Market Characteristics | VOLUNTARY BENEFITS

The voluntary market is very diverse. The remainder of this section briefly describes some of the variations.

Insurance Company Involvement

It is estimated that between 150 and 200 insurance companies offer voluntary benefits, with the number of companies offering individual products being about double the number of companies offering group products and with some companies offering both individual and group products. For a few companies, 50 to 100 percent of their premium income is from voluntary products. For the majority of companies, the figure is under 10 percent.

As a general rule, individual carriers tend to target employers with fewer employees than do group carriers. However, many insurance companies will provide coverage for the employees of almost any size employer. Most companies target employees in the middle income range.

Types of Products Available

The major goal of most insurance companies in the voluntary market is to sell life insurance to employees and their dependents. Individual carriers are heavily concentrated in this market. Life insurance is also the most popular product of group carriers, but they are more likely to also offer health insurance products.

Life insurance products run the gamut from basic term insurance to variable universal life insurance and include accidental death and dismemberment insurance. The most prevalent health insurance products are short-term and long-term disability income. Major medical coverage is seldom offered, but some insurance companies sell specified-disease policies and hospital-indemnity coverage. Dental insurance, prescription drug coverage, and vision coverage are also found, usually in the group insurance market. An increasingly common product is long-term care insurance. A few companies also write property and liability insurance.

Depending on the size of the employer, group products can be tailored to the employer's needs. In the individual marketplace, some providers of voluntary products sell the standard products that are listed in their rate books. Other carriers have specialized products for this market. This is common for universal life insurance and among companies that specialize in voluntary benefits.

Underwriting

Surveys of both employers and employees indicate that the success of a voluntary benefit plan is affected by insurance company underwriting. Although some voluntary benefits are individually underwritten, most plans are responsive to market demands and use either simplified underwriting or guaranteed issues, with group coverage being more likely than individual coverage to have the latter. As a general rule, employers want guaranteed-issue coverage unless simplified underwriting will result in significant cost savings to employees. Several factors affect the underwriting policy of an insurance company, including size, participation level, and issue limits. For example, an insurance company might use simplified underwriting for its universal life product if there is a minimum 8 percent participation rate among employers with 500 employees and the issue limit is $100,000. For a group of 50 employees, the percentage might be 15 and the issue limit, $85,000. For guaranteed issue, the figures might be 35 percent and $80,000 for employers with 500 employees and 55 percent and $50,000 for employers with 50 employees.

Cost

It is estimated that voluntary benefits are about 10 percent less expensive than coverage purchased in the individual marketplace outside the employment relationship. However, significant variations exist. Even when there is no cost differential, the ease of payroll deduction is appealing to employees.

Because both employers and employees have considerable interest in voluntary products being offered on a tax-favored basis, benefits may be provided under a cafeteria plan. However, the use of a cafeteria plan may pose problems, and some benefit consultants feel that voluntary benefits should be kept separate from a firm's cafeteria plan. The issue arises over regulation by ERISA. Most voluntary plans, being employee pay all, are exempt from ERISA rules, which is a definite plus from the employer's perspective. Any benefits purchased under a cafeteria plan are technically purchased with employer funds, even if made with voluntary salary reductions. It is argued that this would bring a voluntary benefit plan under ERISA rules. In 1996 the Pension and Welfare Benefits Administration issued an advisory opinion that ERISA did not apply to premium-conversion plans (also called premium-only plans) used to allow before-tax salary reductions for medical expense benefits. However, the government has not addressed the issue of other voluntary benefits.

Methods of Premium Payment

The vast majority of voluntary benefits use payroll deduction (also referred to as salary allotment or salary reduction) as the method for premium payments, with the employer remitting the premiums to the insurance company. Some insurance companies will bill employees directly if an employer is unwilling to participate in a payroll deduction arrangement. Payroll deduction is very popular with employees, however, and direct billing will probably have an adverse effect on plan participation, although it may also reduce the rate at which coverage lapses when employment terminates.

Premiums are usually determined by the benefits purchased and the frequency of payroll deductions. However, life insurance is often sold on a money-purchase basis. The term money purchase comes from the fact that amounts of coverage are sold on the basis of what can be purchased with a given premium, such as $1, $2, or $5 per week (or other period). Because the amount of coverage is a function of the employee's attained age, larger amounts of coverage are available to younger employees than to older employees.

