The right sale: insurers address suitability concerns as sales of long-term-care products grow. (Life/Health: Long-Term Care).

Ensuring long-term-care policies are being targeted to those who need them, while making sure policyholders are receiving adequate coverage protection, is a foremost issue in agents' and brokers' marketing of these policies. Although some carriers believe a small number of sellers of long-term-care policies may in some ways be exaggerating the need or proposing inadequate coverage amounts, many insurers and industry analysts believe suitability tests are being met.

Today's Growth

Sales of long-term-care insurance are benefiting from the proximity of baby boomers to retirement and improvements in mortality. Industry researcher LIMRA International reported that long-term-care insurance sales through the third quarter of 2002 rose by more than 5% over sales in 2001. During that time, more than 366,200 policies were sold, with $662.8 million in new premium. Contributing significantly to this rise is that people in their 50s and 60s are beginning to understand their parents' needs for long-term care and the cost of that care.

By 2050, the U.S. population of individuals 65-years-old and older is expected to grow to nearly 79 million. Additionally, the nursing facility population aged 65 or older is anticipated to grow to 6.6 million.

The rising cost of home health care, rehabilitation and nursing homes is driving the need for long-term-care protection. Today, the average nursing home charges about $40,000 a year, but such care can cost close to $100,000 in some bigger cities. While roughly 40% of individuals who reach age 70 are expected to need some type of long-term care during the rest of their lives, only 7% of Americans have planned for those needs, according to a recent survey commissioned by GE Long Term Care Insurance.

Insurers, however, are optimistic that increased public awareness and a better understanding by consumers about coverage protection will continue to drive increased sales of this now tapped market.

Suitability

Some reports indicate that only a few agents with little experience in the industry or who sell only a few policies a year may be steering potential long-term-care policyholders in the wrong direction.

"If the job is done properly, needs are explained correctly and the solution is a long-term-care product that fits customers' financial needs, then suitability shouldn't be an issue," said Ron Hagelman Jr., vice president of special markets for State Life Insurance in New Braunfels, Texas.

In addition, states' adoption of the National Association of Insurance Commissioners' long-term-care insurance suitability guidelines and minimal lapse rates for the policies are relieving suitability concerns, said Lynn Boyd, senior director for long-term care for the American Council of Life Insurers in Washington, D.C. The national lapse rate for long-term-care policies is about 1.2%, which Boyd said confirms that appropriate sales are being made and the right people are being targeted.

Some insurers believe there is reason for concern. "When looking at the industry, there are three potential issues for suitability--selling a product to people who can't afford it, overinsuring coverage or underinsuring policyholders," said Buck Stinson, president of GE Long Term Care Insurance. He believes, however, the recent popularity of the product and consumers' growing familiarity with its risks and protections are reducing these concerns. "If there's an agent out there who doesn't really understand the product and hasn't worked in the industry, there may be reason for concern, but because insurers are increasingly educating agents about risks and new product features, we feel comfortable with the appropriateness of long-term-care sales."

It is important to match appropriate needs with policyholder age. For example, younger individuals being targeted for long-term-care insurance sales should be sure other coverage protections are met first, said Pam Delaney, vice president and chief operating officer for MassMutual Long Term Care Insurance. A policy such as disability-income insurance is an important product for individuals in their 40s because they are more likely to become disabled, she added.

In addition, some insurers believe suitability may tie into the inclusion of unnecessary policy features. "From a suitability standpoint, part of the problem is that policies are encumbered with bobbles and bangles, and consumers may purchase something that they may not even ever need," said Robert W. MacDonald, chairman of Allianz Life of North America and principal for CTWConsulting LLC, a Minneapolis-based insurance and management consulting firm.

The challenge, however, may lie with making a one-approach suitability policy that fits all markets, said Guy Bertsch, vice president of long-term-care markets and products for Chattanooga, Tenn.-based UnumProvident. "Are suitability tests and mechanisms for a 40-year-old purchasing through an employer necessary in the same way as for a 75-year-old purchasing an individual policy through a financial planner?" He believes that making proper adjustments in order to treat different customers in various market segments differently based on their vulnerability and own buying habits may be the answer.

While some consumers are still unclear about long-term-care risks and appropriate coverage needs, insurers believe agents and brokers across the industry are doing a good job of steering them in the right direction. "Suitability concerns lie more with the fact that agents or brokers can't underestimate the need for long-term-care insurance," said MacDonald. While coverage may not be necessary for financially viable individuals, most consumers recognize that they are living longer and the cost of living will go up if they need care because of various expenses, he added.

