CALIFORNIA 8 HR LONG-TERM CARE - Success CEHow to gain Maximum Knowledge from this course! In order to enhance the learning and knowledge process, this course incorporates several

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88 HHOOUURR IINNIITTIIAALL TTRRAAIINNIINNGG CCOOUURRSSEE COPYRIGHT © 2011 SUCCESS CONTINUING EDUCATION, INC. 2 Corporate Plaza Drive, Suite 100 Newport Beach, CA 92660 (949) 706-9425 (A member of the Success CE family of Companies.)

© Copyright 2011 Success Continuing Education, Inc. All Rights Reserved. No part of this publication may be used or reproduced in any form or by any means, transmitted in any form or by any means, electronic or mechanical, for any purpose, without the express written permission of Success Continuing Education, Inc. This publication is designed to provide general information on the topic presented. It is sold with the understanding that the publisher is not engaged in rendering any legal or professional services. Although professionals prepared this information, it should not be used as a substitute for professional services. If legal or other professional advice is required, the services of a professional should be sought.

How to gain Maximum Knowledge from this course! In order to enhance the learning and knowledge process, this course incorporates several adult learning strategies designed to increase comprehension and retention of the material. Since it may have been several years since you were involved in a formal learning process, we have included a brief description of the learning concepts employed by this course. The format of this text includes the traditional headings and subheadings as well as highlighting and text borders to bring attention to critical concepts and facts. 1. Highlighting: As you study the text, pay particular attention to areas of text that are highlighted in Yellow. Understanding the concepts and facts contained within the yellow highlighted area are critical to successful completion of the final examination. Text Borders: In order to reinforce certain material in the text, this material will be set apart through the use of text borders such as the one surrounding this paragraph. When you encounter text surrounded by a text border pay particular attention to the point being made. Material within the text border will be reinforced later in the course through the use of review questions. 2. Case Studies: Some of the more variable concepts will be illustrated using case studies. These case studies are designed to reinforce the concept being discussed and it is recommended that you take the necessary time to digest the points made within the case studies. 3. For Insurance Licensees in Non-Monitored States, our exclusive web-based search feature allows quick retrieval of important data for maximizing the learning process. Simply execute Ctrl +F and enter keyword(s) or key phrase(s) to locate those items electronically in the course material. Understanding all of the material in this text is necessary to achieve the overall learning objectives. This material has been incorporated to Success Continuing Education copyrighted courses to increase exposure to portions of the text that are fundamental to the learning process.

TTAABBLLEE OOFF CCOONNTTEENNTTSS CHAPTER 1 ............................................................................................................ 1

CALIFORNIA LONG-TERM CARE ............................................................................ 1 INTRODUCTION AND TOPIC OBJECTIVES.......................................................... 1

COURSE LEARNING OBJECTIVES.............................................................................. 1 COURSE FORMAT ..................................................................................................... 1

WHAT IS LONG-TERM CARE?................................................................................ 2 DEFINITION OF LONG-TERM CARE........................................................................... 2 CLINICAL DEFINITION OF LONG-TERM CARE .......................................................... 2 USING COVERED SERVICES TO DEFINE LONG-TERM CARE ...................................... 2 CALIFORNIA INSURANCE CODE DEFINITION OF LONG-TERM CARE INSURANCE...... 2 ACTIVITIES OF DAILY LIVING TO DEFINE THE NEED FOR LTC SERVICES ................ 3 EVOLUTIONARY PROCESS OF CHRONIC CONDITIONS............................................... 3 THE LONG-TERM CARE CONTINUUM....................................................................... 3 THE RISKS OF NEEDING LONG-TERM CARE SERVICES............................................. 4 LTC SERVICES AND FACILITIES THAT PROVIDE CARE ............................................ 4 AVAILABLE LTC SERVICES ..................................................................................... 4 FORMAL CARE SETTINGS FOR LONG-TERM CARE AVAILABLE IN CALIFORNIA ....... 4 ADULT DAY CARE SERVICES................................................................................... 6 HOW TO LOCATE FACILITIES AND SERVICES IN CALIFORNIA................................... 6 HOW SERVICES ARE PROVIDED AND PAID FOR ........................................................ 6 ALTERNATIVE LIVING SETTINGS/ARRANGEMENTS.................................................. 7 CHANGES OR IMPROVEMENTS TO LONG-TERM CARE SERVICES AND FACILITIES..... 8 REQUIRED NOTICE ................................................................................................... 9 HOW TO MAKE NEW COVERAGE AVAILABLE.......................................................... 9 REQUIRED SERVICES IF HOME OR COMMUNITY BASED BENEFITS ARE OFFERED..... 9 REQUIRED SERVICES DEFINED................................................................................. 9 PROHIBITED LIMITATIONS OF HOME CARE BENEFITS ............................................ 10 EQUIVALENCY OF BENEFIT AMOUNTS: INSTITUTIONAL CARE AND HOME CARE... 11 EQUIVALENCY OF BENEFIT DURATION: INSTITUTIONAL CARE AND HOME CARE .. 11 CALIFORNIA POLICY REQUIREMENTS TO COVER ASSISTED LIVING....................... 11 REQUIRE COVERAGE OF CARE IN A RESIDENTIAL CARE FACILITY ........................ 11 CALIFORNIA DEFINITION OF RESIDENTIAL CARE FACILITY ................................... 11 EQUIVALENCY OF BENEFITS FOR RESIDENTIAL CARE FACILITIES.......................... 12 REQUIRED COVERED EXPENSES IN A RESIDENTIAL CARE FACILITY ...................... 12 ELIGIBILITY FOR CARE IN A RESIDENTIAL CARE FACILITY NQ POLICIES .............. 12

HOW LONG-TERM CARE IS FINANCED TODAY.............................................. 12 MEDICARE BENEFITS ............................................................................................. 13 MEDICARE SUPPLEMENTAL INSURANCE ................................................................ 13 HOME EQUITY CONVERSION MORTGAGE .............................................................. 13 REVERSE ANNUITY MORTGAGE............................................................................. 14

COMMERCIAL REVERSE MORTGAGES.................................................................... 14 ACCELERATED DEATH BENEFITS........................................................................... 14 VIATICAL SETTLEMENTS OR LIFE SETTLEMENTS................................................... 15 SAVINGS AND PERSONAL RESOURCES ................................................................... 15 INSURANCE PRODUCTS THAT CONTAIN LONG-TERM CARE BENEFIT OPTIONS...... 15 STAND-ALONE LONG-TERM CARE BENEFITS ........................................................ 15 ANNUITIES WITH LTC RIDERS .............................................................................. 15 LIFE INSURANCE WITH A LONG-TERM CARE BENEFIT .......................................... 16 MEDI-CAL TO PAY LONG-TERM CARE COSTS ....................................................... 16 MEDI-CAL ELIGIBILITY.......................................................................................... 17 LIMITS ON HOME EQUITY ...................................................................................... 17 MEDI -CAL ASSET LIMITS...................................................................................... 18 NON-INSTITUTIONALIZED SPOUSE ......................................................................... 18 THE SPEND DOWN PROCESS .................................................................................. 18 UNCOMPENSATED TRANSFERS............................................................................... 18 UNDUE HARDSHIP EXCEPTION............................................................................... 18 MEDI -CAL INCOME LIMITS SINGLE INDIVIDUAL................................................... 19 MEDI -CAL INCOME LIMITS MARRIED COUPLE ..................................................... 19 MEDI -CAL ASSET RECOVERY ............................................................................... 19 MEDI-CAL HOME AND FACILITY CARE.................................................................. 19 MEDI-CAL HOME EQUITY ELIGIBILITY LIMITS...................................................... 20 HOME EQUITY DEFINED......................................................................................... 21 DOLLAR AMOUNT OF HOME EQUITY ELIGIBILITY LIMIT ....................................... 21 EXCEPTIONS TO HOME EQUITY LIMITS .................................................................. 21 ESTABLISHING A MEDI-CAL HARDSHIP EXCEPTION .............................................. 22 CIRCUMSTANCES WARRANTING A DETERMINATION OF UNDUE HARDSHIP ........... 22 APPLICANT PROTECTIONS DURING DETERMINATION PROCESS ............................. 23 IF AN UNDUE HARDSHIP IS FOUND NOT TO EXIST ................................................. 23 WHO CAN REQUEST A HEARING............................................................................ 24 APPLICANT PROTECTION DURING PENDING APPEAL ............................................. 24 MEDI-CAL; INELIGIBILITY DUE TO GIFTING ASSETS ............................................. 24 MEDI-CAL; ELIGIBILITY REQUIREMENTS RELATED TO ANNUITIES........................ 24 STATE BECOMES REMAINDER BENEFICIARY ......................................................... 25 WHICH ANNUITIES ARE CONSIDERED FOR REMAINDER INTEREST ........................ 25 VOIDS RESTRICTIVE ANNUITY PROVISIONS........................................................... 26 ACTIONS WHEN STATE BECOMES REMAINDER BENEFICIARY ............................... 26 MEDI-CAL ELIGIBILITY DISCLOSURE TO APPLICANT............................................. 26 MEDI-CAL DHS FORM 7077.................................................................................. 26 LONG-TERM CARE INSURANCE DOES NOT GUARANTEE AVOIDING MEDI-CAL .... 30 TAKING NO ACTION............................................................................................... 30 REFERRAL TO HICAP............................................................................................ 30

CHAPTER 2 .......................................................................................................... 31

LONG-TERM CARE INSURANCE ............................................................................ 31

CHAPTER LEARNING OBJECTIVES .......................................................................... 31 GROUP COVERAGE................................................................................................. 31 EMPLOYER GROUP................................................................................................. 31 TRADE GROUP ....................................................................................................... 31 ASSOCIATION GROUP............................................................................................. 31 DISCRETIONARY GROUP ........................................................................................ 32 TYPES OF LONG-TERM CARE INSURANCE PRODUCTS ............................................ 32 STAND ALONE LONG-TERM CARE POLICY ............................................................ 32 LIFE INSURANCE WITH LTC BENEFIT INCLUDED .................................................. 32 ACCELERATED BENEFITS FOR CHRONIC ILLNESS................................................... 32 ANNUITIES WITH LTCI RIDERS............................................................................. 32 ACCOUNT BALANCE FIRST LTC APPROACH.......................................................... 33 ACCOUNT BALANCE LAST LTC APPROACH .......................................................... 33 COINSURANCE LTC APPROACH............................................................................. 33 WAIVER OF SURRENDER CHARGE VS. LTC RIDER ................................................ 33 QUALIFIED LONG-TERM CARE BENEFITS .............................................................. 34 POLICY FEATURES ................................................................................................. 34 COVERAGE FOR CARE IN A NURSING HOME........................................................... 34 COVERAGE FOR CARE IN A RESIDENTIAL CARE FACILITY (ASSISTED LIVING) ....... 34 HOUSING COSTS INCLUDED ................................................................................... 34 HOUSING COSTS EXCLUDED .................................................................................. 34 COVERAGE FOR HOME AND COMMUNITY CARE .................................................... 35 CALIFORNIA REQUIRED COVERAGE OF SERVICES AND PROVIDERS ....................... 35 HOME OR COMMUNITY BASED SERVICES DEFINED ............................................... 35 USE OF UNLICENSED PROVIDERS TO PROVIDER PERSONAL CARE ......................... 35 PROHIBITIONS OF CERTAIN LIMITATIONS OR EXCLUSIONS .................................... 36 MINIMUM BENEFITS (50%) FOR HOME OR COMMUNITY BASED CARE .................. 37 EQUIVALENCY OF BENEFIT DURATION .................................................................. 37 ADULT DAY CARE ................................................................................................. 37 BENEFIT TRIGGERS FOR NON- TAX QUALIFIED LTC POLICIES .............................. 37 TWO OF SEVEN ADLS OR COGNITIVE IMPAIRMENT............................................... 37 THE SEVEN ADLS REQUIRED IN NON-TAX QUALIFIED POLICIES .......................... 38 IMPAIRMENT OF COGNITIVE ABILITY..................................................................... 38 TWO OF SIX ADLS OR COGNITIVE IMPAIRMENT FOR TAX QUALIFIED POLICIES.... 38 POSSIBILITY OF OTHER BENEFIT CRITERIA ............................................................ 38 DEFINITION OF ADLS FOR TAX QUALIFIED POLICIES ............................................ 39 ALTERNATE DEFINITIONS MAY BE APPROVED...................................................... 39 DEFINITION OF ADLS FOR NON-TAX QUALIFIED POLICIES .................................. 39 INFLATION PROTECTION ........................................................................................ 40 POOLED BENEFITS ................................................................................................. 41 WAIVER OF PREMIUM ............................................................................................ 41 ELIMINATION PERIOD ............................................................................................ 41 BENEFIT PERIOD .................................................................................................... 41 RESTORATION OF BENEFITS ................................................................................... 42 SURVIVOR BENEFITS.............................................................................................. 42 CONTRACTUAL METHODS OF CLAIMS PAYMENT................................................... 42

REIMBURSEMENT................................................................................................... 42 INDEMNITY ............................................................................................................ 42

CHAPTER 3 .......................................................................................................... 44

FEDERAL LEGISLATION AND LONG-TERM CARE INSURANCE ................. 44 INTRODUCTION ...................................................................................................... 44 LEARNING OBJECTIVES.......................................................................................... 44 TAX TREATMENT OF LONG-TERM CARE EXPENSES............................................... 44 HIPAA DEFINITIONS ............................................................................................. 44 DEFINITION OF CHRONICALLY ILL INDIVIDUAL ..................................................... 44 SUBSTANTIAL ASSISTANCE – HANDS-ON & STAND-BY ........................................ 45 CERTIFICATION OF CHRONICALLY ILL BY LHP ..................................................... 45 90 DAY PERIOD IS NOT A DEDUCTIBLE AND NEED ONLY BE LIKELY..................... 45 ANNUAL RECERTIFICATION AS CHRONICALLY ILL ................................................ 46 SEVERE COGNITIVE IMPAIRMENT .......................................................................... 46 ANNUAL RECERTIFICATION OF SEVERE COGNITIVE IMPAIRMENT ......................... 46 SUBSTANTIAL SUPERVISION OF COGNITIVELY IMPAIRED INDIVIDUAL................... 46 TAX TREATMENT OF LONG-TERM CARE INSURANCE ............................................ 46 TAX REPORTING OF LTCI BENEFITS PAID ............................................................. 47 HEALTH SAVINGS ACCOUNTS TO PAY LTCI PREMIUMS........................................ 47 CONSUMER PROTECTIONS IN QUALIFIED LTC POLICIES........................................ 47 POST CLAIMS UNDERWRITING ............................................................................... 48 PREMIUM DEDUCTIBILITY FOR BUSINESS ENTITIES ............................................... 49 OWNERS OF CLOSELY HELD C CORPORATIONS ..................................................... 49 SECTION 125 CAFETERIA PLANS............................................................................ 49 FINAL TREASURY REGULATIONS SECTION 7702B.................................................. 49 TAX TREATMENT OF PRE-1997 LTC POLICIES ...................................................... 50 MATERIAL CHANGE DEFINED................................................................................ 50 TAX TREATMENT OF ACCELERATED BENEFITS...................................................... 51 THE PATIENT PROTECTION AND AFFORDABLE CARE ACT ..................................... 52

CHAPTER 4 .......................................................................................................... 54

CALIFORNIA STATUTORY POLICY PROVISIONS, REQUIREMENTS AND TERMINOLOGY ..................................................................................................... 54

LEARNING OBJECTIVES FOR THIS CHAPTER........................................................... 54 WHAT CALIFORNIA DID TO IMPLEMENT HIPAA ................................................... 54 CALIFORNIA TAX-QUALIFIED VERSUS NON-TAX-QUALIFIED ............................... 55 DISCLOSURE TO CONSUMER OF DIFFERENCES IN QUALIFIED AND NONQUALIFIED 55 BENEFIT PAYMENTS QUALIFIED VERSUS NON-QUALIFIED.................................... 56 IMPORTANT TERMS RELATED TO BENEFIT TRIGGERS ............................................ 56 IMPAIRMENT DEFINED ........................................................................................... 56 COGNITIVE IMPAIRMENT DEFINED......................................................................... 56

DIFFERENCE IN ADLS…NUMBER AND DEFINITION............................................... 56 DIFFERENCES IN BENEFIT TRIGGERS...................................................................... 56 CALIFORNIA ADLS REQUIRED IN NON-TAX QUALIFIED POLICIES ........................ 56 CALIFORNIA NON-QUALIFIED THRESHOLD FOR HOME CARE BENEFITS ................ 57 CALIFORNIA DEFINITION OF ADLS FOR NON-TAX QUALIFIED POLICIES.............. 57 CALIFORNIA ADLS REQUIRED IN TAX QUALIFIED POLICIES ................................. 58 CALIFORNIA QUALIFIED THRESHOLD FOR HOME CARE BENEFITS......................... 58 DEFINITION OF ADLS FOR TAX QUALIFIED POLICIES ............................................ 59 CALIFORNIA DEFINITION OF LICENSED HEALTH CARE PRACTITIONER (LHP) ....... 59 LHP MUST BE INDEPENDENT FROM INSURER ........................................................ 59 REQUIREMENT FOR ASSESSMENT AND WRITTEN PLAN OF CARE ........................... 60 INSURER MAY HAVE CONDITION PRECEDENT TO BENEFIT PAYMENT ................... 60 EXCHANGE FROM NON-TAX QUALIFIED TO TAX QUALIFIED ................................ 60 INSURER RESPONSIBILITIES AND PROHIBITIONS..................................................... 60 DISCLOSURE OF TAX STATUS................................................................................. 60 POLICY TERMS....................................................................................................... 61 SHORTENED BENEFIT PERIOD ................................................................................ 61 PROTECTION AGAINST UNINTENTIONAL LAPSE..................................................... 62 30 DAY NOTICE OF IMPENDING LAPSE................................................................... 62 FIVE MONTH REINSTATEMENT .............................................................................. 62 PROHIBITION AGAINST POST-CLAIMS UNDERWRITING.......................................... 63 DOCUMENT CHECKLIST REQUIRED WITH APPLICATION........................................ 63 COPY OF COMPLETED APPLICATION MUST BE DELIVERED WITH POLICY ............. 64 CALIFORNIA LTC POLICY CANNOT REQUIRE PRIOR HOSPITALIZATION ................ 64 CALIFORNIA REQUIRED CONVERSION OR CONTINUATION OF GROUP COVERAGE . 64 CONTINUATION OF COVERAGE .............................................................................. 65 CONVERSION COVERAGE ....................................................................................... 65 OUTLINE OF COVERAGE REQUIRED ....................................................................... 65 WHEN THE OUTLINE OF COVERAGE MUST BE DELIVERED .................................... 65 DELIVERY OF HICAP NOTICE ............................................................................... 66 REQUIRED DELIVERY OF SHOPPER’S GUIDE .......................................................... 66 OTHER REQUIRED CONSUMER PROTECTIONS......................................................... 66 AVAILABILITY OF CONSUMER RATE GUIDE........................................................... 66 30-DAY FREE LOOK PERIOD.................................................................................. 67 COVERAGE OF RESIDENTIAL CARE FACILITY REQUIRED ....................................... 67 MINIMUM BENEFIT AMOUNT FOR RFCE ............................................................... 67 RCFE BENEFIT ELIGIBILITY .................................................................................. 68 FLEXIBLE BENEFIT REQUIRED ............................................................................... 68

KEEPING THE LTC BENEFIT CURRENT WITH RISING COSTS...................... 68 OFFER OF INFLATION PROTECTION REQUIRED ....................................................... 68 POLICIES NOT COVERED BY REQUIREMENT TO OFFER INFLATION PROTECTION.... 69 WHEN OFFERED TO A GROUP................................................................................. 69 OTHER REQUIREMENTS OF THE INFLATION PROTECTION BENEFIT ........................ 69 CLIENTS ON FIXED INCOMES.................................................................................. 70 IF CONSUMER REJECTS INFLATION OFFER ............................................................. 70 PAST INCREASES IN CALIFORNIA LTC COSTS........................................................ 70

CURRENT NURSING HOME COSTS IN CALIFORNIA ................................................. 71 HOW LIFE EXPECTANCY IMPACTS THE NEED FOR INFLATION PROTECTION........... 71 FUTURE NURSING HOME COSTS IN CALIFORNIA.................................................... 72 THE VALUE OF INFLATION PROTECTION ................................................................ 72 SIMPLE INTEREST INFLATION PROTECTION............................................................ 72 COMPOUND INTEREST INFLATION PROTECTION..................................................... 73 CALIFORNIA REQUIREMENT TO OFFER INFLATION PROTECTION............................ 73 ADDITIONAL REQUIREMENTS FOR INFLATION PROTECTION OFFER ....................... 73 AGENT RESPONSIBILITIES AND PROHIBITIONS ....................................................... 74 DUTY OF HONESTY, GOOD FAITH, AND FAIR DEALING ......................................... 74 AGENT TRAINING REQUIREMENTS......................................................................... 74 STATE TO STATE RECIPROCITY OF TRAINING......................................................... 75 REQUIRED TRAINING TO SELL CALIFORNIA PARTNERSHIP LTC POLICIES ............. 75 SUITABILITY REQUIREMENTS FOR THE SALE OF LTC POLICIES ............................. 75 USE OF PERSONAL WORKSHEET ............................................................................ 75 RATE INFORMATION ON THE PERSONAL WORKSHEET ........................................... 76 REQUIREMENT FOR AGENT TO RETAIN RECORDS FOR FIVE YEARS ....................... 76 REPLACEMENT OF LONG-TERM CARE POLICIES..................................................... 77 REPLACEMENT DEFINED ........................................................................................ 77 POLICY ISSUE DATE............................................................................................... 78 REPLACEMENT QUESTIONS ON POLICY APPLICATION............................................ 78 REQUIRED NOTICE REGARDING REPLACEMENT..................................................... 78 REQUIRED NOTICE REGARDING REPLACEMENT (DIRECT RESPONSE).................... 78 REPLACEMENT OF GROUP LTC COVERAGE ........................................................... 79 LIMITATIONS OF COMMISSIONS ON REPLACEMENT SALES..................................... 79 NO NEW PREEXISTING CONDITION EXCLUSIONS ON REPLACEMENT POLICIES....... 80 DEFINITION OF PREEXISTING CONDITION............................................................... 80 REQUIRED FILING OF COMMISSION STRUCTURE .................................................... 80 REQUIRED PREMIUM CREDITS FOR REPLACEMENT POLICIES................................. 80 PREMIUM CREDIT EXAMPLE .................................................................................. 81 REQUIRED REPORTING OF REPLACEMENTS AND LAPSES ....................................... 81

CALIFORNIA LONG-TERM CARE PRODUCT REQUIREMENTS..................... 82 REQUIRED DEFINITION OF LIFETIME MAXIMUM BENEFIT...................................... 82 MINIMUM STANDARDS FOR HOME CARE............................................................... 82 RESTRICTION ON LIMITATIONS AND EXCLUSIONS IN HOME CARE BENEFITS......... 83 REQUIRED COVERAGE: ANCILLARY SUPPLIES & SERVICES IN NURSING BENEFIT . 84 REQUIRED COVERAGE OF RESIDENTIAL CARE FACILITY (ASSISTED LIVING) ........ 84 BENEFITS MAY NOT BE REDUCED DUE TO OUT OF POCKET EXPENDITURES ......... 85 PROHIBITION OF “USUAL AND CUSTOMARY” BENEFIT PAYMENT STANDARDS..... 85 CALIFORNIA COMMISSIONER MAY WAIVE CERTAIN REQUIREMENTS ................... 85

CHAPTER 5 .......................................................................................................... 86

STATUTORY RATE STABILIZATION REQUIREMENTS................................... 86 CHAPTER LEARNING OBJECTIVES .......................................................................... 86