Some insurance companies sell universal life insurance on a money-purchase basis, but other companies take a different approach. Rather than selecting the desired premium, employees choose the amount of pure death protection. Several options—such as $10,000, $25,000, and $50,000—may be offered, and the available options may vary by salary level or position. A minimum periodic premium will then be specified for each option and a given employee's age. The premium will be sufficient to generate a cash value at retirement age if the insurer's current interest assumptions are met. Employees, however, can elect to pay higher premiums so that a larger cash value will develop. Some insurers set the initial premium at a multiple of the pure insurance cost (such as twice the cost); others make it an amount that will generate a cash value equal to a percentage (such as 50 percent) of the original amount of insurance. After the policy has been in force for a specified time period, employees typically have flexibility in premium levels similar to what is available to persons purchasing universal life insurance outside the employment relationship.

Reasons for Increase in Popularity | VOLUNTARY BENEFITS

A major area of growth for insurance companies in recent years has been through the marketing of voluntary benefits for employees. These products—which can be either group insurance or individual insurance—vary considerably among insurance companies. Even the names used to describe these products are not uniform, with terminology like payroll deduction plans and worksite marketing often being used. For purposes, voluntary benefits will be defined as products provided by the employer that the employee purchases and for which he or she pays 100 percent of the premium.

It is difficult to measure the precise extent of voluntary benefits because statistics are often included with other group or individual products sold by a company. However, surveys indicate that more than half of the employers with 20 to 100 employees make voluntary benefit products available. This figure increases to 90 percent for employers with 1,000 or more employees. It is also estimated that more than half of the employers that provide voluntary benefit plans make at least three products available.

Reasons for Increase in Popularity

Voluntary benefits have increased in popularity in recent years, primarily because of employers' attempts to contain the rising costs of employee benefits. For example, an employer may determine that it cannot afford to institute a new group insurance program and pay any portion of the cost of coverage. Even though employees would naturally like to have the employer share in the cost, the ease of payroll deduction and more liberal underwriting still make a payroll deduction plan attractive to them. In addition, the portability of the coverage is often appealing.

Voluntary benefits have also grown in popularity as a method of providing individual insurance coverage to supplement the benefits provided under a group plan financed by the employer. For example, an employer may pay for a group long-term disability income plan that provides benefits equal to 50 percent of salary. Voluntary benefits then allow employees to purchase additional protection. Or the employer may pay for short-term disability income protection only and make long-term protection available under a voluntary benefit plan.

Changes in demographics make it increasingly difficult for employers to offer an overall benefit plan that meets the needs of all employees. One alternative is to offer a cafeteria plan. Another option is to provide a basic core of benefits that all employees want. Additional benefits, such as long-term care insurance, can be offered on a voluntary basis.

Another reason for the increase in the popularity of voluntary benefits is the increased availability of products. More insurance companies have entered the market to obtain additional revenue at a time when revenue from other sources has been decreasing. As is often the case, this has sometimes resulted in lower costs and more liberal underwriting. However, before entering the voluntary benefits market, agents should be sure they are dealing with a stable company whose market line will stay current with the changing demands of the marketplace.

Types of Plans | GROUP LEGAL EXPENSE INSURANCE

The types of group legal expense plans vary significantly in the ways they provide legal services. When an employer or negotiated trusteeship establishes a group legal expense plan, benefits can be self-funded or purchased from another organization. These other organizations include state bar associations, groups of attorneys, or other organizations (either profit or nonprofit) formed for this purpose. However, most group legal expense coverage is purchased from a relatively small number of organizations, several of which have recently affiliated with insurance companies.

Existing plans fall into one of three types of arrangements:

1. Referral and discount plans

2. Access plans

3. Comprehensive plans

Referral and Discount Plans

The most basic form of legal expense plan is one that involves referrals and discounts. Plan members are referred to an attorney who provides services based on a fee schedule or at a discount from his or her usual fees, but the attorney's charges are paid by the plan member. In some cases, plan members may be eligible to be referred to attorneys who provide free services, such as a clinic for low-income persons or an attorney hotline of a local bar association.

Access Plans

This form of legal expense plan, sometimes also called a telephone access plan, provides plan members with unlimited legal consultation over the telephone for most legal matters. The plan may also provide simple legal services, such as the preparation of wills or powers of attorney or the review of legal documents.

Plan members are referred to an attorney for more complex legal matters. The attorney will often provide an initial free consultation (usually either one-half or one hour), after which the attorney will bill at some discount (often 25 percent) from normal fees. A plan member is responsible for paying this discounted fee.

