Define long-term care
All forms of continuing personal 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
Define the principle of indemnity
It is protection against loss. So the insurance company will do whatever is necessary to return the insured to the state they were in immediately prior to the event happening
What are the advantages and disadvantages to the insurer and the insured of offering an LTCI plan with cash benefits? (5)
- Only P(claim event) must be modelled to estimate estimated claims costs
- Less uncertainty with claim amounts = lower contingency loading = more sales
- No costs associated with organising care with providers (but might have to advice bc of competitive pressure)
- Flexibility and Choice: Cash gives the policyholder choice and can be directly applied to meet personal needs without being earmarked for particular purposes
Disadvantages:
* The policyholder may believe that the policy cover is comprehensive, but find that when a claim is made, the cash is insufficient to buy adequate care = marketing risk = reputation risk
List the needs met by LTCI products/purpose of the product to insured (6)
◦ To provide financial protection when a person becomes unable to look after themselves, typically in old age.
* This provides peace of mind and allows individuals to maintain their independence and dignity
◦ To ensure sufficient funds for care, especially if State provision is unavailable or inadequate.
◦ To avoid dependence on family or friends for unpaid care.
◦ To provide comfort from an independent source of cash triggered by severe incapacity.
◦ To fund care for elderly relatives and friends.
◦ Individuals often prefer policies that meet the actual cost of care, but insurers find this difficult to forecast.
* To cover acute medical intervention at some stage
Main Risks to the Insurer in LTCI (10)
- Transfer probabilities: Significant risks related to claim inception probabilities and transfers between different claim states (e.g., healthy to various levels of care). These transitions are typically assumed to be in the direction of deteriorating health.
▪ Anti-selection and selective withdrawals
▪ Data risk
▪ Moral hazard and exploitative claims: the evaluation of ADLs involves value judgments.
▪ Investment risk: Significant reserves may build up in advance of a claim starting, exposing the insurer to investment performance fluctuations.
▪ Expense risk: Costs associated with policy administration, claims processing, and providing care management services.
▪ Financial risk from withdrawal: This occurs when the asset share is negative, or if withdrawal benefits paid are disproportionate to the asset share.
▪ Marketing risk: The policyholder might expect full coverage of care costs, while the product only provides cash-limited benefits, leading to reputational damage and negative impact on future sales if expectations are not met.
▪ Uncertainty of future costs: This is a key disadvantage for indemnity products, as the future cost of benefits is highly uncertain, which leads to high margins for certainty in premiums.
▪ Longevity (annuity) risk: The risk that policyholders live longer than expected, extending the period over which benefits need to be paid
How do capital requirements for LTCI products compare to other insurance types, and what factors influence them?
How they compare to other products:
: Capital requirements for LTCI can be comparable to those for endowment assurance or other investment contracts. This similarity stems from the pattern of paying regular premiums in advance for a benefit that is paid from when premiums stop. It can also be considered similar to whole life assurance, as there is no fixed latest time for claim payment. However, unlike these, the LTCI benefit is not certainly paid, as policyholders can die without needing long-term care
Factors that influence them:
The nature of the contract and particularly any guarantees given significantly influence capital requirements. Increased risk due to guarantees typically requires increased prudence and larger reserves, and supervisory authorities may even require additional specific reserves for certain types of guarantees
What are the main risks or disadvantages of LTCI products for the insured? (8)
▪ Adequacy of cash benefits: The cash amount chosen at purchase may not be sufficient to meet the actual and escalating costs of healthcare many years in the future, leaving the policyholder to fund the difference.
▪ Complexity and suitability: The wide range of benefit variations, triggers, and product structures can be confusing, making it difficult for less expert purchasers to select a product that truly meets their needs.
▪ High premiums: for guaranteed prems and with increasing age
▪ No guarantee of full cost coverage
▪ Lack of experience in purchasing care services: Even with cash benefits, policyholders and their relatives often lack experience in buying care services, judging quality, or understanding the interaction between private and State-provided care.