CALIFORNIA CONSUMER RATE GUIDE ................................................................... 86 INFORMATION COLLECTED TO PRODUCE RATE HISTORY ...................................... 87 INFORMATION COLLECTED FOR POLICY COMPARISONS......................................... 87 HOW TO GET THE CONSUMER RATE GUIDE ........................................................... 87 THE IMPORTANCE OF RATE STABILITY .................................................................. 88 THE RATE-MAKING PROCESS IN CALIFORNIA ....................................................... 88 REQUIRED SUPPORTING MATERIAL FOR RATE FILINGS ......................................... 89 FILING A PREMIUM RATE INCREASE ...................................................................... 90 REQUIRED FOLLOW-UP REPORTING AFTER A RATE INCREASE IS APPROVED......... 91 LONG-TERM CARE RATE AND HISTORY GUIDE ONLINE......................................... 91 NON-FORFEITURE BENEFIT.................................................................................... 92 REQUIRED OFFER OF NON-FORFEITURE BENEFIT .................................................. 92 CONTINGENT NON-FORFEITURE BENEFIT .............................................................. 93 CONTINGENT NON-FORFEITURE BENEFIT EXAMPLE.............................................. 94 CALIFORNIA GUARANTEE FUND ............................................................................ 94 LTC POLICIES MUST COMPLY WITH CHAPTER 2.6 OF THE CIC .............................. 95 CONTRASTING DIFFERENT LTC SERVICE CARE SETTINGS .................................... 95 DEFINITION OF HOME OR COMMUNITY BASED SERVICES ...................................... 96 PROHIBITED HOME CARE LIMITATIONS AND EXCLUSIONS .................................... 97 BENEFIT AMOUNTS: INSTITUTIONAL CARE VERSUS HOME CARE.......................... 98 REQUIREMENT FOR ASSISTED LIVING BENEFIT...................................................... 98 REQUIRED RESIDENTIAL CARE FACILITY COVERAGE ............................................ 98 DEFINING RESIDENTIAL CARE FACILITY................................................................ 98 COVERED EXPENSES IN A RESIDENTIAL CARE FACILITY........................................ 98 DIFFERENCE BETWEEN ASSISTED LIVING AND SKILLED NURSING CARE.............. 99 ASSISTED LIVING SERVICES IN A RESIDENTIAL CARE FACILITY ............................ 99 NURSING HOMES AND SKILLED NURSING FACILITIES............................................ 99 FACILITIES OFFERING MULTIPLE LEVELS OF CARE ............................................. 100

CHAPTER 6 ........................................................................................................ 101

PARTNERSHIP FOR LONG TERM CARE AND ALTERNATIVES TO LTCI. 101 CALIFORNIA PARTNERSHIP FOR LONG-TERM CARE............................................. 101 HOW LTC PARTNERSHIPS WORK ........................................................................ 101 FEDERAL BARRIERS TO PARTNERSHIP EXPANSION............................................... 102 CHOICE AFFORDED BY A PARTNERSHIP PROGRAM .............................................. 102 EXAMPLE ............................................................................................................. 103 STATE TO STATE RECIPROCITY ............................................................................ 103 PARTNERSHIP GOAL............................................................................................. 103 TYPES OF PARTNERSHIP POLICIES AVAILABLE .................................................... 103 UNIQUE REQUIREMENTS OF PARTNERSHIP LTCI POLICIES.................................. 104 PARTNERSHIP ASSET PROTECTION FEATURE ....................................................... 105 AGENT TRAINING REQUIRED TO SELL PARTNERSHIP POLICIES............................ 105 ALTERNATIVES TO THE PURCHASE OF LONG-TERM CARE INSURANCE................ 105 LONG-TERM CARE POLICIES ARE NOT FOR EVERYONE....................................... 105

INCOME AND SUITABILITY ................................................................................... 106 FAMILY PAID LTCI PREMIUMS............................................................................ 106 AFFORDABILITY OF PARTNERSHIP POLICIES ........................................................ 106 OTHER WAYS TO MANAGE THE COSTS OF LONG-TERM CARE SERVICES ............ 107 ADDITIONAL ALTERNATIVES TO THE PURCHASE OF LTCI................................... 107 INFORMAL CARE BY FAMILY OR FRIENDS............................................................ 107 RETIREMENT HOMES AND CONTINUING CARE COMMUNITIES ............................. 107 LIFE CARE COMMUNITIES.................................................................................... 108 FRATERNAL, RELIGIOUS, UNIONS ORGANIZATIONS PROVIDING LTC SERVICES.. 108 REFERRAL TO HICAP.......................................................................................... 109

CHAPTER 7 ........................................................................................................ 110

CALIFORNIA DEPARTMENT OF INSURANCE AUTHORITY AND ADVERTISING RULES........................................................................................ 110

CHAPTER LEARNING OBJECTIVES ........................................................................ 110 THE INSURANCE COMMISSIONER ......................................................................... 110 ANNUAL REPORT ................................................................................................. 110 PENALTIES ........................................................................................................... 110 OTHER REMEDIES ................................................................................................ 111 NOTICE ................................................................................................................ 111 HEARING PROCEDURE.......................................................................................... 112 LAPSE & REPLACEMENT DATA............................................................................ 112

ADVERTISING GUIDELINES AND MARKETING PRACTICES...................... 112 TOPIC LEARNING OBJECTIVES ............................................................................. 112 ADVERTISEMENTS MUST BE FILED...................................................................... 113 MARKETING GUIDELINES..................................................................................... 113 USE OF SENIOR RELATED DESIGNATIONS ............................................................ 114 WHAT IS A SENIOR DESIGNATION ........................................................................ 114 PENALTIES FOR VIOLATING CODE RELATED TO SENIOR DESIGNATIONS ............. 114 OTHER INSURER REQUIREMENTS......................................................................... 114 ADDITIONAL PROHIBITED UNFAIR TRADE PRACTICES......................................... 115

APPENDIX .......................................................................................................... 117

REQUIRED ATTACHMENTS................................................................................... 117

ATTACHMENT A:TAX TREATMENT OF LONG-TERM CARE INSURANCE & EXPENSES....................................................................................................................... 117

INSTRUCTIONS FOR FORM 1099 LTC ................................................................... 129 INSTRUCTIONS FOR POLICYHOLDER..................................................................... 129 INSTRUCTIONS FOR INSURED................................................................................ 129 IMPLICATIONS FOR CONSUMER ............................................................................ 130 IMPLICATIONS FOR INSURER ................................................................................ 130 COPY OF TAX FORM 1099 LTC FOR 2011............................................................ 131

COPY OF PAGE 1 OF TAX FORM 8853 FOR 2011................................................... 132 COPY OF PAGE 2 OF TAX FORM 8853 FOR 2011................................................... 133 ATTACHMENT B PROVIDER LEGISLATIVE REFERENCE ........................................ 134 ATTACHMENT C:CALIFORNIA PARTNERSHIP FOR LONG-TERM CARE .................. 140 FORMS AND LISTS BEGIN ON FOLLOWING PAGE .................................................. 145 LIST OF CALIFORNIA HICAP OFFICES BY COUNTY AS OF 11/5/2011................... 146 REQUIRED FORMAT FOR OUTLINE OF COVERAGE................................................ 151 GENERAL REQUIREMENTS FOR OUTLINE OF COVERAGE ...................................... 151

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Chapter 1 CALIFORNIA LONG-TERM CARE INTRODUCTION AND TOPIC OBJECTIVES This California long-term care course is designed to satisfy the eight hour initial training requirement to sell long-term care insurance in the state of California. Course content is directed by an outline provided by the California Department of Insurance.

COURSE LEARNING OBJECTIVES

After completing this course, you should:

• Have an understanding of long-term care and how it differs from other levels of care.

• Be familiar with the various long-term care settings and facilities as well as the services typically delivered in each.

• Understand the principal types of long-term care insurance benefits and insurance; • Be able to discuss the differences between tax-qualified and nonqualified long-term

care policies. • Be able to explain to a consumer the required provisions within a California long-

term care policy. • Understand your responsibilities related to determining the suitability of a

recommendation to purchase a long-term care insurance product. • Be familiar with required marketing practices in the sale of long-term care insurance

in California.

COURSE FORMAT

Within the text of this course, sections of and excerpts from California Insurance Code and other publications of California State Agencies will be incorporated for clarity. Whenever such information is included it will always be in italics and clearly labeled as so the reader is aware of the source.

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WHAT IS LONG-TERM CARE?

DEFINITION OF LONG-TERM CARE

The term Long-term Care is used to describe the care needed when one is unable to care for themselves because of a chronic illness or disability. The immediately preceding sentence does not preclude care that is received for a period of time after a major medical event involving hospitalization but prior hospitalization is not a condition precedent in the definition of long-term care. A term that is often associated with long-term care is “chronically ill”. Section 7702B of The Health Insurance Portability and Accountability Act of 1996 defines a chronically ill individual as someone unable to perform at least two activities of daily living for a period of at least 90 days and/or someone who requires “substantial supervision” to protect themselves from threats to health and safety due to severe cognitive impairment. The types of services provided under the heading of long-term care range from assistance with daily activities of living, such as bathing, dressing, toileting, to transferring to a skilled nursing care in a nursing home. Long-term Care is often be provided by family members and/or friends, home care agencies, adult day care programs, nursing homes, and residential and retirement facilities.

CLINICAL DEFINITION OF LONG-TERM CARE

A clinical definition of long-term care is “the provision of medical, social, and personal care services on a recurring or continuing basis to persons with chronic physical or mental disorders. The care may be provided in environments ranging from institutions to private homes. Long-term care services usually include symptomatic treatment, maintenance, and rehabilitation for patients of all age groups.” When people generally think of long-term care, they think of individuals advanced in age. However, long-term care services are utilized by individuals of all ages. The focus of this course will be limited to long-term care as it relates to the elderly population segment.

USING COVERED SERVICES TO DEFINE LONG-TERM CARE

Another way to define Long-term Care (LTC) is to define the insurance products often used to cover the costs of LTC. The following section is pulled from California Insurance Code Section 10231 and defines Long-term Care Insurance. As you read the section below, notice how long-term care insurance policies are defined by the services and care settings covered within the policy.

CALIFORNIA INSURANCE CODE DEFINITION OF LONG-TERM CARE INSURANCE

Excerpt from: California Insurance Code Section 10231

10231.2. "Long-term care insurance" includes any insurance policy, certificate, or rider advertised, marketed, offered, solicited, or designed to provide coverage for

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diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services that are provided in a setting other than an acute care unit of a hospital.

Long-term care insurance includes all products containing any of the following benefit types: coverage for institutional care including care in a nursing home, convalescent facility, extended care facility, custodial care facility, skilled nursing facility, or personal care home; home care coverage including home health care, personal care, homemaker services, hospice, or respite care; or community-based coverage including adult day care, hospice, or respite care. Long-term care insurance includes disability based long-term care policies but does not include insurance designed primarily to provide Medicare supplement or major medical expense coverage.

ACTIVITIES OF DAILY LIVING TO DEFINE THE NEED FOR LTC SERVICES

Within the scope of a long-term care insurance policy the trigger for a policy to pay benefits is for the insured to need assistance with “Activities of Daily Living” (ADL). ADLs will be described in detail throughout this course and the agent will understand how these ADLs determine when a benefit is paid.

EVOLUTIONARY PROCESS OF CHRONIC CONDITIONS

Often a chronic medical condition is the root causal factor for an individual needing long-term care, and many chronic conditions are gradual onset and/or degenerative in nature. For these reasons many chronic conditions can be said to be progressive. As a chronic condition progresses (worsens) the patient will often need additional assistance and services to maintain their health status and perform the activities of daily living. The progression of a chronic illness may also cause a change in care setting for the patient as their degree of needed assistance increases.

THE LONG-TERM CARE CONTINUUM

The evolution of a patient’s disability, impairment, or chronic medical condition often results in an increasing array of vital services as their ability to perform the activities of daily living decreases. This process gives rise to the term long-term care continuum, which represents the changing and expanding needs of the individual. The individual nature of the long-term care continuum can result in a change of venue for care-giving and related costs that are unique to the individual. This long-term care continuum affects not only the individual’s needed services and care settings/patterns, but also affects the caregivers, family members and society as a whole. As the population ages we can expect a continued evolution of care strategies, financing methods, and the regulations that necessarily go with them.

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THE RISKS OF NEEDING LONG-TERM CARE SERVICES

Statistics related to the odds of needing long-term care services abound and vary considerably in the way they are calculated. Many times the statistics only include nursing home confinement in the calculations and do not account for individuals who need long-term care service in a home or community care setting. In a 2007 publication provided by the California Department of Aging, it is reported that 43% of individuals aged 65 or older will experience a stay in a nursing home during their lifetime. According to this study, 9% of the population over the age of 65 would experience a nursing home stay of 5 years or longer, 15% would experience a stay of between 1 to5 years, 8% would experience a stay of 3 to 12 months, and 11% would experience a stay of less than 3 months. The above statistics only account for nursing home stays and do not include many other care settings, including informal care settings provided by family members. The real number of individuals receiving some level of long-term care services is hard to assess because individuals being cared for by family members and not enrolled in a formal care program will likely not be counted.

LTC SERVICES AND FACILITIES THAT PROVIDE CARE

The area of long-term care services is experiencing considerable growth and change. New strategies for providing various levels and types of long-term care services are evolving. These evolving strategies to provide long-term care services range from formal care settings that require regulatory oversight to informal networks of family caregivers, which are more organic in nature.

AVAILABLE LTC SERVICES

Many individuals in need of LTC services may never need highly-skilled personnel in the LTC environment, but may need years of lower-skill-level care, which can be provided by family members in an informal care setting. The types of individual performing services available in the LTC environment range from highly skilled personnel such as physical therapist to unskilled personnel such as personal care assistants.

FORMAL CARE SETTINGS FOR LONG-TERM CARE AVAILABLE IN CALIFORNIA

Below is a brief summary of the formal care settings in California where long-term care services are performed.

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Skilled Nursing Facilities (SNFs)/Nursing Homes: Provide skilled and therapeutic nursing care by licensed nurses (RNs and LVN /LPNs) on a continuous basis for an extended period of time. Intermediate Care Facilities (ICFs/DD): Serving only the developmentally disabled, ICFs provide less intensive nursing care than skilled nursing, and also provide dietary, pharmaceutical, and personal care as well as social and activity services. People entering an ICF may need occasional, but not continuous, nursing care. Residential Care Facilities for the Elderly (RCFE): Also called community care, assisted living, board and care, or independent living facilities. These facilities help people who do not need skilled nursing and are able to live independently with limited assistance. Residential Care Facilities for the Elderly are licensed by the California Department of Social Services Division of Community Care Licensing Home- and Community-Based Services (HCBS): Innovative long-term care programs designed by states to help people with disabilities receive care at home or in their communities so they do not have to rely on institutional care. This overall term refers to home health care, personal care or home care, and 1915 (c) waivers. Home Health Care: Individuals who need skilled nursing and other professional services may receive home healthcare from trained workers who visit the home to help with care needs. To be eligible for home health services, an individual must have a doctor’s orders for either skilled nursing care or therapy services (such as physical, occupational, or speech therapy). The services are provided by home health agencies licensed by the State of California. Hospice: An approach to caring for terminally ill clients that stresses palliative care (relief of pain and uncomfortable symptoms). The goal of hospice care is to minimize pain and suffering, not to cure illness. Hospice clients are cared for by a team of professionals and volunteers who specialize in different types of care. Hospice programs provide care in a variety of settings including: the client’s home, skilled nursing facilities, special units in hospitals, or stand-alone hospice facilities. Personal Care Services/Home Care: Used by individuals who require assistance with the activities of everyday living such as dressing, eating, or bathing. Services do not include skilled nursing care and providers do not need to be certified as home health caregivers. Continuing Care Retirement Communities (CCRC): Continuing Care Retirement Communities combine multiple levels of care such as independent living, assisted living and nursing home care in a single facility/setting. Residents of Continuing Care Retirement Communities pay a large one-time entry fee plus a monthly maintenance fee in exchange for lifetime housing and access to these multiple levels of long-term care services. Residents’ monthly maintenance fees change as they move through the different levels of care within a CCRC. Moving into a CCRC requires signing a legally binding

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contract. . CCRCs are licensed by the Departments of Social Services and/or Health Services.

ADULT DAY CARE SERVICES

For many individuals in need of long-term care services, adult day programs fit nicely into their care regime. This is very useful for a care situation where a child with a career is caring for a parent who needs supervision during the day. Adult day programs can also deliver planned therapy or learning activities, as well as better nutrition. Below is a listing of the basic forms of adult community based day care programs. Adult Day Programs: formerly known as Adult Day Care, these community-based programs provide individualized day care in a protective setting to persons 18 years of age or older who need personal care services, supervision, or assistance with ADLs. Adult Day Health Care: day care that provides medical, rehabilitative, and social services through an individualized plan of care to persons 18 years of age or older with functional limitations caused by physical or mental impairment. Alzheimer’s Day Care Resource Centers: individualized day care for people with moderate to late stage Alzheimer’s disease or related dementias.

HOW TO LOCATE FACILITIES AND SERVICES IN CALIFORNIA

To locate facilities that provide long-term care services, one can visit the California Department of Aging website or call 1 800 510 2020 to get the phone number of the local Area Agency on Aging (AAA) at the county level. The local Area Agency on Aging can also provide detailed information on senior health related services in the area.

HOW SERVICES ARE PROVIDED AND PAID FOR

The cost for long-term care services can be high and, for many, unaffordable. According to the publication “Taking Care of Tomorrow, A Consumer’s Guide to Long-Term Care” provided by the California Department of Aging:

• Nursing home costs in California average $250 per day in 2011. • Assisted living care can cost an average of $88.48 or more a day, depending on their

size, location, and amenities. • A live-in companion or homemaker can cost $150 or more a day, depending on

where you live. The cost is much higher if you need someone with medical training.

• Home caregivers provided through an agency can cost an average of $25.32 an hour or more.

• A visit in your home by a registered nurse can cost $100 a visit or more.

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• A home visit by a medical social worker can cost $110 a visit or more. • Dementia Day Care can cost $25 to $65 a day or more depending on where you live.

If an individual needs long-term care services and cannot afford to pay the costs, they may be eligible to have Medi-Cal pay part of the costs.

ALTERNATIVE LIVING SETTINGS/ARRANGEMENTS

There are many alternate living arrangements for an individual in need of long-term care services. The degree and frequency of assistance needed and financial resources are often determining factors in which living arrangement or care setting is most appropriate for a particular individual. Following is a brief summary of some of the most common alternate living arrangements utilized. Note some of these care settings are formalized and licensed/regulated by California and some are less formal and thus not regulated or licensed. Retirement Homes Living Arrangement Congregate Housing Congregate housing is a term for housing arrangements with shared common space that is specially designed for older residents. Residents live independently in their own unit and housekeeping, meals, laundry, transportation, and other non-medical amenities are included in their monthly rental. This type of housing is often provided in retirement communities and through other senior housing arrangements. Life Care Communities Some Continuing Care Communities are licensed as a Life Care Community. In order to be licensed as a Life Care Community in California the facility must provide the following:

• Guaranteed health care coverage for life - no exceptions. • A guarantee that if the resident's resources were exhausted that they could not lose

their residence or their benefits (i.e. they had to be financially subsidized by the retirement community).

• The retirement community had to have a nursing facility within the community itself.

• The residence (apartment) that they occupied when they entered the community could not be taken from the resident for any reason.

Life Care Communities share many common characteristics with the traditional Continuing Care Community and provide the above additional guarantees. Family Care There are no accurate counts of the number of individuals receiving family-provided care in California. If part of the family care arrangement involves adult day services or

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occasional respite care, their numbers will be included as part of the overall picture. However, many elderly individuals in need of assistance simply move in with an adult child and receive care from the family members. The living arrangements and care settings vary widely in a family care setting. Fraternal, Religious, and Union Organizations Some faith-based, fraternal organizations or unions have special funds to assist their members who need help with long-term care. For example, some of these groups sponsor homes that provide social, personal, and medical services for elderly members of their faith, fraternal organization, or union. Some offer free services, others charge a fee based on income. Some of these groups may sponsor a long-term care insurance program for its members. If you belong to one of these groups or a similar group, ask about any type of long-term care services or benefits that might be available. Home Care and Providers of Home and Community Care. Home Health Care: As the name implies, home care usually occurs in the home of the patient (or possibly in the home of a family member of the patient). Home Care services can also occur in an assisted living facility that the patient has chosen to live in. Home care services can include:

• Personal Care: assistance in your residence with any activity of daily living (bathing, dressing, continence, toileting, transferring, eating, ambulating) as well as using the telephone, managing medication, shopping for essentials, preparing meals, laundry, and light housekeeping.

• Homemaker Services: assistance with chores or activities that are necessary for

you to be able to remain in your residence.

• Respite Care: short-term care in a nursing home, in your home, or in a community program. This “respite” is intended to relieve the primary caregiver in your home.

• Hospice Services: services in your residence that provide physical, emotional,

social, and spiritual support for you, your caregiver, and your family when a terminal illness has been diagnosed.

CHANGES OR IMPROVEMENTS TO LONG-TERM CARE SERVICES AND FACILITIES

To protect consumers from being left behind as new levels of long-term care services become available, most states, including California, require insurers to make the benefits associated with levels of care covered by newer LTC policies available to existing policyholders, even if these benefits are issued after the consumer purchases their policy. There are a variety of mechanisms employed to make this happen.

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REQUIRED NOTICE Most states require that a notice be sent to all existing policy holders within 12 months after the insurer begins to offer the new coverage. HOW TO MAKE NEW COVERAGE AVAILABLE Most states require that the new coverage be offered as a rider, endorsement, or by exchanging the existing policy for the new policy. Items typically addressed include original issue age for premiums in the new policy, and underwriting is allowed on increased benefits. Below is information from the California Insurance Code related to minimum standards for home healthcare or community-based benefits. The CIC section below begins by defining which services must be included in a policy offering benefits for Home or Community-Based services and then defines each of the six listed services in great detail. G. Changes or Improvements to Long-term Care services and Facilities, Sections

10232.9 and 10232.92 of the CIC CIC 10232.9. REQUIRED SERVICES IF HOME OR COMMUNITY BASED BENEFITS ARE OFFERED (Every long-term care policy or certificate that provides benefits for home care or community-based services, must provide at least the following coverages:

(1) Home health care. (2) Adult day care. (3) Personal care. (4) Homemaker services. (5) Hospice services. (6) Respite care.

REQUIRED SERVICES DEFINED For purposes of this section, policy definitions of these benefits may be no more restrictive than the following:

(1) "Home health care" is skilled nursing or other professional services in the residence, including, but not limited to, part-time and intermittent skilled nursing services, home health aid services, physical therapy, occupational therapy, or speech therapy and audiology services, and medical social services by a social worker.

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(2) "Adult day care" is medical or nonmedical care on a less than 24-hour basis, provided in a licensed facility outside the residence, for persons in need of personal services, supervision, protection, or assistance in sustaining daily needs, including eating, bathing, dressing, ambulating, transferring, toileting, and taking medications. (3) "Personal care" is assistance with the activities of daily living, including the instrumental activities of daily living, provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. "Instrumental activities of daily living" include using the telephone, managing medications, moving about outside, shopping for essentials, preparing meals, laundry, and light housekeeping. (4) "Homemaker services" is assistance with activities necessary to or consistent with the insured's ability to remain in his or her residence, that is provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. (5) "Hospice services" are outpatient services not paid by Medicare, that are designed to provide palliative care, alleviate the physical, emotional, social, and spiritual discomforts of an individual who is experiencing the last phases of life due to the existence of a terminal disease, and to provide supportive care to the primary caregiver and the family. Care may be provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. (6) "Respite care" is short-term care provided in an institution, in the home, or in a community-based program, that is designed to relieve a primary caregiver in the home. This is a separate benefit with its own conditions for eligibility and maximum benefit levels.

PROHIBITED LIMITATIONS OF HOME CARE BENEFITS (c) Home care benefits must not be limited or excluded by any of the following:

(1) Requiring a need for care in a nursing home if home care services are not provided. (2) Requiring that skilled nursing or therapeutic services be used before or with unskilled services. (3) Requiring the existence of an acute condition. (4) Limiting benefits to services provided by Medicare-certified providers or agencies. (5) Limiting benefits to those provided by licensed or skilled personnel when other providers could provide the service, except where prior certification or licensure is required by state law. (6) Defining an eligible provider in a manner that is more restrictive than that used to

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license that provider by the state where the service is provided. (7) Requiring "medical necessity" or similar standard as a criteria for benefits.