Access plans can often be provided at a cost of $5 to $10 per month per member.

Comprehensive Plans

Most legal expense plans can be categorized as comprehensive plans, and premiums usually fall in the range of $10 to $20 per month per member, depending on the level of services provided.

In addition to telephone consultation, comprehensive plans cover in-office and trial work of attorneys. The term comprehensive may be a slight misnomer because most plans are not designed to cover 100 percent of a member's potential legal services; 80 to 90 percent is probably a better figure.

Comprehensive plans usually contain a list of covered services. While there are significant variations among plans, most cover at least the following:

• Unlimited legal advice by telephone

• Document review and preparation

• Name changes

• Adoptions

• Purchase or sale of primary residences

• Eviction defense

• Civil actions

• Driver's license suspension

• Juvenile court proceedings

• Consumer protection

• Bankruptcy

• IRS audits

• Debt collection

• Child custody and support

• Divorce, but possibly only for the covered employee and not dependents

If a particular legal service that is required is not on the list of covered services, there may be some limited coverage as long as the service is not otherwise excluded. This limited service, for example, may be in the form of telephone consultation or a limited amount of work by the attorney, such as two to four hours per family per year.

Legal expense plans have exclusions, and common exclusions include the following:

• Business activities or transactions

• Preparation of tax returns

• Class-action suits

• Actions involving the legal expense plan

• Actions involving the employer

• Actions involving the union that bargained for the coverage

• Cases that have contingent fees

Comprehensive plans take three approaches to the method by which a plan member may select an attorney. Many plans use a closed-panel approach, under which a panel of attorneys has agreed to provide covered services at a predetermined fee or hourly rate for which they bill the plan. The plan member selects the attorney, and benefits are generally available at little or no additional cost. However, plans may limit some benefits to a scheduled maximum (such as $500) and usage limitation (such as four hours). A few plans also have deductibles and copayments.

Other plans are open-panel. A plan member can choose any licensed attorney; however, plan benefits are usually subject to scheduled dollar maximums.

Many plans are modified-panel plans. Under such plans, a plan member may choose either a panel attorney, as in a closed-panel plan, or select his or her own attorney. The election of a panel attorney often results in benefits being paid in full, while the election of a nonpanel attorney results in the use of benefit maximums.

Current Tax Treatment | GROUP LEGAL EXPENSE INSURANCE

Plans that cover the legal expenses of employees have been a common benefit in several European countries for many years. However, until the mid-1970s, the concept was not widely used in the United States. The plans that did exist were almost always established by unions and were financed from general union funds. Usually, the legal services were provided by attorneys who were employed by the unions, and the only legal services covered were those limited to job-related difficulties, such as suspensions or workers' compensation disputes.

The limited extent of legal expense plans was due to the existence of several obstacles, all of which have been substantially reduced or eliminated in recent years as a result of changes to state and federal laws. In 1973, the Taft-Hartley Act was amended to make legal expense benefits a new subject of collective bargaining, and the Tax Reform Act of 1976 gave favorable tax treatment to certain legal expense plans by providing that neither the premiums paid by employers nor the benefits received under the plans constitute taxable income to employees. As a result of these changes, the number of legal expense plans grew considerably, particularly for union employees as a result of collective bargaining. These plans are typically negotiated trusteeships that provide benefits on an uninsured basis. Some employers have established voluntary plans—possibly as part of a cafeteria plan—under which an employee can elect to participate if he or she desires. In most cases, the employee pays the full cost of the coverage on an after-tax basis. It is also becoming increasingly common for employers to offer some legal expense benefits under employee-assistance plans.

Current Tax Treatment

Under provisions of the 1976 tax act, Section 120 of the Internal Revenue Code was established. This Code section allowed an employer to pay annual premiums to a "prepaid legal services plan" of up to $70 for each employee without the employee's incurring any taxable income. To qualify as a prepaid legal services plan, a group legal expense plan had to meet specific requirements regarding funding and nondiscrimination. Section 120 was always subject to a sunset provision, but the date of expiration was extended several times. However, the section was allowed to expire at the end of 1992. Unless Section 120 is revived at some future date (and periodically there continue to be bills in Congress to do this), any premiums paid by the employer for group legal expenses coverage are treated as taxable income for employees. Benefits are taxable if a plan is self-funded. If Section 120 is revived, favorable tax treatment could also be provided to group legal expense benefits available (within limits) under a cafeteria plan.

