Husband: “Hey honey, we need to change our vows.”
Wife: “What?”
Husband: “Yeah, they say ‘in sickness and in health,’ but what about accident?”
Wife: “What is your problem?”
Husband: “Well, my DI policy says that a disability is caused by either an accident or sickness.”
Wife: “What’s your point?”
Husband: “Well, you should love me and stay married to me however I am disabled.”
Wife: “How disabled? Like you can’t do your job disabled or can’t do Activities of Daily Living disabled?”
Husband: “I would think that both should be covered—or—included.”
Wife: “What if you are just unemployed?”
Husband: “That would be temporary.”
Wife: “You better believe it!”
Husband: “You know…my DI policy is guaranteed renewable to age 67, but conditionally renewable to age 75 if I’m working.”
Wife: “OK, so what?”
Husband: “Well, in the old days when marriage vows were invented, people only lived to age 50, so you were only married for 30 years. Nowadays, ‘till death do us part’ could be 80 years. Maybe we should have a conditional renewability provision in our marriage contract after, say, 30 years?”
Wife: “You know where the dog sleeps?”
Husband: “Yes.”
Wife: “Then I know where to find you.”
It’s true: this couple could live a long life together (or separate). When DI was invented, people worked to age 65 and died shortly thereafter. Today, people might work to age 65 or 70, then retire and live another 25 years and have a 70 percent chance of needing long term care services and support at some point.1 Long term care insurance (LTCI) was born to continue where DI ends.
A person’s largest asset during working years is their potential income; their yet worth. Their largest asset in retirement is investments which provide retirement income, and the biggest threat to retirement income is a long term care event—an extended catastrophic disability. Is it time for a product that combines DI and LTCI into one product that can provide income protection for life?
Maybe, but it would depend on the design and cost. Combo products may not be priced lower than two separate policies, and the definitions might be lacking as well. Be that as it may, this article is a means to compare and contrast the two lines of coverage and open a discussion about the possibility of Linked Benefit Income Protection (LBIP).
Can DI and LTCI get along in the same policy or are there irreconcilable differences?
The following are policy features found in both DI and LTCI. Can these features be modified to address both DI and LTCI at once? There are differences between DI and LTCI contracts; there are many similarities as well. Which provisions might be able to survive together in our Hypothetical Linked Benefit Income Protection (HLBIP) product?
1. Structure and Renewability
• DI is guaranteed renewable to age 65/67 and then conditionally renewable if still working. LTCI is guaranteed renewable (GR) for life. Some DI is also non-cancellable (NC), with guaranteed rates.
HLBIP structure and renewability: The base policy could be a DI policy with earned income disability benefits payable up to age 70, and long term care costs reimbursed by the catastrophic disability benefit, similar to the CAT riders found today, except guaranteed renewable for life. Lifetime renewability would be the biggest hurdle to overcome in the development of an LBIP product.
2. The Definition of Disability or Eligibility for Benefits
• DI benefit eligibility requires proof that, due to accident or sickness, you are unable to perform the important duties of your occupation, whereas LTCI benefit eligibility requires proof of loss of ability to perform ADLs or proof of a severe cognitive impairment. This is a big difference, unless you are not working or are not currently employed when you suffer an accident or sickness. If this were to happen, your DI carrier’s claims department may end up looking at ADL deficiency to determine eligibility for benefits. This is a gray area, but it is proof that a DI carrier knows how to adjudicate an LTCI claim.
HLBIP eligibility: The base policy could be a DI policy with benefits for initial disability requiring the inability to perform important duties of one’s own occupation during working years up to age 70. The extended coverage for catastrophic disability would require loss of ADLs or severe cognitive impairment.
3. Elimination Period or Waiting Period
• The DI waiting period (WP) is the number of days that you must be disabled before benefits are paid. For DI, it typically must be met within a timeframe, such as two times the WP. For instance, a 90 day WP must be satisfied within 180 days. For disabilities separated by more than 6 months of recovery, a new WP will probably be required.
• The LTCI elimination period (EP) is either met by service days where you have received care, or calendar days that have gone by after it has been verified that you will be receiving care. In addition, before LTCI benefit eligibility, you must have been certified that you will need care for at least 90 days regardless of the duration of the EP. In most policies, once a day of the LTCI EP is satisfied, it does not need to be satisfied again.
HLBIP EP and WP: Keeping with tradition, the initial disability WP could be satisfied within three times the WP for each disability occurring before age 70. The extended catastrophic disability EP could be a calendar day EP needing to be satisfied only one time.
4. Benefit Period and Lifetime Maximum
• The “to age 65” (or to age 67 or 70) DI benefit period essentially turns a DI policy into a decreasing term type policy. With the typical DI policy, multiple disabilities may be covered over your working years, if separated by periods of recovery.
