Primer on Long-Term Care

Robert Serena

March 2022

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Table of Contents
Section 1.0 - Executive Summary ............................................................................................................................................. 4
Section 2.0 - What is long-term insurance? ............................................................................................................................. 6
Section 3.0 - How are long-term care expenses funded? ....................................................................................................... 7
3.1 – Summary ........................................................................................................................................................................ 7
3.2 – Out of pocket................................................................................................................................................................... 7
3.3 – Medicare ......................................................................................................................................................................... 7
3.4 – Medicaid ......................................................................................................................................................................... 7
3.5 – Private coverage ............................................................................................................................................................. 7
Section 4.0 - Long-Term Care providers and services............................................................................................................ 8
4.1 - Summary ......................................................................................................................................................................... 8
4.2 - Informal Caregiver ........................................................................................................................................................... 8
4.3 - Home Health Care Aides ................................................................................................................................................. 9
4.4 - Nursing Home .................................................................................................................................................................. 9
Section 5.0 - Policy characteristics .......................................................................................................................................... 9
5.1 - Purchase Channel ........................................................................................................................................................... 9
5.2 - Financial Structure ........................................................................................................................................................... 9
5.2.1 - Standalone - Indemnity ..................................................................................................................................... 10
5.2.2 - Standalone - Reimbursement ........................................................................................................................... 11
5.2.3 - Integrated Benefit policies ................................................................................................................................. 11
5.3 – Pre-existing conditions .................................................................................................................................................. 11
Section 6.0 – Cost drivers for an LTCI policy ........................................................................................................................ 11
6.1 – Summary ...................................................................................................................................................................... 11
6.2 - Issue age ....................................................................................................................................................................... 12
6.3 - Benefit level ................................................................................................................................................................... 12
6.4 – Inflation Rider ................................................................................................................................................................ 12
6.5 - Deductible or elimination period..................................................................................................................................... 13
6.6 - Coverage period ............................................................................................................................................................ 13
6.7 - Level of Care ................................................................................................................................................................. 13
6.8 – Benefit Triggers............................................................................................................................................................. 14
Section 7.0 - Tax-Status of LTCI.............................................................................................................................................. 14
Section 8.0 – Modeling and Risk Management Considerations ........................................................................................... 15
8.1 - Summary ....................................................................................................................................................................... 15
8.2 – Modeling Parameters .................................................................................................................................................... 16
8.3 – Modeling Methodologies ............................................................................................................................................... 19
8.3.1 - Claims cost method (CCM) ............................................................................................................................... 20
8.3.2 - First principles method (FPM) ........................................................................................................................... 21
8.3.3 - Multistate stochastic method (MSSM)............................................................................................................... 21
8.4 – Construction of a financial model .................................................................................................................................. 21

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 8.4.1 – Spreadsheet architecture map ......................................................................................................................... 21
8.4.2 - Background on survival functions .................................................................................................................... 25
8.4.2 - Data Flows ....................................................................................................................................................... 27
8.4.3 - Spreadsheet methodology ............................................................................................................................... 27
8.5 – Risk Management from the insurer perspective ............................................................................................................ 28
8.5.1 – Asset Liability Risk ........................................................................................................................................... 28
8.5.2 - Financial Risk (Credit)....................................................................................................................................... 29
8.5.3 - Financial (Inflation Rates) ................................................................................................................................. 29
8.5.4 - Insurable – Morbidity (Incidence rates, claim costs) ......................................................................................... 29
8.5.5 – Insurable (Other – Lapse and Mortality) ........................................................................................................... 29
8.5.6 – Operational (Information Technology, Regulatory Compliance) ....................................................................... 30
Section 9.0 – Regulatory considerations ............................................................................................................................... 30
9.1 – Background on the NAIC .............................................................................................................................................. 30
9.2 – Model Laws/Acts/Regulations/Guidelines ..................................................................................................................... 31
Section 10.0 – Long-Term Care partnership programs......................................................................................................... 32
10.1 – Summary..................................................................................................................................................................... 32
10.2 – Program Benefits ........................................................................................................................................................ 33
10.3 – Eligibility Requirements ............................................................................................................................................... 34
Section 11.0 – Recommendations and Conclusions............................................................................................................. 34
11.1 – Market Innovations...................................................................................................................................................... 34
11.2 – Consumer action plan ................................................................................................................................................. 35
Appendix A – Long-Term Care Independent Review Entities .............................................................................................. 36
Appendix B – Terms of Reference .......................................................................................................................................... 38
Appendix C – Questions consumers should ask. ................................................................................................................. 43
Appendix D – Sample replacement notice language ............................................................................................................ 45
Appendix E – Specified format for outline of coverage ........................................................................................................ 46
Appendix F – Helpful resources on Long-Term Care............................................................................................................ 49

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Section 1.0 - Executive Summary
The purpose of this article is to provide the reader with a clear and accessible overview of the
Long-Term Care marketplace, product structure, tax-treatment, risk management and modeling
considerations, and regulatory evolution over the past ~48 years (1974 → 2022). I encourage
the reader to first review the Terms of Reference in Appendix B - Terms of Reference to gain
familiarity with key terminology before diving into the article.

The importance of Long-Term Care Insurance (LTCI) to the retirement planning programs of
individual American consumers has never been greater since LTCI products were initially
introduced in 1974. Some of the key milestones in the history of LTCI in the United States are
captured in Exhibit 1 below:

• First private LTC product sold to US consumers.

• Marketplace not as highly regulated as now - lack of consumer protections led to predatory sales
1974 practices, excessive premium increases, inappropriate policy cancellation due to pre-existing conditions,
etc.

• NAIC adopted the Long-Term Care Insurance Model Act in 1987 and the Long-Term Care Model
Regulation in 1988 to provide regulators with a set of minimum standards that insurers selling LTCI
1987 policies must adhere to.

• Health Insurance Portability and Accountability Act (HIPAA) of 1996 introduced the concept of a "qualified
LTC" policy and specified the criterion points that such a policy must meet.
1996

• For products issued pre-2000, NAIC focused on the Expected Loss Ratio (ELR) in assessing insurer's
rate requests. This approach led to inadequate pricing and led to many insurer's requesting large rate
increases.
2000 • In 2000, NAIC amended the existing regulation and introduced a more comprehensive approach to rate
setting and rate justification, focusing on anticipated costs over the lifetime of the policy.

• Deficit Reduction Act of 2005 introduced additional consumer protections.

2005

• President Obama signed the "Class Act" into law in 2009.

• The program provided a publicly funded federal LTCI product, and was intended to address gaps in LTCI
2010 coverage due to rapid increases in health care costs and the general lack of availability of LTCI coverage.
• Society of Actuaries demonstrated that the rate structure and the voluntary nature of the coverage were
likely to result in adverse selection and the program not being self-supporting.

EXHIBIT 1 – Evolution of the Long-Term Care market over the period 1974 to 2021.

The critical importance of LTCI as an element in each consumer’s “personal risk management”
program can best be illustrated by looking at the Baby Boomer generation (Boomers). Boomers

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were born between mid-1946 and mid-1964, and as of 2017, make up roughly 22% of the US
population as of a study by the US census 2017 – this can be seen in Exhibit 2 below:1

EXHIBIT 2 – Population of different generational groups in the US

If we define “normal retirement age” as 65, the first boomers started retiring in 2011 and the last
cohort (those born in 1964) will retire in 2029. This wave of individuals leaving the work force
and moving into retirement status creates multiple financial stresses in the US Social insurance
system – Social Security, Medicare, and Medicaid.
These stresses, particularly with Medicare, and additionally the rapidly increasing costs for long-
term care, make it a risky proposition for the average boomer couple to rely solely on Medicare
and personal retirement savings/pension income to fund long-term care expenses. Exhibit 3
clearly illustrates the critical drivers of the need for long-term care services and more innovative
funding and service delivery mechanisms.

EXHIBIT 3 – Drivers of the current “state of the LTC market” in the US in 20222
The dramatic increases in the cost of Long-Term Support and Services (LTSS) over the period
2004 to 2020 are aptly demonstrated by Exhibit 4 below – this an excerpt from the 2020

1
US Census Bureau
2
SOURCE: Milken Institute → Report on the current and future state of the LTC market

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Genworth Cost of Care survey. As the graphs illustrate, Nursing Home Costs increased at a
compounded annual rate of 3.2% in the 15-year period from 2004 to 2019. For Assisted Living
Facilities, the comparable figure was 3.9%.

EXHIBIT 4 – Excerpt from 2020 Genworth Cost of Care survey

Section 2.0 - What is long-term insurance?

LTCI is a form of health insurance, and is specifically designed to cover any expenses related
to providing care for an individual that is unable to provide care for themselves. LTCI allows an
individual in need of LTSS to either partially or fully offset the potentially dramatic costs of
extended care without jeopardizing their income, retirement savings, and other investments.
A key concept with regard to triggering the beginning of benefit payments from an LTCI policy is
the concept of the “Activities of Daily Living” or ADLs. ADLs are a commonly used insurance
industry term and are defined in every LTC policy. The ADLs can vary but typically include the
following 6 activities:
• Bathing
• Dressing
• Transferring (e.g. physically moving oneself from one room to another)
• Eating
• Toileting
• Maintaining Continence
LTCI policies can cover a range of potential expenses, including but not limited to nursing home
costs, visiting nurses, meal-delivery services, chore services, adult daycare centers, respite
services for regular caretakers, etc.

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Section 3.0 - How are long-term care expenses funded?
3.1 – Summary
Long-term care can be extremely expensive depending on a variety of factors – the level of
services and the time period involved in the provision of these services, the region of the country
where the services are being provided, whether the care is provided in the individual’s home or
a Skilled Nursing Facility (SNF), etc.

3.2 – Out of pocket

Americans typically fund a substantial portion of LTSS expenses out-of-pocket. Group and
individual medical insurance policies will pay for short-term hospital stays related to chronic
health conditions, but will not fund extended long-term care expenses.

3.3 – Medicare
Medicare is the federal health insurance program that provides individuals aged 65 and older
and people with disabilities with support in paying for medical care services, such as
hospitalizations, physician visits, home health care, and preventive benefits.
Many senior Americans are under the impression that once they reach Medicare eligibility age
– 65 – that Medicare picks up the bulk of any long-term care expenses that they may incur – this
is largely not the case. Medicare will typically pay for short-term stays at SNFs after a hospital
stay, but similar to private medical insurance, is not designed for nor will it fund long-term care
expenses for any extended period. It does not cover purely custodial care, which is the type of
care that is provided to most people in nursing homes.

3.4 – Medicaid
Medicaid, which is a US Federal Government program that provides medical coverage to lower-
income Americans, actually does pay a substantial portion of the incurred LTSS expenses in the
US every year. But this comes with significant downsides for the impacted individuals and their
spouses (if married) – they will have to “spend down” their resources to a specified level before
Medicaid will kick in. While certainly an option for funding LTSS expenses, relying solely on
Medicare is not optimal.

3.5 – Private coverage

The 4th option, and oftentimes the most expensive option, is to purchase a private LTCI policy
from one of the insurers that write such coverage. As I will discuss later in the article, LTCI
products are very complex instruments that present a wide array of risk factors to the issuing
insurers – morbidity risk, lapse risk, interest rate risk, regulatory risk, etc. For these reasons, the
number of firms offering flexible LTC products with a broad feature set has been dwindling in the
US over the past 10 years (2012 – 2022).

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Section 4.0 - Long-Term Care providers and services
4.1 - Summary
There are several distinct types of LTSS providers – (1) Informal Caregivers, (2) Home
HealthCare Aides, and (3) Nursing Homes.
Exhibit 5 is an excerpt from the May 2020 Milken Institute report on the current state and future
state of the long-term care market. The exhibit groups the distinct types of providers into the 3
“level of care buckets” – Low, Medium, and High.

EXHIBIT 5 – Different types of LTC services and providers3

4.2 - Informal Caregiver

Typically, family and friends provide unpaid assistance to those with long-term care needs. The
spectrum of LTC needs is very broad:
• Minor care levels - Elderly person that lives on his/her own, is still largely in command of their
mental faculties, and may simply have “lost a step” with advancing age. In this instance, a
relative or a friend could stop by a few times a week to ensure that the person had enough
food, their home was clean, they were feeling well and taking their medication, etc. This
person’s needs are relatively predictable and can be met with a time commitment of 5 to 10
hours per week.
• Major care levels – Elderly person that recently suffered a stroke, has lost a lot of their
mobility, is unable to feed or clothe themselves, requires the administration of regular
medication, etc. This person would require virtual full-time assistance. Oftentimes, the
caregiver for an elderly person in these circumstances would be a child, and that person

3
SOURCE: Milken Institute → Report on the current and future state of the LTC market

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 could potentially quit his/her job in order to take care of their ailing mother/father, thereby
sacrificing her own financial well-being.