The cost of legal expense plans is deductible for the employer. Employees, however, have taxable income to the extent of employer payments. If the plan is prefunded, the employee is taxed on his or her share of the premium paid and benefits are received tax free. If a plan is self-funded by the employer, the employee's taxable income is the value of the benefits paid by the plan.

Group Long-Term Care Policies | GROUP LONG-TERM CARE INSURANCE

Most of the early group long-term care policies were designed for specific large employers, and much variation existed. For the last few years, most insurance companies have had a standard group long-term care product, which in virtually all cases is consistent with the provisions in the Long-Term Care Insurance Model Act of the National Association of Insurance Commissioners. The result is that group policies tended to be comparable to the broadest policies sold in the individual marketplace.

Effect of Health Insurance Portability and Accountability Act

The tax treatment of long-term care insurance was made more favorable by HIPAA. Because favorable tax treatment is given only if long-term care insurance policies meet prescribed standards, the nature of most long-term coverage has changed. In most cases, the imposition of federal standards results in broader coverage for consumers. However, Congress seems to have been concerned with the revenue loss associated with this tax legislation. As a result, policies that are modified to comply with the federal standards may in some cases actually provide more limited coverage than has been previously required in several states, particularly with respect to qualifying for benefits.

It should be emphasized that the long-term care changes in the act are primarily changes in the income tax code. States still have the authority to regulate long-term care insurance contracts. They have no obligations to bring state rules and regulations into conformity with these tax changes. However, all states allow "qualified" contracts so that consumers can obtain the new tax benefits.

In the individual marketplace, there are both "qualified" contracts and contracts that do not meet the new HIPAA rules—called nonqualified contracts—and there is some debate over which type of contract is better. However, in the group marketplace, most, if not all, of the contracts are qualified.

Eligibility for Favorable Tax Treatment. The act provides favorable tax treatment to a qualified long-term care insurance contract. This is defined as any insurance contract that meets all the following requirements:

• The only insurance protection provided under the contract is for qualified long-term care services.

• The contract cannot pay for expenses that are reimbursable under Medicare.

• The contract must be guaranteed renewable.

• The contract does not provide for a cash surrender value or other money that can be borrowed or paid, assigned, or pledged as collateral for a loan.

• All refunds of premiums and policyholder dividends must be applied as future reductions in premiums or to increase future benefits.

• The policy must comply with various consumer protection provisions. For the most part, these are the same provisions contained in the NAIC model act and already adopted by most states. However, the new federal act requires the issuer of any level-premium contract to offer a nonforfeiture benefit that can take the form of one of the following: paid-up insurance, extended term insurance, a shortened benefit period, or any similar benefit allowed by regulations that might be issued.

The act defines qualified long-term care services as necessary diagnostic, preventive, therapeutic, curing, treating, and rehabilitative services, as well as maintenance or personal care services that are required by a chronically ill individual and are provided by a plan of care prescribed by a licensed health care practitioner.

A chronically ill person is one who has been certified as meeting one of the following requirements:

• The person is expected to be unable to perform, without substantial assistance from another person, at least two activities of daily living (ADLs) for a period of at least 90 days due to a loss of functional capacity. The act allows six ADLs, and a qualified long-term care policy must contain at least five of the six. These ADLs are eating, bathing, dressing, transferring from bed to chair, using the toilet, and maintaining continence. (The secretary of health and human services is permitted to prescribe regulations so that a person having a level of disability similar to the level of disability of a person who cannot perform two activities of daily living would also be considered chronically ill.)

• Substantial services are required to protect the individual from threats to health and safety due to substantial cognitive impairment, even if the person can perform all other ADLs.

Federal Income Tax Provisions. A qualified long-term care insurance contract is treated as accident and health insurance. Therefore any employer contributions are deductible to the employer and do not result in any taxable income to an employee. Benefits received under a group plan are received tax free by an employee with one possible exception. Under contracts written on a per diem basis, proceeds are excludable from income up to $190 per day in 2000. (This figure is indexed annually.) Amounts in excess of $190 are also excludable to the extent that they represent actual costs for long-term care services.

Coverage cannot be offered through a cafeteria plan on a tax-favored basis. In addition, if an employee has a flexible spending account for unreimbursed medical expenses, any reimbursements for long-term care services must be included in the employee's income.