▪ No surrender or death benefits
▪ Fund exhaustion (unit-linked plans): In unit-linked plans without full guarantees, there’s a concern that the unit fund could become exhausted without sufficient investment growth, causing cover to lapse unless more money is contributed.
▪ “Risk of living too long”: For individuals relying on their own capital, there’s a significant risk of exhausting their funds if they live longer than anticipated while needing care
What benefits do Long-Term Care Insurance (LTCI) products offer to the insurer?
- allows them to address a growing market need, especially with an aging population, creating a new source of premiums and revenue
- By providing financial protection, insurers fulfill a social function while also building their business
*Insurers also gain from investment income on the significant reserves that build up from premiums paid in advance of claim
What are the characteristic structures of immediate needs LTCI products?
- Immediate needs products provide a guaranteed lifetime income on payment of a single premium, calculated individually based on the applicant’s health status
- The level of benefit may increase with deepening incapacity and can cover both care home and domiciliary care
- hese products are often considered equivalent to impaired annuities, but their actual structure can vary widely, including pure endowments, purchased life annuities, and disability covers
- Considerations for constructing these plans include policyholders’ and life offices’ tax positions, regulatory capital, and benefits flexibility
- Ph can select a death benefit, structured as a minimum payment period, amortising the single premium, or capital protection of part of the single premium.
What are the common product structures for pre-funded Long-Term Care Insurance solutions?
Pre-funded LTCI products can be stand-alone policies or integrated as optional additions (riders) to other main policies. Examples of integrated riders include:
▪ Added to a Critical Illness (CI) policy, where the definition of Total and Permanent Disability (TPD) often changes at a specified age (e.g., 60) from work-related activities to the loss of independent living (failure of ADLs). Many common causes of long-term care are already covered by the main CI policy.
▪ Provided as a rider on a whole of life insurance policy, which pays the sum assured on death or accelerates a fixed percentage.
▪ Added to an Income Protection (IP) policy, allowing cover to continue beyond normal retirement age, with the definition of disability switching from occupation-related to activity-related (e.g., ADL failure) at the end of the IP term
What types of guarantees are available in LTCI products, particularly for premiums and in unit-linked plans? (6)
- Guaranteed products ensure that the insurer will not seek further premiums or reduce benefits after a certain age (e.g., 70 or 75), providing certainty for policyholders with fixed incomes.
- reviewable prems more common than guarantees ones
For unit-linked plans, guarantees relate to the investment fund:
▪ No guarantee that a single premium will provide lifetime protection.
▪ Protection from a fixed age (e.g., 90), meaning no further risk premiums are drawn if the fund is positive at that age.
▪ A full guarantee where the insurer accepts the risk of fund exhaustion, requiring investment choice restriction.
▪ During the claims period, there is a choice of fund protection levels: protecting the entire investment fund (units returned to policyholder as lump sum, all benefits from non-unit fund), protecting the initial investment, or allowing the entire fund to be exhausted before the non-unit fund is used
What benefits might LTCI plans provide? (7)
- the impaired annuity (for pre-funded) or immediate annuity (immediate needs) or lump sum
- fixed monthly benefits to cover assistive devices (e.g., grab rails, bathing seats, stair lifts) to help policyholders regain independence and defer further claims
- personal alarms linked to medical service providers to help people remain in their own homes
- provision of independent care advice at the point of claim
- paid-up benefit (reducing the benefit amount) after regular premiums have been paid for a minimum period
- death benefit and surrender benefit, UNCOMMON, although death benefit is likely for unit-linked version
Describe the trigger of the benefit payment of an LTCI product
Failure to meet some predetermined number of ADLs:
* mobility
* transfer
* feeding
* dressing
* toileting
* washing
Or cognitive impairment: deterioration in, or loss of, mental capacity from an organic cause (like Alzheimer’s or irreversible dementia)
– and surviving the deferred period
What are the three main components into which the costs of care can be divided?