4.3 - Home Health Care Aides

Home HealthCare Aides are typically employed by Home Health Care Agencies and provide
their services to the patient in their home rather than at a nursing facility – physical therapy,
rehabilitative care, assistance with ADLs, etc.

4.4 - Nursing Home

Provide both inpatient skilled nursing and long-term care services. The most costly of the 3
options.

Section 5.0 - Policy characteristics

5.1 - Purchase Channel
LTCI policies can be purchased on a group basis (through one’s employer) or individual basis
(directly from an insurer). Exhibit 6 below captures the benefits of an employer provided plan
(group plan) to both employers and employees.

Agent Benefits
Employer • Employer-paid premiums under tax-qualified LTCI plans are tax-deductible for all C-
Corporations and, with respect to employees who are not more-than-2% shareholders, all S-
Corporation employers.
• Basic benefits can be provided with employee choice to purchase additional coverage.
• Reduces absences due to employee care for relatives covered by the plan.
• Improves productivity.
• Increases morale.
• Can be provided on a selective basis.
• Can be used to retain key executives with a key executive benefit.

Employee • LTCI more affordable; premiums generally discounted when purchased through an employer
program.
• Guaranteed issue makes implementation easier and more efficient.
• Benefits are tax-free, whether the employer or employee pays the premium.
• Spousal and family coverage is available.
• Increased security and peace of mind that income and assets are protected.
• Assists in purchasing long-term care insurance for relatives that can serve to reduce the amount
of caregiving employees must personally provide.
• Policies are fully portable.

EXHIBIT 6 – Potential benefits for LTCI offered through employers.

5.2 - Financial Structure

The three distinct types of LTCI policies are (1) Standalone - Indemnity policies, (2) Standalone
- Reimbursement policies, and (3) Integrated Benefit policies.

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5.2.1 - Standalone - Indemnity
This type of policy is standalone, which means that the policy only covers the costs related to
long-term care events, and designed to provide a fixed dollar amount per day for a specified
amount of time.
Indemnity policies may also offer an inflation protection feature – essentially, the initial $ amount
per day is increased by X% annually (or some other time period). The amount of the “inflation
kicker” can be a fixed, pre-specified amount (e.g. 3% or 5% per annum), or a floating rate linked
to a published inflation index (e.g. CPI less 1.00% per annum).
The importance of adding the inflation protection rider to an LTC policy is clearly illustrated by
Exhibit 7 below4, which illustrates the growth in per capita health care spending over the period
1970 to 2017 in the US.

EXHIBIT 7 – Growth in health care spending over the period 1970 to 2017
Having said that, consumers need to carefully evaluate the addition of an inflation protection
feature as they can be extremely expensive – to coin the oft-quoted phrase used in capital
markets…”there is no free lunch when it comes to managing risk”.
With an indemnity policy, the insured would not have to present receipts of expenses incurred
to the insurer in order to be reimbursed. The insurer would simply pay the specified benefit
amount to the insured.
IMPORTANT NOTE – In other parts of this paper, I describe the notion of “utilization risk”.
Utilization is a component of morbidity risk and specifically relates to the expected
proportion of an insured’s daily $ benefit limit that he/she will draw down while on
disability. This only applies to reimbursement-type policies, not indemnity-type policies.

4
Sourced from Peterson-Kaiser Health System Tracker – December 10, 2018 (How has US spending on healthcare changed
over time?)

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When pricing LTC policies with indemnity benefits, the policies are modeled as if the
entire daily $ benefit limit is paid while an insured is disabled.
5.2.2 - Standalone - Reimbursement
Under this type of policy, unlike an indemnity policy, the insurer reimburses the insured for actual
expenses incurred rather than simply paying a fixed benefit amount. If the insured’s costs are
unexpectedly high, then this type of policy may be preferable, as long as the contractual limits
are sufficient. Administratively, this type of policy imposes more of a burden on the insured as
he/she must keep diligent records in tracking incurred expenses in order to be reimbursed.
5.2.3 - Integrated Benefit policies
This policy is a more recent innovation in the LTC marketplace. The policy will be designed with
a “pooled benefit” amount that the insured can be utilized, or drawn down, for a multitude of
different expense types.
EXAMPLE – Joe Smith purchases an integrated benefit policy with a maximum pooled
benefit amount of $200,000. If Joe chose to use his benefits for nursing home care, and
the cost was $100/day, he would be able to stay in the facility for roughly 5 ½ years before
exhausting his benefits. Conversely, if Joe only required care for 1,000 days (2 ¾ years),
then he would still have $100,000 in benefits remaining in his account.
Another type of integrated policy is a combined life insurance and LTC policy. In this instance, if
the named insured incurred LTC expenses before passing away, some portion of the life policy
death benefit could be “accelerated” to fund the LTC expenses. Depending on the product
design, it could be the case that the amount accelerated is subtracted out of the death benefit
that will be paid to the beneficiaries(s) upon the insured’s death.

5.3 – Pre-existing conditions

Any consumer considering the purchase of an LTCI policy should familiarize themselves, in
detail, with any limitations that come with a given policy. The LTCI issuer uses these limitations
in order to keep premiums at an affordable level, and the limitations will differ from policy to
policy. Some typical limitations include:
• Coverage for drug and alcohol abuse; and
• Coverage for self-inflicted injuries; and
• Coverage for pre-existing condition such as cancer, heart disease, etc. that existed at the
time of issuance. Pre-existing conditions and any LTSS needs that flow from those conditions
will typically be excluded from coverage for a fixed period of time from issuance.

Section 6.0 – Cost drivers for an LTCI policy

6.1 – Summary
There are 7 main factors that determine the premium charged for an LTC policy:
• The age of the insured when the policy is issued; and

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• The level of the benefit provided; and
• Whether the benefit is inflation adjusted; and
• The deductible or elimination period; and
• The length of the coverage period; and
• The level of care that the policy covers – Home Health Care, Nursing Home, Assisted Living;
and
• The criterion for determining eligibility – commonly referred to as benefit triggers.
IMPORTANT NOTE - LTC premiums are often level and therefore remain the same over the
policy period. Premiums can potentially be raised but only across an entire class of policyholders.
EXAMPLE – Joe Smith is 65-years old and recently purchased an LTCI policy with a
premium-paying period of 5 years, an indemnity benefit of $250/day with no inflation
protection, and a coverage term of 5 years. Joe’s initial premium is $2,000/year and will
remain level for the entire premium-paying period unless the insurer raises premiums on
all policyholders in Joe’s same underwriting risk class (e.g. 65-year-old male non-
smokers). The insurer is not permitted to raise Joe’s premium alone if they do not
similarly raise the premiums of all other insureds in Joe’s same risk class.

6.2 - Issue age

Premiums levels are typically lower for insureds that buy an LTCI policy at a younger age. This
is driven by several factors – the anticipated LTSS costs for a younger insured are lower than
for an older insured. Additionally, the younger the insured is at issue, the longer the time horizon
over which to pay premiums, thereby requiring a lower premium per year.

6.3 - Benefit level

The benefit structure of an LTCI policy is typically expressed in terms of 2 different $ amounts:
• The daily benefit amount; and
• The lifetime maximum cumulative benefit amount.
Lower benefit levels always equal lower premiums with all else equal.

6.4 – Inflation Rider

As described above in Section 1.0 - Executive Summary, the cost of LTSS have been increasing
dramatically over the past ~15 years and show no signs of flattening out. A consumer
considering the purchase of an LTCI policy would be well advised to consider adding an inflation
rider to their policy. Not all LTCI issuers offer inflation riders.
Inflation riders typically provide for an annual % increase to the base benefit that the policy offers.
The % increases can be applied on a simple or compounded basis, and the rate itself can either
be a pre-selected fixed % (e.g. 1%, 3%, and 5% are common rates) or tied to a widely published
inflation index. A few simple examples will serve to illustrate the different inflation options – let
us assume a basic daily benefit of $200 per day, and a benefit period of 10 years.
• Simple interest option, 3%

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 • Benefit t = Benefit 0 (1 + 3% ∗ t)
• Benefit 0 = $200 per day.
• Compound interest option, 5%
• Benefit t = Benefit 0 (1 + 5%)t
• Benefit 0 = $200 per day.
• Annual rate tied to the CPI rate (floored at 1.00%, capped at 5.00%)
• CPIt = the CPI rate in policy year t.
• CPIMin = 1.00%, CPIMax = 5.00%
• CPI1 = 3.00%, CPI2 = 3.50%, CPI3 = 7.50%
• Benefit 3 = Benefit 0 ∏3t=1(1 + Min(CPIMax, Max (CPIMin, CPIt )) = Benefit 0 (1 + 3%)(1 +
3.50%)(1 + 5.00%)
However, while a very desirable rider to add to a base LTCI policy, inflation riders are a very
expensive option for the LTCI issuer to underwrite, and so they must charge a higher premium
for policies with the inflation rider.

6.5 - Deductible or elimination period

In the abstract, insurance policies can be designed with two type of deductibles – described in
Exhibit 8 below:
Deductible Type Description of how they work
Monetary Deductible • The $ amount of losses that the insured must retain before the insurance “kicks in”.
• Monetary deductibles are very common on commercial and personal lines coverage
– auto, homeowners, umbrella, property, etc.
• They can also be found on group and individual medical insurance.

Temporal Deductible • Rather than a $ amount that the insured must retain and fund losses himself/herself,
(aka Elimination Period) this type of deductible refers to the time period after a covered event occurs in which
the insured must retain any incurred losses.
• Temporal deductibles are most commonly found on group and individual disability
income and LTCI policies.

EXHIBIT 8 – Different deductible types

Premiums are inversely related to the deductible. Higher deductibles → lower insurer costs →
more losses retained by insured → lower premium level.

6.6 - Coverage period

This refers to the number of years that the LTCI issuer will provide LTC coverage to the insured
if the insured experiences an insured LTC event. Premiums are directly related to the coverage
period. The longer the specified coverage period, the higher the premium level.

6.7 - Level of Care

A desirable feature in an LTCI policy is to have a broad definition of “covered care” – not just
SNF or Home Health Care, but multiple types and/or levels of care that can accommodate
different insureds with a spectrum of LTSS needs. This breadth applies not only to the types of

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facilities and agencies providing the care, but also to the skills and training of the individuals
providing the care.
Certainly, the broader the definition of covered care, the higher the premium for the LTCI policy.
But a cost-conscious consumer can adjust other cost levers – benefit amount, inflation
protection, elimination period, etc. – to keep costs manageable while still ensuring that when the
coverage is needed, the policy can accommodate as broad a range of care as possible.

6.8 – Benefit Triggers

Each policy will have distinct benefit triggers, but a common trigger before receiving coverage is
that the insured is unable to perform 2 of the 6 ADLs described in Section 1 for a defined period
of time, typically 90 days.
Another type of trigger is that the insured individual must require “substantial supervision” to
protect that individual against threats to health and safety arising from cognitive impairments.

Section 7.0 - Tax-Status of LTCI

The US Congress has defined a special class of LTCI policy termed “Qualified Long-Term Care
Insurance” (QLTCI). A contract must meet the following requirements in order to be classed as
an QLTCI policy:5
• The only insurance protection provided under the contract is the coverage of qualified long-
term care services (generally, being unable to perform at least two ADLs or requiring
substantial supervision due to severe cognitive impairment); and
• The contract does not pay or reimburse expenses that are reimbursable under Medicare,
except when Medicare is a secondary payor or when the contract makes payments on an
indemnity basis without regard to actual expenses incurred; and
• The contract is guaranteed renewable; and
• The contract does not provide for a cash surrender value or other money that can be paid,
assigned, pledged, or borrowed; and
• All refunds of premiums, and all dividends, or similar amounts, are to be applied as a
reduction in future premiums or to increase future benefits; and
• Enumerated consumer protection provisions are included in the contract. For example,
prohibition on requiring hospitalization prior to eligibility for benefits, notice before lapse of
policy, offer of inflation protection, etc; and
• The ADL loss must be expected to last for at least 90 days, as certified by a Licensed Health
Care Practitioner; and
• A Licensed Health Care Practitioner must provide recertification every 12 months; and
• A plan of care must be provided.
The tax benefits of a qualified LTCI are described below in Exhibit 9:

5
SOURCE: M Benefit Solutions - A primer on Long-Term Care

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 Taxable Description
item
Benefits • Reimbursement benefits are not included in income.
• Per day or indemnity benefits are not included in income except those amounts that exceed the greater
of total qualified LTC expenses, or $230/day (2004 maximum, adjusted annually for inflation).