MacDonald believes the issue around long-term-care insurance is not suitability but rather understandability. If consumers understand coverages, risks and needs, they are able to make better decisions about whether or not policies are appropriate for them. "Because consumers can't understand the product the way they should be able to, agents who are unscrupulous can sometimes take advantage of selling something that doesn't fit the need," However, he believes that only a small number of agents fit that persona. "Instead, most carriers are working hard to ensure that their agents are correctly informing consumers about their needs and appropriate coverage amounts," he added.

Protecting the Fortress

Agent education is key to eliminating long-term-care suitability concerns.

Many insurers believe the answer lies in making sure agents are selling long-term-care insurance as part of an entire financial planning package. "In order for agents to do the most thorough job possible, it's important that they talk about long-term-care planning as part of a complete financial plan," said MassMutual's Delaney.

The first step in the sales process should be for agents to complete a basic needs analysis to determine whether the consumer should buy the coverage and how much is necessary. "If an agent has been trained to professionally represent long-termcare insurance, he has to, by definition, know enough about basic needs to be able to determine how much is too much, how much is too little and how much coverage is just right," said State Life's Hagelman.

Insurers also are training agents to make sure they know the latest product features and regional average costs for long-term-care services. "Companies are working hard with their agents on this because it's a black eye for the company and the industry if inappropriate sales are made," said Guenther Ruch, administrator for Wisconsin's Office of the Commissioner of Insurance.

Agents also are finding it easier to sell this coverage as consumers become more aware of the need for the product through their family situation or through personal research on the Internet.

"In terms of suitability, there were initial concerns about sales being made to people who shouldn't be buying long-term-care insurance because of low assets or limited income, or concerns that appropriate coverage wasn't being marketed to the right individuals," said Loida Abraham, second vice president of retail long-term care for John Hancock. The company has adopted the NAIC's suitability guidelines and incorporated their requirements into all of John Hancock's insurance applications and agent-training materials, helping to eliminate these concerns.

NAIC to the Rescue

Addressing ways that help ensure that sales of long-term-care insurance are suitable was the main reason the NAIC developed its Long-Term Care Insurance Model Act and Regulation. Section 24 of the model regulation provides consumer protection guidelines regarding suitability and nonforfeiture benefits. "Suitability is always a difficult regulatory matter to approach because it's so subjective and personal," said Ruch of Wisconsin's Office of the Commissioner of Insurance. "At the same time, the NAIC believed it was important that there be suitability standards so that insurance companies are required to use their guidelines to evaluate risks coming in the door."

Under the provisions of the model regulation, insurers are required to develop and implement suitability standards, train their agents on the standards and obtain certain pertinent information from applicants. Carriers are also required to examine applicants' ability to pay for the proposed coverage and any other "pertinent financial information related to the purchase of coverage, the applicant's goals or needs with respect to long-term care and the value, benefits and costs of the applicant's existing insurance, if any, when compared to the values, benefits and costs of the recommended purchase or replacement of any existing insurance," according to the act.

In addition, the NAIC model regulation requires that agents complete a personal worksheet with applicants to determine whether a long-term-care policy is appropriate for an individual. The worksheet's needs assessment factors in an individual's income, expenses, savings and investments.

As a way to ensure suitable sales and purchases, insurers and consumers must determine whether applicants are able to afford a policy, even if their income drops or becomes fixed. In addition, there must be a determination as to whether the applicant will be able to afford the policy if premiums increase and whether the benefits included in a policy are appropriate for the individual.

This year, the NAIC's senior issues task force will re-examine the long-term-care model act and regulation and accept public comment on ways to enhance its suitability guidelines, as well as other aspects of the current model.

Long-Term-Care Use: How the Benefits Were Spent by Those Receiving
Services

In the past 15 years, the number of people using assisted-living
facilities has grown dramatically--from about 150,000 residents in 1985
to 1.2 million in 2000. Over the same period, use of home health care
has more than doubled.

                           1985   1991   1995   2000

Home Health Care            800  1,284  1,284  2,200
Assisted-Living Facility    150    303    690  1,200
Nursing Home              1,015  1,427  1,385  1,050

Source: The American Council of Life Insurers, Milliman USA

Note: Table made from bar graph

LTC Insurance Purchases In the Individual Market By Age of Buyer

More Americans are buying long-term-care insurance before age 65.


Younger than 65  33%
Ages 65 to 74    51%
75 and older     16%

Source: The American Council of Life Insurers

Note: Table made from pie chart