapse protection, and partnership programs

Three protections around a long-term care policy

This lesson covers three topics that sit around a long-term care policy rather than inside its benefit schedule: replacing one policy with another, protecting the insured against an unintended lapse, and partnership policies that tie private coverage to Medicaid asset protection.

Start with Florida's baseline. A long-term care insurance policy is any policy or rider designed to pay for necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance or personal care services in a setting other than an acute care unit of a hospital. Medicare supplement, major medical, disability income and similar coverages are not long-term care insurance.

Replacement

Replacement means buying a new long-term care policy that will cause an existing one to lapse, be surrendered or be reduced. Because long-term care premiums rise with age and new policies can restart waiting periods, replacement must be clearly in the applicant's interest.

Standard practice, reflected in the NAIC model that most states follow:

• The application asks whether the applicant already has long-term care or Medicare supplement coverage and whether the new policy is intended to replace it.
• When replacement is involved, the applicant receives a replacement notice explaining the risks, and the producer should compare the two policies side by side.
• A replacing policy should generally credit time already served under the old policy's preexisting-condition and probationary periods, so the insured is not left uncovered.

Florida tools that support a sound comparison:

• An outline of coverage must be delivered at the time of application for an individual policy, summarizing principal benefits, exclusions and limitations, any costs the policy will not fully cover, and renewal provisions including any right to change premiums.
• Page one carries a Notice to Buyer advising the buyer to periodically review the policy against changes in the cost of long-term care, which is the honest reason a review, and sometimes a replacement, is considered.
• After a new policy's preexisting-condition waiting period expires, it may not use waivers or riders to exclude or limit coverage for specifically named preexisting conditions. Until that period expires, a replacing policy may not cover a preexisting condition, which is the main risk of switching.

Lapse protection

Long-term care buyers are often older, and the very conditions the policy covers, such as memory loss, can cause someone to forget to pay the premium. Standard lapse protections, as found in the NAIC model:

• Third-party designee. The applicant is offered the chance to name at least one other person, such as an adult child, to receive notice before the policy lapses for nonpayment.
• Advance notice. The insurer must give the insured and the designee written notice and a period to pay before the policy terminates.
• Reinstatement. If a lapse was caused by the insured's cognitive impairment or loss of functional capacity, the policy can be reinstated for a limited time after lapse on proof of that impairment.

Florida defines the terms these protections rely on. Cognitive impairment is a deficiency in short- or long-term memory, orientation as to person, place and time, deductive or abstract reasoning, or judgment as it relates to safety awareness. Chronically ill means certified by a licensed health care practitioner as unable to perform at least two activities of daily living for at least 90 days, or as needing substantial supervision because of severe cognitive impairment.

Partnership programs

A long-term care partnership program is a joint effort between a state's Medicaid program and private insurers, expanded nationally by the federal Deficit Reduction Act of 2005.

• A qualified partnership policy earns dollar-for-dollar asset protection: for every dollar the policy pays in benefits, a dollar of the insured's assets is disregarded if the insured later applies for Medicaid.
• Partnership policies must be tax-qualified long-term care policies, whose benefit trigger mirrors Florida's chronically ill definition.
• They must include inflation protection based on age at purchase: compound inflation protection for buyers under 61, some inflation protection for buyers 61 through 75, and none required at 76 or older.
• The protection covers assets, not income; the insured must still meet Medicaid's other eligibility rules.

Exam tip: replacement is about comparison and not losing coverage, lapse protection is about the designee and reinstatement after cognitive impairment, and partnership is about dollar-for-dollar Medicaid asset protection.