Premiums Employer-Paid
• Subject to normal, reasonable compensation limitations, premiums are deductible by C-Corporation
employers.
• Total premium excluded from employee’s income.

Employee-Paid
• Deductible by employee who itemizes, subject to limitations outlined below for individually purchased
insurance.
• May not be paid through a cafeteria plan.

Individually purchased.
• Treated as a medical expense deduction, which is allowable to the extent that such expenses exceed
7.5% of adjusted gross income.
• Limited to the lesser of actual premium paid or eligible LTC premium.

EXHIBIT 9 – Tax benefit of an LTCI policy

Section 8.0 – Modeling and Risk Management Considerations

8.1 - Summary
LTCI is one of the most complex products currently being sold in the US insurance marketplace,
both from a regulatory and consumer protection standpoint (numerous and varied rules) and
also arguably one of the riskiest products on account of the range of risk factors that confront
any insurance firm that underwrites LTCI (LTCI issuer) – both insurable risk factors (morbidity,
mortality, benefit utilization, expense), financial risks (inflation, market, credit), and operational
risks (regulatory, IT, cost efficiency). I will delve into each of these risks in greater detail below.
Earlier generations of LTCI policies issued in the 1980s and 1990s were often dramatically
underpriced due to misestimated assumptions (e.g. claims costs, mortality, lapse rates, and
interest rates) and lax underwriting practices. In turn, the inadequate profitability and required
reserve increases on these blocks of business resulted in insurers requesting large rate
increases from the state regulators.
Unlike other forms of health insurance – short-term medical and major medical – LTCI is priced
similarly to permanent life insurance, which is say on an issue-age basis. This means that the
LTCI issuer essentially “solves” for the level annual premium that the insured will pay over the
premium paying period. Given the pattern that LTC claim costs are an increasing function of
attained age, this means that premiums are greater than the $ outlay for claims in the early policy
years, and are therefore “saved” in order to pre-fund higher levels of claim costs in later policy
years. For this reason, the loss ratio for an LTCI policy must include the annual change in
required reserves as a measure of the outlay for claims.
IncurredClaimst + ∆ Reservest
• LossRatiot = Premiumst

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Exhibit 10 illustrates the “pre-funding” and “reserve release” portions of the premium paying
cycle.

EXHIBIT 10 – Premium paying/incurred claims pattern for a hypothetical policy

This attribute of LTCI – premiums calculated on an issue age basis – really heightens the
importance of the LTCI issuer developing rigorous pricing models in which the critical
assumptions are based on the best information available at the time. Additionally, its equally
important that the LTCI issuer sensitivity and stress test the model in order to highlight the most
material risk factor sensitivities and use that information to plan out – as precisely as possible in
advance given the long duration of the product – the future triggering events that may drive
requests for rate increases.

8.2 – Modeling Parameters

One important consideration that the model developer must be mindful of is that each modeled
parameter/risk driver described in Exhibit 11 below is subject to both process risk and parameter
risk:
• Process Risk – The risk that actual results will differ from modeled results on account of the
statistical variation inherent in the assumed Probability Density Functions (PDFs); and
• Parameter Risk – The risk that the assumed PDFs do not accurate reflect the underlying,
real-world dynamics of the modeled risk, also resulting in actual results that differ from
modeled results.

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 Balance Modeling Assumption Description
Sheet Assumptions type
Item
Assets Default rates Estimated • The rate at which the issuers of fixed income securities default on their
obligations due to insolvency.
• Premiums increase with increasing default rates → If the bonds and
other assets that the LTCI issuer invested premium $s into experience
higher than expected level of defaults, the insurer in turn will experience
capital losses on their invested principal, and lower principal levels lead
to lower expected levels of positive asset cash flows to fund liability cash
flows.

Assets Earned Rate Estimated • For shorter duration insurance products (e.g. short-term health, auto,
term life with a limited coverage period), the model developer can make
a reasonable assumption that the earned rate is fixed at some level for
the entire projection.
• But for longer duration products, It is critical that the earned rate be
linked directly to the projected performance of the underlying assets.
This type of formulation works well in stochastic simulations since the
earned rate (and by extension, the investment income) for each modeled
asset class will be path dependent.
• Premiums increase with decreasing earned rates → A lower interest rate
environment leads to the LTCI issuer confronting lower reinvestment
rate levels. This leads to lower levels of coupon and dividend income,
and this leads to lower positive asset cash flows to fund liability cash
flows.

Assets Loss Given Default Estimated • The economic value of the loss on a fixed income security due to the
(LGD) default of the issuer.
• The Loss Given Default (LGD) depends on (1) The total exposure, (2)
The Probability of Default (POD), and (3) The recovery rate.
• Premiums increase with higher-than-expected LGDs → Increasing LGDs
translates to lower default recoveries, and this leads to lower positive
asset cash flows to fund liability cash flows.

Assets Prepayment rate Estimated • The rate of prepayment on mortgage loans and structured mortgage
securities.
• LTCI issuers typically use a standard industry model (Public Securities
Association – PSA) or model the rate as a dynamic function of interest
rate differentials.
• Premiums increase with higher-than-expected prepayment rates →
Prepayment rates tend to increase as interest rates drop. This occurs on
account of mortgage holders finding the economics of refinancing their
mortgage more appealing at lower rate levels.
• This early return of principal forces LTCI issuers to reinvest at the lower
prevailing yield rates, and this leads to lower levels of investment income
and lower positive asset cash flows to fund liability cash flows.

Liabilities Administrative Estimated • Administrative expenses include costs associated with contracting with
Expenses providers, sales and marketing, enrollment and billing, customer service,
utilization review, case management, and other functions.
• Often produced as the output of annual expense reviews.
• Premiums increase with higher-than-expected expenses → Increasing
expense rates leads to higher liability cash flows without an offsetting
increase in positive asset cash flows.

Liabilities Age Input Parameters Two ages that impact modeling:

• Issue age
• Attained age (subsequent to issue)
• Premiums increase with increasing issue age → Policies issued to older
insureds implicitly have a shorter premium paying period, and this leads
to a higher level of premiums per year to fund the same expected liability
cash flows.

Liabilities Benefit Period Input Parameters • The length of the period during which the LTCI issuer will be funding the
insured’s LTSS benefits.

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 • Premiums increase with increasing benefit periods → Assuming the
same daily $ benefit limit, a longer benefit period implies a higher lifetime
$ limit, and this translates to higher liability cash flows.

Liabilities Elimination Period Input Parameters • Once the benefit triggers have been met and the insured is eligible for
coverage, the elimination period (EP) is the length of the time period that
must elapse before the insurer will begin to pay benefits.
• During the elimination period, the insured will be self-funding their LTSS
costs.
• The EP is essentially the temporal deductible on an LTCI policy, and
serves the same function as a $ deductible on a Major Medical or Auto
policy.
• Premiums decrease with increasing elimination period → A longer
elimination period translates to a longer “risk retention period” for the
insured, or a longer period of time where the insured must self-fund any
LTSS costs. The higher the level of insured self-funding, the lower the
premium charged by the LTCI issuer.

Liabilities Inflation Input Parameters • Typically used to model the anticipated year-on-year growth rate in
& Estimated administrative expenses.
• Can be a fixed, deterministic rate or modeled stochastically (e.g. tied to
a widely published index that is part of the output from an Economic
Scenario Generator (ESG)).
• Inflation can impact both the insurer (e.g. growth in expense amounts)
and the insured (e.g. benefit level inflates annually due to inflation rider).
• Premiums increase with higher inflation levels → If a policy carries an
inflation protection rider, the cost of such a policy will always be higher
than a policy without the rider as expected benefit payments will be
higher.

Liabilities Morbidity - Claim Estimated • Critical input to modeling the “severity component” of health insurance
cost losses.
• Can be estimated by an insurer using its own claims history, or if the
internal data is not 100% credible, then a blend of industry and internal
data.
• Premiums increase with higher-than-expected claims costs → Higher
expected claim cost levels translates to higher liability cash flows.

Liabilities Morbidity - Estimated • Refers to the likelihood or incidence rate of an individual becoming ill
Incidence with a sickness or injury.
• Premiums increase with higher-than-expected disability incidence rates
→ Higher than expected disability rates translates into higher expected
claims costs, and this translates to higher liability cash flows.

Liabilities Morbidity - Estimated • The anticipated rate of usage of certain health care services or
Utilization rate procedures by plan participants as a % of the daily benefit limit.
• This risk is not present with indemnity policies as the LTCI issuer will pay
the entire daily $ benefit once the insured has met the policy triggering
conditions. The modeling consideration only applies to reimbursement
policies.
• Premiums increase with higher-than-expected benefit utilization rates →
Higher than expected utilization by the insured of their contractual
benefit limit translates into higher expected claims costs, and this
translates to higher liability cash flows.

Liabilities Morbidity Estimated • The rate at which morbidity rates (including incidence, severity) are
Improvement – expected to improve (e.g. decrease).
Active • Typically expressed as vector of rates (indexed by attained age) or a
matrix of rates (indexed by issue age and duration since issue).
• Premiums rates decrease with higher-than-expected morbidity
improvement → higher than expected improvement rates in both
incidence rates and expected claim costs results in lower-than-expected
liability cash flows.

Liabilities Mortality – Active Estimated • The rate at which insureds die from the active population.
• Premiums decrease with higher-than-expected mortality rates → LTCI
typically offers limited non-forfeiture benefits and death benefits. So, if

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 more insureds die than expected, the reserve attributable to those
insureds is reallocated to other active and disabled insureds in the pool.

Liabilities Mortality – Disabled Estimated • The rate at which insureds die from the disabled population.
• Premiums decrease with higher-than-expected mortality rates → LTCI
typically offers limited non-forfeiture benefits and death benefits. So, if
more insureds die than expected, the reserve attributable to those
insureds is reallocated to other active and disabled insureds in the pool.

Liabilities Mortality Estimated • The rate at which mortality rates are expected to improve (e.g.
Improvement – decrease).
Active • Typically expressed as vector of rates (indexed by attained age) or a
matrix of rates (indexed by issue age and duration since issue).
• Premiums rates increase with higher-than-expected mortality
improvement → if insureds are living longer than expected, this
translates into higher-than-expected incidence rates and claims costs.

Liabilities Smoking status Input Parameters • Smoker or non-smoker. Typically smokers will have higher premium
rates than non-smokers on account of having higher expected losses.
• Premiums are higher for smokers than non-smokers → Similar to the
rating process for life insurance, insureds that smoke will, on average,
(1) Have a higher likelihood of becoming disabled and (2) Have a higher
expected claim cost while on claim.

Liabilities Termination Rate – Estimated • The rate at which disabled insureds terminate being on claim and return
Recovery to the active population.
• Premium rates decrease with higher-than-expected termination rates →
Higher than expected termination rates indicate that more disabled
insureds are recovering and returning to the active population, and this
translates into lower liability cash flows.

EXHIBIT 11 – Key financial modeling assumptions/parameters

8.3 – Modeling Methodologies

There have been 3 discrete generations of LTC modeling approaches, described below. Before
walking through the technical details of each methodology, I want to provide some background
on two critical modeling variables that are unique to LTCI policies – (1) Insured status and (2)
Level of Care.
The “Insured Status” variable is an enumerated variable and can take on the following values at
a given point in time for each insured:
• Active - Never on claim; and
• Active - Was on claim, now recovered; and
• Disabled - Currently on claim; and
• Dead; and finally
• Lapsed – The insured voluntarily terminated their policy.
Specific to the disabled “status”, there are 3 different enumerated values for the “Level of Care”
variable, each of which has implications for the type and cost of LTSS that the insured receives:
• Skilled Nursing Facility (NH); and
• Home Health Care (HHC); and
• Assisted Living Facility (ALF).

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Exhibit 12 below provides a graphical view of the transitions between the “insured status” states.
The red highlighting indicates terminal states – death and lapsed.