With some exceptions, expenses for long-term care services, including insurance premiums, are treated like other medical expenses. That is, self-employed persons may deduct a portion of premiums paid, and persons who itemize deductions can include the cost of long-term care services, including insurance premiums, for purposes of deducting medical expenses in excess of 7.5 percent of adjusted gross income. However, there is a cap on the amount of personally paid long-term care insurance premiums that can be claimed as medical expenses

Policy Characteristics

Eligibility for Coverage. The typical eligibility rules (that is, full-time employee, actively at work, and so on) apply to group long-term care policies. At a minimum, coverage can be purchased for an active employee and/or spouse. Many policies also provide coverage to retirees and to other family members such as children, parents, parents-in-law, and, possibly, adult children. There is a maximum age for eligibility, but it is frequently as high as age 85 and may be higher.

Cost. As previously mentioned, the cost of group long-term care coverage is almost always borne by the employee. Initial premiums are usually based on five-year age brackets and increase significantly with age. For example, one plan has an annual premium of $300 for persons aged 40 to 44 and $975 for persons aged 60 to 65. Once coverage is elected, premiums remain level and do not increase when a person enters another age bracket. Coverage is guaranteed renewable, so premiums can be increased by class.

Under some plans, premiums are payable for life. Under other plans, premiums are higher but cease at retirement age. Such a plan is analogous to a life insurance policy that is paid up at age 65. Virtually all plans contain a waiver-of-premium provision that becomes effective when a covered person starts to receive benefits.

Levels of Care. There are several types of care that group long-term care policies can provide. All group policies cover the first three items on the following list, and most policies can provide coverage for all the listed items. However, to receive coverage for some benefits, such as home health care, a covered person might have to elect the benefit and pay an increased premium.

• Skilled-nursing care, which consists of daily nursing and rehabilitative care that can be performed only by or under the supervision of skilled medical personnel and must be based on a doctor's orders.

• Intermediate care, which involves occasional nursing and rehabilitative care that must be based on a doctor's orders and can be performed only by or under the supervision of skilled medical personnel.

• Custodial care, which is primarily to handle such personal needs as walking, bathing, dressing, eating, or taking medicine and can usually be provided by someone without professional medical skills or training.

• Home health care, which is received at home, and includes part-time skilled nursing care, speech therapy, physical or occupational therapy, part-time services from home health aides, and help from homemakers or chore workers.

• Adult day care, which is received at centers specifically designed for the elderly who live at home but whose spouses or families are not available to stay home during the day. The level of care received is similar to that provided for home health care. Most adult day care centers also provide transportation to and from the center.

• Care coordination, which includes the services of a licensed health care practitioner who can access a person's condition, evaluate care options, and develop an individualized plan of care that provides the most appropriate services.

• A bed reservation benefit, which continues payments to a long-term care facility for a limited time (such as 20 days) if a patient must temporarily leave because of hospitalization. Without a continuation of payments, the bed may be rented to someone else and unavailable on the patient's release from the hospital.

• Respite care, which allows occasional full-time care at home for a person who is receiving home health care. Respite-care benefits enable family members (or other persons) who are providing much of the home care to take a needed break.

Some policies provide other types of benefits. These include, for example, the purchase or rental of needed medical equipment, emergency alert systems, and assisted-living benefits for facilities that provide care for the frail elderly who are no longer able to care for themselves but do not need the level of care provided in a nursing home.

Benefits. Benefits are usually limited to a specific dollar amount per day, with $50 to $150 being common. A few plans allow participants to select varying benefit levels (for example, $50, $75, $100, $150, or $200 per day) when coverage is initially elected. Benefits may vary by level of care, with the highest benefits being provided for skilled nursing care and the lowest level for home health care and/or adult day care if they are covered. For example, home health care benefits are often paid at one-half the level of custodial care benefits. Annual respite care benefits are usually limited to some multiple, such as 20, of the maximum daily benefit. Most states require that insurance companies offer protection against inflation, usually in the form of benefits increasing periodically based on some index such as the consumer price index. However, inflation increases are often capped at some annual maximum, such as 3 percent.

While a few group long-term care plans provide benefits for an unlimited duration, most limit benefits to a period of time, ranging from three to seven years, or to some equivalent dollar maximum. It should be noted that most persons who enter nursing homes either are discharged or die within two years. However, it is not unusual for stays to last seven years or longer. As in the case of disability income insurance, benefits are often subject to a waiting period, which may vary from 10 to 150 days with 90 days being most common.

Some policies provide for a full restoration of benefits if a covered person has recovered and not been receiving long-term care benefits for a certain period of time, often 180 days. In the absence of such a provision, maximum benefits for a subsequent claim are reduced by the amount of any benefits previously paid.