EQUIVALENCY OF BENEFIT AMOUNTS: INSTITUTIONAL CARE AND HOME CARE Every comprehensive long-term care policy or certificate that provides for both institutional care and home care and that sets a daily, weekly, or monthly benefit payment maximum, must pay a maximum benefit payment for home care that is at least 50 percent of the maximum benefit payment for institutional care, and in no event must home care benefits be paid at a rate less than fifty dollars ($50) per day. Insurance products approved for residents in continuing care retirement communities are exempt from this provision. EQUIVALENCY OF BENEFIT DURATION: INSTITUTIONAL CARE AND HOME CARE Every comprehensive long-term care policy or certificate that sets a durational maximum for institutional care, limiting the length of time that benefits may be received during the life of the policy or certificate, must allow a similar durational maximum for home care that is at least one-half of the length of time allowed for institutional care.

CALIFORNIA POLICY REQUIREMENTS TO COVER ASSISTED LIVING

The following section of the California Insurance Code sets the requirements for policies that cover confinement in a nursing facility (Nursing Home) to also cover care in a residential care facility (Assisted Living). This code section also sets a minimum benefit amount for assisted living as a percent of the benefit payable for institutional care. CIC 10232.92. REQUIRE COVERAGE OF CARE IN A RESIDENTIAL CARE FACILITY Every long-term care policy or certificate covering confinement in a nursing facility must also include a provision with the following features: CALIFORNIA DEFINITION OF RESIDENTIAL CARE FACILITY Care in a residential care facility must be covered. "Residential care facility" means a facility licensed as a residential care facility for the elderly or a residential care facility as defined in the Health and Safety Code. Outside California, eligible providers are facilities that meet applicable licensure standards, if any, and are engaged primarily in providing ongoing care and related services sufficient to support needs resulting from impairment in activities of daily living or impairment in cognitive ability and which also provide care and services on a 24-hour basis, have a trained and ready-to-respond employee on duty in the facility at all times to provide care and services, provide three meals a day and accommodate special dietary needs, have agreements to ensure that residents receive the

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medical care services of a physician or nurse in case of emergency, and, have appropriate methods and procedures to provide necessary assistance to residents in the management of prescribed medications.

EQUIVALENCY OF BENEFITS FOR RESIDENTIAL CARE FACILITIES

The benefit amount payable for care in a residential care facility must be no less than 70 percent of the benefit amount payable for institutional confinement.

REQUIRED COVERED EXPENSES IN A RESIDENTIAL CARE FACILITY

All expenses incurred by the insured while confined in a residential care facility, for long-term care services that are necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, needed to assist the insured with the disabling conditions that cause the insured to be a chronically ill individual as authorized by Public Law 104-191 and regulations adopted pursuant thereto, must be covered and payable, up to but not to exceed the maximum daily residential care facility benefit of the policy or certificate. There must be no restriction on who may provide the service or the requirement that services be provided by the residential care facility, as long as the expenses are incurred while the insured is confined in a residential care facility, the reimbursement does not exceed the maximum daily residential care facility benefit of the policy or certificate, and the services do not conflict with federal law or regulation for purposes of qualifying for favorable tax consideration provided by Public Law 104-191.

ELIGIBILITY FOR CARE IN A RESIDENTIAL CARE FACILITY NQ POLICIES

In policies or certificates that are not intended to be federally qualified, the threshold establishing eligibility for care in a residential care facility must be no more restrictive than that for home care benefits, as defined in subdivision (a) of Section 10232.8, and the definitions of impairment in activities of daily living and impairment of cognitive ability must be the same as for home care benefits, as defined in subdivisions (a) and (g) of Section 10232.8. In policies or certificates that are intended to be federally qualified, the threshold establishing eligibility for care in a residential care facility must be no more restrictive than that for home care benefits, as defined in subdivision (b) of Section 10232.8, and the definitions of impairment in activities of daily living and impairment in cognitive ability must be the same as those for home care benefits as defined in subdivisions (b), (c), (d), (e), and (f) of Section 10232.8.

HOW LONG-TERM CARE IS FINANCED TODAY

The costs of long-term care can be a major financial issue for many seniors, and there are many potential sources to use in paying for long-term care services. The following course section will cover most of the sources of payments currently used to pay for long-term care services.

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• Medicare • Medicare Supplemental • Home Equity Conversion • Reverse Annuity Mortgages (a current demonstration project under HUD Life) • Commercial reverse mortgages • Accelerated death benefits and annuities • Viatical Settlements or Life Settlements • Savings • Life insurance and annuities with long-term care • Medi-Cal

MEDICARE BENEFITS

A popular misconception is that Medicare will pay for nursing home costs. This is in part fueled by the fact that Medicaid (Medi-Cal in California) will pay for nursing home costs in many circumstances. Under certain limited conditions, Medicare will pay some nursing home costs for Medicare beneficiaries who require skilled nursing or rehabilitation services. To be covered, the individual must receive the services from a Medicare certified skilled nursing home after a qualifying hospital stay. A qualifying hospital stay is the amount of time spent in a hospital just prior to entering a nursing home; this is at least three days. For purposes of determining these three days the day of admission is counted but the day of discharge is not counted. Medicare will cover up to 100 days of skilled nursing confinement each benefit period. However, after 20 days, beneficiaries must pay a coinsurance ($141.50 per day in 2011). Medicare will only pay for nursing home care preceded by the three-day hospital stay mentioned above. Medicare's eligibility requirements are established at the federal level by the Centers for Medicare and Medicaid Services (CMS). MEDICARE SUPPLEMENTAL INSURANCE Medicare supplement policies are sometimes called Medigap policies because they help pay for gaps in Medicare coverage, such as deductibles and co-insurances. Most Medigap plans will help pay for skilled nursing care, but only when that care is covered by Medicare. HOME EQUITY CONVERSION MORTGAGE The Home Equity Conversion Mortgage (HECM) is offered through HUD (Department of Housing and Urban Development) and the FHA (Federal Housing Authority). In order to qualify for a home equity conversion mortgage one must:

• Be 62 years of age or older

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• Own the property outright or have a small mortgage balance • Occupy the property as their principal residence • Not be delinquent on any federal debt • Participate in a consumer information session given by an approved HECM

counselor

The individual may select from the following five payment plans:

• Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.

• Term - equal monthly payments for a fixed period of months selected. • Line of Credit - unscheduled payments or in installments, at times and in an

amount of your choosing until the line of credit is exhausted. • Modified Tenure - combination of line of credit plus scheduled monthly

payments for as long as you remain in the home. • Modified Term - combination of line of credit plus monthly payments for a fixed

period of months selected by the borrower.

REVERSE ANNUITY MORTGAGE There is currently a demonstration project available through HUD for a reverse annuity mortgage. Details of this program are available directly from HUD (The Department of Housing and Urban Development. COMMERCIAL REVERSE MORTGAGES From an organized non-governmental commerce perspective, there is the reverse mortgage whereby the homeowner will sell their home to a financial institution and receive monthly payments for life. While the home owner is alive no payments are due and upon death of the homeowner the heir can elect to walk away from the home or pay off the mortgage lien. The monthly amount that a reverse mortgage provider will pay a homeowner is reduced by the rental value of the home because the homeowner continues to live in the home or if they are institutionalized they may rent the home. ACCELERATED DEATH BENEFITS Many life insurance policies offer an “Accelerated Death Benefit,” where the insurance company pays the insured a reduced amount of the stated death benefit as a lump sum or in periodic payments before the insured dies. These benefits require a trigger to be paid such as, benefits might be paid if the insured is diagnosed with a terminal illness, or has a major organ transplant, or has been in a nursing home for six months. The amount of the accelerated death benefit is limited to a percent of the life insurance death benefit and usually reduces the death benefit payable to the beneficiary upon death of the insured by the amount of the accelerated death benefit plus administrative fees and interest.

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VIATICAL SETTLEMENTS OR LIFE SETTLEMENTS Both Viatical Settlements and Life Settlements are secondary markets for life insurance policies and can result in the insured receiving a lump sum cash settlement for the sale of their life insurance policy. Both of these transactions involve the insured selling their life insurance policy to a third party for an amount greater than the internal cash values (if any) of the policy. Viatical Settlement A terminally ill insured individual can sell their in force life insurance policy to a Viator (Viatical settlement company). This transaction involves the insured receiving a payment in advance of death (lump sum) in return for selling their life insurance policy. The new policy owner (Viator) has all rights and benefits of the policy and is entitled to the death benefit. Life Settlement In a life settlement the insured does not need to be terminally ill to sell their policy. Since the insured does not have to be terminally ill, the life settlement generally pays a lower amount to the insured that a viatical settlement. SAVINGS AND PERSONAL RESOURCES Many nursing home residents pay nursing home costs out of their own savings. After these savings and other resources are exhausted, many individuals who are confined to a nursing home for an extended time eventually become eligible for Medicaid (Medi-Cal in California). Using savings or accumulated assets to pay for long-term care costs can have tax consequences for the individual who must liquidate assets to pay these costs. INSURANCE PRODUCTS THAT CONTAIN LONG-TERM CARE BENEFIT OPTIONS STAND-ALONE LONG-TERM CARE BENEFITS A stand-alone long-term care policy that is designed specifically to pay for long-term care costs is the predominate insurance approach to insure the potential costs associated with long-term care services. We will cover this type of long-term care financing option in detail in the next chapter. ANNUITIES WITH LTC RIDERS Some annuities offer a long-term care rider. These long-term care riders will occasionally qualify as a “qualified” long-term care rider under the Health Insurance Portability and Accountability Act, but most do not. These LTC riders are designed to help pay the costs associated with long-term care services. Some annuities will provide this benefit if the

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annuitant suffers an illness or injury that requires a home health aide or nursing home confinement. Some annuities will provide this benefit if the annuitant AND/OR their spouse meets the above benefit trigger. The amount of the benefit will usually be a percent or factor of the annuity values at the time of claim. The duration of the benefit will be determined by several factors related to the annuity value.

LIFE INSURANCE WITH A LONG-TERM CARE BENEFIT

Some life insurance policies offer a long-term care benefit (usually as an optional rider) The life insurance products accelerate the life insurance policy's death benefit to cover qualifying long-term care expenses (typically after an Elimination Period of 90 or 100 days). Some of these policies offer the ability to elect an extension of benefits option (for an additional premium) which could extend total long-term care benefits beyond the face amount of the insurance policy. We will address the California regulation of these products in a later section of this course.

MEDI-CAL TO PAY LONG-TERM CARE COSTS

Many individuals believe that Medicare will cover the costs associated with long-term care and this is not the case. Medicaid (Medi-Cal in California) will pay for most of the costs associated with long-term care, but will only do so if the individual is eligible for Medi-Cal coverage. Medi-Cal is a means-based program designed to assist the poor and those financially unable to pay the costs associated with care. The eligibility process requires individuals to spend down most of their available savings and contribute most of their income towards the costs. Medi-Cal will cover the portion of the costs not covered by the individual’s income and assets. Medi-Cal is the California state version of Medicaid, and it includes both Federal and State funds. According to the California Health and Human Services Agency, Medi-Cal pays for approximately 65 percent of all nursing home costs in California and covers many different care settings through a number of different programs. Medi-Cal covers many long-term care services such as:

• Limited in-home medical care • Adult day care • Rehabilitation • Therapy • Protective supervision • Assistance with daily activities (such as bathing and dressing)

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Medi-Cal also covers care in nursing homes, but the care must occur in a Medi-Cal approved nursing home facility. Some nursing homes do not accept Medi-Cal-eligible individuals so relying on Medi-Cal for payment of nursing home costs can limit one’s choice of facilities.

MEDI-CAL ELIGIBILITY

The Medi-Cal eligibility determination process requires a person to meet income and asset (countable resources) tests or requirements.

Like most states, California allows certain assets to be exempted from the asset requirements and therefore not part of “countable” assets. Following is a list of exempt assets for Medi-Cal eligibility determination purposes.

• Personal residence. If a person does not live in the home because he or she is in a nursing home or other facility, the home remains exempt as long as person intends to return home someday. The home also remains exempt if the person’s spouse or dependent relative lives in it.

• Up to $6,000 of income-producing real estate • Real estate of any value used in a business or trade • One motor vehicle • Personal effects and household items • Jewelry—Wedding and engagement rings are entirely exempt; other items of

jewelry with a total value of $100 or less are exempt. • IRAs and other work-related retirement plans • Life insurance policies with a combined face value of $1,500 or less, plus accrued

interest and dividends • Term life insurance • Burial plots and prepaid burial plans

LIMITS ON HOME EQUITY

A person is not eligible for home and facility care benefits under Medi-Cal if his or her equity interest in a principal residence is more than $750,000 (California Welfare and Institutions Code Sec. 14006.15(c)). However, this limit will not apply if any of the following circumstances exist:

• The person’s spouse or child under age 21 lives in the house, and the child or spouse is blind or disabled.

• The person was eligible for Medi-Cal long-term care benefits based on an application filed before January 1, 2006.

• The Department finds that denying the person’s Medi-Cal application would create a hardship for that individual.

Additional information about home equity and Medi-Cal eligibility will be discussed later

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in this chapter.

MEDI -CAL ASSET LIMITS

In addition to the exempt assets listed above, Medi-Cal allows a single individual to keep up to $2,000 in assets. This limit is set at $3,000 for a couple if they both need care covered by Medi-Cal. Assets for eligibility purposes are determined as of the day the individual is admitted to a nursing home.

NON-INSTITUTIONALIZED SPOUSE

A Community Spouse is the spouse of a Medi-Cal covered individual and will only be considered as a community spouse if they do not also need care funded by Medi-Cal. In addition to the exempt assets discussed earlier, a community spouse may keep a certain amount the couple’s community and separate property without adversely affecting their spouse’s Medi-Cal eligibility. This amount is called the community spouse resource allowance (CSRA). In 2011, this allowance is $109,560 and is adjusted for inflation periodically.

THE SPEND DOWN PROCESS

If an individual’s countable assets exceed allowable amounts, they must spend down resources until they are at or below the state poverty level before they are eligible for Medi-Cal.

UNCOMPENSATED TRANSFERS

If an individual attempts to impoverish themselves for Medi-Cal purposes by gifting assets, they face a risk of being ineligible for Medi-Cal for a period of time. If an individual transfers assets for less than fair market value this could be considered an uncompensated transfer. In an uncompensated transfer the amount that the fair market value of the asset transferred exceeds the compensation received treated as a gift. When applying for Medi-Cal the applicant will be asked ask whether they transferred any assets within the 30 month period immediately preceding the date of application. These asset transfers will then be reviewed to determine eligibility. The 30-month period is referred to as the “look back period.” If any of these transfers are considered to be uncompensated transfers, the individual will be ineligible for Medi-Cal for a period of time.

UNDUE HARDSHIP EXCEPTION

California Welfare and Institutions Code Sec. 14015.1 states that An individual will not be ineligible for home and facility care benefits under Medi-Cal for any period if the Department determines that an undue hardship exists. Circumstances that would qualify as an undue hardship will be discussed later in this text.

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MEDI -CAL INCOME LIMITS SINGLE INDIVIDUAL

If a single individual meets the Medi-Cal asset eligibility rules, then they may keep a certain amount of income each month. This monthly amount is called the personal needs allowance and is $35 in 2011. The individual’s remaining income must be paid towards the cost of care that is provided, this is called the share of cost.

MEDI -CAL INCOME LIMITS MARRIED COUPLE

Special income rules apply when a community spouse (as defined earlier) is present. The community spouse may keep all of their income. If the community spouse’s income is below a certain dollar amount, known as the minimum monthly maintenance needs allowance (MMMNA), the spouse in the nursing home may give income to the community spouse to raise their income up to the MMMNA. In 2011, the MMMNA is $2,739 and is subject to periodic adjustments for inflation. AS in the example above for the single individual, the spouse in the nursing home is allowed to keep a $35 monthly personal needs allowance.

MEDI -CAL ASSET RECOVERY

California has a Medi-Cal Recovery Unit that can make a claim against the estate of Medi-Cal recipients who die and were 55 years of age or older when they received Medi-Cal benefits. Medi-Cal can seek reimbursement from the estate of a recipient of Medi-Cal benefits paid on their behalf by filing a lien or claim against the estate. Assets that were considered exempt during the eligibility process when applying for Medi-Cal are not considered exempt for Medi-Cal recovery purposes. The amount that Medi-Cal can recover is limited to the dollar amount of benefits paid for the deceased’s care or the value of the deceased’s estate, whichever is less. Medi-Cal cannot recover from certain assets, such as IRAs, work-related pension funds, or term life insurance policies (unless the policy’s benefits are payable to the estate). As discussed below, California Welfare and Institutions Code Sections 14006.15(a)(2), 14006.41(b), and 14009.6 covers annuities purchased on or after September 1, 2004. These sections state that annuities purchased on or after September 1, 2004, are also subject to recovery by Medi-Cal when the annuitant dies. The state would have been named as a remainder beneficiary during the application process. If a deceased Medi-Cal beneficiary has a surviving spouse, Medi-Cal cannot file a claim against the estate until the spouse dies or sells the property.

MEDI-CAL HOME AND FACILITY CARE

In 2008 California Senate Bill 483 was passed to require that recipients of Medi-Cal benefits for facility or home care disclose any interest they (or their spouse) have in an

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annuity. Under this bill, the state of California would become the remainder beneficiary of the annuity unless the annuity owner prohibits the state from becoming the remainder beneficiary. Medi-Cal will treat the annuity value as an uncompensated transfer (gift) for Medi-Cal eligibility purposes unless an undue hardship can be proven by the annuity owner. A summary of the Senate Bill 483 follows below: SB 483 (Kuehl), Chapter 379, Statutes of 2008: Requires a recipient of Medi-Cal benefits to disclose any interest they or their spouse has in an annuity as a condition of eligibility for medical assistance for home or facility care. The bill would also require the state, as an operation of law, to become a remainder beneficiary of certain annuities, as described, unless the individual notifies the state in writing that he or she prohibits the state from becoming a remainder beneficiary, as provided, and would require the department to inform an individual and his or her spouse of this fact at the time of the individual's application or re-determination of Medi-Cal eligibility. The bill would also require that before any penalties, as provided for in the bill, are imposed that may result in a period of ineligibility for medical assistance for home and facility care, an individual must have the right to demonstrate that a period of ineligibility would be an undue hardship, as defined. It would require the state to provide notice to individuals requesting medical assistance for home and facility care of the undue hardship exception and would require a determination of whether an undue hardship exists to be made before an applicant is denied eligibility for medical assistance for home and facility care. If an individual or his or her spouse notifies the state in writing that he or she prohibits the state from becoming a remainder beneficiary to his or her annuity, the bill would require the annuity to be treated as a transfer of assets for less than fair market value for purposes of determining Medi-Cal eligibility

MEDI-CAL HOME EQUITY ELIGIBILITY LIMITS

Like most states, California places a limit on the amount of home equity an individual may have and still qualify for Medi-Cal assistance with LTC costs. The California Welfare and Institution Code addresses this issue in detail California Welfare and Institution Code Section 14006.15.

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HOME EQUITY DEFINED

Equity Interest is defined as the lesser of the following:

• The assessed value of the principal residence determined under the most recent

tax assessment, less any encumbrances of record.

• The appraised value of the principal residence determined by a qualified real estate appraiser who has been retained by the applicant or beneficiary, less any encumbrances (liens or mortgages) of record.

DOLLAR AMOUNT OF HOME EQUITY ELIGIBILITY LIMIT

An individual is not eligible for medical assistance for home and facility care if his or her equity interest in the principal residence exceeds seven hundred fifty thousand dollars ($750,000). No later than December 31, 2011, and each year thereafter, this amount must be increased based on the percentage increase in the consumer price index for all urban consumers (all items, United States city average), rounded to the nearest one thousand dollars ($1,000).

EXCEPTIONS TO HOME EQUITY LIMITS

The home equity limitations will not apply to an individual if any of the following circumstances exist:

• The spouse of the individual or the individual's child, who is under 21 years of age, or who is blind or who is disabled and is lawfully residing in the individual' s home.

• The individual was determined eligible for medical assistance for home and

facility care based on an application filed before January 1, 2006.

• The department determines that ineligibility for medical assistance for home and facility care would result in demonstrated hardship on the individual.

Any of the following circumstance will qualify as a “demonstrated hardship”:

• The individual was receiving home and facility care prior to January 1, 2006.

• The individual has been determined to be eligible for medical

assistance for home and facility care based on an application filed on or after January 1, 2006, and before the date that regulations adopted pursuant to this section are certified with the Secretary of State.

• The individual purchased and received benefits under a long-term care

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insurance policy certified by the department's California Partnership for Long-Term Care Program.

• The individual's equity interest in the principal residence exceeds the

equity interest limit, but would not exceed the equity interest limit if it had been increased by using the quarterly House Price Index (HPI) for California, published by the Office of Federal Housing Enterprise Oversight (OFHEO).

• The applicant or beneficiary has been denied a home equity loan by at

least three lending institutions, or is ineligible for any one Federal Housing Administration (FHA) approved loan or reverse mortgage.

• The applicant or beneficiary, with good cause, is unable to provide

verification of the equity value.

ESTABLISHING A MEDI-CAL HARDSHIP EXCEPTION

At each application and redetermination for Medi-Cal assistance, there will be a determination if an undue hardship exists before an applicant is subjected to a period of ineligibility. The section of Welfare and Institution Code below describes the criteria for determining if an undue hardship exists. If it is determined that an undue hardship exists, the applicant will not be subjected to a period of ineligibility. Welfare and Institutions Code Section 14015.1. The department (HHS) must consider, at initial application or redetermination, whether an undue hardship exists prior to finding that an applicant or recipient is subject to a period of ineligibility for medical assistance for home and facility care. No person must be subject to a period of ineligibility for medical assistance for home and facility care at the time of the initial application or redetermination if the department determines that an undue hardship exists.

CIRCUMSTANCES WARRANTING A DETERMINATION OF UNDUE HARDSHIP

Any of the following circumstances will qualify as an undue hardship:

The individual has been determined eligible for medical assistance for home and facility care based on an application filed on or after January 1, 2006, and before the date that regulations adopted pursuant or relating to this section have been certified with the Secretary of State. The withholding of medical assistance for home and facility care would cause an endangerment to the life or health of the individual.

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The denial of medical assistance for home and facility care would result in the eviction of the individual from a nursing home. The individual is otherwise eligible for the Medi-Cal program and unable to obtain home and facility care without Medi-Cal. The denial of medical assistance for home and facility care would cause the individual to be unable to remain at home or in the community and would hasten or cause the individual's entry into a medical or long-term care institution. The individual would be deprived of food, clothing, shelter, or other necessities of life.

APPLICANT PROTECTIONS DURING DETERMINATION PROCESS

The department of Health and Human Services must establish regulations, procedures, and forms that ensure all of the following:

The department or county provides a notice of the undue hardship process, at the initial request and the annual redetermination, to any individual who requests medical assistance for home and facility care. The notice must inform the individual that undue hardship must be considered before a request for medical assistance for home and facility care is denied. A timely and simplified process is established to determine whether an undue hardship exists and an exception will be granted. If the issue of undue hardship is considered and found not to apply, the department must provide the individual with a notice of action that states the reasons for the adverse determination. The notice of action must specify how that adverse determination can be appealed. Upon the request of the applicant or beneficiary, or person acting on his or her behalf, undue hardship notices must be provided to the home and facility care administrator in accordance with regulations promulgated by the department.

IF AN UNDUE HARDSHIP IS FOUND NOT TO EXIST

If the department of Health and Human Services does not determine that an undue hardship exists the applicant has the right to appeal and a right to a hearing. During the appeal process the applicant has several important protections described in the Welfare and Institutions Code Section below. Welfare and Institutions Code Section 14015.2.

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WHO CAN REQUEST A HEARING

Any of the following individuals or entities may request a fair hearing on the issue of whether an undue hardship exists in a particular circumstance:

The individual requesting or receiving medical assistance for home and facility care. A personal representative of the individual requesting or receiving medical assistance for home and facility care. The facility where the individual who is requesting or receiving medical assistance for home and facility care is residing, with the consent of that individual or the personal representative of that individual.

APPLICANT PROTECTION DURING PENDING APPEAL

An individual with a pending undue hardship appeal who is subject to a period of ineligibility must continue to receive medical assistance for home and facility care for a maximum of 30 bed-hold days.