EXHIBIT 12 – Graphic representation of “insured status”

8.3.1 - Claims cost method (CCM)
The CCM was used in the “early days” of LTCI and was the simplest to implement from a
modeling perspective.
The method calculates claims costs in 1 of 2 ways – (1) Total Lives Claim Cost (TLCC) and (2)
Healthy Lives Claim Cost (HLCC). Both methods involve pre-calculating the Actuarial Present
Value (APV) of expected future claims using the probability of incidence (frequency) and the
severity (combination of the length of stay and % utilization of $ benefits):
• TLCC – Expected claims costs are developed by applying incidence rates to projected total
exposures; and
• HLCC - Expected claims costs are developed by applying incidence rates to projected
healthy exposures. An additional step for HLCC is required in the form of pre-calculating
factors that represent the ratio of healthy exposures to total exposures.
The TLCC method has the weakness that all ongoing exposures – both active and on-claim –
contribute to both the Active Life Reserves (ALR) and the Disabled Life Reserves (DLR). The
HLCC takes account of the status (only applies to the healthy exposures) and so those on claim
do not contribute to ALRs.
For firms that wish to utilize CCM, the recommended approach is the HLCC. The TLCC will
result in increasingly imprecise projections if the proportionate mix of life statuses (e.g. % of the
remaining total insured cohort in each status bucket) deviates from expectations over time.

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8.3.2 - First principles method (FPM)
The FPM is more sophisticated than the CCM – rather than relying on pre-calculated incidence
and severity tables that are loaded into the model (CCM), the transition of insureds between the
different life statuses and level of care is dynamic and performed during the run time of the
model.
This approach allows for insurers to analyze risk factor sensitivities and decompose financial
performance drivers more precisely than the CCM method. Of course, this increased modeling
rigor comes with greater computational demands, increased requirements for more granular
data, and greater staff capability to both initially develop the model and then maintain the model
to a high standard of quality over time.
8.3.3 - Multistate stochastic method (MSSM)
MSSM is the most sophisticated of the 3 methods examined. Depending on the level of
complexity desired, the model owner could choose to implement a fully stochastic model for both
liability risk drivers (e.g. mortality, morbidity, time on claim, expenses, lapses, utilization rates,
and inflation rates) and asset risk drivers (e.g. yield rates, default rates, equity returns,
prepayment rates, etc).
Of particular note, the MSSM allows for utilizing a comprehensive Asset Liability framework in
which, rather than simply assuming a fixed earnings rate & discount rate, the model can
incorporate inforce asset data and recognize the actual cash flows generated by the asset
portfolios (coupon payments, principal repayments, dividends, etc). This allows for a dynamic
approach to calculating a path dependent stream of gross earned rates, and this in turn allows
for calculating meaningful risk sensitivities.
Similar to the evolution from CCM to FPM, the MSSM adds several layers of complexity to the
FPM approach:
• Selection of appropriate PDFs with which to simulate the input assumptions; and
• Initial estimation and periodic re-estimation of the parameters for each of the PDFs; and
• More complex development and implementation code with higher levels of operational risk
and points of failure.

8.4 – Construction of a financial model

In this section, I provide a high-level summary for one implementation of an MSSM. This
implementation was developed by the American Academy of Actuaries LTC Principles Based
Reserves Working Group. The model was developed in Excel and processes a sample set of
inforce LTCI polices on a seriatim basis. The model can be found here →
https://www.actuary.org/content/stochastic-model-4-multiple-policies-dataset. I’ll provide a full
decomposition of the calculation mechanics and greater detail on the spreadsheet functionality
in a future paper.
8.4.1 – Spreadsheet architecture map
Exhibit 13 below contains an architecture map of the spreadsheet and details the name,
description, and model layer (e.g. input, processing, and output) for each tab.

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Tab Tab Name Description Model
# layer
1 Notes and • User enters key input assumptions/parameters on this tab: Input/Processing
Parameters • Incident rate multiplicative factors; and
• Selection factors; and
• Mortality rate multiplicative factors (active); and
• Lapse rate multiplicative factors; and
• Mortality rate multiplicative factors (disabled); and
• Termination rate multiplicative factors; and
• Valuation date; and
• Number of Trials; and
• Max No of Loops; and
• Expense per policy; and
• Expense per premium; and
• Commission; and
• Initial expense per claim; and
• Ongoing expense per claim; and
• Ongoing expense per claim paid.
• Macro buttons used to control processing flow on this tab, as well as notes & run
instructions.

2 Policy Data • This tab houses the 6,113 inforce policy records…policies were issued between Jan Input
2003 and May 2010.
• There are 15 data attributes in the data model, as follows:
• Policy ID/#
• Birth Date
• Issue Date
• Volume
• Premium Mode
• Gender
• Elimination Period
• Benefit Period
• Benefit Limit
• EP Type
• Cause 2 Adjustment
• Min Index
• Max Index
• Index Type
• Modal Premium

3 Record Count • Used as an index in the VBA code looping routine. Input

4 Incidence Rate • LTC Ins Exp Study 2004 Facility Comprehensive adjusted to 0 EP. Input
C1 • These values are the count of individuals per 100,000 insured becoming disabled
and requiring comprehensive LTSS in a comprehensive care facility.
• Table is indexed by age (columns 18 to 121) and duration (rows 0 to 100).

5 Incidence Rate • LTC Ins Exp Study 2004 Facility Home Care adjusted to 0 EP. Input
C2 • These values are the count of individuals per 100,000 insured becoming disabled
and requiring LTSS through Home Health Care.
• Table is indexed by age (columns 18 to 121) and duration (rows 0 to 100).

6 Selection • Multiplicative factors that are applied to incidence rates. Input

Factors • Indexed only by duration (either from issue or recovery).

7 Termination • Rates of disabled individuals recovering and returning to active population – males. Input
Rates C1 • Table is indexed by age (columns) and duration (rows).

8 Termination • Rates of disabled individuals recovering and returning to active population – Input
Rates C2 females.
• Table is indexed age (columns) and duration (rows).

9 Salvage C1 • Rates of disabled individuals recovering and returning to active population – males. Input
• Table is indexed age (columns) and duration (rows).

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10 Salvage C2 • Rates of disabled individuals recovering and returning to active population – Input
females.
• Table is indexed by age (columns) and duration (rows).

11 Region • Input
Percentiles
12 Active Mortality • Mortality for active participants – male and female. Input
• Tables are A2000 Male Basic ANB – Select & Ultimate, and A2000 Female Basic
ANB – Select & Ultimate.
• Table is indexed by age (columns) and duration since issue (rows).

13 Claimant • Mortality for participants on claim – male and female. Input

Mortality • Tables are attained age and A2000 Basic ANB.

14 Lapse • Lapse rates indexed by duration rates. Input

• Separate rates for “since issue” and “since recovery”.

15 Interest • This model uses a single, deterministic interest rate path. Input
Scenario • Historical rates are used from 1970 to the last year prior to the valuation date
(06/30/2011), and then forward rates are used from 2011 for the remainder of the
projection period (year 2110).
• This tab also contains real rates and CPI rates.

16 Stochastic • The VBA code reads in each of the 6,113 policy records and displays the policy Processing
Active attributes and the year-by-year decrement factors that apply to that policy.

17 Active Trial • Used to store the simulation results generated on the <Stochastic Active> tab. Reporting
Results
18 Claims • Summarizes results for each trial that results in a claim due to cause 1 Reporting
• or 2. Includes second and later claims following recovery.
19 Stochastic • For each claim, first determines time to event, then determines event Processing
Claims • (death, recovery).
20 Recoveries • Summarizes the recoveries from Disabled Trial Results. Reporting
21 Disabled Trial • Summarizes the results of each claim. Reporting
Results
22 Stochastic • For each recovery, first determines time to event, then determines Processing
Recoveries • event (lapse, death, or claim).
23 Recovered Trial • Summarizes the results of each recovery. Reporting
Results
24 Trial Summary • Used to store the results from each simulation trial Reporting
EXHIBIT 13 – Model Architecture Map
The model also makes use of named ranges…Exhibit 14 below summarizes the range name,
tab location, address, and description for each named range:
Named Tab location Address Description
Range
ClaimNo Stochastic Claims A2 The ordinal number of the claim being processed
Comm Notes and D17 The commission rate applied to premium cash flows
Parameters
Current_Time Stochastic Active K4 The current date and time
End_Time Active Trial Results B3 The ending time for the simulation.
ExpClm Notes and D20 Claim related expense.
Parameters
ExpInClm Notes and D18 Claim related expense.
Parameters
ExpOnClm Notes and D19 Claim related expense.
Parameters
ExpPol Notes and D15 Expense per policy
Parameters
ExpPrem Notes and D16 % of premium expense rate
Parameters
Labels Notes and B40..B52 The column labels that are used for the outputs of the stochastic modeling
Parameters for actives lives and claims.

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 NoLoops Notes and B12
Parameters
NoTrials Notes and B11 The number of simulation paths/trials for each policy processed.
Parameters
OutputActive Stochastic Active C123:AJZ128 The section where the results for each policy/trial are captured.
OutputClaim Stochastic Claims C155:AJZ160 The section where the results for each claim/trial are captured.
OutputRecovery Stochastic C123:AJZ128 The section where the results for each recovery/trial are captured.
Recoveries
Payout Stochastic Claims AB10:AB122 The $ amount of claims paid for any policyholders that become disabled.
RecNo Stochastic Active A2 The number of the record from the <Policy Data> tab currently being
processed.
RecoveryNo Stochastic A2 The number of the claim case currently being processed for recovery.
Recoveries
Result Stochastic Active K114:W114 The last row in the decrement section.
Start_Time Active Trial Results B2
Time_Type Stochastic Active M114, X114
TotalRecs Record Count A4 The user-selected number of active policies that will be processed in the
current run.
EXHIBIT 14 – Summary of named ranges in the modeling spreadsheet
Finally, the simulation is being run against a hypothetical inforce policy population of 6,113
policies…Exhibit 15 below contains an excerpt from the <Policy Data> tab of the first 25 policies.
Exhibit 16 contains a data dictionary for the policy data.

EXHIBIT 15 – Excerpt of the inforce policies from the <Policy Data> tab
Field Variable Description
name type
Policy ID Text string Policy number
Birth Date Date Insured’s birth date
Issue Date Date Policy issue date
Volume Numeric - Integer $ amount of coverage expressed as benefit per day
Prem Mode Enumerated Premium paying model:
• a = annual
• s = semi-annual
• q = quarterly
• m = monthly
Gender Enumerated The gender of the insured:
• m = male
• f = female

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 Elim Per Numeric – • The amount of time that must pass from the date when a covered event occurs in order for
Integer benefits to be paid.
• Expressed as the number of days – 20, 60, 90 and 180.
Ben Per Numeric – • The amount of time that benefits are paid.
Integer • Expressed as the number of years – 2, 3, 4, 5 and 99.
• If set to 99, the benefit period is effectively lifetime.
Benefit Limit Enumerated • The limit on the monthly benefit limit. If the policyholder elects an inflation option for his/her
policy, the inflation adjustment also applies to the benefit limit.
EP Type Enumerated
Cause 2 Numeric – Whole
Adjustment
Min Index Numeric – Whole The minimum value of the CPI Index used to inflate the benefit amount and benefit limit.
Max Index Numeric – Whole The maximum value of the CPI Index used to inflate the benefit amount and benefit limit.
Index Type Enumerated Take on 2 values → (1) s = simple and (2) c = compound.
Modal Premium Numeric - Whole The $ of the model premium, paid at the model frequency specified.
EXHIBIT 16 – Data dictionary for policy data
8.4.2 - Background on survival functions
The simulation dynamics for the model are built around the “Waiting Time” approach - this
approach involves a two-step process to determine the state of a policyholder, where one
random number is drawn to determine the timing of the next change in state, and another is
drawn to determine the new state.
To understand the technical details of the spreadsheet’s calculations, we first need to define
some basic terminology related to survival functions and hazard functions. As described above
in 8.3 – Modeling Parameters, the process to project the cash flows arising from an LTCI policy
involves analyzing several potential state transitions – (1) Active → Disabled, (2) Active →
Lapsed, (3) Active → Dead, (4) Disabled → Recovered → Active, (5) Disabled → Lapsed, and
(6) Disabled → Dead. These multi-state dynamics are to be distinguished from the much simpler
state transition dynamics for life insurance (e.g. Active → Dead, Active → Lapsed) and annuities
(Active → Annuitization, Active → Lapsed, Active → Dead).
In the abstract, the term survival analysis refers to a collection of statistical procedures that are
used measure a specific variable of interest → the time until a specific event occurs. By event,
we mean one of the state transitions that are enumerated above for LTCI products.
This variable is measured relative to some type of starting point or starting date…for an LTCI
policy, there are 3 key dates of interest – (1) The issue date of the policy, (2) The current
valuation date from which the forward cash flows of the policy are being projected, and (3) The
simulated event date, which will be projected to occur after the valuation date.
The “event of interest” that we’re tracking is one of the 6 state transitions that are captured above.
The event occurrence (e.g. an active person becoming disabled, a disabled person dying) are
viewed as “failure” events…in other words, the survival period ends when the event occurred.
A key concept is the notion of censoring…this term refers to the scenario when the failure event
does not coincide with the temporal range of the observation period. There are two types of
censoring – left censoring and right censoring, and both are defined below.
• Left censoring – The unit being observed (e.g. a human life, a mechanical part) fails and is
removed from the observed population before the observation period begins, or alternatively