- living costs (food, clothing, heating)
- housing costs (rent, mortgage payments)
- personal care (getting looked after bc of disability or frailty)
Who are the main providers of long-term care? (4)
- family
- the state
- insurance
- the individual through accumulated assets
What are the two generic types of LTCI cover?
- Pre-funded plans: Purchased by relatively healthy people to protect them against the future risk of disability.
- Immediate needs plans: Purchased by long-term care claimants to protect them against the uncertain survival duration
Provide examples of how LTCI benefits can be integrated as riders on other policies
- CI: often involving a switch in the Total and Permanent Disability (TPD) definition from “activities of daily work” to “loss of independent living” (failure of ADLs) at a specified age (e.g., age 60).
- WLA: The contract pays the sum assured on death, or accelerates a fixed percentage of the sum assured to fund LTC.
- IP: Cover continues beyond normal retirement age, with the disability definition switching from occupation-related to activity-related (e.g., failure of ADLs) at the end of the IP term
Describe the typical structure of benefit payments based on ADL failure.
- Benefit payments are dependent upon the claims definition, which may be triggered by a single or multiple events.
- It is common for 50% of the benefit to be paid on the failure of two out of six ADLs.
- 100% of the benefit is often payable on the failure of three or more out of six ADLs.
- The full benefit is also usually payable as a result of mental impairment.
What are the needs met/ purposes of Single Premium Unit-Linked LTCI products?
- To function primarily as a flexible investment contract and secondly as an LTCI vehicle.
- To recognise that people prefer purchasing a savings plan but avoid considering LTC.
- To address the unattractiveness of basic LTCI products which often have no surrender or death benefits
- The structure allows trust beneficiaries to inherit the fund proceeds if the insured dies before receiving LTC benefits.
Regarding unit-linked LTCI, what is the risk associated with escalating risk charges, and what guarantees can plans offer to mitigate this risk?
- Risk: As the policyholder ages and benefits escalate, the risk charges increase, leading to a concern that the unit fund may become exhausted, causing the cover to lapse.
Guarantees Offered:- No guarantee of sufficiency for lifetime protection.
- Protection from a fixed age (e.g., age 90), after which no further risk premiums are drawn.
- A full guarantee where the insurer accepts the risk of fund exhaustion, keeping the policy in-force regardless of age
What is meant by “protecting the entire investment fund” in a unit-linked LTCI product during the claims period?
All LTC benefits will be paid from the non-unit fund.
- The unit fund will be returned to the policyholder as a lump sum.
- This applies if the contract is primarily sold as an investment vehicle with LTCI benefits
How does the choice of fund protection level in a unit-linked LTCI policy affect the deferred period?
- The choice of fund protection is equivalent to varying the deferred period.
- If the entire fund is protected, the minimum deferred period applies (normally three months), and the insurance benefit begins immediately afterward.
- If the fund is not protected (or only partially protected), the unit fund is used first to pay benefits, effectively lengthening the total deferred period beyond the minimum period selected
Explain how moral hazard is managed in LTCI contracts, and why risk remains even with these controls.
Control: Moral hazard would be unmanageable without the use of Activities of Daily Living (ADLs) as triggers.
- Remaining Risk: The disability trigger alone may not be sufficient to protect against the risk of exploitative claims, as the evaluation of ADLs involves value judgements and is not an exact science.
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Chapter 5 = Income Protection28
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Chapter 153
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Chapter 1314
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Chapter 1817
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Chapter 1915
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Chapter 2010
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Chapter 2125
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Chapter 223
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Investments2
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Risks5
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Chapter 84
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Chapter 7 LTCI23
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Chapter 6 CI22
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Chapter 121
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Chapter 176
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Chapter 2210
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Chapter 2412
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Group products5
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Reinsurance - 29+3021
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Regulation6
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Other general questions7
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Underwriting11
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Chapter 238
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Chapter 325
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Chapter 3311
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Chapter 345
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Chapter 3516
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Chapter 2511
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Chapter 264
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Embedded value2
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Chapter 275
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Chapter 161
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Chapter 9 and 103
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Chapter 173
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Product needs7