Eligibility for Benefits. Eligibility for benefits under group long-term care policies is based on meeting the requirements of a chronically ill person as previously described. With respect to ADLs, most policies specify that the covered person be unable to perform at least two out of six ADLs (without substantial assistance from another person) for at least 90 days. However, some policies use a criterion of two out of five ADLs.

There is a second criterion for eligibility, which if satisfied results in the payment of benefits even if the ADLs can be performed. This criterion is based on cognitive impairment, which can be caused by Alzheimer's disease, strokes, or other brain damage. Cognitive impairment is generally measured through tests performed by trained medical personnel.

Because eligibility for benefits often depends on subjective evaluations, most insurance companies use some form of case management. Case management may be mandatory, with the case manager determining eligibility, working with the physician and family to decide on an appropriate type of care, and periodically reassessing the case. Case management may also be voluntary, with the case manager making recommendations about the type of care needed and providing information about the sources for care.

Underwriting. If a group is large enough, coverage is provided on a guaranteed-issue basis for employees who are actively at work. Other categories of eligible persons and employees of small groups are usually subject to individual underwriting, in a manner similar to that in the marketplace for individual long-term care insurance.

Unlike medical expense insurance, a long-term care policy usually does not contain a preexisting-conditions provision. There is little need for such a provision because insurers are required in most states to underwrite at the time coverage is written and are not allowed to use post claims underwriting. If properly underwritten at that time, claims within usual preexisting-conditions periods are very unlikely to occur. In addition, waiting periods for benefits often serve a similar purpose.

Exclusions. Several exclusions are found in group long-term care policies:

• War

• Institutional care received outside the United States

• Treatment for drug or alcohol abuse

• Intentionally self-inflicted injury

• Attempted suicide

• Confinement or care for which benefits are payable under workers' compensation or similar laws

• Confinement or care for which the covered person or the covered person's estate is not required to pay

In contrast to many older individual policies, group contracts have not been written to exclude organic-based mental diseases such as Alzheimer's disease.

Renewability and Portability. Group long-term care plans are guaranteed renewable. If a participant leaves employment, the group coverage can usually be continued on a direct-payment basis, under either the group contract or an individual contract.

Sources of Long-Term Care | GROUP LONG-TERM CARE INSURANCE

There are several sources other than insurance that are available for providing long-term care. However, there are drawbacks associated with each source.

One source is to rely on personal savings. Unless a person has substantial resources, however, this approach may force an individual and his or her dependents into poverty. It may also mean that the financial objective of leaving assets to heirs will not be met.

A second source is to rely on welfare. The Medicaid program in most states will provide benefits, which usually include nursing home care, to the "medically needy." However, a person is not eligible unless he or she is either poor or has exhausted most other assets (including those of a spouse). There is also often a social stigma associated with the acceptance of welfare.

Life-care facilities are growing in popularity as a source of meeting long-term care needs. With a life-care facility, residents pay an "entrance fee" that allows them to occupy a dwelling unit but usually does not give them actual ownership rights. The entrance fee may or may not be refundable if the resident leaves the facility voluntarily or dies. As a general rule, the greater the refund is, the higher the entrance fee will be. Residents pay a monthly fee that includes meals, some housecleaning services, and varying degrees of health care. If a person needs long-term care, he or she must give up the independent living unit and move to the assisted-living or nursing home portion of the facility, but the monthly fee normally remains the same. The disadvantages of this option are that the cost of a life-care facility is beyond the reach of many persons, and a resident must be in reasonably good health and able to live independently at the time the facility is entered. Therefore the decision to use a life-care facility must be made in advance of the need for long-term care. Once such care is needed or is imminent, this approach is no longer viable.

A few insurers now include long-term care benefits in some cash-value life insurance policies. Essentially, an insured can begin to use this accelerated benefit while still living. For example, if the insured is in a nursing home, he or she might receive a benefit equal to 25 percent or 50 percent of the policy face. However, any benefit reduces the future death benefit payable to heirs.

The Need for Long-Term Care | GROUP LONG-TERM CARE INSURANCE

The Need for Long-Term Care

The need for long-term care arises from the following factors:

• An aging population

• Increasing costs

• The inability of families to provide full care

• The inadequacy of insurance protection

An Aging Population

Long-term care has traditionally been thought of as a problem primarily for the older population. The population aged 65 or over is the fastest-growing age group; today, it represents about 11 percent of the population, a figure that is expected to increase to between 20 percent and 25 percent over the next 50 years. The segment of the population aged 85 and over is growing at an even faster rate. While less than 10 percent of the "over 65" group is over age 85 today, this percentage is expected to double over the next two generations.