MEDI-CAL; INELIGIBILITY DUE TO GIFTING ASSETS

It is important to understand the limitations on how far back the department will look for uncompensated transfers. The section below of the Welfare and Institutions Code clearly states that if assets were transferred prior to the look back period, they will not be considered in determining eligibility. NOTE: California has not implemented the section of the federal law, The Deficit Reduction Act of 2005, related to increasing the look-back period from 30 months to 60 months. As of June of 2011, California still has a look-back period of only 30 months. Welfare and Institution Code Section 14015(c) California presumes that assets transferred by the applicant or beneficiary prior to the look-back period established by the department preceding the date of initial application were not transferred to establish eligibility or reduce the share of cost. These assets must not be considered in determining eligibility.

MEDI-CAL; ELIGIBILITY REQUIREMENTS RELATED TO ANNUITIES

If an applicant for Medi-Cal (or their spouse) owns an annuity, they will be notified at application or redetermination that the state will be named as remainder beneficiary of the annuity. The applicant has the right to prohibit the state from becoming remainder beneficiary, but exercising that right can cause the value of the annuity to be considered an uncompensated transfer for eligibility purposes. This is important for an agent to

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understand because the sale of an annuity will not necessarily shelter funds from Medi-Cal determination. Below are two sections of the California Welfare and Institutions Code to further illuminate this situation. Welfare and Institutions Code Section 14006.41(b) At the time of the individual's application or redetermination, the department must inform the individual and his or her spouse that, by virtue of its provision of medical assistance for home and facility care to the individual, the state will, by operation of law, become a remainder beneficiary of certain annuities (those purchased or subject to certain transactions since February 8, 2006) The section of the California Welfare and Institutions Code below describe which annuities are considered for having the state become remainder beneficiary. This section also describes limitations on which annuities are considered as well as how a current transaction can bring an exempt annuity into consideration. Welfare and Institutions Code Section 14009.6

STATE BECOMES REMAINDER BENEFICIARY

As a result of providing medical assistance for home and facility care to an individual, the state must, by operation of law, become a remainder beneficiary of annuities purchased in whole or in part by the individual or his or her spouse in which the individual or his or her spouse is an annuitant unless the individual or his or her spouse notifies the department in writing that he or she prohibits the state from acquiring a remainder interest in his or her annuity. If the annuity owner notifies the department in writing and prohibits the state from becoming acquiring a remainder interest the purchase of the annuity must be treated as the transfer of an asset for less than fair market value (a gift).

WHICH ANNUITIES ARE CONSIDERED FOR REMAINDER INTEREST

If an annuity meets any of the following conditions it can be considered for a remainder interest by the state.

If the annuity is purchased (in whole or part) on or after February 8, 2006.

If the annuity was purchased before February 8, 2006, but was the subject of a transaction that occurred on or after February 8, 2006.

The term "Transaction" includes, but is not limited to, any action taken by the individual or his or her spouse that changes the course of payments to be made by the annuity or the treatment of the income or principal of the annuity. The following are NOT considered as a transaction when determining if an annuity purchased prior to February 8, 2006 is subject to the state having a remainder

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interest. Routine changes and automatic events that do not require any action or decision on or after February 8, 2006. Changes that occur based on the terms of the annuity that existed prior to February 8, 2006, and that do not require a decision, election, or action to take effect. Changes that are beyond the control of the individual or the individual's spouse.

VOIDS RESTRICTIVE ANNUITY PROVISIONS

Any provision in any annuity that has the effect of restricting the right of the state to become a remainder beneficiary is void. If an individual or his or her spouse notifies the department in writing that he or she prohibits the state from acquiring a remainder interest in his or her annuity, the purchase of the annuity must be treated as the transfer of an asset for less than fair market value (which means the transfer is considered an uncompensated transfer of “gift” and can affect eligibility).

ACTIONS WHEN STATE BECOMES REMAINDER BENEFICIARY

When the state becomes aware of an annuity in which it has acquired a remainder interest, the department must notify the issuer of the annuity of the state's acquisition of its remainder beneficiary interest. The issuer of the annuity must, upon notification by the department, immediately inform the department of the amount of income and principal being withdrawn from the annuity as of the date of the individual's disclosure of the annuity. The issuer of the annuity must, upon request by the department or any agent of the department, immediately disclose to the department the amount of income and principal being withdrawn from the annuity. The issuer of the annuity must immediately notify the department if there is any change in either of the following:

• The amount of income or principal being withdrawn from that annuity.

• The named beneficiaries of the annuity.

MEDI-CAL ELIGIBILITY DISCLOSURE TO APPLICANT

MEDI-CAL DHS FORM 7077

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The Welfare and Institutions Code (W&IC) 14006.3 and 14006.4 require counties to provide form DHS 7077 to all Long-term Care (LTC) applicants, their spouses, and/or authorized representatives/agents. The county must provide and review the DHS 7077 during an assessment or a face-to-face interview. The DHS 7077 must be signed by (and a copy provided to) the applicant and his/her spouse, legal representative, or agent, and a copy retained for the case record. If the applicant is not competent, the DHS 7077 must be reviewed with, signed by, and provided to someone who is competent, such as a competent spouse, an attorney and/or agent if such person is present at a face-to-face interview or assessment. If the representative did not attend the face-to-face interview, such as with a public guardian or conservator, the county must mail the form to the representative for his/her signature. On the following page is a copy of the form. Form DHS 7077 is provided to the applicant in an 8 ½ x 11 tri-fold document with the print in landscape mode. For the purposes of this online course we have extracted the text and presented it in portrait mode which spans 2 pages. The form was not altered in any other way.

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Beginning of California DHS Form 7077

State of California—Health and Human Services Agency Department of Health Care Services

NOTICE REGARDING STANDARDS FOR MEDI-CAL ELIGIBILITY

If you or your spouse is in or is entering a nursing facility, read this important message!

You or your spouse do not have to use all your resources, such as savings, before Medi-Cal might help pay for all or some of the costs of a nursing facility.

You should be aware of the following to take advantage of these provisions of the law:

Unmarried Resident

An unmarried resident is financially eligible for Medi-Cal benefits if he or she has less than $2,000 in available resources. A home is an exempt resource and is not considered against the resource limit, as long as the resident states on the Medi-Cal application that he or she intends to return home. Clothes, household furnishings, irrevocable burial plans, burial plots, and an automobile are examples of other exempt resources.

If an unmarried resident is financially eligible for Medi-Cal reimbursement, he or she is allowed to keep from his or her monthly income a personal allowance of $35 plus the amount of health insurance premiums paid monthly. The remainder of the monthly income is paid to the nursing facility as a monthly deductible called the “Medi-Cal share-of-cost.”

Married Resident

If one spouse lives in a nursing facility, and the other spouse does not live in a nursing facility, the Medi-Cal program will pay some or all of the nursing facility costs as long as the couple together does not have more than $109,560 in available assets. The couple’s home will not be counted against this $109,560 as long as one spouse or a dependent relative, or both, lives in the home, or the spouse in the nursing facility states on the Medi-Cal application that he or she intends to return to the couple’s home to live.

If a spouse is eligible for Medi-Cal payment of nursing facility costs, the spouse living at home is allowed to keep a monthly income of at least his or her individual monthly income or $2,739, whichever is greater. Of the couple’s remaining monthly income, the spouse in the nursing facility is allowed to keep a personal allowance of $35 plus the amount of health insurance premiums paid monthly. The remaining money, if any, generally must be paid to the nursing facility as the Medi-Cal share-of-cost. The Medi-Cal program will pay remaining nursing facility costs.

Under certain circumstances, an at-home spouse can obtain an order from an administrative law judge that will allow the at-home spouse to retain additional resources or income. Such an order can allow the couple to retain more than $109,560 in available resources if the income that could be generated by the retained resources would not cause the total monthly income available to the at-home spouse to exceed $2,739. Such an order also can allow the at-home spouse to retain more than $2,739 in monthly income, if the extra income is necessary “due to exceptional circumstances resulting in significant financial duress.”

An at-home spouse also may obtain a court order to increase the amount of income and resources that he or she is allowed to retain, or to transfer property from the spouse in the nursing facility to the at-home spouse. You should contact a knowledgeable attorney for further information regarding court orders.

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The paragraphs above do not apply if both spouses live in a nursing facility and neither previously has been granted Medi-Cal eligibility. In this situation, the spouses may be able to hasten Medi-Cal eligibility by entering into an agreement that divides their community property. The advice of a knowledgeable attorney should be obtained prior to the signing of this type of agreement.

Note: For married couples, the resource limit ($109,560 in 2010) and income limit ($2,739 in 2010) generally increase a slight amount on January 1 of every year.

Transfer of Home for Both a Married and an Unmarried Resident

A transfer of a property interest in a resident’s home will not cause ineligibility for Medi-Cal reimbursement if either of the following conditions is met:

(a) At the time of transfer, the recipient of the property interest states in writing that the resident would have been allowed to return to the home at the time of the transfer, if the resident’s medical condition allowed him or her to leave the nursing facility. This provision must only apply if the home has been considered an exempt resource because of the resident’s intent to return home.

(b) The home is transferred to one of the following individuals:

(1) The resident’s spouse. (2) The resident’s minor or disabled child. (3) A sibling of the resident who has an equity interest in the home, and who resided in the resident’s home for at least one year immediately before the resident began living in institutions. (4) A son or daughter of the resident who resided in the resident’s home at least two years before the resident began living in institutions, and who provided care to the resident that permitted the resident to remain at home longer.

This is only a brief description of the Medi-Cal eligibility rules; for more detailed information, you should call your county welfare department. You will probably want to consult with the local branch of the state long-term care ombudsman, an attorney, or a legal services program for seniors in your area.

I have read the above notice and have received a copy.

Signature of person being admitted Date

Signature of spouse Date

Signature of legal representative Date DHCS 7077 (01/10)

End of California DHS Form 7077

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LONG-TERM CARE INSURANCE DOES NOT GUARANTEE AVOIDING MEDI-CAL

For many, long-term care insurance will serve as a financial bulkhead against the costs associated with the potential for needing long-term care services. However it is important to note that purchasing long-term care insurance does not guarantee the insured will never need to apply to Medi-Cal for assistance. Many factors such as the amount of daily benefit purchased, the benefit duration purchased, whether the insured purchased inflation protection as well as future costs of long-term care services could combine to cause an individual who has purchased long-term care insurance to need assistance from Medi-Cal.

TAKING NO ACTION

Taking no action does not prepare an individual for the potential costs of long-term care services. Unfortunately many individuals do not take any action to prepare for the possibility of needing long-term care services in their senior years. There are many reasons that people take no action, and this course cannot begin to explore them all. Some of the more common reasons have to do with financial ability, lack of exposure to the facts, and misconceptions about Medicare.

REFERRAL TO HICAP

One way a California agent can assist a consumer with decisions related to long-term care and insurance in general is by referring them to HICAP.

The California Department of Aging offers counseling services to all parties interested in locating long-term care providers and services. This counseling program, called Health Insurance Counseling and Advocacy Program or HICAP, assists seniors and others to review life insurance policies, file medical claims, advise on long-term care services, and counsel on other consumer health concerns. A complete list of HICAP offices is provided at on the Department of Aging Website -- www.aging.state.ca.us.

The appendix to this course contains a county by county list of HICAP local programs

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Chapter 2 LONG-TERM CARE INSURANCE CHAPTER LEARNING OBJECTIVES This chapter discusses the many different aspects of long-term care insurance. After completing this chapter, readers should have a better understanding of the different types of products and coverage offered and of the many factors that must be taken into account when working with these products. These factors include agent responsibilities, the prohibition of certain actions within certain products, the physiological criteria that is used to determine eligibility and needs, the different types of care and services that can be offered, and when those services are most likely to be needed. GROUP COVERAGE Long-term care insurance is available in a group environment through several different distribution channels. Below we will summarize the major types of groups likely to offer long-term care insurance to their members. All group insurance products share several common characteristics. For instance, rates are usually lower than with the same individual insurance product, and each policyholder is actually termed a certificate holder. There is one master policy issued to the group and each certificate holder (enrolled member of the group) gets a certificate of coverage instead of a policy. EMPLOYER GROUP Some employers offer group LTCI to their employees as part of a benefits package. Employees have choices in the areas of benefit amount, benefit duration and inflation options. The tax benefits of employer-offered group LTCI will be discussed in detail in the California required attachment on tax treatment of LTCI. TRADE GROUP Group coverage can also be provided through a trade group. These trade groups will be comprised of members who share a common occupation or trade, and this can make underwriting trade group LTCI simpler and quicker. ASSOCIATION GROUP Association group is where an association that was formed for reasons other than obtaining group insurance coverage offers group LTCI to its members. These association

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members are not as likely as a trade group to share the same general occupational classification. DISCRETIONARY GROUP A discretionary group insurance product often lacks the affinity between members that is seen in the above group relationships. The insurer marketing discretionary group products usually has a trust set up to control the master insurance contract and eligibility for coverage and benefits is controlled by the trustee(s) of the trust.

TYPES OF LONG-TERM CARE INSURANCE PRODUCTS

From an insurance perspective, there are three basic approaches taken by the insurance industry to offer coverage of the costs associated with long-term care services. The three basic categories of insurance products designed to offer LTC coverage are:

• A stand-alone long-term care policy • A life insurance policy with LTCI build in or added as a rider • An annuity with a LTCI built in or added as a rider

STAND ALONE LONG-TERM CARE POLICY

The stand-alone policy is one designed as a single needs product and is entirely focused the coverage of costs associated with long-term care services. This was the first industry response to the need for LTC coverage and remains the most prevalent approach.

LIFE INSURANCE WITH LTC BENEFIT INCLUDED

Some life insurance policies offer long-term care benefits as part of the life insurance benefit. In this case any long-term care benefits paid reduce the future death benefit payable. If the long-term care benefit reduces the death benefit below a certain predetermined level, often a separate LTCI rider within the policy pays for the remaining LTCI benefits up to the benefit duration.

ACCELERATED BENEFITS FOR CHRONIC ILLNESS

Some life insurance policies offer long-term care benefits via accelerated benefits or living benefit provisions. The trigger for these benefits is usually chronic illness or major surgery. The benefit amounts and duration will be disclosed within the life insurance contract. ANNUITIES WITH LTCI RIDERS Some annuities offer a long-term care rider. These long-term care riders will occasionally qualify as a “qualified” long-term care rider under the Health Insurance Portability and Accountability Act, but most do not. These LTC riders are designed to help pay the costs

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associated with long-term care services. Some annuities will provide this benefit if the annuitant suffers an illness or injury that requires a home health aide or nursing home care confinement. Some annuities will provide this benefit if the annuitant AND/OR their spouse meets the above benefit trigger. The amount of the benefit will usually be a percent or factor of the annuity values at the time of claim. The duration of the benefit will be determined by several factors related to the annuity value. There are several ways these LTC riders are structured. In all three basic LTC approaches the account value of the annuity is charged a premium for an LTC rider which provides some of the LTC benefits the account value of the Annuity also provides part of the benefit and in most annuities with a LTC rider the annuity account value can be exhausted in the process leaving the annuity owner without any remaining annuity values. The three basic approaches are listed below.

ACCOUNT BALANCE FIRST LTC APPROACH

One approach to the LTC benefit is to first spend the account balance of the annuity to provide the LTC benefit and then use the insurance that was purchased to provide a tail benefit for the balance of covered care.

ACCOUNT BALANCE LAST LTC APPROACH

Another approach first uses the insurance purchased via the rider premium until it is exhausted and then begins to exhaust the annuity account value.

COINSURANCE LTC APPROACH

Yet another approach employs both the account balance and the LTC insurance purchased with the rider simultaneously and have the LTC insurance pay a portion of the benefit and the account balance pay the remaining amount. There are differences in the premiums charged for each of these approaches as well as the taxation of premiums and annuity account balances as they are liquidated.

WAIVER OF SURRENDER CHARGE VS. LTC RIDER

While most annuities offer some level of waiver of the surrender charge if the annuitant is confined to a LTC facility, and this is a good thing, the waiver should not be confused with a long-term care rider. The LTC rider can provide a benefit that will pay for a wider array of LTC services than the surrender charge waiver applies to (the waiver of surrender charge usually requires confinement). In addition, the waiver is not LTC insurance and does not increase the ability of the annuitant to pay for LTC services beyond what they can withdraw penalty-free form the annuity.

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QUALIFIED LONG-TERM CARE BENEFITS If an annuity offers qualified long-term care benefits, they must comply with all requirements for these benefits, including benefit triggers. All policy definitions must also follow the same required definitions for items such as chronic illness, activities of daily living, and cognitive impairment. POLICY FEATURES Long-term care policies generally offer policy features and benefits that can be classified as either institutional care benefits or community/home care benefits. Many policies cover both institutional and community/home benefits. The institutional care benefits cover care in a traditional nursing home or what many might term “in-patient.” The community or home-care benefit encompasses a wider array of potential care settings, from the home of the patient to a residential care facility. Under community of home care, an individual may change the care venue from their home to the home of a relative and eventually to a residential care facility. At some point it is also possible that the same individual will need to be in an institution such as a nursing home. Ideally an individual would only be institutionalized when the institution is the care setting best capable of providing the care needed by the patient. COVERAGE FOR CARE IN A NURSING HOME Most long-term care policies offer benefits for institutional care that will cover the insured when confined to a nursing home. Room and board is always part of the nursing home benefit but it is not always part of the assisted living benefit. In addition to room and board, the nursing home benefit will cover custodial care services that are not traditionally covered by Medicare, but unlike Medicare there is not a required hospital confinement required prior to the nursing home stay to qualify for benefits. COVERAGE FOR CARE IN A RESIDENTIAL CARE FACILITY (ASSISTED LIVING) Coverage of community-based care is offered in many long-term care policies. When coverage is offered for care in a residential care facility (assisted living), certain California requirements must be met. These requirements will be detailed in the section of California Insurance Code below. HOUSING COSTS INCLUDED Most long-term care policies that offer a benefit for assisted living cover the cost of housing in the residential care facility as part of the amount for reimbursement. HOUSING COSTS EXCLUDED In some residential care facilities the patients have already covered their housing costs through a continuing-care community approach or some other arrangement, and in this case a benefit is not needed to cover housing costs. Some policies are structured to meet this need by offering a benefit for assisted living that covers and care and board but does

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not cover the costs associated with housing. COVERAGE FOR HOME AND COMMUNITY CARE California Insurance Code Section 10232.9 CALIFORNIA REQUIRED COVERAGE OF SERVICES AND PROVIDERS The section of the California Insurance Code below sets minimum standards for home care or community care services by defining the services and providers covered. The following section also limits restrictions that may be placed on home or community-based services CIC 10232.9. Every long-term care policy or certificate that provides benefits for home care or community-based services must provide at least the following:

• Home health care. • Adult day care. • Personal care. • Homemaker services. • Hospice services. • Respite care.

The policy definitions of these benefits may be no more restrictive than the definitions in the following section: HOME OR COMMUNITY BASED SERVICES DEFINED

"Home health care" is skilled nursing or other professional services in the residence, including, but not limited to, part-time and intermittent skilled nursing services, home health aid services, physical therapy, occupational therapy, or speech therapy and audiology services, and medical social services by a social worker. "Adult day care" is medical or nonmedical care on a less than 24-hour basis, provided in a licensed facility outside the residence, for persons in need of personal services, supervision, protection, or assistance in sustaining daily needs, including eating, bathing, dressing, ambulating, transferring, toileting, and taking medications.

USE OF UNLICENSED PROVIDERS TO PROVIDER PERSONAL CARE NOTE: The wording in the definitions used in the California Insurance Code below is important because it prevents the insurer from requiring a licensed individual to perform personal care and other unskilled services. The unlicensed individual can perform the unskilled services for less cost than a licensed individual, which can save the insured benefit dollars.

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"Personal care" is assistance with the activities of daily living, including the instrumental activities of daily living, provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. "Instrumental activities of daily living" include using the telephone, managing medications, moving about outside, shopping for essentials, preparing meals, laundry, and light housekeeping. "Homemaker services" is assistance with activities necessary to or consistent with the insured's ability to remain in his or her residence, that is provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. "Hospice services" are outpatient services not paid by Medicare, that are designed to provide palliative care, alleviate the physical, emotional, social, and spiritual discomforts of an individual who is experiencing the last phases of life due to the existence of a terminal disease, and to provide supportive care to the primary care giver and the family. Care may be provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. "Respite care" is short-term care provided in an institution, in the home, or in a community-based program, that is designed to relieve a primary care giver in the home. This is a separate benefit with its own conditions for eligibility and maximum benefit levels.

PROHIBITIONS OF CERTAIN LIMITATIONS OR EXCLUSIONS Home care benefits cannot be limited or excluded by any of the following:

Requiring a need for care in a nursing home if home care services are not provided. Requiring that skilled nursing or therapeutic services be used before or with unskilled services. Requiring the existence of an acute condition. Limiting benefits to services provided by Medicare-certified providers or agencies. Limiting benefits to those provided by licensed or skilled personnel when other providers could provide the service, except where prior certification or licensure is required by state law. Defining an eligible provider in a manner that is more restrictive than that used to license that provider by the state where the service is provided.

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Requiring "medical necessity" or similar standard as a criteria for benefits. MINIMUM BENEFITS (50%) FOR HOME OR COMMUNITY BASED CARE Every comprehensive long-term care policy or certificate that provides for both institutional care and home care and that sets a daily, weekly, or monthly benefit payment maximum, must pay a maximum benefit payment for home care that is at least 50 percent of the maximum benefit payment for institutional care, and in no event must home care benefits be paid at a rate less than fifty dollars ($50) per day. Insurance products approved for residents in continuing care retirement communities are exempt from this provision. EQUIVALENCY OF BENEFIT DURATION Every such comprehensive long-term care policy or certificate that sets a durational maximum for institutional care, limiting the length of time that benefits may be received during the life of the policy or certificate, must allow a similar durational maximum for home care that is at least one-half of the length of time allowed for institutional care. ADULT DAY CARE The California Insurance Code section above also requires Adult Day Care as a benefit if Home or Community Care benefits are offered. This is a very important benefit to many elders who wish to stay out of an institutional setting. They may arrange to live with a family member who has to go to work each day and can only provide care during non-work hours. Having the availability of Adult Day Care can make such an individual’s alternate living arrangement feasible. BENEFIT TRIGGERS FOR NON- TAX QUALIFIED LTC POLICIES An important part of the long-term care policy that the agent should be very familiar with is the benefit trigger. The benefit trigger varies between qualified and non-qualified LTC policies. The section of the California Insurance Code below details the benefit triggers by defining the Activities of Daily Living ADLs. California Insurance Code Section 10232.8(a) In every long-term care policy or certificate that is not intended to be a federally qualified long-term care insurance contract and provides home care benefits, the threshold establishing eligibility for home care benefits must be at least as permissive as a provision that the insured will qualify if either one of two criteria are met: TWO OF SEVEN ADLS OR COGNITIVE IMPAIRMENT

(1) Impairment in two out of seven activities of daily living. (2) Impairment of cognitive ability.

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The policy may provide for lesser but not greater eligibility criteria. The commissioner, at his or her discretion, may approve other criteria or combinations of criteria to be substituted, if the insurer demonstrates that the interest of the insured is better served. THE SEVEN ADLS REQUIRED IN NON-TAX QUALIFIED POLICIES "Activities of daily living" in every policy that is not intended to be a federally qualified long-term care insurance contract and provides home care benefits must include

• eating, • bathing, • dressing, • ambulating, • transferring, • toileting, and • continence;

IMPAIRMENT OF COGNITIVE ABILITY "impairment" means that the insured needs human assistance, or needs continual substantial supervision; and "impairment of cognitive ability" means deterioration or loss of intellectual capacity due to organic mental disease, including Alzheimer's disease or related illnesses, that requires continual supervision to protect oneself or others. TWO OF SIX ADLS OR COGNITIVE IMPAIRMENT FOR TAX QUALIFIED POLICIES In all federally qualified long-term care policies, the threshold establishing eligibility for home care benefits must provide that a chronically ill insured will qualify if either one of two criteria are met:

(1) Impairment in two out of six activities of daily living. (2) Impairment of cognitive ability.