• LTCI policies, on the other hand, have one pool of money equal to the monthly benefit multiplied by a number of months correlating to what is now called a benefit multiplier. The benefit multiplier label replaced benefit period in the LTCI world to reinforce that you do not need to collect your benefits within a time period. Unused long term care benefits carry forward and extend the perceived benefit period.
HLBIP benefit period: A new hybrid product might provide two year, three year, five year, and “to age 70” benefit period options for initial disability; and 24 month, 36 month, or 60 month benefit multiplier options for extended catastrophic disability.
5. Inflation Protection/Benefit Increase Options
• The DI COLA is a cost of living increase while you are disabled. DI COLA only increases the monthly benefit after the insured has been disabled and collecting benefits for an entire year, plus the waiting period. A $6,000 per month DI benefit purchased with COLA is still $6,000 per month 24 years later if you were never benefit-eligible.
• The LTCI inflation protection is often called a benefit increase option, and typically increases the potential benefits by an amount every year the policy is in force. A $6,000 per month LTCI benefit with three percent inflation protection would grow to be a $12,000 per month benefit over 24 years, whether or not you were on claim. Huge difference!
• A future purchase option or guarantee of insurability option is valuable inflation protection, especially on a DI policy. As income increases, you are able to purchase coverage to protect your increased income without evidence of health insurability. The increases that you purchased may allow your benefit to be a substantially higher percentage of your income than buying a COLA rider.
HLBIP inflation rider: So as not to overly disturb the way things have been approved by insurance departments nationwide, a new LBIP policy might offer the usual DI COLA option on the initial disability benefit, and a CPI benefit increase option on the extended catastrophic disability benefit.
6. Non-Forfeiture and ROP
• Not many DI carriers offer return of premium benefits. When they do, it might be that they return 50 percent each ten years, or a percentage at death, less any claims. ROP benefits on LTCI policies are now frequently included in the policy, but most only return your premiums if you die before age 65/67.
• Non-forfeiture on an LTCI policy has no DI equivalent. You can pay substantially more (15-50 percent) for your LTCI policy by including the non-forfeiture rider. With this rider, you can stop paying premiums and still have a small policy with a new lifetime maximum pool of money equal to the premiums you previously paid.
• What could cause people to want to stop paying for LTCI policies? How about a substantial rate increase? Well, built in to LTCI policies these days is a contingent non-forfeiture provision, which is designed to let you walk away and still have access to a pool of money equal to your premiums paid if the carrier raises your rate substantially. The contingent non-forfeiture provision is included in the cost of policies sold today.
HLBIP non-forfeiture: Let’s assume that we must include contingent non-forfeiture or a non-forfeiture option in the provisions of the extended catastrophic disability, and that the portion of the premiums attributed to the extended catastrophic disability benefits could be separated and available to pool for a non-forfeiture benefit.
7. Indemnity, Cash, or Reimbursement
• DI policies pay a cash benefit to the insured. A cash benefit is sometimes called an indemnity benefit. A long term care insurance policy may have a cash benefit, or a reimbursement type benefit. A cash benefit is given to the insured to spend however they see fit. A reimbursement type benefit will reimburse you for the cost you have incurred for the eligible care. Reimbursement policies have lower premiums. Some LTCI carriers have discontinued offering 100 percent cash products in part due to fraud and abuse involved with the use of relatives providing care.
HLBIP cash or reimbursement: To keep the premium and risk lower, the LBIP policy could use the reimbursement model for the extended catastrophic disability benefit.
8. Benefit Amount
• Both DI and LTCI offer policies with monthly benefit amounts. DI is underwritten for occupation, income, health and lifestyle. LTCI is underwritten for health and lifestyle, and geographic cost of care is a consideration as well.
HLBIP benefit amount: During the initial disability benefit term, the benefit would need to be tied to traditional income tables. The extended catastrophic disability might be offered with up to an additional $10,000 monthly benefit.
Income Protection Today
DI and LTCI may never have the opportunity to get married. Not many carriers would even have both of them in the same building. Today’s DI seems old and traditional while LTCI is still trying to find itself, and each product is subject to its own myriad of rules and glossary of terms.
A DI and LTCI marriage, culminating in a linked benefit product, would be a marriage of convenience—to protect income for life with one transaction; to form the base of a plan for living a long life.
We do not need to wait for insurance carriers to develop LBIP. We can start selling LTCI to younger people as if it is the extended catastrophic disability benefit; a guaranteed renewable CAT rider. Link an individual disability income insurance plan with a long term care insurance plan to make your own Linked Benefit Income Protection plan to protect both the client’s ability to earn income during working years and their ability to perform activities of daily living during their lifetime.
Footnote:
1. “2015 Medicare & You,” National Medicare Handbook, Centers for Medicare and Medicaid Services (September 2014).