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 the failure event occurs during the observation period, but the timing of the event is bounded
within a range [𝑡1 , 𝑡2 ], and the timing of the event is not precisely known.
• Right censoring – The unit being observed either (1) Leaves the study before the failure event
occurs and before the observation period terminates or (2) Survives beyond the end of the
observation period.
The next step is to introduce some basic terminology for survival analysis.
• T = random variable represent an individual’s survival time.
• t = a specific value of T.
• d = an enumerated random variable that takes on only 2 values → 0 or 1:
• 0 if failure occurs during the observation period; and
• 1 if censoring occurs
• S(t) = P(𝑇 > 𝑡) = the probability that T>t = the survivor function. Exhibit 17 below provides
the value of S(t) for different values of t:
T S(t)
1 P(𝑇 > 1)
2 P(𝑇 > 2)
3 P(𝑇 > 3)
4 P(𝑇 > 4)
5 P(𝑇 > 5)
EXHIBIT 17 – Different value of the survival function
• The survival function can be both a continuous and discrete function of t. If a continuous
function, then S(t) will have several properties:
• The survival function is a decreasing function of t. This makes intuitive sense given
that the probability of a 20-year-old surviving to age 50 is higher than the probability
of the same individual surviving to age 75.
• s(0) = 1. This means that all individuals being observed are assumed to be alive (e.g.
to have survived) to the beginning date of the observation period.
• lim 𝑆(𝑡) = 0 → This means that if the observation period is extended without limit, all
𝑡−>∞
of the individuals being observed will ultimately die.
• The hazard function, denoted by h(t), is defined to be the instantaneous potential per unit of
time for the event to occur, given that the individual has survived up to time t. The equation
for the hazard function is given by:
P(t≤T≤t+∆t|T≥t)
• h(t) = lim
∆t−−>0 ∆t
• It’s important to note the comparison between the two – the survival function measures
the probability of not failing or surviving to the end of the observation period, whereas the
hazard function measures the rate of failing.
• Because the hazard function uses conditional probability (e.g. the probability of surviving
until time t), the hazard is also referred to as the Conditional Failure Rate.

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 • The term rate is used rather than probability because the hazard function is not bounded
to the interval (0,1). The numerator in the above equation is a conditional probability is
therefore bounded by (0,1), but the denominator is a small unit of time (e.g. seconds,
minutes, hours).
• So the hazard function is the instantaneous probability of failure at time t per unit of time.
• The hazard function will always be non-negative (>=0) and has no upper bound.
• Finally, we provide the functional relationships between the survival and hazard functions:
𝑡
• S(t) = EXP[− ∫0 ℎ(𝑢)𝑑𝑢]
𝑑𝑆(𝑡)/𝑑𝑡
• h(t) = − [ ]
𝑆(𝑡)

8.4.2 - Data Flows

Exhibit 18 below illustrates the data across the 3 model layers – input, processing, and
reporting. This is a slightly different view on the model structure presented in the architecture
map above in Exhibit 13.

EXHIBIT 18 – Data flow for the LTCI model from the American Academy of Actuaries
8.4.3 - Spreadsheet methodology
All of the core calculations in the model are performed using formulas in the spreadsheet. The
model also makes use of multiple VBA macros.
• The module <CleanUp> is invoked at the start of a new projection and clears the results from
the prior simulation from the following tabs – (1) Active Trial Results, (2) Claims, (3) Disabled
Trial Results, (4) Recoveries, (5) Recovered Trial Results, and (6) Trial Summary.

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• The module <Stochastic Trials> is used to read in inforce policy data (from the Policy Data
tab) and process each policy.

8.5 – Risk Management from the insurer perspective

8.5.1 – Asset Liability Risk
One of the most material risks facing LTCI issuers is the mismatch risk between assets and
liabilities. This risk factor impacts all intermediate and long-duration insurance products – whole
life insurance, universal life insurance, payout annuities, long-term care, disability income – but
the risk is particularly material for LTCI as product durations often exceed 30 years, considerably
longer than the other products mentioned above.
This attribute of LTCI can be clearly seen in the hypothetical premium paying/claims outlay
pattern illustrated in 8.1 - Summary. The mismatch issue is compounded in the low interest rate
environment that has persisted since the Great Financial Crisis of 2008 – this trend is illustrated
in Exhibit 19 below.
Evolution of 5 and 10 year Treasury rates over 50 years
18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0
04/02/1971 04/02/1976 04/02/1981 04/02/1986 04/02/1991 04/02/1996 04/02/2001 04/02/2006 04/02/2011 04/02/2016 04/02/2021

Treasury - 5 year Treasury - 10 year

EXHIBIT 19 – Treasury rates (5 year and 10 year) over the period 1971 to 2021
A reasonable rule of thumb is that for every 100-basis point drop in yields, the LTCI issuer would
need to increase premium rates in the range {10%, 15%} to cover the deficit. Given LTCI’s long
duration, there are also market liquidity issues in finding conventional, non-callable bonds with
the necessary maturities, particularly 30-year bonds. There are other instruments available that
can potentially lengthen the asset-side duration and better match the liability duration – bonds
with embedded options, convertible bonds, equities, structured mortgage products (e.g. CLOs,
CMOs, MBSs) – but these products come with their own array of risks (e.g. prepayment risk,
convexity risk, equity price risk) that make achieving and maintaining a prudent and sustainable

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Asset Liability Management (ALM) balance more difficult. Additionally, there are statutory
restrictions on the allocation that the LTCI issuer can have to equities.
So the LTCI issuer is confronted with interest rate risk to the extent that (1) It has to liquidate
investment assets in an increasing rate environment, thereby incurring capital losses or (2) It is
struggling to reinvest periodic cash flows (e.g. coupons, premiums, bond maturities) in new
assets that have sufficient yield to meet the insurer’s return requirements.
8.5.2 - Financial Risk (Credit)
As described above, LTCI insurers are heavy investors in fixed income assets – bonds,
mortgages, structured credit securities, different derivatives, etc. So by extension those insurers
are confronted with credit risk in the form of:
• Downgrades and/or bankruptcy of security issuers; and
• Bankruptcy of any trading counterparties for which the insurer has a positive Mark-to-Market
(M2M) value.
8.5.3 - Financial (Inflation Rates)
As illustrated in the chart above in Section 1.0 - Executive Summary, the costs of LTSS have
been increasing at a dramatic rate over the past ~15 years. This trend impacts both the direct
cost of care (Claims Cost) and ancillary expenses for providing the care. Adverse inflation
experience presents to the LTCI issuer in two forms – (1) Claims costs that are higher than
expected and priced for and (2) Ancillary expenses that are higher than expected and priced for.
8.5.4 - Insurable – Morbidity (Incidence rates, claim costs)
Adverse morbidity experience presents to LTCI issuers in two forms – (1) Frequency - The
incidence rates of insureds going on claim is higher than expected, and (2) Severity - The
distribution of claim costs is worse than expected.
Pricing the morbidity risk factor is a challenging issue for insurers, and even 40+ years after the
market started, there is still not an industry standard morbidity table that firms can use to derive
their own pricing tables.
8.5.5 – Insurable (Other – Lapse and Mortality)
The lapse rate is the rate at which healthy insureds (e.g. those that are not on claim) voluntarily
terminate their policies and no longer pay premiums. The mortality rate is the rate at which either
(1) Health insureds die (e.g. premium paying, not on claim) or (2) Disabled insureds die (e.g.
while on claim).
These are critical assumptions given that qualified LTCI policies do no offer cash surrender
value. So a terminating insured does not receive any surrender value when he/she terminates
their policy. Similarly, the estate of an insured that dies does not receive a death benefit from
the policy. The LTCI issuer must take care in estimating these assumption values. If set at too
high a level (e.g. fewer insureds lapse and/or die than anticipated in the pricing – referred to as
“lapse supported”), then there will potentially be an adverse impact on the LTCI issuer.

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8.5.6 – Operational (Information Technology, Regulatory Compliance)
Given the LTCI product complexities, it is no surprise that the product presents the LTCI issuer
with an increased operational risk profile as well.
The most direct example of this increased risk profile relates to modeling and data availability.
Any dedicated LTCI cash flow projection models used for pricing, valuation, and risk
management purposes will be, by design, more complex than cash flow projection models for
other insurance products – more assumptions to estimate, more complex calculation mechanics
to build, and greater experience data requirements.
Additionally, as a form of health insurance, LTCI is subject to all of the same laws and regulations
around market conduct, sales practices, and information protection that other forms of health
insurance are subject to.

Section 9.0 – Regulatory considerations

9.1 – Background on the NAIC6
State insurance regulators created the NAIC in 1871 to address the need to coordinate
regulation of multistate insurers. The first major step in that process was the development of
uniform financial reporting by insurance companies. Since then, new legislative concepts, new
levels of expertise in data collection and delivery, and a commitment to even greater
technological capability have moved the NAIC forward into its role as a multidimensional,
regulatory support organization.
The (NAIC) is the U.S. standard-setting and regulatory support organization created and
governed by the chief insurance regulators from the 50 states, the District of Columbia and five
U.S. territories. Through the NAIC, state insurance regulators establish standards and best
practices, conduct peer review, and coordinate their regulatory oversight. NAIC staff supports
these efforts and represents the collective views of state regulators domestically and
internationally. NAIC members, together with the central resources of the NAIC, form the
national system of state-based insurance regulation in the U.S.
EXHIBIT 20 below describes the different divisions with the NAIC and their specific roles:
Division Description of activities
Communications/Media • Provides communications for the NAIC and its members through media
Relations relations, news releases, electronic and Web-based material, and the
promotion of consumer education through Insure U.

Executive • Provides overall support to the NAIC and its members. The Executive Division
includes the Finance Department and the Business Strategy, Risk
Management and Compliance Department.

Financial Regulatory • Provides technical expertise in areas of financial regulation, solvency

Services regulation, financial reporting, statutory accounting, capital adequacy (risk-

6
SOURCE: NAIC site → https://content.naic.org/index_about.htm

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 based capital), accounting, examinations, reinsurance, investments, and
international insurance issues to regulators.

Human Resources and • Contributes to the NAIC’s internal operations, including human resources
Internal Services activities, facilities, records management, and copy and mail services.

Information Technology • Works to protect insurance consumers by delivering information technology

Group products and services that support state-based insurance regulation.
• The ITG supports a number of tools that enable insurance regulators to further
the state-based system, including the following capabilities and services:
• Service desk;
• Enterprise technology initiatives;
• Market regulation systems;
• Financial data repository and analysis;
• Automated Valuation Service (AVS+);
• System for Electronic Rate and Form Filing (SERFF);
• Online Premium Tax for Insurance (OPTINS);
• Securities valuation systems; and
• State Based Systems (SBS).
• Ultimately, the ITG strives to provide world-class data-collection capabilities
and unparalleled technology for state-based insurance regulation.

Legal • Researches and analyzes developments in insurance law, provides advice to

state insurance regulators and serves as in-house counsel to the association.

Member Services • Provides support to members and staff in the areas of Education and Training,
Meeting Planning, and Library Resources.

Regulatory Services • Provides support to members and staff in the areas Actuarial & Statistical
Division Services, Market Regulation, and Financial Regulatory Services.

Technical Services • Provides overall technology support with I-Site, MyNAIC, and StateNet.