POSSIBILITY OF OTHER BENEFIT CRITERIA Other criteria must be used in establishing eligibility for benefits if federal law or regulations allow other types of disability to be used applicable to eligibility for benefits under a long-term care insurance policy. If federal law or regulations allow other types of disability to be used, the commissioner must promulgate emergency regulations to add those other criteria as a third threshold to establish eligibility for benefits. Insurers must submit policies for approval within 60 days of the effective date of the regulations. With respect to policies previously approved, the department is authorized to review only the changes made to the policy. All new policies approved and certificates issued after the effective date of the regulation must include the third criterion.

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DEFINITION OF ADLS FOR TAX QUALIFIED POLICIES The definitions of "activities of daily living" to be used in policies that are intended to be federally qualified long-term care insurance must be the following until the time that these definitions may be superseded by federal law or regulations:

(1) Eating, which must mean feeding oneself by getting food in the body from a receptacle (such as a plate, cup, or table) or by a feeding tube or intravenously. (2) Bathing, which must mean washing oneself by sponge bath or in either a tub or shower, including the act of getting into or out of a tub or shower. (3) Continence, which must mean the ability to maintain control of bowel and bladder function; or when unable to maintain control of bowel or bladder function, the ability to perform associated personal hygiene (including caring for a catheter or colostomy bag). (4) Dressing, which must mean putting on and taking off all items of clothing and any necessary braces, fasteners, or artificial limbs. (5) Toileting, which must mean getting to and from the toilet, getting on or off the toilet, and performing associated personal hygiene. (6) Transferring, which must mean the ability to move into or out of bed, a chair or wheelchair.

ALTERNATE DEFINITIONS MAY BE APPROVED The commissioner may approve the use of definitions of "activities of daily living" that differ from the verbatim definitions of this subdivision if these definitions would result in more policy or certificate holders qualifying for long-term care benefits than would occur by the use of the verbatim definitions of this subdivision. In addition, the following definitions may be used without the approval of the commissioner:

The verbatim definitions of eating, bathing, dressing, toileting, and continence in this subdivision and a substitute, verbatim definition of "transferring" as follows: "transferring," which must mean the ability to move into and out of a bed, a chair, or wheelchair, or ability to walk or move around inside or outside the home, regardless of the use of a cane, crutches, or braces.

DEFINITION OF ADLS FOR NON-TAX QUALIFIED POLICIES The definitions to be used in policies and certificates for impairment in activities of daily living, "impairment in cognitive ability," and any third eligibility criterion adopted by regulation must be the verbatim definitions of these benefit eligibility triggers allowed by

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federal regulations. In addition to the verbatim definitions, the commissioner may approve additional descriptive language to be added to the definitions, if the additional language is

(1) warranted based on federal or state laws, federal or state regulations, or other relevant federal decision, and (2) strictly limited to that language which is necessary to ensure that the definitions required by this section are not misleading to the insured.

(g) The definitions of "activities of daily living" to be used verbatim in policies and certificates that are not intended to qualified contracts must be the following:

(1) Eating, which must mean reaching for, picking up, and grasping a utensil and cup; getting food on a utensil, and bringing food, utensil, and cup to mouth; manipulating food on plate; and cleaning face and hands as necessary following meals. (2) Bathing, which must mean cleaning the body using a tub, shower, or sponge bath, including getting a basin of water, managing faucets, getting in and out of tub or shower, and reaching head and body parts for soaping, rinsing, and drying. (3) Dressing, which must mean putting on, taking off, fastening, and unfastening garments and undergarments and special devices such as back or leg braces, corsets, elastic stockings or garments, and artificial limbs or splints. (4) Toileting, which must mean getting on and off a toilet or commode and emptying a commode, managing clothing and wiping and cleaning the body after toileting, and using and emptying a bedpan and urinal. (5) Transferring, which must mean moving from one sitting or lying position to another sitting or lying position; for example, from bed to or from a wheelchair or sofa, coming to a standing position, or repositioning to promote circulation and prevent skin breakdown. (6) Continence, which must mean the ability to control bowel and bladder as well as use ostomy or catheter receptacles, and apply diapers and disposable barrier pads. (7) Ambulating, which must mean walking or moving around inside or outside the home regardless of the use of a cane, crutches, or braces.

INFLATION PROTECTION Inflation protection is an important benefit that must be offered by all LTCI policies in California. In a later chapter we will cover the California requirements of the inflation

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benefit offered and disclosure related to the offer. The goal of inflation protection is to keep the LTCI benefit current with the actual costs of LTC services in the future. Historically, the costs of all goods and services tend to increase over time due to inflation. While the rate of inflation has varied markedly in the past and future inflation rates are difficult to predict, what is certain is that inflation tends to erode the purchasing power of a fixed dollar amount over time. POOLED BENEFITS There are two types of long-term care policies that offer pooled benefits. One type of “pooled benefit” is available in a joint policy that usually covers a husband and wife. This type of pooled benefit usually has a total benefit amount that applies to both of the individuals insured by the policy. If one of the insured individuals is paid benefits, the benefits paid are deducted from the total pool of benefits. For example, if a husband and wife have a policy that provides $200,000 in total long-term care benefits, and the husband uses $75,000 in benefits from the policy, $125,000 of the pool of benefits would be for use by either of the beneficiaries. The other type of “pooled benefit” insures one individual and provides a total dollar amount of benefit that can be used for various long-term care services and care settings. These policies pay a daily, weekly, or monthly dollar limit for one or more covered services. The “pooled benefit” approach allows the insured individual to combine benefits in ways that best meet their needs. For example the insured might combine the benefit for home care with the benefit for community-based care instead of using the nursing home benefit. WAIVER OF PREMIUM Most long-term care policies offer a waiver of premium benefit that will generally waive the premium after 90 days of long-term care services are provided. Most policies require the 90 days to be consecutive and some policies will waiver the premium back to day one (after the 90 day period), which results in a premium refund to the insured equal to three months of past premiums paid. ELIMINATION PERIOD The elimination period (often called the waiting period) is the period of time the insured retains the risk of loss due to long-term care expenses. The elimination period is a good premium management tool in that the premium gets lower as the elimination period gets longer. The elimination period is almost always expressed in days (30, 60 90 days etc). BENEFIT PERIOD The benefit period determines how long benefits will be paid under a long-term care policy. In many policies the benefit period is fixed and usually expressed in years or months. With some pooled benefit policies the benefit period may fluctuate in length

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depending on the rate at which the “pool of benefits” (money) is spent.

Most insurers offering long-term care policies offer, one, two, three, four, five, or six years and lifetime benefit options. The benefit period is a powerful premium management tool for the individual who feels they can’t afford a long-term care policy. By shortening the benefit period premiums will be lowered, and this allows the proposed insured to practice the risk management principle of risk retention.

RESTORATION OF BENEFITS Some long-term care policies offer a restoration of benefit rider. This option will restore the benefit period to the original duration after part of the benefit period is used and the insured is discharged from care for a minimum period of time (usually 180 days or longer). For example: An individual purchases a 3 year (36 months) benefit period with a restoration of benefit rider/option. The insured then receives nine months of benefits from the policy for a stay in a nursing home and is discharged from care. After the required period (let’s say 180 days) during which the insured is not “in care” the insured’s benefit period is restored to 3 years (36 months). NOTE: if the individual purchases a lifetime benefit period the restoration of benefit feature will not be necessary. SURVIVOR BENEFITS Some long-term care policies will offer a survivor benefit. These survivor benefits are not a state-mandated benefit and, as such, vary considerable. The survivor benefits range from paid-up LTC coverage for the survivor to continuation of the LTC benefit of the deceased spouse for a predetermined period. CONTRACTUAL METHODS OF CLAIMS PAYMENT The amount of the benefit paid to the insured is usually calculated one of two ways. Either the benefit is based on a reimbursement of actual expenses incurred (up to a stated limit) or it is based on a predetermined daily indemnity amount. REIMBURSEMENT Reimbursement plans reimburse the insured for the actual cost of care and services provided up to a stated maximum. The maximum daily reimbursement will usually be set at or below the current maximum daily amount that can be excluded from income. More on this issue is available in the California required attachment titled “Tax Treatment of Long-term Care Insurance and Expenses” at the end of this text.

INDEMNITY Many LTC policies agree to pay the insured on an indemnity basis. The contract agrees to indemnify the insured a certain amount (usually a daily benefit) for every day that their contract is in benefit payment mode. The agreed-upon amount may or may not be sufficient to pay the actual costs incurred by the insured. It is also possible that the benefit amount could exceed the actual cost of the services provided, allowing the insured

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to accumulate the additional funds for future use. The indemnity method of benefit payments for a long-term care policy is usually called the Cash or Per Diem method.

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Chapter 3 FEDERAL LEGISLATION AND LONG-TERM CARE INSURANCE INTRODUCTION The Health Insurance Portability & Accountability Act of 1996 (HIPAA) Public Law created a framework by which costs incurred for chronic illness would be treated as medical expenses under IRC Sec. 213(d) and by which long-term care insurance policies that meet certain requirements would be considered “tax-qualified” allowing for tax-free benefits and tax deductible premiums under certain circumstances. LEARNING OBJECTIVES The major learning objective of this section is for the reader to understand the tax treatment of long-term care expenses as well as the premiums and benefits related to tax-qualified long-term care insurance policies. TAX TREATMENT OF LONG-TERM CARE EXPENSES To understand the tax treatment of long-term care expense, premiums, and benefits, one must first have a clear understanding of definitions used within HIPAA. These definitions are important because they help define conditions and requirements that must be met for certain long-term care expenses to be deductible. Some of these definitions delineate requirements for a long-term-care policy to be considered tax-qualified. HIPAA DEFINITIONS The following section covers several definitions that are at the heart of the intent of HIPAA to allow limited tax relief to individuals experiencing long-term care expenses and also provide a tax incentive for individuals to purchase long-term care insurance. DEFINITION OF CHRONICALLY ILL INDIVIDUAL Internal Revenue Code (IRC) Section 213d describes the circumstance under which certain medical expenses are deductible. Under the IRC, in order to be considered qualified long-term care services (and thus the costs or expenses associated with these services) the services must be: “Necessary diagnostic, preventative, therapeutic, curing, treating, mitigating,

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rehabilitative services and maintenance and personal care services required by a chronically ill individual pursuant to a plan of care prescribed by a licensed health care practitioner. “

In order to fully understand the IRC definition of qualified long-term care services, we must first understand several terms used within the definition. To be considered “A chronically ill individual,” one must be certified by a licensed health care practitioner within the previous 12 months as meeting one of the following tests:

• The insured is unable, for at least 90 days, to perform at least two activities of daily living (ADL’s) without substantial assistance from another individual, due to loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence. These six activities of daily living were defined earlier in this text when we discussed California Insurance Code (CIC) section 10232.8(f)(1 – 6).

• The insured requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

SUBSTANTIAL ASSISTANCE – HANDS-ON & STAND-BY Another term used in the definition of a chronically ill individual that needs to be understood is “substantial assistance.” The IRS published notice 97-31 in 1997 to clarify the term substantial assistance. Substantial assistance can mean either hands-on or stand-by assistance. Below is a summary of the IRS wording defining these terms.

• Hands-On Assistance: means the physical assistance of another person without which the individual would be unable to perform the ADL.

• Stand-By Assistance: means the presence of another person within arm’s reach of the individual that is necessary to prevent, by physical intervention, injury to the individual while the individual is performing the ADL.

CERTIFICATION OF CHRONICALLY ILL BY LHP Surprisingly, The Internal Revenue Code is not very concise in the way it defines a Licensed Health Care Practitioner (LHP). California Insurance Code section 10232.8(c) is more specific and specifies the role of the LHP in the certification, assessment, and plan of care of the insured for the purposes of the claims process. The LHP must be independent of the insurance company and “must not be compensated in any manner that is linked to the outcome of the certification.”

90 DAY PERIOD IS NOT A DEDUCTIBLE AND NEED ONLY BE LIKELY The 90-day period of inability to perform at least two ADLs is not required to have occurred before an individual can be certified as chronically ill. It depends on whether the LHP can certify that the individual is likely to need substantial assistance for the 90-day

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period. The 90-day period is also not a required deductible period, meaning that a tax-qualified long-term-care policy can pay benefits during the required 90-day period. ANNUAL RECERTIFICATION AS CHRONICALLY ILL A chronically ill individual must be recertified as chronically ill on an annual basis. A tax-qualified long-term-care policy must require the annual recertification as chronically ill. SEVERE COGNITIVE IMPAIRMENT The same IRS Notice (97-13) mentioned above also defines severe cognitive impairment as “a loss or deterioration in intellectual capacity that is similar to Alzheimer’s disease and like forms of irreversible dementia and is measured by clinical evidence and standardized tests that reliably measure impairment in short-term and long-term memory, orientation to people, places or time and deductive or abstract reasoning.” ANNUAL RECERTIFICATION OF SEVERE COGNITIVE IMPAIRMENT There is no requirement for certification of a 90 day period by a LHP for severe cognitive impairment but the insured must be recertified as severely cognitively impaired annually. SUBSTANTIAL SUPERVISION OF COGNITIVELY IMPAIRED INDIVIDUAL The last part of the definition of a ‘chronically ill individual” relates to an individual who has severe cognitive impairment and needs substantial supervision “to protect the health and safety” of the individual. This determination is part of the LHP finding of severe cognitive impairment and is also part of the annual recertification. TAX TREATMENT OF LONG-TERM CARE INSURANCE HIPAA generally states that policies following the above guidelines for chronically ill individuals will be considered as tax-qualified long-term-care policies. There are still limits to the deductibility of premiums for tax-qualified LTCI policies as well as limits to the amount of LTCI benefits that may be received tax-free. As additional clarification of HIPAA IRS Notice 97-13 states: A qualified long-term care policy meets the requirements for favorable tax treatment. The tax advantage of a qualified long-term-care policy versus a non-qualified long-term-care policy is the limited federal income tax deduction of the premiums. The policyholder of a long-term care policy will be able to deduct some or all of their long-term care premiums depending on their age. Below is a table showing the age thresholds and amount of long-term-care premiums that may be deducted in tax year 2011. These amounts are adjusted for inflation and will go up periodically.

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TAX REPORTING OF LTCI BENEFITS PAID In order for the insured to deduct the long-term-care premiums, the insurer must file IRS form 1099-LTC, Long-Term Care and Accelerated Benefits as required by law. The insured handles the deduction on Schedule A (itemized deductions) and must file IRS form 8853. NOTE: This applies to ALL LTCI policies (tax-qualified and non-tax-qualified)

Generally, benefits received under qualified or non-qualified long-term care policies are not includable in income. Benefits from actual cost (also called reimbursement policies), which pay for the actual services a beneficiary receives, are not included in income. Benefits from per diem or indemnity policies, which pay a predetermined amount each day, are not included in income except amounts that exceed either the beneficiary's total qualified long-term-care expenses or $300 per day (for 2011…periodically adjusted by the IRS), whichever is greater. So the real tax difference between a qualified and non-qualified long-term-care policy is the deductibility (subject to the above table) of some or possibly all of the premiums for the federal income-tax return of the policyholder.

HEALTH SAVINGS ACCOUNTS TO PAY LTCI PREMIUMS

Funds from a Health Savings Account Health (HSA) or Medical Savings Account (MSA) can be used to pay for LTCI premiums up to the age-related amounts stated above.

CONSUMER PROTECTIONS IN QUALIFIED LTC POLICIES

A group qualified long-term-care policy must provide for continuation of coverage or conversion. In the event that the insured is no longer in the group and is subject to losing coverage. The insured must be able to maintain his/her coverage under the group policy by the payment of premiums. If the benefits or services covered are restricted to certain providers, which the insured can no longer use, the insurance company must provide for a continuation of benefits that are substantially equivalent. Similarly, if a group policy is terminated, the insurance company must provide the insured with a converted policy which is substantially equivalent to the policy which was terminated. In order for an

Attained age as of 12/31/2011 Deductible Premium

40 or younger $340

Older than 40 but not older than 50 $640

Older than 50 but not older than 60 $1,270

Older than 60 but not older than 70 $3,390

Older than 70 $4,240

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insured to benefit from this provision, he or she must have been covered under the terminated plan for at least six months immediately prior to the termination.

All qualified long-term-care policies must have a provision to protect the insured against unintended lapse. The policy must not be issued until the company has received a written designation from the applicant identifying at least one other person who is to receive notice from the insurance company before the policy may be terminated. The form used to identify the additional person must have a space for the person's full name and address. If for any reason the policy is to lapse, the insurance company is required to provide written notice to the insured and his/her designated agent identified on the form. Further, the insurance company may not terminate a policy for nonpayment of premiums until it has given the insured 30 days notice of the potential termination. Notice must be provided by first class mail, postage paid to the insured and to all the persons identified by the insured.

POST CLAIMS UNDERWRITING

Another important feature of qualified plans is that post-claim underwriting is restricted and limited. Post-claim underwriting occurs when, after a claim is filed by the policyholder, the insurance company declines the coverage on the ground that it would not have issued to policy if it had know about some medical condition. Under HIPAA, applications for long-term-care insurance must contain clear and unambiguous questions designed to elicit information about the healthy status of the applicant. Further, if the application asks whether the applicant takes prescribed medications, it must ask for a list of those medications. The insurance company, if it receives the medication list, may not deny coverage for any condition which was being treated by any of the medications listed, even if that condition would have been grounds for a denial of coverage at the application stage. The application must contain a clear bold caution to applicants that states that if the answers on the application are incorrect or untrue, the company has the right to deny coverage or rescind the contract. Therefore, it is important for applicants to fill out the application fully and correctly and list all the prescribed medications being taken.

HIPAA also established minimum standards for home health and community care benefits in qualified policies. If the policy provides benefits for home health or community care, it may not limit or exclude benefits by requiring that skilled care be required first or that the services be provided by registered or licensed practical nurses or that the provider be Medicare-certified. The policy may not exclude coverage for personal care services provided by a home health aide or adult day care service. The policy may not require that benefits be triggered by an acute illness.

Inflation protection is also included as a required element of a qualified plan. It is intended that meaningful inflation protection be provided. The legislation requires that the insurance company use reasonable hypothetical or graphic demonstrations that disclose how the inflation protection will work.

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PREMIUM DEDUCTIBILITY FOR BUSINESS ENTITIES

• Sole Proprietor (self-employed): A business owner who files IRS form Schedule C (Profit or Loss from a Business or Profession) is considered an individual for tax purposes and only eligible to deduct the premiums as noted in the table above. Must be a qualified long-term care policy.

• Sub (s) Corporation. A sub (s) corporation can deduct the limits described in the table above and the covered employee does not pay income tax on the premiums or benefits (subject to the limits on benefits described above). Must be a qualified long-term care policy.

• C Corporations. A C corporation is entitled to the deduction of 100% of the premium. The covered employee does not pay income tax on the premiums or benefits (subject to the limits on benefits described above). Must be a qualified long-term care policy.

• L.L.C or L.L.P. A limited liability company or Limited Liability Partnership is allowed to deduct the limits described in the table above and the covered employee does not pay income tax on the premiums or benefits (subject to the limits on benefits described above). Must be a qualified long-term care policy.

• Partnership. A partnership is allowed to deduct the limits described in the table above and the covered employee does not pay income tax on the premiums or benefits (subject to the limits on benefits described above). Must be a qualified long-term care policy.

OWNERS OF CLOSELY HELD C CORPORATIONS Generally, the owners of a closely held C corporation are treated as employees, and the corporation can deduct all premiums paid for an LTCI insurance contract. The owner/employee does not have to include the premiums in taxable income. The corporation can discriminate in determining which group (Class) of employees will have LTCI premiums paid by the corporation as long as stock ownership is not part of determining who is a member of the group. Note: All covered individuals in the group must be employees…not just members of the Board of Directors, officers, or stockholders. SECTION 125 CAFETERIA PLANS Qualified LTCI cannot be included in an IRC Section 125 cafeteria plan or flexible spending arrangement. FINAL TREASURY REGULATIONS SECTION 7702B

As part of the HIPAA process final treasury regulations were implemented in December of 1998 and became internal revenue code (IRC) section 7702(b). Following is a summary of this code section:

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Long-term-care policies issued before January 1, 1997 that meet state requirements in effect at that time are grandfathered as qualified long-term-care policies (regardless of the new HIPAA sections), however; if a contract has material changes it will lose the grandfathered status.

• Qualified contracts cannot accrue cash values. • Qualified contracts must be guaranteed renewable. • Qualified contracts can only use policy dividends to reduce future premiums. • Qualified contracts must be issued within 30 days of approval. • If an insured request information pertaining to a claim denial, it must be

delivered within 60 days. • Non-qualified policies do not qualify for a premium deduction on the

policyholder’s federal tax return.

TAX TREATMENT OF PRE-1997 LTC POLICIES When HIPAA was passed there was concern over how to treat policies issued prior to January 1, 1997. Many of these older policies would not comply with the HIPAA requirements. The Department of the treasury established guidelines for these older policies (Notice 97-31, May 1997) stated that policies issued prior to January 1, 1997 that met the “long-term care insurance requirements of the state in which the contract was issued” would be grandfathered and considered tax-qualified. However, if one of these “grandfathered” policies had a material change, then it may lose tax-qualified status. MATERIAL CHANGE DEFINED Final regulations issued in December 1998 identified criteria for which a “material change” would result in a policy losing its tax-qualified status. The following are treated as “material changes” and considered issuance of a new contract with the resulting loss of tax-qualified status:

• A change in terms of a contract that alters the amount or timing of an item payable by either the policyholder, the insured or insurance company.

• A substitution of the insured under an individual contract. • A change (other than a non-material change) in the contractual terms or in the plan

under which the contract was issued relating to eligibility for membership in the group covered under a group contract.

The following actions are not considered “material changes” and will not jeopardize the policy’s grandfathered status:

• Regarding premiums: a change in the mode of premium payment; an increase or decrease in premiums for all contracts that have been issued on a guaranteed renewable basis; a reduction in premiums due to the purchase of a long-term-care insurance policy by a member of the policyholder’s family; a reduction in

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premium due to a reduction in coverage made at the request of a policyholder; a reduction in premiums that occurs because the policyholder becomes entitled to a discount under the issuer’s pre-1997 premium rate structure (such as a group or association discount or change from smoker to non-smoker status); the addition, without an increase in premiums, of alternative forms of benefits that may be selected by the policyholder.

• Regarding riders: the addition of a rider to increase benefits under a pre-1997 contract if the rider would constitute a qualified long-term care insurance contract if it were a separate contract; the deletion of a rider or provision of a contract (called an HHS – Health and Human Services – rider) that prohibited coordination of benefits with Medicare.

• Other actions include: the effectuation of a continuation or conversion of coverage right under a group contract following an individual’s ineligibility for continued coverage under the group contract; the substitution of one insurer for another in an assumption reinsurance transaction; the expansion of coverage under a group contract caused by corporate merger or acquisition; the extension of coverage to collectively-bargained employees; the addition of former employees.

Note: If an agent is considering replacing a pre-1997 policy, it is imperative that the

consumer understand the differences in benefit triggers between the older policy and the proposed policy. Many of the pre-1997 LTC policies have very liberal benefit triggers. Also many of the older polices do not have the 90-day “chronically ill” requirement imposed by HIPAA. Finally, some of the older policies did not coordinate their benefit with Medicare, which could result in more actual benefit being paid to the insured than with a post-HIPAA LTC policy.

TAX TREATMENT OF ACCELERATED BENEFITS The Pension Protection Act of 2006 (PPA), like HIPAA, is an enormous piece of legislation that addresses hundreds of disparate issues. Also like HIPAA, a very small portion (section 844) deals with long-term-care insurance and riders that are part of life insurance or annuity contracts. PPA affirms HIPAA as it pertains to life insurance contracts and accelerated benefit riders (ABRs). Over the years, accelerated benefit riders have appeared in various life insurance policies with a promise to pay part of the death benefit (generally 2% to 4% monthly) if a qualifying event other than death occurs, e.g. disability, critical illness, cancer, terminal or chronic illness.

Section 101(g)(1) of the Internal Revenue Code governs the accelerated payment of death proceeds on the life of a terminally or chronically-ill insured. HIPAA added section 7702B to the IRC, and this section specified the definition of chronic illness. Essentially, if the qualifying event for benefits matches the chronic illness definition established by HIPAA, the early payout of the death benefit for long-term care expenses will not be taxed as income. This section does not address chronic illness riders in annuity contracts.

