Designing a low cost benefit

We are constantly faced with trade-offs between available resources and quality results. Benefits for long-term care insurance (LTCI) are no different. In establishing a long-term care (LTC) benefit program, an employer is faced with a dilemma of providing a valuable benefit to its employees while being constrained by the limited resources at-hand. However, the True Group approach to LTCI offers reasonable alternatives for lowering costs that should be considered.

What is a high cost LTC product?

To understand what is less expensive, let’s define what would be considered as a (very) high cost LTC benefit. Such benefit would typically be offered to all employees and their spouses (with low level of underwriting). This product would offer full benefit to all policyholders at any point in time, with the employer fully funding the benefit at 100% contribution rate over working lifetime of an employee (for instance, to age 65). The product would cover a wide range of services, such as Nursing Home, 100% of Home Health Services, Assisted Living Facility, Respite, Equipment, and include compound inflation protection, low elimination period, high maximum benefit period/amount and daily maximum amount as well as no waiting or vesting periods. It would be a great benefit to have, yet very few would be able to afford this product and therefore participate in the program (including the employer).

Which options in the product design can help lower costs?

Costs could be reduced drastically by incorporating True Group features, along with some re-consideration of design. To begin with, employee contributions could be introduced such that employer-employee contribution split is 50/50%. Secondly, coverage could be limited to employees only with tighter underwriting. Table 1 below demonstrates relative savings of other selected design options.

A reasonable mix of these options can substantially reduce the costs. Note that adding 50% employee contribution reduces costs by more than 50%, since some employees will choose not to participate in the plan. One could further reduce the cost by making the employer portion paid up not by age 65 but rather over employees’ entire lifetime. However, this would likely cause more employees to not carry the coverage into retirement. Some of the options listed above such as low maximum benefit periods, Home Health Care Only plans, and no inflation protection would be very undesirable. The absence of inflation protection may even be considered unethical, due to inadequate level of benefits provided by such contract. Hence, employee contribution rate, vesting and waiting periods present very feasible options for reducing costs (70% reduction for 50/50 contributions split, 44% reduction for five years of vesting, and 25% for two years of waiting) without defeating the purpose of the benefit.

Why is true group long-term care so important?

• Many Americans will have no way to pay for long-term care services when they are needed.
• Insurance for long-term care will not become widespread if only available on an individual basis, which means that the change will need to come first from employers.
• Group coverage needs to include employer contributions to make it affordable to employees and vesting to make it affordable to employers.