An aging society presents changing problems. Those who needed long-term care in the past were most likely to have suffered from strokes or other acute diseases. With longer life spans, a larger portion of the elderly will be incapacitated by chronic conditions such as Alzheimer's disease, arthritis, osteoporosis, and lung and heart disease—conditions that often require continuing assistance with day-to-day needs. The likelihood that a nursing home will be needed increases dramatically with age. One percent of persons between the ages of 65 and 74 reside in nursing homes, and the percentage increases to 6 percent between the ages of 75 and 84. At age 85 and over, the figure rises to approximately 25 percent.

It should be noted that the elderly are not the only group of persons who need long-term care. Many younger persons are unable to care for themselves because of handicaps resulting from birth defects, mental conditions, illnesses, or accidents.

Increasing Costs

More than $50 billion is spent each year on nursing home care. This cost is increasing faster than inflation because of the growing demand for nursing home beds and the shortage of skilled medical personnel. The cost of complete long-term care for an individual can also be astronomical, with annual nursing home costs of $30,000 to $50,000 and more not unusual.

The Inability of Families To Provide Full Care

Traditionally, long-term care has been provided by family members, often at considerable personal sacrifice and great personal stress. However, it is becoming more difficult for families to provide long-term care for the following reasons:

• The geographic dispersion of family members

• Increased participation in the paid work force by women and children

• Fewer children in the family

• More childless families

• Higher divorce rates

• The inability of family members to provide care because they themselves are growing old

The Inadequacy of Insurance Protection

Private medical expense insurance policies (both group and individual) almost always have an exclusion for convalescent, custodial, or rest care. Some policies, particularly group policies, do provide coverage for extended-care facilities and for home health care. In both cases, the purpose is to provide care in a manner that is cheaper than care in a hospital. However, coverage is provided only if a person also needs medical care; benefits are not provided if a person is merely "old" and needs someone to care for him or her.

Medicare is also inadequate because it does not cover custodial care unless this care is needed along with the medical or rehabilitative treatment provided in skilled nursing facilities or under home health care benefits.

Exclusions, Limitations, Predetermination of Benefits & Termination | Contractual Provisions

Exclusions

Exclusions are found in all dental plans, but their number and type vary. Some of the more common exclusions are charges for the following:

• Services that are purely cosmetic, unless necessitated by an accidental bodily injury while a person is covered under the plan (Orthodontics, although often used for cosmetic reasons, can usually also be justified as necessary to correct abnormal dental conditions.)

• Replacement of lost, missing, or stolen dentures or other prosthetic devices

• Duplicate dentures or other prosthetic devices

• Oral hygiene instruction or other training in preventive dental care

• Services that do not have uniform professional endorsement

• Occupational injuries to the extent that benefits are provided by workers' compensation laws or similar legislation

• Services furnished by or on behalf of government agencies, unless there is a requirement to pay

• Certain services that began prior to the date that coverage for an individual became effective (e.g., a crown for which a tooth was prepared prior to coverage)

Limitations

Dental insurance plans also contain numerous limitations that are designed to control claim costs and to eliminate unnecessary dental care. In addition to deductibles and coinsurance, virtually all dental plans have overall benefit maximums. Except for DHMOs, which usually do not have a calendar-year limit, most plans contain a calendar-year maximum (varying from $500 to $2,000) but no lifetime maximum. However, some plans have only a lifetime maximum (such as $1,000 or $5,000), and a few plans contain both a calendar-year maximum and a large lifetime maximum. These maximums may apply to all dental expenses, or they may be limited to all expenses except those that arise from orthodontics (and occasionally periodontics). In the latter case, benefits for orthodontics are subject to a separate, lower lifetime maximum, typically between $500 and $2,000.

Most dental plans limit the frequency with which some benefits are paid. Routine oral examinations and teeth cleaning are usually limited to once every six months, and full-mouth X-rays to once every 24 or 36 months. The replacement of dentures may also be limited to one time in some specified period (such as five years).

The typical dental plan also limits benefits to the least expensive type of accepted dental treatment for a given dental condition. For example, if either a gold or silver filling can be used, benefit payments will be limited to the cost of a silver filling, even if a gold filling is inserted.