The Pension Protection Act established that long-term-care insurance included as a rider on life insurance and annuity contracts is treated for tax purposes as a separate contract. If

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the long-term care rider is structured as a tax-qualified LTC, benefit amounts received under the LTC rider will be treated as qualified long-term-care benefits and will not be subject to taxation (effective January 1, 2010). Another part of the Pension Protection Act expanded section 1035 rules to allow life insurance and annuity contracts to be exchanged tax-free for qualified long-term-care insurance contracts. If a single premium deferred annuity contains a qualified long-term-care rider the premiums (or charges) for this coverage can be deducted from the internal growth of the annuity without a taxable event (income) to the annuitant. In addition, if the annuitant qualifies for care, the long-term-care benefits payments from the annuity will be received free of income tax. A typical product design for a single-premium deferred annuity (SPDA/LTCI) combo product will provide a long-term-care benefit that is generally a multiple of the annuity account value. The payout will be delivered over a certain number of months, 24, 36, or 48. While examples will vary by insurance carrier, age, and health conditions, let’s say that the insured wants $6,000 per month of benefit for 48 months ($6,000 X’s 48 = $288,000). To get that $288,000 benefit, the policyholder may have to place $100,000 into the SPDA combo product. A risk charge will be taken from the accumulation of the product to provide the additional $188,000 of coverage. Annual costs may vary and should be checked. The first money out of the SPDA to pay the long-term care benefit will be the insured’s initial premium to the plan. If the policyholder dies before their contribution is exhausted, a beneficiary will receive the difference. Once benefits are paid beyond the initial premium, the insurance company will continue to pay benefits until they are exhausted. The risk charge for the benefit beyond the premium will generally be between one-half to 1.25 basis points. In other words, if a typical SPDA was paying a return of 5.5%, the combo plan may only pay 4.5%. Again, since the long-term-care benefit under the program qualifies under IRC section 7702B, the cost of the long-term-care benefit will not be a taxable event to the insured. Long-term-care benefit payments will reduce the basis of the annuity for income tax purposes. This may create a larger tax burden on heirs of the annuity owner after death. An immediate annuity can also contain a qualified chronic illness benefit and enjoy qualified status as long as the definition of chronic illness matches that of HIPAA. Also, under the expanded 1035 exchange rules an annuity without an LTC rider can be exchanged using section 1035 for an annuity with a qualified LTC rider.

THE PATIENT PROTECTION AND AFFORDABLE CARE ACT The Patient Protection and Affordable Care Act (PPACA), enacted in 2010, created a publicly administered, voluntary long-term care insurance initiative called the Community Living Assistance Services and Supports (CLASS) program.

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The CLASS program, which is set to begin in 2013 or 2014, will offer a lifetime cash benefit to provide some protection against the costs of paying for long-term-care services and will thus help people remain in their homes and communities. Anyone who is currently employed will be able to enroll in CLASS, and premiums will be payable through payroll deductions if an individual’s employer elects to participate in the program. Self-employed people or those whose employers do not offer the benefit will also be able to join the CLASS program through a government payment mechanism. There will be no screening for pre-existing conditions and no lifetime benefit limit. Eligibility for CLASS is therefore guaranteed. All CLASS benefits will be funded through premium payments rather than by taxes, an approach that is expected to reduce Medicaid costs over time. The Act prohibits the use of taxpayer funds to cover the program's benefits. It is expected that the monthly premium levels will range from $140 to $240, depending on the participant’s age. (Those with incomes below the federal poverty level will pay only nominal amounts.) Program benefits will be paid out of a CLASS fund specifically earmarked for this purpose. The fund will hold participant premiums and fund earnings. Under the program, enrollees will qualify to receive benefits if they:

• meet a qualifying level of disability; • have paid premiums for five years; and • have worked at least three of those five years.

Though the specifics are to be defined by the Department of Health and Human Services, a “qualifying level of disability” is expected to mean:

• the inability to perform at least two or three ADLs for at least 90 days; or • cognitive impairment requiring substantial supervision for at least 90 days.

Benefits are expected to be based on a “functional ability” scale, with as many as six different levels. Each level will provide for a different benefit amount, and those with greater need or greater disability will receive higher benefits. The Act provides that the average daily benefit must be at least $50. The benefits can be used to pay for home-based and community-based LTC services or for support to help the participant live in a residential or institutional setting of their choosing. There will be no lifetime benefit limit; benefits will continue for as long as the participant has a qualifying level of disability. Once benefits begin, participants will have to recertify their eligibility every year.

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Chapter 4 CALIFORNIA STATUTORY POLICY PROVISIONS, REQUIREMENTS AND TERMINOLOGY LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, readers should know and understand:

• The differences between tax-qualified policies and tax-non-qualified policies, including differences in benefit triggers, ADLs (Activities of Daily Living), benefit payments, etc.

• How some ADLs are defined differently in tax-qualified policies and tax-non-qualified policies.

• Measures that must be taken to prevent unintentional policy lapse • Prohibitions, such as the prohibition of post-claims underwriting. • Agent requirements, such as disclosure of tax status. • How inflation protection functions, why it’s needed, and what is required of the

agent. • The rules governing replacement LTC policies.

WHAT CALIFORNIA DID TO IMPLEMENT HIPAA With the passage of HIPAA there were many changes in the structure of long-term care policies. Immediately there were many apparent differences between the federal HIPAA and older state laws related to long-term-care contracts. The grandfather provisions helped mitigate some of consumer’s concerns, but there remained major differences in the state (including California) and federal laws related to benefit triggers. Qualified LTC policies required a greater level of disability before a benefit could be paid than did many policies issued in states with more liberal benefit requirements. One major difference was related to the benefit trigger known as “medical necessity,” commonly used in pre-HIPAA LTC policies, that is not allowed in qualified LTC policies. In addition, HIPAA mandated consumer protections for qualified LTC policies that were not applied to nonqualified LTC policies.

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The California legislature passed several Senate Bills (SB) and Assembly Bills (AB) that reconciled many of the inconsistencies between HIPAA and California long-term-care law that predated HIPAA. In the first year that HIPAA was effective the California Legislature passed AB 1483, SB 1052, and SB 527. In the following two legislative sessions three more Bills were passed. As a group, these laws were designed to:

• Help Clarify the differences between the qualified and nonqualified LTC policies. • Require adequate disclosure to consumers for them to understand the difference

between qualified and nonqualified LTC policies. • Implement suitability standards and replacement rules related to the sale of LTC

policies. • Require inflation protection to be offered as an option as well as the right to change

coverage amounts. • Pave the way for insurance carriers to offer both qualified and nonqualified polices,

thus ensuring greater choice for California consumers. Appendix A at the end of this course contains a detailed listing of the legislative history related to California long-term-care insurance regulation. CALIFORNIA TAX-QUALIFIED VERSUS NON-TAX-QUALIFIED In an earlier chapter we covered California Insurance Code Section 10232, which among other things covered several differences between a tax-qualified and non-tax-qualified long-term-care insurance policy in California. DISCLOSURE TO CONSUMER OF DIFFERENCES IN QUALIFIED AND NONQUALIFIED In order for the consumer to have a better understanding of the differences between qualified and nonqualified LYTC policies, California requires disclosure to the consumer in the form of a notice that must be given to all prospective long-term-care purchasers. This notice explains the difference between qualified and nonqualified LTC policies. A signed and dated copy of the notice must be retained maintained by the insurer. Below is the verbiage required in the notice:

IMPORTANT NOTICE THIS COMPANY OFFERS TWO TYPES OF LONG-TERM CARE POLICIES IN

CALIFORNIA: (1) LONG-TERM CARE POLICIES (OR CERTIFICATES) INTENDED TO QUALIFY

FOR FEDERAL AND STATE OF CALIFORNIA TAX BENEFITS. AND (2) LONG-TERM CARE POLICIES (OR CERTIFICATES) THAT MEET CALIFORNIA

STANDARDS AND ARE NOT INTENDED TO QUALIFY FOR FEDERAL OR STATE OF CALIFORNIA TAX BENEFITS BUT WHICH MAY MAKE IT EASIER TO QUALIFY FOR

HOME CARE BENEFITS. The notice must also contain a comparison of qualified and nonqualified policy features and benefits, such as the following from the NAIC’s A Shopper’s Guide to Long-Term

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Care Insurance: Tax-qualified long-term-care policies must be labeled as “federally tax qualified.” Consumers should be informed that these policies use a standard of benefit eligibility that may be stricter than standards for nonqualified policies and that it may be easier to qualify for benefits under a nonqualified policy.

BENEFIT PAYMENTS QUALIFIED VERSUS NON-QUALIFIED In order to understand the circumstances in which benefits will paid under a non-tax qualified LTC policy versus a tax-qualified LTC policy, it is important to have a thorough understanding of the components that make up the benefit trigger. IMPORTANT TERMS RELATED TO BENEFIT TRIGGERS In order to better understand when a benefit will be paid, it will help to begin by reviewing the definitions of several key terms used within California Insurance Code when determining the threshold for benefit payment. IMPAIRMENT DEFINED "Impairment" means that the insured needs human assistance or needs continual substantial supervision (CIC 10232.8(a)). COGNITIVE IMPAIRMENT DEFINED "Impairment of cognitive ability" means deterioration or loss of intellectual capacity due to organic mental disease, including Alzheimer's disease or related illnesses, that requires continual supervision to protect oneself or others (CIC 10232.8(a)). DIFFERENCE IN ADLS…NUMBER AND DEFINITION As stated earlier, the benefit triggers in non-tax-qualified policies are generally considered more liberal than those within tax-qualified policies. There are seven required ADLs in non-tax-qualified policies; whereas, only six ADLs are required in tax-qualified policies. In addition, the required definitions of the ADLs in non-tax-qualified policies are more encompassing than the required definitions in tax-qualified policies DIFFERENCES IN BENEFIT TRIGGERS An important part of the long-term care policy that the agent should be very familiar with is the benefit trigger. The benefit trigger varies between qualified and nonqualified LTC policies. The benefit trigger is comprised of the definition of the ADL’s and the threshold for benefit eligibility, which is usually expressed as needing assistance with a number of ADLs. CALIFORNIA ADLS REQUIRED IN NON-TAX QUALIFIED POLICIES California requires the following seven "Activities of daily living" in every policy or certificate that is not intended to be a federally qualified long-term care insurance contract and provides home care benefits. NOTE: Ambulating is NOT a required ADL in tax-qualified LTC policies.

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• Eating • Bathing • Dressing • Ambulating • Transferring • Toileting • Continence

CALIFORNIA NON-QUALIFIED THRESHOLD FOR HOME CARE BENEFITS In every long-term care policy or certificate that provides home care benefits and is not intended to be a federally qualified long-term care insurance contract, the threshold establishing eligibility for home care benefits must be at least as permissive as a provision that the insured will qualify if either one of two criteria below are met:

• Impairment in two out of seven activities of daily living. • Impairment of cognitive ability.

NOTE: If Federal laws change to include a third criteria the California Commissioner will enact emergency regulations to require insurers to offer this third criteria. The policy or certificate may provide for lesser but not greater eligibility criteria. The commissioner, at his or her discretion, may approve other criteria or combinations of criteria to be substituted, if the insurer demonstrates that the interest of the insured is better served. (CIC 10232.8(a)) CALIFORNIA DEFINITION OF ADLS FOR NON-TAX QUALIFIED POLICIES As we saw above, California requires seven ADLs to be included in all non-tax-qualified LTC policies. These ADLs are defined below, and insurers are required to use the definitions verbatim in nonqualified LTC contracts. The seventh ADL, Ambulating, is not a required ADL in tax-qualified LTC policies. Below are the verbatim definitions required in non-tax-qualified LTC policies issued in California. (from CIC 10232.8)

Eating, must mean: reaching for, picking up, and grasping a utensil and cup; getting food on a utensil, and bringing food, utensil, and cup to mouth; manipulating food on plate; and cleaning face and hands as necessary following meals. Bathing, must mean: cleaning the body using a tub, shower, or sponge bath, including getting a basin of water, managing faucets, getting in and out of tub or shower, and reaching head and body parts for soaping, rinsing, and drying. Dressing, must mean: putting on, taking off, fastening, and unfastening garments and undergarments and special devices such as back or leg braces, corsets, elastic stockings or garments, and artificial limbs or splints.

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Toileting, must mean: getting on and off a toilet or commode and emptying a commode, managing clothing and wiping and cleaning the body after toileting, and using and emptying a bedpan and urinal. Transferring, must mean: moving from one sitting or lying position to another sitting or lying position; for example, from bed to or from a wheelchair or sofa, coming to a standing position, or repositioning to promote circulation and prevent skin breakdown. Continence, must mean: the ability to control bowel and bladder as well as use ostomy or catheter receptacles, and apply diapers and disposable barrier pads. Ambulating, must mean: walking or moving around inside or outside the home regardless of the use of a cane, crutches, or braces.

CALIFORNIA ADLS REQUIRED IN TAX QUALIFIED POLICIES California requires the following six "Activities of daily living" in every policy or certificate that is intended to be a federally qualified long-term care insurance contract and provides home care benefits. NOTE: Ambulating, which is a required ADL in non-tax-qualified policies, is not required in tax-qualified policies.

• Eating • Bathing • Dressing • Transferring • Toileting • Continence

CALIFORNIA QUALIFIED THRESHOLD FOR HOME CARE BENEFITS California requires that in every long-term care policy that is intended to be a federally qualified long-term care insurance contract the threshold establishing eligibility for home care benefits must provide that a chronically ill insured will qualify if either one of two criteria below are met.

• Impairment in two out of six activities of daily living. • Impairment of cognitive ability.

NOTE: The requirement that the insured be chronically ill (as defined by HIPAA) is

added to the threshold for benefits in a tax-qualified LTC policy; whereas, the requirement for the insured to be chronically ill is not included in the threshold for non-tax-qualified policies. If Federal laws change to include a third criteria for meeting the benefit payment threshold, the California Commissioner will enact emergency regulations to require insurers to offer this third criteria.

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DEFINITION OF ADLS FOR TAX QUALIFIED POLICIES The definitions for the seven ADLs required by California in all tax-qualified LTC policies must be used verbatim in the policies, or in the case of group coverage in the certificates of coverage. These definitions are listed directly from California Insurance Code below.

Eating must mean: feeding oneself by getting food in the body from a receptacle (such as a plate, cup, or table) or by a feeding tube or intravenously. Bathing must mean: washing oneself by sponge bath or in either a tub or shower, including the act of getting into or out of a tub or shower. Continence must mean: the ability to maintain control of bowel and bladder function; or when unable to maintain control of bowel or bladder function, the ability to perform associated personal hygiene (including caring for a catheter or colostomy bag). Dressing must mean: putting on and taking off all items of clothing and any necessary braces, fasteners, or artificial limbs. Toileting must mean: getting to and from the toilet, getting on or off the toilet, and performing associated personal hygiene. Transferring must mean: the ability to move into or out of bed, a chair, or wheelchair.

CALIFORNIA DEFINITION OF LICENSED HEALTH CARE PRACTITIONER (LHP) HIPAA was silent on the definition of a licensed health care practitioner so California, like most states, adopted a federal definition. California defines a "licensed health care practitioner" as “a physician, registered nurse, licensed social worker, or other individual whom the United States Secretary of the Treasury may prescribe by regulation. LHP MUST BE INDEPENDENT FROM INSURER The initial certification and annual recertification of an individual as chronically ill is at the core of the benefit payment threshold in a tax-qualified LTC policy. To make sure this certification or recertification is carried out without any financial bias on the part of the LHP, California requires the LHP to be independent of the insurer. This means the LHP cannot be an employee of the insurer nor can their compensation be tied in any way to the outcome of their decision as to the chronically ill status of the insured. The licensed health care practitioner is required to develop a written plan of care after personally examining the insured. The costs to have a licensed health care practitioner certify that an insured meets, or continues to meet, the definition of "chronically ill individual," or to prepare written

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plans of care cannot be counted against the lifetime maximum benefit of the LTC policy. REQUIREMENT FOR ASSESSMENT AND WRITTEN PLAN OF CARE Before benefits can be paid under a tax-qualified LTC policy, a comprehensive assessment of the insured’s health needs and support system must be performed. Using the information from the assessment, a licensed health care practitioner must then develop a written plan of care. California defines a plan of care as “a written description of the insured's needs and a specification of the type, frequency, and providers of all formal and informal long-term care services required by the insured, and the cost.” NOTE: The requirement for a certification of chronically ill and a written plan of care are NOT required for non-qualified LTC policies. INSURER MAY HAVE CONDITION PRECEDENT TO BENEFIT PAYMENT California Insurance Code allows that precedent to the payment of benefits for any care covered by the terms of a long-term care policy, any insurer offering long-term care insurance may obtain a written declaration by a physician, independent needs assessment agency, or any other source of independent judgment suitable to the insurer whose services are necessary. (CIC 10233) EXCHANGE FROM NON-TAX QUALIFIED TO TAX QUALIFIED If a consumer is considering exchanging from a non-tax qualified LTC policy to a tax qualified policy they should be informed of the differences between the two types of contracts. Terms such as chronically ill, substantial assistance and severe cognitive impairment should be explained to them. In addition, they should understand the differences in the definitions of the ADLs from non-tax-qualified to tax-qualified. INSURER RESPONSIBILITIES AND PROHIBITIONS California Insurance Code imposes many insurer responsibilities and prohibitions relating long-term care insurance policies, marketing practices, and company procedures. Many aspects of these responsibilities take the form of disclosures. DISCLOSURE OF TAX STATUS As part of the effort to ensure that consumers understand whether they are purchasing a tax-qualified or non-tax-qualified policy, California Insurance Code section 10232.1 requires language to be prominently displayed on the first page of the policy application, the policy, and the outline of coverage that clearly state the tax status of the policy. For policies intended to be qualified long-term care policies, the wording must read as follows:

“This contract for long-term care insurance is intended to be a federally

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qualified long-term care insurance contract and may qualify you for federal

and state tax benefits.”

For policies intended to be non-qualified long-term care policies, the wording must read as follows:

“This contract for long-term care insurance is not intended to be a federally

qualified long-term care insurance contract.”

POLICY TERMS Many terms within a long-term care policy in California are required to adhere to language and meanings set forth in the California Insurance Code. If the term Medicare is used it must mean - the "Health Insurance for the Aged Act," Title XVIII of the Social Security Amendments of 1965 as then constituted or later amended, or Title I, Part I of Public Law 89-97, as enacted by the 89th Congress of the United States of America and popularly known as the Health Insurance for the Aged Act (CIC 10235.2) When using terms that relate to long-term care services such as “skilled nursing care,” “intermediate care,” home health care,” and others, the terms must be defined in relation to the level of skill required, the nature of the care, and the setting in which the care is required to be delivered. (CIC 10235.2) When defining all providers of long-term care services including, but not limited to, skilled nursing facilities, intermediate care facilities, and home health, agencies must be defined in relation to the services and facilities required to be available and the licensure or qualification of those providing the services. The policy definition may require that the provider be appropriately licensed or certified. (CIC 10235.2) SHORTENED BENEFIT PERIOD California requires several non-forfeiture options in long-term care policies. One such required non-forfeiture option is the option for the insured to elect a shortened benefit period. This option is required to be offered at time of application, and insurers can charge an additional premium for the benefit. The requirements for this optional benefit are as follows:

• The insured must be eligible to elect the benefit no longer than after 10 years of premium payments.

• The lifetime maximum benefit of this non-forfeiture benefit must be no less than the dollar equivalent of either three months of care at the nursing facility per diem benefit contained in the policy or the amount of the premiums paid, whichever is greater. The lifetime benefit may be reduced for claims paid prior to election of this option.

• When elected, the benefits payable are the same benefits covered in the policy, including riders.

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• Cash back, extended term, and reduced paid-up forms of non-forfeiture benefits are not allowed.

• The lifetime maximum benefit amount must increase proportionally with the number of years of premium payment. (CIC 10235.30)

NOTE: This benefit is not required to be offered in life insurance policies that accelerate benefits for long-term care.

PROTECTION AGAINST UNINTENTIONAL LAPSE Another consumer protection required by the California Insurance Code is protection against unintentional lapse. This protection is designed to prevent a lapse due to the insured forgetting (perhaps due to cognitive impairment) to make a premium payment. Insurers must offer policy holders the right to designate a person other than themselves to receive notice of lapse due to nonpayment of premiums. (CIC 10235.40) To prove that the insurer has offered the insured/applicant the right to designate at least one individual in addition to the applicant to receive notice of lapse or termination of a policy or certificate for nonpayment of premium, the insurer must receive from each applicant one of the following:

• A written designation listing the name, address, and telephone number of at least one individual in addition to the applicant who is to receive notice of lapse or termination of the policy or certificate for nonpayment of premium; or

• A waiver signed and dated by the applicant electing not to designate additional persons to receive such notice.

The insurer must notify the insured of their right to change the designee at least once every two years. 30 DAY NOTICE OF IMPENDING LAPSE An individual long-term care insurance policy or certificate may not lapse or be terminated for nonpayment of premium unless the insurer gives notice to the insured and to the insured’s designated contact of the impending lapse or termination at least 30 days before the effective date of the lapse or termination. Notice must be given by first class U.S. mail not less than 30 days after a premium is due and unpaid.

FIVE MONTH REINSTATEMENT Insurers are also required to provide reinstatement of coverage after a lapse if proof is provided that the insured has been diagnosed with a loss of functional capacity or cognitive impairment. Assuming proof of loss of functional capacity or cognitive impairment is provided, the insured must reinstate the policy if: requested to do so within five months after termination due to lapse; and all past due premiums are paid. (CIC 10235.40)

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PROHIBITION AGAINST POST-CLAIMS UNDERWRITING

Post-claim underwriting occurs when after a claim is filed by the policyholder, the insurance company declines the coverage on the ground that it would not have issued the policy if it had knowledge about some medical condition. Under HIPAA, applications for long-term care insurance must contain clear and unambiguous questions designed to elicit information about the health status of the applicant. Further, if the application asks whether the applicant takes prescribed medications, it must ask for a list of those medications. The insurance company, if it receives the medication list, may not deny coverage for any condition which was being treated by any of the medications listed, even if that condition would have been grounds for a denial of coverage at the application stage. The application must contain a clear bold caution to applicants stating that if the answers on the application are incorrect or untrue, the company has the right to deny coverage or rescind the contract. The California Insurance Code follows these HIPAA requirements to prevent post-claims underwriting. In addition, California requires that the application ask yes or no health questions.

The exact wording that California requires on the policy application is reproduced below:

"Caution: If your answers on this application are misstated or untrue, the insurer may have the right to deny benefits or rescind your coverage." (CIC 10232.3 (b))

Two other issues closely related to post claims underwriting are addressed by California Insurance Code as follows: Long-term care policies may not be field-issued. (CIC 10232.3 (e)) The contestability period for long-term care insurance is two years. (CIC 10232.3(f)) DOCUMENT CHECKLIST REQUIRED WITH APPLICATION California requires that every application for long-term care insurance must include a checklist showing every document that is required to be given to the applicant at time of solicitation. The documents required by the checklist include, but are not limited to:

• “Important Notice Regarding Policies Available” (explains tax-qualified versus nonqualified LTC policies);

• The outline of coverage (summary of policy benefits and features of the policy applied for);

• The HICAP Notice (details the free counseling services offered by the Health Insurance Counseling and Advocacy Program (HICAP);

• Long-Term Care Insurance Shoppers Guide; • “Long-Term Care Insurance Personal Worksheet” (required under suitability rules

(CIC 10234.95(c)); and • “Notice to Applicant Regarding Replacement of Accident and Sickness or Long-

Term Care Insurance” (only when replacement is indicated).