Capital Markets & • Examines the credit quality and value of insurer's investment portfolios for the
Investment Analysis benefit of the regulatory community.

EXHIBIT 20 – Summary of activities of NAIC operational divisions

9.2 – Model Laws/Acts/Regulations/Guidelines

The NAIC model law development process helps provide uniformity while balancing the needs
of insurers operating in multiple jurisdictions with the unique nature of state judicial, legislative,
and regulatory frameworks.
While the value of a state-based regulatory system from a consumer protection perspective is
the ability to tailor state laws and regulations to meet the needs of resident consumers, there is
recognition that there are some areas where uniformity and consistency across state borders is
beneficial to all. It is primarily through the states’ adoption of NAIC model laws and regulations
that the legal framework for insurance regulation has been largely harmonized all 50 states.7

7
SOURCE: NAIC website → Article on Model Laws

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In 2007, the NAIC updated the criteria and procedure for model law development. For a new
model to be developed or an existing model to be updated, it must meet two standards. First,
the subject matter must require a minimum national standard and/or uniformity across the states.
Second, NAIC members must commit significant state insurance regulator and association
resources to encourage adoption across the states.
To initiate the development process, an NAIC group requests approval from its Parent
Committee and then the Executive (EX) Committee. Once approved, the group has one year to
complete its work, at which point it must be adopted by at least a two-thirds majority by the
Parent Committee and subsequently by the Executive (EX) Committee and Plenary at the next
NAIC national meeting.8

Section 10.0 – Long-Term Care partnership programs

10.1 – Summary9
Long-Term Care (LTC) Partnership Programs - also called Qualified State Long Term Care
Partnership Programs - originated in 1992 in four states that implemented pilot programs
(California, Connecticut, Indiana, New York). In 1993, the Omnibus Budget Reconciliation Act
(OBRA) prevented the expansion of these programs to additional states. However, with the
passing of the 2005 Deficit Reduction Act (DRA), all states were given the option of creating
partnership programs.
An individual consumer considering the purchase of an LTCI policy should first check with their
state’s Department of Insurance to ensure that their state has a partnership program. Each
state’s program will typically have a name specific to that state.
Long Term Care (LTC) Partnership Programs are a collaboration between private long-term care
insurance companies and a state’s Medicaid program. The intention of partnership programs is
to encourage the purchase of long-term care insurance to help cover the costs of long-term care,
while also alleviating the burden on the states to pay for this type of care via Medicaid.
Of particular relevance to seniors who may need Medicaid in the future, participating in a
partnership program protects some (or in some cases, all) of a program participant’s assets
(resources) from the Medicaid asset limit. Furthermore, the “protected” assets are also safe from
Medicaid’s asset recovery program, sheltering assets as inheritance for family members after
the passing of a Medicaid recipient. Partnership for Long Term Care Programs can be thought
of as a Medicaid asset protection technique for healthy seniors who do not have an immediate
need for long term care.

8
SOURCE: NAIC website → Model Laws 101
9
SOURCE: American Council on Aging → https://www.medicaidplanningassistance.org/partnerships-for-long-term-care/

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10.2 – Program Benefits
Any individual or married couple looking to purchase a private LTCI policy should give strong
consideration to purchasing a partnership policy. In the absence of purchasing a partnership
policy, the couple would face the prospect of the Medicaid spend down requirements if (1) They
completely exhausted the benefit limit on their LTCI policy and (2) Had substantial liquid assets
that they would be required to liquidate before Medicaid would step in and pick up funding for
any ongoing long-term care expenses.
Each state has a limit on the level of assets an individual applying for Medicaid can retain, and
while they vary across states, the limit is typically very low, often < $2,000. The term “countable
assets” is used to describe any assets, both physical and financial, that would be considered in
calculating an applicant’s net worth and by extension the amount of assets that the individual
would have to “spend down” before reaching the required limit. Several types of assets are not
countable and are excluded from the spend down calculation – primary residence, household
furnishings, personal items, and a car.
The benefits of owning a partnership program are fairly straight forward and easy to explain – if
the Medicaid applicant had purchased a partnership policy while healthy, and then proceeded
to meet the triggering definition of needing LTSS (2 of 6 ADLs) and that policy paid funds up to
its lifetime $ limit in LTSS expenses, then that amount of countable assets (the lifetime $ limit)
would be removed from the applicant’s net worth/countable asset inventory in the Medicaid
spend down calculation.
An example will serve to illustrate the concept → Joe and Jane Smith are both 55 years old, still
working, and both are relatively healthy. They plan to retire in 10 years when they are both 65.
Joe has a familial history of early onset Alzheimers, and so realizes that it would be prudent if
he and Jane purchased a joint, standalone LTCI policy on both of them. Joe and Jane live in
New York state, and Joe’s insurance agent has educated both of them about the benefits of a
partnership program policy, and also encouraged them to purchase such a policy. Joe and Jane
purchased a policy at 55 with a total pooled $ limit (e.g. covering the long-term care for both of
them) of $500,000. The policy is inforce for 10 years when Joe begins to show signs of dementia
right after retiring at 65. His doctor diagnoses him as being unable to perform 4 of the 6 ADLs,
and Jane agrees to move Joe into an SNF. The cost of the facility is $300/day, and Joe remains
under their care until he passes at age 77…unfortunately, his care alone exhausted the
$500,000 benefit amount on the joint policy. But since they had purchased a partnership policy,
Jane is able to retain $500,000 in otherwise countable assets. Jane dies at 85 without ever
needing LTSS, and then is able to avoid the Medicaid Estate Recovery Program and pass her
residual estate (up to the $500,000 limit + non-countable assets) to her beneficiaries.
IMPORTANT NOTE – Financial planners, insurance company marketing materials, and other
providers of advice with regard to retirement and estate planning matters encourage consumers
to consider purchasing an LTCI policy in their late 40s or early 50s to realize the benefit of lower
periodic premium payments. This is certainly the case as such individuals will have a longer
period of time over which to fund the purchase of their LTCI policies. But a more critical benefit

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is that insurers that underwrite LTCI have implemented stringent medical underwriting standards
over time in order to improve their financial results. If a couple such as our hypothetical Joe and
Jane Smith had waited until later in life to purchase an LTCI, the likelihood of an insurer denying
their application would have increased.

10.3 – Eligibility Requirements

• Potential consumers of an LTCI policy must reside in a state that sponsors a partnership
program; and
• The consumers senior must purchase a policy from a private insurer that is specifically
designated as a “partnership-qualified policy” from a private insurance company; and
• The insurance company and the long-term care policy must be approved by the state
partnership program in which the purchaser resides; and
• If the consumer purchases a non-partnership long term care insurance policy, he / she will
have insurance coverage, but there will be no Medicaid asset protection / Medicaid estate
recovery protection should the need for long term care Medicaid arise; and
• It is highly advisable that the consumer purchase the policy while he/she/they are healthy
and do not need LTSS services currently. Aside from the direct economic benefit of lower
periodic premiums, the consumers have a much higher likelihood of being approved by the
private insurer if they are healthy; and
• The partnership-qualified policy must include inflation protection, typically offered through a
rider to the base policy. Inflation riders are typically offered in 1 of 2 ways – (1) As a fixed
percentage increase in the policy limit annually or (2) Linked to a commonly-used inflation
index (e.g. the Consumer Price Index); and
• The partnership policy has to be a federally tax-qualified long term care plan. This means
that part of the premium cost can be used as a tax deduction; and
• The senior must be able to afford the monthly / annual premium (the cost of the policy); and
• For asset disregard (asset limit and Medicaid estate recovery), a senior must receive long
term care Medicaid in the state in which he / she bought the partnership policy OR receive
long term care Medicaid in a state that has a LTC Partnership for Long Term Care Program
and has a reciprocal agreement with the state in which the senior wants to receive Medicaid
benefits.

Section 11.0 – Recommendations and Conclusions

11.1 – Market Innovations
Given the currently large and growing demand for LTSS, there are currently a range of different
innovations being prototyped and evaluated in the market. Exhibit 21 captures different private
sector approaches to addressing the issue of inadequacies in both the availability and
affordability of LTC products:

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EXHIBIT 21 – Private sector product and marketing innovations

11.2 – Consumer action plan

The private LTCI market in the US is very fragmented in 2022, with many fewer insurers than
the early 2000s. And the products that do remain have more stringent underwriting requirements,
lower lifetime $ limits and benefit periods, and generally higher prices.
Additionally, which Medicare and Medicare Supplement policies have modestly expanded their
LTSS-related benefits over the past few years, they still do not cover the form of LTSS that most
insureds ultimately need – custodial care.
Unfortunately, all of these trends serve to increase the pressure on individual consumers to plan
ahead and be ready well in advance of any potential future LTC needs…some basic steps that
the average consumer (and their spouse if applicable) to reduce stress and optimize financial
and health outcomes:
• Educate oneself about the LTC marketplace and the different regulations and laws that apply
– the resources summarized in Appendix F – Helpful resources on Long-Term Care are a
good start in this process; and
• Develop a relationship with a trusted financial advisor that has knowledge of both the LTCI
market and other traditional retirement planning products/services; and
• Look into and purchase standalone LTC and/or hybrid life insurance/annuity products before
retirement (ostensibly while still in good health); and
• Work with an estate planning attorney to develop a will and distinct types of trusts that make
the process of gifting assets to loved ones easier.

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Appendix A – Long-Term Care Independent Review Entities10
In order for an organization to qualify as an independent review organization for long-term care
insurance benefit trigger decisions, it shall comply with all of the following:
• The independent review organization shall ensure that all health care professionals on its
staff and with whom it contracts to provide benefit trigger determination reviews hold a current
unrestricted license or certification to practice a health care profession in the United States.
• The independent review organization shall ensure that any health care professional on its
staff and with whom it contracts to provide benefit trigger determination reviews who is a
physician holds a current certification by a recognized American medical specialty board in
a specialty appropriate for determining an insured’s functional or cognitive impairment.
• The independent review organization shall ensure that any health care professional on its
staff and with whom it contracts to provide benefit trigger determination reviews who is not a
physician holds a current certification in the specialty in which that person is licensed, by a
recognized American specialty board in a specialty appropriate for determining an insured’s
functional or cognitive impairment.
• The independent review organization shall ensure that all health care professionals on its
staff and with whom it contracts to provide benefit trigger determination reviews have no
history of disciplinary actions or sanctions including, but not limited to, the loss of staff
privileges or any participation restriction taken or pending by any hospital or state or federal
government regulatory agency.
• The independent review organization shall ensure that neither it, nor any of its employees,
agents, or licensed health care professionals utilized for benefit trigger determination reviews
receives compensation of any type that is dependent on the outcome of the review.
• The independent review organization shall ensure that neither it, nor any of its employees,
agents, or licensed health care professionals it utilizes for benefit trigger determination
reviews are in any manner related to, employed by or affiliated with the insurer, insured or
with a person who previously provided medical care or long-term care services to the insured.
• The independent review organization shall provide a description of the qualifications of the
reviewers retained to conduct independent review of long-term care insurance benefit trigger
decisions, including the reviewer’s current and past employment history, practice affiliations
and a description of past experience with decisions relating to long-term care, functional
capacity, dependency in activities of daily living, or in assessing cognitive impairment.
Specifically, with regard to reviews of tax qualified long-term care insurance contracts, it must
demonstrate the ability to assess the severity of cognitive impairment requiring substantial
supervision to protect the individual from harm, or with assessing deficits in the ability to
perform without substantial assistance from another person at least two activities of daily
living for a period of at least 90 days due to a loss of functional capacity.
• The independent review organization shall provide a description of the procedures employed
to ensure that reviewers conducting independent reviews are appropriately licensed,
registered or certified; trained in the principles, procedures and standards of the independent

10
SOURCE:NAIC → Model Law 641

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 review organization; and knowledgeable about the functional or cognitive impairments
associated with the diagnosis and disease staging processes, including expected duration of
such impairment, which is the subject of the independent review.
• The independent review organization shall provide the number of reviewers retained by the
independent review organization and a description of the areas of expertise available from
such reviewers and the types of cases such reviewers are qualified to review (e.g.
assessment of cognitive impairment or inability to perform activities of daily living due to a
loss of functional capacity).
• The independent review organization shall provide a description of the policies and
procedures employed to protect the confidentiality of protected health information, in
accordance with federal and state law.
• The independent review organization shall provide a description of its quality assurance
program.
• The independent review organization shall provide the names of all corporations and
organizations owned or controlled by the independent review organization or which own or
control the organization, and the nature and extent of any such ownership or control. The
independent review organization shall ensure that neither it, nor any of its employees, agents,
or licensed health care professionals utilized are not a subsidiary of, or owned or controlled
by, an insurer or by a trade association of insurers of which the insured is a member.
• The independent review organization shall provide the names and resumes of all directors,
officers and executives of the independent review organization.