Predetermination of Benefits

About half of dental contracts provide for a pretreatment review of certain dental services by the insurance company. Although this procedure is usually not mandatory, it does allow both the dentist and the patient to know just how much will be paid under the plan before the treatment is performed. In addition, it enables the insurance company (or other provider of benefits) to have some control over the performance of procedures that are unnecessary or more costly than necessary, by giving patients an opportunity to seek less costly care (possibly from another dentist) if benefits will be limited.

In general, the predetermination-of-benefits provision (which goes by several names, such as precertification or prior authorization) applies only in nonemergency situations and when a dentist's charge for a course of treatment exceeds a specified amount (varying from $200 to $300). The dentist files a claim form (and X-rays, if applicable) with the insurance company just as if the treatment had already been performed. The insurance company reviews the form and returns it to the dentist. The form specifies the services that will be covered and the amount of reimbursement. If and when the services are actually performed, payment is made to the dentist by the insurance company after the claim form has been returned with the appropriate signatures and the date of completion.

When the predetermination-of-benefits provision has not been followed, benefits are still paid. However, neither the dentist nor the covered person knows in advance what services will be covered by the insurance company or how much the insurance company will pay for these services.

Termination

Coverage under dental insurance plans typically terminates for the same reasons it terminates under medical expense coverage. Rarely is there any type of conversion privilege for dental benefits, even when the coverage is written as part of a major medical contract. However, dental coverage is subject to the continuation rules of COBRA.

Benefits for a dental service received after termination may still be covered as long as (1) the charge for the service was incurred prior to the termination date and (2) treatment is completed within 60 or 90 days after termination. For example, the charge for a crown or bridgework is incurred once the preparation of the tooth (or teeth) has begun, even though the actual installation of the crown or bridgework (and the billing) does not take place until after the coverage terminates. Similarly, charges for dentures are incurred on the date the impressions for the dentures are taken, and charges for root canal therapy are incurred on the date the root canal is opened.

Eligibility | Contractual Provisions

In contributory plans, most employers use the same eligibility requirements for dental coverage as they use for medical expense coverage. However, some employers have different probationary periods for the two coverages. Probationary periods are used because members of a group who previously had no dental insurance usually have a large number of untreated dental problems. In addition, because many dental care expenditures are postponable, an employee who anticipates coverage under a dental plan in the future is inclined to postpone treatment that is not crucial. Depending on the group's characteristics, the number of first-year claims for a new plan or for new employees and their dependents under an existing dental plan can be expected to run between 20 percent and 50 percent more than long-run annual claims. Therefore, to counter this higher-than-average number of claims, some employers use a longer probationary period for dental benefits than for medical expense benefits. Other employers may have the same probationary period for both types of coverage but will impose waiting periods before certain types of dental expenses will be covered (such as 12 months for orthodontics).

Longer-than-usual probationary periods or waiting periods initially minimize claims, but unless an organization has a high turnover rate, the result may be false economy. Many persons who do not have coverage merely postpone treatment until they do have coverage. This postponement may actually lead to increased claims, because existing dental conditions only become more severe and then require more expensive treatment. For this reason, some benefit consultants feel that dental plans should at most contain relatively short probationary and waiting periods.

Another method of countering high first-year claims is to require evidence of insurability. For example, an insurance company might require any person who desires coverage from the dental plan to undergo a dental examination. If major dental problems are disclosed, the person must have them corrected before insurance coverage becomes effective.

Because dental expenditures are postponable and somewhat predictable, the problem of adverse selection under contributory plans is more severe for dental insurance than for many other types of group insurance. To counter this adverse selection, insurance companies impose more stringent underwriting (including eligibility) requirements on contributory dental plans than they do on other types of group insurance. In addition, most insurance companies insist on a high percentage of participation (such as 80 percent or 85 percent), and a few will not write contributory coverage. Many insurance companies also insist on having other business besides dental coverage from the employer.

The problem of adverse selection is particularly severe when persons desire coverage after the date on which they were initially eligible to participate. These persons most likely want coverage because they or someone in their family needs dental treatment. Dental insurance contracts contain several provisions that try to minimize this problem, including one or a combination of the following:

• Reducing benefits (usually by 50 percent) for a period of time (such as one year) following the late enrollment.

• Reducing the maximum benefit to a low amount (such as $100 or $200) for the year following the late enrollment.

• Excluding some benefits for a certain period (such as one or two years) following the late enrollment period. This exclusion may apply to all dental expenses except those that result from an accident, or it may apply only to a limited array of benefits (such as orthodontics and prosthetics).