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If an insurer does not complete medical underwriting and resolve all reasonable questions arising from information submitted with an application before issuing the policy or certificate, then the insurer may only rescind the policy or certificate or deny an otherwise valid claim upon clear and convincing evidence of fraud or material misrepresentation of the risk by the applicant. COPY OF COMPLETED APPLICATION MUST BE DELIVERED WITH POLICY California requires that a copy of the completed application is delivered to the insured with the policy. (CIC 10234.95(g)) As a final measure to keep tabs on policy rescissions, California requires all insurers to maintain records of policy rescissions and annually file a report with the commissioner. This report must show the reason for rescission, how long the policy was in force, and age and gender of the insured. CALIFORNIA LTC POLICY CANNOT REQUIRE PRIOR HOSPITALIZATION Many older LTC policies contained wording that conditioned benefit payments on the prior receipt of in-patient hospital care. While it is true that some chronic conditions originate as an acute medical condition and require hospitalization, not all chronic conditions involve a hospital stay. Also, the requirement for a prior in-patient hospital stay is an eligibility requirement for Medicare to pay for a stay in a skilled nursing facility, so policy with this wording tended to overlap Medicare coverage. California Insurance Code section 10232.5 prohibits a long-term care policy from preconditioning the availability of benefits on prior hospitalization. In addition, a policy cannot precondition the receipt of community based or home care on prior institutional care (such as a previous stay in a nursing home). CALIFORNIA REQUIRED CONVERSION OR CONTINUATION OF GROUP COVERAGE California Insurance Code Section 10236.5 requires insurers offering group LTC policies to provide for continuation or conversion of coverage if the group coverage terminates. There are several circumstance where the insurer is not required to provide continuation or conversion coverage, such as if the group coverage was terminated because the insured failed to make a premium payment or if the group coverage is replaced within 31 days by new group coverage that was effective the day after the previous coverage terminated. In order to group replacement coverage to qualify as a reason not to offer continuation or conversion coverage several criteria must be met:

• The replacement coverage must provide identical benefits or benefit determined by the commissioner to be substantially equivalent to the previous coverage.

• The premium for the replacement coverage must be calculated on the insured's

age at the time of issue of the group certificate for the coverage which is being replaced.

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If the coverage is not lapsed due to nonpayment of premiums or replaced with identical coverage within 31 days, the insurer must offer continuation or conversion coverage. CONTINUATION OF COVERAGE "Continuation coverage" means the maintenance of coverage under an existing group policy when that coverage would be or has been terminated and which is subject only to continued timely payment of the premium. (CIC 10236.5) If an individual is insured under a group LTC policy and their eligibility is based on a relationship to another person, they are entitled to continuation coverage if the qualifying relationship terminates by divorce or death. CONVERSION COVERAGE "Conversion coverage" means an individual policy of long-term care insurance issued by the insurer of the terminating group coverage without considering insurability and containing benefits which are either identical to the group coverage which would be or has been terminated or have been determined by the commissioner to be at least substantially equivalent to the existing or replaced group coverage. (CIC 10236.5) If the insurer provides conversion coverage, the premium must be calculated on the insured’s age at the time the group certificate was issued (issue age). OUTLINE OF COVERAGE REQUIRED When a consumer is contemplating the purchase of long-term care insurance, an outline of coverage can be a very important aide in the decision-making process. California requires an outline of coverage to be delivered to each prospective applicant of an LTC policy. The outline of coverage is intended to convey to the consumer a summary of the specific benefits, features, and limitations offered by the policy. The information included and format used for the outline of coverage is specified in CIC 10235 and is included in the Appendix to this course. The outline of coverage must be a freestanding document, using no smaller than 10-point type, and must not contain advertising material.

The state-mandated form for the outline of coverage is organized in a logical order and provides areas for the insurer to insert product specific. This approach facilitates the comparison of several different LTC products and can also be a useful aid for an agent to quickly compare two LTC products. WHEN THE OUTLINE OF COVERAGE MUST BE DELIVERED The California Insurance Code addresses when the outline of coverage must be delivered to the consumer “at the time of the initial solicitation.” (CIC 10233.5)

• In the case of agent solicitations, the agent must deliver the outline of coverage before presenting an application or enrollment form.

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• In the case of direct response solicitations, the outline of coverage must be presented in conjunction with the application or enrollment form.

DELIVERY OF HICAP NOTICE California Insurance Code (section 10234.94 (a)(8)) requires that a HICAP Notice is also delivered at the time of solicitation. This is a written notice informing the consumer that the Health Insurance Counseling and Advocacy Program (HICAP) provides free health-insurance counseling to senior California residents. The agent must provide the name, address, and telephone number of the local HICAP program and the statewide HICAP number (1-800-434-0222) to prospective applicants. REQUIRED DELIVERY OF SHOPPER’S GUIDE Insurers are also required to deliver a copy of the long-term care shopper’s guide developed by the California Department of Aging before presenting an LTC application or enrollment form for insurance. This guide, entitled Taking Care of Tomorrow, was prepared for consumers who want to plan for their long-term care needs. Specifically, the guide explains:

• The risks of needing long-term care • The different types of available housing and care • How consumers can pay for long-term care • The available benefits and features of long-term care insurance • The questions consumers should ask before purchasing a policy • How partnership-approved long-term care policies differ from other policies

From: California Insurance Code Section 10234.94(a)(9)

OTHER REQUIRED CONSUMER PROTECTIONS California Insurance Code Section 10234.9(a) requires that all advertisements intended to generate sales leads must prominently state that “an insurance agent will contact you,” if this is the case. Any agent, broker, or other person who contacts a consumer as a result of receiving information generated by a cold lead device must immediately disclose that fact to the consumer. A cold lead device is any marketing device or process that does not clearly disclose that its purpose is to solicit insurance, and that an agent or insurance company will make follow-up contact. (California Insurance Code Section 10234.9(a)) AVAILABILITY OF CONSUMER RATE GUIDE The California Department of Insurance publishes a consumer rate-guide each year (by December 1st) to assist consumers to compare rates among long-term-care policies and insurers.

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Agents must notify each prospective client that this rate guide is available. The consumer can obtain a copy of this rate guide by calling the Department of Insurance’s consumer toll-free telephone number (1-800-927-HELP) or by calling the Health Insurance Counseling and Advocacy Program (HICAP) toll-free telephone number. (California Insurance Code Section 10234.6)

30-DAY FREE LOOK PERIOD If a consumer is not satisfied with a long-term-care policy for any reason, they may return it via first class United States mail within 30 days for a full premium refund. The insurer then must refund all premiums paid directly to the insured within 30 days of receipt of the returned policy. The return of an LTC policy will void the policy as if no policy was ever issued. All LTC policies must have a notice of the right to return prominently displayed on the first page of the policy. (CIC 10232.7) COVERAGE OF RESIDENTIAL CARE FACILITY REQUIRED b. Benefit eligibility California requires all LTC policies that provide coverage for nursing home confinement to also cover care in a residential care facility. Assisted living is a more common term used for the type of care that is provide in a residential care facility. A Residential care facility is defined as a facility licensed as a residential care facility for the elderly (RCFE) as defined by the California Health and Safety Code. If the facility is outside of California, and thus not licensed in California, it will be considered a residential care facility for determining benefit eligibility if it is a facility that:

• is primarily engaged in providing ongoing care and related services to individuals with impairment in activities of daily living or cognitive ability;

• provides care and services on a 24-hour basis; • has trained employees on duty at all times; • provides three meals a day and accommodates special dietary needs; • ensures that residents receive necessary medical care by a physician or nurse in case

of emergency; and • has procedures to assist residents in managing their prescribed medications. (CIC

10232.92)

MINIMUM BENEFIT AMOUNT FOR RFCE California also requires that the benefit amount payable for care provided in a residential care facility must be equivalent to no less than 70 percent of the benefit amount payable for institutional confinement. All expenses incurred by the insured in a residential care facility for necessary long-term-care services must be covered and payable up to but not

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exceeding the maximum daily residential care facility benefit in the policy or certificate. LTC policies cannot limit or restrict who provides the service, nor may they require services to be provided by the residential care facility as long as the expenses are incurred while the insured is in the facility and the reimbursement does not exceed the maximum daily residential care facility benefit in the policy. (CIC 10232.92) RCFE BENEFIT ELIGIBILITY The threshold for benefit eligibility in a residential care facility must be no more restrictive than that for home-care benefits. The definitions for impairment in activities of daily living and impairment of cognitive ability must be the same as for home-care benefits under the type of policy issued (tax-qualified or nonqualified). (CIC 10232.92) FLEXIBLE BENEFIT REQUIRED California requires every LTC policy to define the maximum lifetime benefit as a single dollar amount that may be used interchangeably for any home-based and community-based services, assisted living benefit, or institutional care covered by the policy. There can be limit on any specific covered benefit except for a daily, weekly, or monthly limit set for home-based and community-based care and for assisted living care, and for the limits for institutional care. LTC policies may still limit reimbursement of actual expenses and incurred expenses up to daily, weekly, and monthly limits. (CIC 10232.93)

KEEPING THE LTC BENEFIT CURRENT WITH RISING COSTS Since costs inevitably increase, a policy without some form of inflation protection would be outdated in a few short years. Inflation protection riders available in LTC policies increase the benefit amount in an effort to keep the benefit current with the rising costs of long-term-care services. Adding inflation protection to a long-term-care insurance policy increases the premiums paid for the policy, causing some consumers to shy away from adding this important benefit. Protecting the LTC benefit from erosion in purchasing power is so important that California, like most states, requires all LTC insurers to offer every prospective insured an inflation protection option. In addition to offering the inflation option, the insurer must provide, with or in the outline of coverage, a graphic comparison of a policy that increases benefits at a compounded annual rate of not less than 5% with a policy that does not increase benefits. This graphical comparison must be reasonable and must show benefit levels over at least a 20-year period along with any expected premium increases to pay for the inflation protection. (CIC 10237.6) OFFER OF INFLATION PROTECTION REQUIRED California requires insurers to offer to each policyholder the option to purchase a long-term-care insurance policy that provides increasing benefit levels and benefit maximums

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to account for reasonably anticipated increases in the costs of long-term-care services covered by the policy. At the time of purchase, insurers must offer each applicant the option to purchase a long-term-care insurance policy or certificate containing an inflation protection feature that is no less favorable than one that does one or more of the following:

• Increases benefit levels annually in a manner so that the increases are compounded annually at a rate of not less than 5 percent.

• Guarantees the insured individual the right to periodically increase benefit levels without providing evidence of insurability or health status and without regard to claim status or history so long as the option for the previous period has not been declined. The amount of the additional benefit must be no less than the difference between the existing policy benefit and that benefit compounded annually at a rate of at least 5 percent for the period beginning with the purchase of the existing benefit and extending until the year in which the offer is made.

• Covers a specified percentage of actual or reasonable charges and does not include a maximum specified indemnity amount limit. (CIC 10237.1)

POLICIES NOT COVERED BY REQUIREMENT TO OFFER INFLATION PROTECTION Section 10237.3 of The California Insurance Code exempts certain polices from the requirement to offer inflation protection as described above.

• Life insurance policies or riders containing accelerated long-term-care benefits are not required to offer inflation protection.

• Expense incurred long-term-care insurance policies are also not required to

offer inflation protection. NOTE: For the purposes of this section an “expenses incurred long-term-care-insurance policy” does NOT include policies that pay a specified percentage of reasonable and customary charges up to a stated, indemnity-type maximum amount.

WHEN OFFERED TO A GROUP If a group LTC policy is issued to an employer or trade association the required offer of inflation protections must be made to the group policyholder. (CIC 10237.2) OTHER REQUIREMENTS OF THE INFLATION PROTECTION BENEFIT Inflation protection benefit increases under a policy must continue without regard to an insured's age, claim status, claim history, or the length of time the person has been insured under the policy. An offer of inflation protection that provides for automatic benefit increases must include an offer of a premium that the insurer expects to remain constant. The inflation protection offer must disclose in a conspicuous manner that the premium may change in the future

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unless the premium is guaranteed to remain constant. Inflation protection benefit increases cannot be reduced due to the payment of claims. (CIC 10237.4) CLIENTS ON FIXED INCOMES For policyholders living on a fixed income, the requirement that the inflation protection feature offered must include a premium that the insurer expects to remain level is very important to help the policyholder budget current and future premium expenditures. IF CONSUMER REJECTS INFLATION OFFER California Insurance Code requires that all LTC policies be issued with an inflation protection provision that increases the benefit at a rate not less than 5 percent compounded annually unless an insurer obtains a rejection of inflation protection signed by the policyholder. The rejection, to be included in the application or on a separate form, must state:

"I have reviewed the outline of coverage and the graphs that compare the benefits and premiums of this policy with and without inflation protection. Specifically, I have reviewed the plan, and I reject 5 percent annual compound inflation protection. _______________________________ __________________ Signature of Applicant Date" (CIC 10237.5)

PAST INCREASES IN CALIFORNIA LTC COSTS Nursing home costs in California have been increasing at a fairly steady rate of approximately 5% over the last 20 years. In 2011 the average daily cost for a private nursing home in California is $250 a day or $91,250 per year (California Long-term Care Partnership 2011). Affording a private nursing home bed for an extended stay is beyond the financial resources of many individuals. Considering the ever increasing costs of nursing home care, it is very important that a consumer be informed and offered options to properly address future nursing home costs. Below is a chart showing the average annual increase in nursing home costs in California for selected periods

Percent Annual Increases in California LTC Costs versus CPI Increase

Time Period Number of Years Avg Annual CA LTC Increase Avg Annual CPI Increase

1980 – 1989 10 7.5% 4.8% 1990 – 1999 10 4.3% 2.8% 1980 – 1999 20 5.8% 3.7%

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1991 – 2010 Most recent 20 years 5% 2.6% California Partnership for Long-Term Care, 2011. U.S. Bureau Labor Statistics

In recent years the annual increase in LTC costs in California has been trending slightly downwards towards 5% but still exceed annual increases in the Consumer Price Index CURRENT NURSING HOME COSTS IN CALIFORNIA According to the California Partnership for Long-term Care, in 2011 the median daily costs for a bed in a private nursing home in California is $250. While this is the median rate statewide, costs do vary significantly within the state. The table below shows the 2011 median daily rate for private nursing home in selected California cities or regions.

California Nursing Home Costs 2011 Median Daily Nursing Home Rates by City/Region 2011 Entire State $250 El Centro $154

Los Angeles County $218 Napa $316

Riverside-San Bernadino-Ontario $199 San Francisco $355

Santa Barbara- Santa Maria-Goleta $337 Vallejo-Fairfield $218

Genworth Financial 2011 Cost of Long-term Care Survey HOW LIFE EXPECTANCY IMPACTS THE NEED FOR INFLATION PROTECTION When determining whether to add inflation protection to a long-term-care policy, the applicant should consider their remaining life expectancy, because the longer they are expected to live, the greater the potential for long-term-care service costs to increase over their lifetime. The table below shows California specific average life expectancies. When reviewing this information, it is important to point out that these are the average life expectancies and that someone who will qualify for a long-term-care policy is likely to live longer than these averages.

Average Life Expectancy for California (in Years) Age Male Female

50 – 55 31.00 34.44 55 – 60 26.81 29.98 60 – 65 22.80 25.65 65 – 70 19.01 21.53 70 – 75 15.48 17.67 75 – 80 12.37 14.18 80 – 85 9.78 11.09

85+ 7.79 8.69 California Department of Health Services, Abridged Life Tables for California, 2004, published November 2006

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FUTURE NURSING HOME COSTS IN CALIFORNIA If the costs for a nursing home stay continue to increase at a compound rate of 5% per year (as in the last 20 years), the cost for a nursing home stay of 2. 25 years (821 days) will be a significant expenditure. The table below shows the cost for a 2.25 year stay in a California nursing home if costs continue to increase at 5% compound inflation.

Cost of 2.25 year Nursing Home Stay in California Assuming 5% compound inflation

Daily Cost Annual Cost Total Cost 2.25 years

2011 $250 $91,250 $205,250 In 14 years $495 $180,675 $406,395 In 20 years $663 $241,995 $544,323 In 30 years $1,080 $394,200 $886,680 THE VALUE OF INFLATION PROTECTION To illustrate the value of inflation protection we will use a few examples detailing the out-of-pocket expenses for nursing home stays at various future dates. These examples show the out-of-pocket expense without inflation protection and with simple inflation protection.

Out of Pocket Expense Nursing Home Stay in California Without Inflation Protection

Daily Cost 5% Inflation

Daily Benefit Daily Out of Pocket Expense

Annual Out of Pocket Expense

2011 $250 $250 $0 $0 In 14 years $495 $250 $245 $89,419 In 20 years $663 $250 $413 $150,863 In 30 years $1,080 $250 $830 $303,127 As we can see from the table above, the out-of-pocket expenses incurred without inflation protection are considerable. SIMPLE INTEREST INFLATION PROTECTION If an individual chooses to add simple inflation protection to a long-term-care policy, it will provide some protection against future increases in the cost of long-term-care services; however, there can still be significant out-of-pocket expense incurred for a nursing home stay. Adding an inflation protection feature to a long-term-care policy increases the premiums, and the 5% simple interest inflation protection option is cheaper than a 5% compound interest inflation protection option and is certainly better than not adding any inflation protection benefit. The table below illustrates the out-of-pocket

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expense incurred when a simple inflation protection option is added to a long-term-care policy

Out of Pocket Expense Nursing Home Stay in California With 5% Simple Inflation Protection




2011 $250 $250 $0 $0 In 14 years $495 $425 $70 $25,544 In 20 years $663 $500 $163 $59,613 In 30 years $1,080 $625 $455 $166,252 COMPOUND INTEREST INFLATION PROTECTION If an individual chooses 5% compound inflation protection, then the increases in the daily benefit amount as a result of the inflation protection option/rider would keep up with 5% inflation. The table below shows that 5% compound inflation protection will keep up with 5% inflation on the current cost of a California nursing home bed. NOTE: It is still possible for the nursing home costs to increase due to inflation at a rate greater than 5%.

Out of Pocket Expense Nursing Home Stay in California With 5% Compound Inflation Protection




2011 $250 $250 $0 $0 In 14 years $495 $495 $0 $0 In 20 years $663 $663 $0 $0 In 30 years $1,080 $1,080 $0 $0 CALIFORNIA REQUIREMENT TO OFFER INFLATION PROTECTION California Insurance Code Section 10237 requires long-term-care policies to include an offer of inflation protection and applies to all long-term-care policies issued or delivered in California after January 1, 1991. No insurer may deliver or issue for delivery a long-term care insurance policy or certificate in California unless the insurer offers to each policyholder the option to purchase inflation protection designed to increase policy benefit levels and benefit maximums to account for reasonably anticipated increases in the costs of covered long-term care services. ADDITIONAL REQUIREMENTS FOR INFLATION PROTECTION OFFER Section 10237.4 of the California Insurance Code requires that inflation protection benefits are also subject to the following requirements:

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• Inflation protection benefit increases must continue without regard to an insured’s age, claim status, claim history, or the length of time the person has been insured under the policy.

• An offer of inflation protection that provides for automatic benefit increases must include a premium the insurer expects to remain constant. The offer must disclose in a conspicuous manner that the premium may change in the future unless the premium is guaranteed to remain constant.

• Inflation protection benefit increases must not be reduced due to the payment of claims.

AGENT RESPONSIBILITIES AND PROHIBITIONS DUTY OF HONESTY, GOOD FAITH, AND FAIR DEALING Any legitimate insurance transaction requires utmost good faith from all involved parties. There should be no attempt to deceive made by the applicant, agent, or insurer. Since insurance contracts are intangible, the consumer must rely on the fidelity of the agent and insurer to disclose and explain all relevant facts surrounding the insurance contract and to act in the consumer’s best interest. In order to protect long-term-care insurance consumers, the California Insurance Code states that insurers and agents owe a duty of honesty, good faith, and fair dealing to the policyholder or prospective policyholder. (CIC 10234.8)

“An insurer, agent, or broker’s conduct during the offer and sale of a policy previous to the purchase is relevant to any action alleging a breach of the duty of honesty, good faith, and fair dealing.” CIC 10237.8(b)

The section above means that an agent’s conduct and actions during the sales process must evidence honesty, good faith, and fair dealing to be in compliance with CIC. AGENT TRAINING REQUIREMENTS In order to ensure that agents understand the long-term-care products they offer to consumers, section 10234.93 of the California Insurance Code requires agents to complete California state-specific long-term-care continuing education training covering a state-mandated outline prior to selling long-term-care insurance. The timing and amount of training depends on the date of initial licensure as follows:

• If the agent was first licensed after January 1, 1992, eight hours of training in each of the first four 12-month periods beginning from the date of original license issuance, and eight hours of training before each license renewal thereafter;

• If the agent was first licensed before January 1, 1992, eight hours of training before each license renewal.

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The training required by this section applies towards the agent’s overall continuing education requirement. Insurers must make sure that agents have completed this training before being authorized to solicit or sell long-term-care insurance. STATE TO STATE RECIPROCITY OF TRAINING While California generally recognizes and reciprocates with the continuing education requirements of other states, they require non-resident agents to complete the California state-specific long-term-care course regardless of any similar training they may have completed in their resident state of licensure. REQUIRED TRAINING TO SELL CALIFORNIA PARTNERSHIP LTC POLICIES In order for an agent to solicit or sell long-term-care policies certified by the California Long-term Care Partnership, they must attend 8 hours of classroom instruction in addition to the 8 hr training specified above. SUITABILITY REQUIREMENTS FOR THE SALE OF LTC POLICIES All insurers selling LTC policies in California must develop (in writing) and administer standards used to determine the suitability of sales and/or replacements of LTC policies. In developing and administering these standards the insurer must address the applicant’s needs and consider whether the transaction will improve the applicant’s position. These suitability standards must be available for inspection by the commissioner if so requested. Insurers must train their agents on using these suitability standards and implement the necessary procedures to verify compliance with the suitability standards. These procedures must be such that they are verifiable via audit. When developing the suitability standards and procedures, the insurer must take into account the following factors:

• The applicant’s ability to pay for the proposed coverage and other financial information related to the purchase of the coverage;

• The applicant’s goals or needs with respect to long-term care and the advantages and disadvantages of using insurance to meet these objectives; 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. CIC 10234.95(a) & (b)

USE OF PERSONAL WORKSHEET The insurer and agent (if an agent is involved) must make “reasonable efforts” to obtain the information described in the suitability standards. “Reasonable efforts” require the use of a Personal Worksheet that has been filed by the insurer with the Commissioner. The Personal Worksheet must be presented to and completed by the applicant before an insurer can consider the applicant for coverage.

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The personal worksheet follows a format established by the National Association of Insurance Commissioners and allows the insurer to ask for additional relevant information not on the standard form. The goal of the Personal Worksheet is to illicit sufficient information from the applicant to determine the suitability of the proposed sale or replacement of long-term-care insurance. RATE INFORMATION ON THE PERSONAL WORKSHEET In addition to serving as a vehicle for collecting information from the applicant, the Personal Worksheet also serves to disclose information to the applicant. One important element of the disclosure oriented information contained on the Personal Worksheet is a section detailing all of the insurer’s rate increases and requested rate increases on or after January 1, 1990. In addition, this section must include a notification to the applicant that a rate guide is available which compares policies sold by different insurers. CIC 10234.95(c)(2) REQUIREMENT FOR AGENT TO RETAIN RECORDS FOR FIVE YEARS Section 10508.5 of the California Insurance Code requires agents to retain records in an orderly manner for a period of five years, so that the information is readily available and open to inspection by the commissioner. Section 10508 enumerates the records that must be retained by the agent and insurer.

• The original application for each insurance policy or contract sold in this state. • Records showing the premiums received by the insurer for each insurance

policy or contract issued. • The insurer must retain production records showing all insurance policies or

contracts sold by each agent or other agent in the expired portion of the current calendar year and the whole of each of the preceding five calendar years.

• The insurer must maintain records showing the amount of commissions paid and to whom they are paid. This information is necessary for each insurance policy or contract issued.

• The insurer must maintain records or memoranda identifying any agent other than the agent whose name appears on the application and who, to the actual knowledge of the insurer, handled any part of an insurance transaction for which the other agent was not compensated.

• Correspondence, written solicitations or proposals, or other written communications sent by the insurer to a prospect, applicant, or insured, or received from him or her by the insurer, excluding printed material in general use distributed by the insurer, either directly or indirectly through its life agents.

• Correspondence, written proposals, notices, a statement of reasons, or other written communications, if any, pertaining to the rescission, termination, or nonrenewal of a policy or contract, or the election of non-forfeiture values , sent

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by an insurer to a policyholder or contract holder or received from him or her by an insurer.