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Appendix B – Terms of Reference
Term Description
Activities of Daily • The tasks of everyday life. These activities include eating, dressing, getting into or out
Living (ADLs) of a bed or chair, taking a bath or shower, and using the toilet.
• Instrumental activities of daily living are activities related to independent living and
include preparing meals, managing money, shopping, doing housework, and using a
telephone.11

Acute Condition • An individual suffering from an acute condition requires frequent monitoring by health
care professionals in order to maintain his or her health.

Adult Day Care12 • A program for six (6) or more individuals, of social and health-related services provided
during the day in a community group setting for the purpose of supporting frail, impaired
elderly or other disabled adults who can benefit from care in a group setting outside the
home.

Assisted Living • Assisted living residents usually live in their own apartments or rooms and share
Facilities (ALF)13 common areas.
• They have access to many services, including up to three meals a day; assistance with
personal care; help with medications, housekeeping, and laundry; 24-hour supervision,
security, and on-site staff; and social and recreational activities.

Benefit Trigger14 • A contractual provision in the insured’s policy of long-term care insurance conditioning
the payment of benefits on a determination of the insured’s ability to perform activities
of daily living and on cognitive impairment.
• For purposes of a tax-qualified long-term care insurance contract, as defined in Section
7702B of the Internal Revenue Code of 1986, as amended, “benefit trigger” shall include
a determination by a licensed health care practitioner that an insured is a chronically ill
individual.

Chronically Ill15 Any individual who has been certified by a licensed health care practitioner as:

• Being unable to perform (without substantial assistance from another individual) at least
2 ADLs for a period of at least 90 days due to a loss of functional capacity; or
• Requiring substantial supervision to protect such individual from threats to health and
safety due to severe cognitive impairment.

Cognitive • Cognitive impairment is when a person has trouble remembering, learning new things,
Impairment16 concentrating, or making decisions that affect their everyday life. Cognitive impairment
ranges from mild to severe.
• With mild impairment, people may begin to notice changes in cognitive functions, but
still be able to do their everyday activities.
• Severe levels of impairment can lead to losing the ability to understand the meaning or
importance of something and the ability to talk or write, resulting in the inability to live
independently.

11
SOURCE: National Cancer Institute → https://www.cancer.gov/publications/dictionaries/cancer-terms/def/adl
12
SOURCE: NAIC → NAIC Model Regulation
13
SOURCE: National Institute of Aging → https://www.nia.nih.gov/health/residential-facilities-assisted-living-and-nursing-
homes
14
SOURCE: NAIC → NAIC Model Regulation
15
SOURCE: IRS Code Section 7702B → https://www.law.cornell.edu/uscode/text/26/7702B
16
SOURCE: Centers for Disease Control → https://www.cdc.gov/aging/pdf/cognitive_impairment/cogimp_poilicy_final.pdf

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 Continuing Care • Continuing care retirement communities (CCRCs), or multi-level care facilities, provide
Retirement (CCR residents with a lifetime continuum of care. They assure the care recipient independent
community17 living as long as possible, and provide for nursing assistance if or when it is needed.
• This type of living arrangement can be particularly useful to financially sound couples
who are in need of distinct levels of care and who wish to maintain a strong relationship,
even though the typical CCRC resident is a physically and financially independent, 80-
year-old, highly educated, single female.

Custodial Care18 • Consists of any non-medical care that can reasonably and safely be provided by non-
licensed caregivers.
• Can take place at home or in a nursing home.
• Involves help with daily activities like bathing and dressing. In specific cases where care
is received at home, care can also include help with household duties such as cooking
and laundry.

Exceptional Only those increases filed by an insurer as exceptional for which the commissioner
Increase19 determines the need for the premium rate increase is justified:
• Due to changes in laws or regulations applicable to long-term care coverage in this
state; or
• Due to increased and unexpected utilization that affects the majority of insurers of
comparable products.

Expected Loss Ratio • The ratio of incurred claims to earned premiums.

(ELR) • Incurred claims is the sum of paid claims plus the change in loss reserves for (1) Active
claims and (2) Claims incurred but not reported (IBNR).

Guaranteed Issue • A term used to describe health or life insurance that an insurer must issue regardless
of the applicant’s underlying health status or other demographic attributes (e.g. age,
gender).

Guaranteed • A provision in a life, disability or LTCI policy that requires the insurer to renew the policy
Renewable on its anniversary.
• The premium can usually be increased if the increase applies to the entire class of
insureds covered by the policy.

HIPAA20 • HIPAA is a federal law that required the creation of national standards to protect
sensitive patient health information from being disclosed without the patient’s consent
or knowledge.
• The US Department of Health and Human Services (HHS) issued the HIPAA Privacy
Rule to implement the requirements of HIPAA.
• The HIPAA Security Rule protects a subset of information covered by the Privacy Rule.

Incurred But Not • IBNR is an estimate of the amount of claim dollars outstanding for events that have
Reported (IBNR)21 already happened but have not yet been reported to the insurer.

Independent Review • An organization that conducts independent reviews of long-term care benefit trigger
Organization22 decisions.

17
SOURCE: Natural Caregivers Library → Article on CCRs
18
SOURCE: Center for Medicare and Medicaid Services → Article on custodial care
19
SOURCE: NAIC → NAIC Model Regulation
20
SOURCE: Centers for Disease Control → Definition of HIPAA
21
SOURCE: The Actuary Magazine → https://theactuarymagazine.org/tag/incurred-but-not-reported-ibnr/
22
SOURCE: NAIC → NAIC Model Law

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 Licensed Health • An individual qualified by education and experience in an appropriate field, to
Care Professional determine, by reviewing a given patient’s medical records, whether the patient suffers
from a functional or cognitive impairment.

Long Term Services • Encompasses a variety of health, health-related, and social services that assist
and Supports individuals with functional limitations due to physical, cognitive, mental conditions, or
(LTSS)23 disabilities.

Medicaid • Medicaid is a joint federal and state program that provides free or low-cost health
coverage to millions of Americans, including low-income people, families and children,
pregnant women, the elderly, and people with disabilities.
• The federal government provides a portion of the funding for Medicaid and sets
guidelines for the program. Medicaid programs vary from state to state. 24

Medicaid Estate • Abbreviated as MERP or MER, is a program in which a state’s Medicaid agency seeks
Recovery Program25 reimbursement of all long-term care costs for which it paid for a Medicaid beneficiary.
• Long term costs can include nursing home care, home, and community-based services
to prevent premature institutionalization, and hospital/prescription drug costs related to
long term care.
• Medicaid’s estate recovery follows the Medicaid recipient’s death, and it is through his
/her remaining estate (typically one’s home) that the Medicaid agency attempts
repayment.

Medicare Medicare is the federal health insurance program, developed in 1965 under the Lyndon
Johnson administration, which provides medical coverage to:
• People who are 65 or older
• Certain younger people with disabilities
• People with End-Stage Renal Disease (permanent kidney failure requiring dialysis or a
transplant, sometimes called ESRD)

The distinct parts of Medicare help cover specific services:

• Medicare Part A – Hospital Insurance
• Medicare Part B – Medical Insurance
• Medicare Part D – Prescription Drug Coverage26

Mental or Nervous • A broad term that covers a range of ailments, including neurosis, psychoneurosis,
Disorder psychopathy, psychosis, or mental or emotional disease or disorder.

Morbidity The term can be interpreted in two ways:

• It can refer to an individual’s current state of health (e.g. poor or ill health).
• Also used to describe the probabilities of an insured individual suffering a health event
and becoming ill.
• Actuaries use morbidity incidence rates (indexed by attained age) to price different
forms of health insurance.

NAIC Producer This Act governs the qualifications and procedures for the licensing of insurance
Licensing Model producers. It simplifies and organizes some statutory language to improve efficiency,
Act27

23
SOURCE: The Milken Institute → Report on the current and future state of the LTC market
24
SOURCE: Benefits.gov
25
SOURCE: American Council on Aging →Estate Recover Program
26
SOURCE: Medicare website
27
SOURCE: NAIC → NAIC Model Law

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 permits the use of new technology and reduces costs associated with issuing and
renewing insurance licenses.

Non-Cancelable • A term used in a Life, Annuity, or Health Insurance policy that refers to the right of an
insured to continue the given insurance policy inforce by making timely premium
payments.
• The insured can’t unilaterally raise premiums on such policies under any circumstances.

Parameter Risk • The risk that arises when estimating the parameters of population-based statistics
calculated from a sample.
• EXAMPLE: LTC insurer XYZ has estimated that the lapse rate for a 65-year-old male
is 10% based on 5 years-worth of historical data (2005 to 2009). But this does not mean
that the population lapse rate is 10%. Using any type of sample data allows the model
developer to say that he/she believes the best estimate of the lapse rate to be in the
range {7%, 13%} at a specific confidence interval.

Policy Coverage • The term or duration of the policy. The policy period encompasses the time between
Period the exact hour and date of policy inception and the hour and date of expiration. 28

Post-Acute Care29 • Refers to care provided to patients recently released from the hospital, and can take
place in a range of different settings, including nursing homes and rehabilitation centers.

Pre-existing • A chronic health problem, like asthma, diabetes, or cancer, that you had before the date
conditions that new health coverage starts.30

Premium Paying The period of time over which the premiums on an insurance policy will be paid.
Period • For property and casualty forms of cover - auto, property, and umbrella - the premium-
paying period and the policy period are both typically 1 year.
• For life and health forms of cover – Disability Income and LTCI – the premium-paying
period and the policy coverage period can be different and typically exceeds 1 year.

Process Risk • Refers to the uncertainty around how many times a specific event will occur, even when
the probability of occurrence of that event is none with certainty.
• EXAMPLE – The event is getting HEADS when flipping a fair coin. The probability of
getting HEADS on any given coin flip is 50%, and on average, which translates to an
expectation of getting 50 HEADS in 100-coin flips. But that does not mean that the next
100-coin flips will yield 50 HEADS.

Qualified Actuary • This term refers to any actively practicing actuary in the US that is a member of
American Academy of Actuaries in good standing.

Respite Care • Temporary care for frail or impaired persons that allows volunteers to have a rest from
care giving.

Skilled Nursing • A nursing facility with the staff and equipment to give skilled nursing care and, in most
Facility cases, skilled rehabilitative services and other related health services. 31

28
SOURCE: Institute of Risk Management site
29
SOURCE: The Society for Post-Acute and Long-Term Care Medicine → Definition of Post-Acute Care
30
SOURCE: HealthCare.gov
31
SOURCE: Medicare website

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 Spend Down32 • A process by which you become eligible for Medicaid by using your resources to pay
medical bills until you reach the eligible asset level and income limits.

Value Based • Value-based insurance design (VBID) is a strategy that minimizes or eliminates out-of-
Insurance Designs pocket costs for high-value services in defined patient populations.
(VBID)33 • The primary objective of VBID is to reduce and eventually eliminate financial barriers to
high-value health care services.
• High value health care services are identified through evidence-based analysis. The
more clinically beneficial and cost-effective the therapy is for a patient group, the lower
the out-of-pocket costs.

32
SOURCE: Council on Aging → https://www.help4seniors.org/Downloads/fact-sheets/LTC%20Basics.pdf
33
SOURCE: American Association of Family Physicians → AAFP article

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Appendix C – Questions consumers should ask.
Question to be asked
Am I eligible?
Does my family health
history give an indication of
whether LTC is right for me?
What are the dollar or
coverage period limits on the
policy?
How does the policy’s
deductible work?
How does the renewability
provision work for the
policy?
If I surrender the policy, will I
receive any non-forfeiture
benefits (NF) from the
policy?
Will the premium be waived
if I am receiving benefits?
How much medical history
will I have to disclose in
applying?
Will the insurer that I buy
from be around to pay my
expenses in the future?
Description
• Insurers typically have a restricted age range within which they are willing to
sell policies.
• However, the range is usually very broad and older applicants, particularly
those in good health at the time of submittal, are likely to be approved.
• The health patterns of one’s parents and grandparents are one of the elements
to consider when evaluating an LTCI policy for purchase – longevity, incidence
of dementia in old age, other chronic health conditions.
• These attributes were described above in 8.2 – Modeling Parameters and have
a direct relationship with the level of premium charged.
• Also known as the “elimination period”.
• This is essentially the risk retention period for the insurer (e.g. the period of time
measured from the coverage triggering event to when the insurer will start
paying benefits).
• LTC policies, particularly individual policies, are typically referred to as
“guaranteed renewable”.
• This means that, absent not paying one’s premium or making material
misrepresentations and/or omissions on the application, an insured’s policy
cannot be canceled.
• As mentioned above, premiums can be raised, but only for an entire
underwriting class.
• NF benefits can take one of 3 forms – (1) Return of premium in the event of
death or lapse/surrender, (2) Stop paying premiums but the benefit coverage
continues and is funded by a built-up Cash Surrender Value, or (3) The policies
pays out the CSV upon lapse/surrender.
• Increasingly in recent years, insurers are moving to offer NF benefits on LTC
policies.
• Of course, the higher level of payout in the event of death or lapse/surrender
does require the insurer to charge a higher premium level to fund the increased
benefits.
• Commonly referred to as a “Waiver of Premium” provision (WOP).
• This means that an insured will not have to pay premiums while receiving
benefits under the policy.
• It is important to understand the specific WOP provisions for each policy – they
can differ across policies.
• As with any type of health or life insurance, it is critical that the applicant provide
as comprehensive and accurate compilation of their health history to the insurer
as possible.
• Insurance policies, including LTC, typically contain provisions that allow the
insurer to deny coverage within a fixed time period from issue if they find that
the insured materially misrepresented or omitted key health history information.
• This point is arguably the most important consideration when comparing LTC
policies across private insurance firms.
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What types of services and
the related expenses are
covered?
Will any benefits that I
receive be taxable to me as
income?
How does the policy treat
pre-existing conditions?
What the “free look”
provisions in the policy?
Who should I consult with
before purchasing an LTC
policy?
• Insurance is a product (e.g. a financial promise to pay benefits) that is delivered
over a very long period of time that can be measured in several decades.
• So it is critical that the insurer have an excellent reputation, an established
operational record in the LTC marketplace, and be very strong financially.
• With the exception of incremental differences at the margin, insurance products
are highly regulated and statutorily required to offer a minimum set of benefits
for a given type of cover – this is particularly the case for LTC.
• So insurance products themselves are commodity products – what
distinguishes one product from another is the reputation, customer service
offered, and the financial and claims-paying strength of the firm selling the
product.
• Care provided in nursing homes – Skilled, intermediate, and custodial.
• Home care services – Skilled and non-skilled nursing care, physical therapy,
homemakers, and home health aides.
• Structural or physical modifications to the insured’s home to accommodate their
health condition(s).
• The laws around taxation of the benefits paid out by various insurance products
are numerous, very complex, and vary by product.
• But as a general matter, and particularly in the case where premiums are not
tax-deductible to the insured, the benefits paid under the same contract (if and
when) would not be considered taxable income.
• This terms refers to any medical condition that the insured had prior to applying
for coverage.
• Pre-existing conditions falls under the general heading “policy exclusions” –
explicit exclusions are necessary with insurance policies in order to keep
premiums affordable – LTC policies are no different.
• One approach that an insurer may use to handle a pre-existing condition would
be to require that long-term care expenses were not incurred for a defined
period of time (e.g. 6 months) prior to policy issuance.
• This term refers to the specified period of time, measured from policy issuance,
within which the insured can cancel the policy and procure a pro-rated refund
from the insurer.
• The best person to start with is the broker and/or agent that is selling the policy
– they can answer questions about policy features, provide details about the
insurer’s financial strength, spell out how the policy would respond under
certain scenarios, etc.
• But there are several others that one should consult with – an attorney with
expertise in insurance law, your medical provider, other financial advisors, etc.
• An insurance contract is a legally binding agreement between the insured and
the insurer. Before committing to the transaction, the insured should ensure that
they are completely comfortable with the provisions in the contract.
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Appendix D – Sample replacement notice language

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Appendix E – Specified format for outline of coverage
[COMPANY NAME]
[ADDRESS - CITY & STATE]
[TELEPHONE NUMBER]
LONG-TERM CARE INSURANCE
OUTLINE OF COVERAGE

[Policy Number or Group Master Policy and Certificate Number]

[Except for policies or certificates which are guaranteed issue, the following caution statement, or language
substantially similar, must appear as follows in the outline of coverage.]

Caution: The issuance of this long-term care insurance [policy] [certificate] is based upon your responses to the
questions on your application. A copy of your [application] [enrollment form] [is enclosed] [was retained by you when
you applied]. If your answers are incorrect or untrue, the company has the right to deny benefits or rescind your
policy. The best time to clear up any questions is now, before a claim arises! If, for any reason, any of your answers
are incorrect, contact the company at this address: [insert address]
• This policy is [an individual policy of insurance]([a group policy] which was issued in the [indicate jurisdiction in
which group policy was issued]).

• PURPOSE OF OUTLINE OF COVERAGE - This outline of coverage provides a very brief description of the
key features of the policy. You should compare this outline of coverage to outlines of coverage for other policies
available to you. This is not an insurance contract, but only a summary of coverage. Only the individual or group
policy contains governing contractual provisions. This means that the policy or group policy sets forth in detail
the rights and obligations of both you and the insurance company. Therefore, if you purchase this coverage, or
any other coverage, it is important that you READ YOUR POLICY (OR CERTIFICATE) CAREFULLY!

• FEDERAL TAX CONSEQUENCES - This [POLICY] [CERTIFICATE] is intended to be a federally tax-qualified

long-term care insurance contract under Section 7702B(b) of the Internal Revenue Code of 1986, as amended;
or Federal Tax Implications of this [POLICY] [CERTIFICATE]. This [POLICY] [CERTIFICATE] is not intended
to be a federally tax-qualified long-term care insurance contract under Section 7702B(b) of the Internal Revenue
Code of 1986 as amended. Benefits received under the [POLICY] [CERTIFICATE] may be taxable as income.

• TERMS UNDER WHICH THE POLICY OR CERTIFICATE MAY BE CONTINUED IN FORCE OR

DISCONTINUED.
o [For long-term care health insurance policies or certificates describe one of the following permissible policy
renewability provisions:
▪ Policies and certificates that are guaranteed renewable shall contain the following statement:]
RENEWABILITY: THIS POLICY [CERTIFICATE] IS GUARANTEED RENEWABLE. This means you
have the right, subject to the terms of your policy, [certificate] to continue this policy as long as you pay
your premiums on time. [Company Name] cannot change any of the terms of your policy on its own,
except that, in the future, IT MAY INCREASE THE PREMIUM YOU PAY.
▪ [Policies and certificates that are noncancellable shall contain the following statement:]
RENEWABILITY: THIS POLICY [CERTIFICATE] IS NONCANCELLABLE. This means that you have
the right, subject to the terms of your policy, to continue this policy as long as you pay your premiums
on time. [Company Name] cannot change any of the terms of your policy on its own and cannot change
the premium you currently pay. However, if your policy contains an inflation protection feature where
you choose to increase your benefits, [Company Name] may increase your premium at that time for
those additional benefits.
o [For group coverage, specifically describe continuation/conversion provisions applicable to the certificate
and group policy;]
o [Describe waiver of premium provisions or state that there are not such provisions.]

• TERMS UNDER WHICH THE COMPANY MAY CHANGE PREMIUMS

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 [In bold type larger than the maximum type required to be used for the other provisions of the outline of
coverage, state whether or not the company has a right to change the premium, and if a right exists, describe
clearly and concisely each circumstance under which the premium may change.]

• TERMS UNDER WHICH THE POLICY OR CERTIFICATE MAY BE RETURNED AND PREMIUM
REFUNDED.
• [Provide a brief description of the right to return–“free look” provision of the policy.]
• [Include a statement that the policy either does or does not contain provisions providing for a refund or
partial refund of premium upon the death of an insured or surrender of the policy or certificate. If the policy
contains such provisions, include a description of them.]

• THIS IS NOT MEDICARE SUPPLEMENT COVERAGE - If you are eligible for Medicare, review the Medicare
Supplement Buyer’s Guide available from the insurance company.
• [For agents] Neither [insert company name] nor its agents represent Medicare, the federal government or
any state government.
• [For direct response] [insert company name] is not representing Medicare, the federal government or any
state government.

• LONG-TERM CARE COVERAGE - Policies of this category are designed to provide coverage for one or more
necessary or medically necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal
care services, provided in a setting other than an acute care unit of a hospital, such as in a nursing home, in
the community or in the home. This policy provides coverage in the form of a fixed dollar indemnity benefit for
covered long-term care expenses, subject to policy [limitations] [waiting periods] and [coinsurance]
requirements. [Modify this paragraph if the policy is not an indemnity policy.]

• BENEFITS PROVIDED BY THIS POLICY.

• [Covered services, related deductibles, waiting periods, elimination periods and benefit maximums.]
• [Institutional benefits, by skill level.]
• [Non-institutional benefits, by skill level.]
• Eligibility for Payment of Benefits
• [Activities of daily living and cognitive impairment shall be used to measure an insured’s need for long-term
care and must be defined and described as part of the outline of coverage.]

• LIMITATIONS AND EXCLUSIONS.

• Preexisting conditions;
• Non-eligible facilities and provider;
• Non-eligible levels of care (e. g., unlicensed providers, care or treatment provided by a family member,
etc.);
• Exclusions and exceptions;
• Limitations.
• [This section should provide a brief specific description of any policy provisions which limit, exclude, restrict,
reduce, delay, or in any other manner operate to qualify payment of the benefits described in Number 6
above.]
• THIS POLICY MAY NOT COVER ALL THE EXPENSES ASSOCIATED WITH YOUR LONG-TERM CARE
NEEDS.

• RELATIONSHIP OF COST OF CARE AND BENEFITS - Because the costs of long-term care services will
likely increase over time, you should consider whether and how the benefits of this plan may be adjusted. [As
applicable, indicate the following:
• That the benefit level will not increase over time;
• Any automatic benefit adjustment provisions;
• Whether the insured will be guaranteed the option to buy additional benefits and the basis upon which
benefits will be increased over time if not by a specified amount or percentage;

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 • If there is such a guarantee, include whether additional underwriting or health screening will be required,
the frequency and amounts of the upgrade options, and any significant restrictions or limitations;
• And finally, describe whether there will be any additional premium charge imposed, and how that is to be
calculated.]
• ALZHEIMER’S DISEASE AND OTHER ORGANIC BRAIN DISORDERS - [State that the policy provides
coverage for insureds clinically diagnosed as having Alzheimer’s disease or related degenerative and
dementing illnesses. Specifically describe each benefit screen or other policy provision which provides
preconditions to the availability of policy benefits for such an insured.]

• PREMIUM.
• [(a) State the total annual premium for the policy;
• (b) If the premium varies with an applicant’s choice among benefit options, indicate the portion of annual
premium which corresponds to each benefit option.]

• ADDITIONAL FEATURES.
• [(a) Indicate if medical underwriting is used;
• (b) Describe other key features.]

• CONTACT THE STATE SENIOR HEALTH INSURANCE ASSISTANCE PROGRAM IF YOU HAVE GENERAL
QUESTIONS REGARDING LONG-TERM CARE INSURANCE. CONTACT THE INSURANCE COMPANY IF
YOU HAVE SPECIFIC QUESTIONS REGARDING YOUR LONG-TERM CARE INSURANCE POLICY OR
CERTIFICATE.

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Appendix F – Helpful resources on Long-Term Care
1. National Clearinghouse for Long-Term Care Information – Department of Health and Human
Services → https://acl.gov/ltc
2. National Association of Insurance Commissioners → www.naic.org
3. Americas Health Insurance Plans → https://www.ahip.org/issues/long-term-care-insurance/
4. National Council on Aging → https://www.ncoa.org/
5. Federal Long-Term Care Insurance Program → https://www.ltcfeds.com/
6. US Department of Health and Human Services → https://www.hhs.gov/aging/long-term-
care/index.html
7. Alzheimers Association → https://www.alz.org/about
8. Genworth Cost of Care Surveys → https://www.genworth.com/aging-and-you/finances/cost-
of-care.html

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