• A copy of a written comparison of benefits, limitations, exclusions, and costs of existing accident, sickness, or long-term care coverage and proposed coverage.

• A copy of the outline of coverage or disclosure statement required by law or regulation.

• Copies of any correspondence between the policyholder or prospective policyholder and the agent or insurer.

• Copies of correspondence between anyone acting on behalf of the policyholder or prospective policyholder and the agent or insurer.

REPLACEMENT OF LONG-TERM CARE POLICIES The replacement of long-term-care insurance policies is not illegal activity as long as it is in the best interest of the policyholder; however, there exists a potential for unwarranted replacements to occur, and therefore California Insurance Code requires close monitoring and regulation of replacement activities. Two components of the California Insurance Code related to the replacement of long-term-care insurance limit the commissions that can be paid to an agent in a replacement transaction and require insurers to annually report the agents with the highest levels of replacement activity. REPLACEMENT DEFINED To fully understand the regulations and agent responsibilities surrounding a replacement transaction involving long-term-care insurance, we will first define a replacement transaction. If the overall transaction or series of transactions surrounding the purchase of a long-term-care policy results in the lapse, forfeiture, surrender, or termination of another long-term-care policy, the transaction is considered a replacement. California Insurance Code Section 10234.85 prohibits agents from causing a policyholder to replace a long-term-care policy unnecessarily. Considerations that will determine if a replacement is warranted include, among other items, the level of benefits, the length of benefit period and premium charges for both the existing and proposed long-term-care policies. A replacement transaction that will decrease benefits and increase premiums is specifically prohibited. California Insurance Code Section 10234.85 also presumes that any third or greater policy sold to a policyholder in any 12-month period is unnecessary. There is an exception to this rule when a policy is replaced solely for the purpose of consolidating policies with a single insurer. Replacements are allowed when the transaction will result in increased benefits, lower premiums or both.

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POLICY ISSUE DATE Agents considering a replacement transaction should pay close attention to the issue date of the existing policy. When the federal law, Health Insurance Portability and Accountability Act, (HIPAA) originally set the requirements for what constitutes a “qualified” LTC policy it allowed that LTC policies issued prior to 1/1/1997 were automatically grandfathered and received qualified status. Many of these older policies are still in force and may have more liberal benefit triggers than policies issued since. This is not to say that a policy with an issue date prior to 1/1/1997 is preferred or somehow better than a policy issued today. Some of these older policies also may have restrictions that are not allowed in a policy issued today and/or not covered benefits that are mandated in currently issued policies. For example some of the older policies:

• May require a prior hospitalization before covering a nursing home confinement. • May not cover home health care or provide adult day care benefits. • May not offer inflation protection or the ability to increase benefits without proof of

insurability in another manner. • May not include non-forfeiture benefits. • May offer benefit amounts that are not sufficient to cover today’s costs without a

mechanism to increase benefit amounts REPLACEMENT QUESTIONS ON POLICY APPLICATION California Insurance Code Section 10235.16(a) requires that all long-term-care policy applications contain questions to ascertain if a replacement is intended. These questions may be on a supplement to the application provided the form is required with all applications and is signed by the applicant. REQUIRED NOTICE REGARDING REPLACEMENT California Insurance Code Section 10235.16 requires that once an agent determines a transaction involves a replacement they must give the applicant a “Notice Regarding Replacement of Accident and Sickness or Long-term Care Coverage.” This form includes a comparison of the new and existing policies. The applicant must receive this form prior to issuing or delivering the policy. The applicant must sign the form and one copy is left with the applicant and one signed copy must be retained by the insurer. REQUIRED NOTICE REGARDING REPLACEMENT (DIRECT RESPONSE) Section 10235.18 of the California Insurance Code requires that insurers using direct response solicitation methods must deliver a notice regarding replacement of accident and sickness or LTC coverage to the applicant upon issuance of the policy or certificate.

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REPLACEMENT OF GROUP LTC COVERAGE In the replacement transaction involving group long-term-care coverage, each individual insured is not directly involved in the replacement decision therefore the group master policyholder who makes the replacement decision must provide substantially the same benefits in the new policy as existed in the replaced policy without the insured individuals having a gap in coverage. When replacing group LTC, section 10236.8 of the California Insurance Code states that the replacing insurer must do all of the following:

• Provide benefits identical to the terminating coverage or benefits determined by the commissioner to be at least substantially equivalent to the terminating coverage. Lesser or greater benefits may be provided if the commissioner determines the replacement coverage is the most advantageous choice for the beneficiaries.

• Calculate the premium on the insured's age at the time of issue of the group certificate for the coverage that is being replaced. If the coverage being replaced has itself replaced previous group coverage, the premium for the newest replacement coverage must be calculated on the insured's age at the time the previous group certificate was issued. If the replacement coverage adds new or increased benefits, the premium for the new or increased benefits may be calculated on the insured's age at the time of replacement.

• Offer coverage to all persons covered under the replaced group policy on its date of termination.

• Not exclude coverage for preexisting conditions if the terminating group coverage would provide benefits for those preexisting conditions.

• Not require new waiting periods, elimination periods, probationary periods, or similar preconditions related to preexisting conditions. The insurer must waive any such time periods applicable to preexisting conditions to the extent that similar preconditions have been satisfied under the terminating group coverage.

• Not vary the benefits or the premium based on the insured's health, disability status, claims experience, or use of long-term care services.

LIMITATIONS OF COMMISSIONS ON REPLACEMENT SALES To further discourage unwarranted replacements, California insurance Code Section 10234.97 regulates the commission that can be paid to an agent involved in a replacement transaction. In the replacement of individual coverage the sales commission will be calculated on the difference in commissions between the annual premium of the replacement coverage and the annual premium of the replaced coverage. If the premium on the replacement product is less than or equal to the premium for the product being replaced, the sales commission must be limited to the percentage of sale normally paid for renewal of long-term care policies or certificates.

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Replacement must be contingent upon the insurer's declaration that the replacement policy materially improves the position of the insured. For purposes of this commission limitations the term "commission or other compensation" includes monetary or non-monetary remuneration of any kind relating to the sale or renewal of the policy or certificate including, but not limited to, bonuses, gifts, prizes, awards, and finder's fees. NO NEW PREEXISTING CONDITION EXCLUSIONS ON REPLACEMENT POLICIES California requires that when a long-term care policy replaces another long-term care policy, the replacing insurer must waive any time periods applicable to preexisting conditions and probationary periods to the extent that similar exclusions have been satisfied under the original policy. California Insurance Code Section 10233.3 DEFINITION OF PREEXISTING CONDITION Preexisting condition can be defined no more restrictively than a medical condition for which the proposed insured has had treatment recommended by or received from a physician within the 6-month period immediately prior to the policy effective date. REQUIRED FILING OF COMMISSION STRUCTURE Every long-term care insurer must file its commission structure or an explanation of its compensation plan. Any amendments to the commission structure or compensation plan must be filed with the commissioner before implementation. REQUIRED PREMIUM CREDITS FOR REPLACEMENT POLICIES California Insurance Code Section 10234.87 requires that if an insurer replaces a policy or certificate that it has previously issued, the insurer must recognize past insured status by granting premium credits toward the premiums for the replacement policy or certificate. The premium credits must equal five percent of the annual premium of the prior policy or certificate for each full year the prior policy or certificate was in force. The premium credit must be applied toward all future premium payments for the replacement policy or certificate, but the cumulative credit allowed need not exceed 50 percent. The following limitations on premium credits apply:

• No credit is required to be provided if a claim has been filed under the original policy or certificate.

• The cumulative credits allowed need not reduce the premium for the replacement policy or certificate to less than the premium of the original policy or certificate.

Life insurance policies that accelerate benefits for long-term care are not required to offer

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premium credits. PREMIUM CREDIT EXAMPLE Susan has owned a long-term care policy for 6 years and 3 months and has paid annual premiums of $2,200. Susan’s insurer is offering to replace her policy with a newer policy that includes additional benefits and a new annual premium $2,600. Since Susan has had her current policy (issued by the same insurer) for 6 full years, her insurer must offer her a premium credit equal to 5% of each full year of premiums (we ignore the additional 3 months). Susan has paid 6 years of premiums at $2,200, resulting in total premiums of $13,200. The premium credit will be $660 ($13,200 x 5%). The California Insurance Code does not require the insurer to offer premium credits to the point that the premiums for the new policy would be lower than the premiums for the existing policy. Since the annual premium for the new policy Susan’s insurer is offering her is only $400 more than her existing policy and the premium credit is $660, the insurer only has to offer Susan a premium credit equal to $400. REQUIRED REPORTING OF REPLACEMENTS AND LAPSES California Insurance Code Section 10234.86 requires each insurer to maintain records for each agent showing the following:

• The amount of the agent’s replacement sales as a percent of his or her total annual sales.

• The amount of lapses of long-term care insurance policies sold by the agent as a percent of his or her total sales.

On or before June 30 each year, every insurer files a report with the Commissioner detailing the following information:

• The 10 percent of the insurer’s California agents with the highest percentage of lapses and replacements.

• The number of lapsed policies as: a percentage of the insurer’s total annual sales in the state; a percentage of its total number of policies in force in the state; and as a total number of each policy form in the state as of the end of the preceding calendar year.

• The number of replacement policies sold as a percentage of its total annual sales in the state and as a percentage of its total number of policies in force in the state as of the end of the previous year.

An agent’s appearance on the report of the top 10% with the highest percentage of lapse and replacements does not mean a violation has occurred; however, these reports can result in a closer review by regulators.

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CALIFORNIA LONG-TERM CARE PRODUCT REQUIREMENTS REQUIRED DEFINITION OF LIFETIME MAXIMUM BENEFIT Section 10232.93 of the California Insurance Code requires that every long-term care policy must define the maximum lifetime benefit as a single dollar amount that may be used interchangeably for any home and community-based services, assisted living benefit, or institutional care covered by the policy. There can be no limit on any specific covered benefit except for a daily, weekly, or monthly limit set for home and community-based care and for assisted living care, and for the limits for institutional care. This means that the pool of money available within the long-term care policy can be used interchangeably for the different care settings covered by the policy. Any benefits that are not used in the policy remain available for future use. The Insurer is still allowed to limit benefits to actual expenses and incurred expenses up to daily, weekly, and monthly limits. MINIMUM STANDARDS FOR HOME CARE Section 10232.9 of the California sets the minimum standards for home care or community-based services. Policies that purport to cover home or community-based services must offer at least the following coverages:

• Home Health Care: Home health care is defined as:

“Skilled nursing or other professional services in the residence, including, but not limited to, part-time and intermittent skilled nursing services, home health aid services, physical therapy, occupational therapy, or speech therapy and audiology services, and medical social services by a social worker”.

• Adult Day Care: Adult day care is defined as:

“Medical or nonmedical care on a less than 24-hour basis, provided in a licensed facility outside the residence, for persons in need of personal services, supervision, protection, or assistance in sustaining daily needs, including eating, bathing, dressing, ambulating, transferring, toileting, and taking medications.”

• Personal Care: Personal care is defined as

“Assistance with the activities of daily living, including the instrumental activities of daily living, provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. "Instrumental activities of daily living" include using the

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telephone, managing medications, moving about outside, shopping for essentials, preparing meals, laundry, and light housekeeping.”

• Homemaker Services: Homemaker services are defined as

“Assistance with activities necessary to or consistent with the insured's ability to remain in his or her residence, that is provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction.”

• Hospice Services: Hospice services are defined as

“Outpatient services not paid by Medicare, that are designed to provide palliative care, alleviate the physical, emotional, social, and spiritual discomforts of an individual who is experiencing the last phases of life due to the existence of a terminal disease, and to provide supportive care to the primary care giver and the family. Care may be provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction.”

• Respite Care: respite care is defined as

“Short-term care provided in an institution, in the home, or in a community-based program, that is designed to relieve a primary care giver in the home. This is a separate benefit with its own conditions for eligibility and maximum benefit levels.”

RESTRICTION ON LIMITATIONS AND EXCLUSIONS IN HOME CARE BENEFITS The insurer cannot limit or exclude home care benefits by any of the following:

• Requiring a need for care in a nursing home if home care services are not provided.

• Requiring that skilled nursing or therapeutic services be used before or with unskilled services.

• Requiring the existence of an acute condition. • Limiting benefits to services provided by Medicare-certified providers or

agencies. • Limiting benefits to those provided by licensed or skilled personnel when other

providers could provide the service, except where prior certification or licensure is required by state law.

• Defining an eligible provider in a manner that is more restrictive than that used to license that provider by the state where the service is provided.

• Requiring "medical necessity" or similar standard as a criteria for benefits. Any long-term care policy that covers both institutional care and home or community

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care and sets a daily, weekly, or monthly benefit maximum must pay an amount for home care (daily, weekly or monthly) that is at least 50% of the limit set for institutional care. In addition the minimum daily benefit that can be paid for home care is $50 per day. Long-term care products that are approved for sale to residents of continuing care communities are exempt from this requirement. If a long-term care policy covering both institutional and home care sets a maximum benefit length for home care, it must be at least 50% of the maximum benefit duration set for institutional care. REQUIRED COVERAGE: ANCILLARY SUPPLIES & SERVICES IN NURSING BENEFIT Section 10232.95 of the California Insurance Code requires that all long-term care policies that cover nursing facility care must also cover ancillary supplies and services up to the state’s daily, weekly, or monthly limits for as long as they cover nursing facility care. REQUIRED COVERAGE OF RESIDENTIAL CARE FACILITY (ASSISTED LIVING) All long-term care policies that cover confinement in a nursing facility must also cover care in a residential care facility for the elderly (RCFE). The most popular term used to describe the type of care that occurs in a residential care facility for the elderly is assisted living, and this is the term we will use to reference residential care facility for the elderly in this text. California Insurance Code also requires long-term care policies to pay a benefit amount for assisted living equal to at least 70% of the benefit amount payable for institutional confinement within the policy. So that an agent can understand where assisted living occurs, we will cover the definition of a residential care facility (assisted living facility) both within California and outside California.

An assisted living facility within California is defined as “a facility licensed as a residential care facility for the elderly or a residential care facility as defined in the Health and Safety Code.”

Since an assisted living facility located outside California is not required to be licensed as a residential care facility in California, the operative definition of a residential care facility (assisted living facility) located outside of California to be used within a California long-term care policy is:

“Facilities that meet applicable licensure standards, if any, and are engaged primarily in providing ongoing care and related services sufficient to support needs resulting from impairment in activities of daily living or impairment in cognitive ability and which also provide care and services on

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a 24-hour basis, have a trained and ready-to-respond employee on duty in the facility at all times to provide care and services, provide three meals a day and accommodate special dietary needs, have agreements to ensure that residents receive the medical care services of a physician or nurse in case of emergency, and, have appropriate methods and procedures to provide necessary assistance to residents in the management of prescribed medications.” California Insurance Code Section 10232.92

BENEFITS MAY NOT BE REDUCED DUE TO OUT OF POCKET EXPENDITURES It is common for policyholders of long-term care policies and/or their family members to pay out-of-pocket costs related to elder care. The fact that the insured, or anyone else, has paid out-of-pocket for a service or supply covered by the long-term care policy does not allow the insurer to reduce benefits. California Insurance Code Section 10233.4 PROHIBITION OF “USUAL AND CUSTOMARY” BENEFIT PAYMENT STANDARDS Long-term care policies in California cannot provide for payment of benefits based on a standard described as "usual and customary," "reasonable and customary," or words of similar import. California Insurance Code Section 10233.2 CALIFORNIA COMMISSIONER MAY WAIVE CERTAIN REQUIREMENTS The California insurance commissioner may waive any provision related to the article covering minimum standards for home and community-based care if it is in the best interest of the insureds. In order to waive a provision for a particular policy, the commissioner must make written findings that:

• The waiver would be in the best interest of the insureds; and • The intent of the minimum standards for home and community based care could

not be effectively or efficiently achieved without the waiver; and • Any of the following:

The waiver is necessary to the development of an innovative and reasonable approach for insuring long-term care.

The policy or certificate is to be issued to residents of a life care or continuing care retirement community or some other residential community for the elderly and the waiver is reasonably related to the special needs or nature of such a community.

The waiver is necessary to permit long-term care insurance to be sold as part of, or in conjunction with, another insurance product.

The commissioner may also condition any waiver upon the insurer complying with alternative requirements to achieve the purposes of the minimum standards for home or community-based care.

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Chapter 5 STATUTORY RATE STABILIZATION REQUIREMENTS The purchase of a long-term care policy is a major decision for prospective policyholders, and the variety of policy benefits, features, and premium levels available can be confusing. Many long-term care policy holders are living on a fixed income, and it is important that they be able to predict and budget most of their expenditures, including their long-term care premiums. To assist consumers with this decision, the California Department of Insurance publishes a consumer rate guide each year. Each insurer selling long-term care insurance in California must file rates and supporting actuarial documentation to substantiate rates and requested rate increases. CHAPTER LEARNING OBJECTIVES Upon completing this chapter, readers should have a full knowledge of how policy rates are managed in California and why rate stability is important. The reader should be able to understand:

• How the consumer rate guide functions • How the rate-making process works and what factors drive the process • How a policy premium can be increased • What materials are needed for rate filings • How non-forfeiture benefits function

CALIFORNIA CONSUMER RATE GUIDE In conjunction with the Health Insurance Counseling and Advocacy Program (HICAP), the California Commissioner of Insurance prepares a consumer rate guide for long-term care insurance each year. The consumer rate guide includes the following information:

• Comparisons of the different types of long-term care insurance and coverages/benefits available to in the California marketplace; and

• A premium history for each insurer that is authorized to sell long-term care insurance in California.

There are two distinct parts to the California Consumer Rate Guide:

• A history of the rates for all long-term care policies issued in California showing the current year rate and for the rate for the four preceding years; and

• A comparison of the policies, benefits, and sample premiums for all policies currently being issued to California consumers. California Insurance Code Section

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10234.6(a).(b) INFORMATION COLLECTED TO PRODUCE RATE HISTORY To produce the rate history part of the consumer rate guide, the California Department of Insurance requires each insurer selling long-term care insurance in California to provide the following information for the current year and each of the immediately preceding four years for each policy form sold:

• Company name • Premium rate increases requested • Policy type • Policy form identification • Premium rate increases approved • Dates of premium rate increase approvals • Dates policy sold • Date acquired (if applicable) • Any additional information required by the Department

The insurer must provide the information above by July 31 of each year and, with the exception of proprietary information, the information is available to the public. California Insurance Code Section 10234.6(b)(1),(d) INFORMATION COLLECTED FOR POLICY COMPARISONS In producing the policy comparison part of the rate guide, the California Department of Insurance develops separate sections for group and individual policies. The entire guide is cross-referenced so that a reader can easily reference the premium rates for each policy form from the policy comparison section. California Insurance Code Section 10234.6(b)(2). HOW TO GET THE CONSUMER RATE GUIDE California Insurance Code Section 10234.6 (c)

Anyone can get a copy of the consumer rate guide from any of the following venues: • Any of the Health Insurance Counseling and Advocacy Program (HICAP) offices • By calling the Insurance Department’s consumer toll-free telephone number; and • On the California Insurance Department’s Web site. As we learned earlier, agents must also notify clients that the rate guide is available, and each insurer must disclose the availability of the rate guide in the premium section of the Long-Term Care Insurance Personal Worksheet. A sample of the wording used to disclose the availability of the consumer rate guide within the Long-term Care Insurance Personal Worksheet is below:

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A rate guide is available that compares the policies sold by different insurers, the benefits provided in those policies, and sample premiums. The rate guide also provides a history of the rate increases, if any, for the policies issued by different insurers in each state in which they do business, since January 1, 1990. You can obtain a copy of this rate guide by calling the Department of Insurance’s consumer toll-free telephone number (1-800-927-HELP), by calling the Health Insurance Counseling and Advocacy Program (HICAP) toll-free telephone number (1-800-434-0222), or by accessing the Department of Insurance’s web site (www.insurance.ca.gov).

THE IMPORTANCE OF RATE STABILITY Having predictable and stable long-term care insurance rates is a very important issue related to the ability of a policyholder to sustain the policy so benefits can be accessed when needed. Many policyholders will not need long-term care policy benefits until late in life when they are living on a fixed income, and their ability to afford premium payments until benefits are needed is essential to delivering on the benefits promised within the policy. California is at the forefront of regulating long-term care premium stability and imposes several requirements and sanctions on insurers that are not seen in other states. California’s approach is to make sure that the initial premiums for a policy form are calculated to remain level for the life of the contract using moderately adverse actuarial assumptions. The National Association of Insurance Commissioners (NAIC) has issued a model regulation covering rate stability and California has adopted many key elements of this model regulation and added more components than any other state. By taking this approach, California increases the likelihood that if a consumer can affords the premiums for a long-term care policy when it is first purchased, they will still be able to afford the premiums well into the future, when benefits are most needed. THE RATE-MAKING PROCESS IN CALIFORNIA Setting premium rates for long-term care policies can be viewed as two separate events: the setting of initial premium rates when the policy form is first marketed; and adjusting or increasing the premium rates to account for adverse claims experience that was not anticipated in the initial rate building process. Before a long-term care product can be sold in California the insurer must file premium rates for approval by the Commissioner. An actuary working with the California Department of Insurance will review the premium-rate schedule and before approval must certify to the Commissioner that:

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• The initial premium-rate schedule is sufficient to cover anticipated costs under

moderately adverse experience; and • The premium-rate schedule is reasonably expected to be sustainable over the life of

the form with no future premium increases anticipated. As part of the initial rate review, the actuary working with the California Department of Insurance can request actuarial demonstrations to determine the reasonableness of the assumptions made by the insurer in building the premium-rate schedule. There are several resources that can be used to determine the reasonableness of actuarial assumptions made by the insurer, such as: (California Insurance Code Section 10236.11(a))

• Historical premium and claims experience of similar policy forms. • Information from other claims experience studies that would be relevant to the

policy form and benefits in question. REQUIRED SUPPORTING MATERIAL FOR RATE FILINGS California Insurance Code Section 10236.11(b) As part of the required rate filing package, each insurer must submit an actuarial memorandum describing the assumptions used in building the premium rate schedule. Specifically the actuarial memorandum must include:

• A detailed description of morbidity assumptions • An Analysis of voluntary lapse rates • An Analysis of mortality assumptions • Asset investment yield rates used • A Detailed description of all expense components • Plan and option mix assumptions • Expected lifetime loss ratio • Contract reserves • Projections of annual earned premiums • Projected claim loss ratios • Projected incurred claims

California Insurance Code Section requires that, in addition to the actuarial memorandum, all rate filings must include an actuarial certification. The actuarial certification must contain the following statements certified by the insurer’s actuary:

• A statement that the initial premium-rate schedule is sufficient to cover anticipated costs under moderately adverse experience and that the premium-rate schedule is reasonably expected to be sustainable over the life of the form with no future premium increases anticipated;

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• A statement that the policy design and coverage provided have been reviewed and considered;

• A statement that the underwriting and claims adjudication processes have been reviewed and considered;

• A complete description of the basis for contract reserves that are anticipated to be held under the form; and

• A statement that the premium rate schedule is not less than the premium rate schedule for existing similar policy forms also available from the insurer, except for reasonable differences attributable to benefits.

FILING A PREMIUM RATE INCREASE Before an insurer may increase premiums for a long-term care policy, they must file a premium rate increase request and receive approval from the commissioner. Similar to the rate filing required for an initial premium-rate schedule an insurer must submit several required components to complete the premium increase request package. One such requirement is that the insurer include an actuarial memorandum that justifies the rate increase by including the following information: California Insurance Code Section 10236.13(b)

• Lifetime projections of earned premiums and incurred claims based on the requested premium-rate schedule increase and the method and assumptions used in determining the projected values, including reflection of any assumptions that deviate from those used for pricing other forms currently available for sale.

• Disclosure of how reserves have been incorporated into the rate increase. • Disclosure of the analysis performed to determine why a rate adjustment is

necessary, the pricing assumptions that were not realized and why, and other actions taken by the company that the actuary relied on.

• A statement that policy design, underwriting, and claims adjudication practices have been considered; and if it is necessary to maintain consistent premium rates for new certificates and certificates receiving a rate increase, the insurer must file composite rates reflecting projections of new certificates.

An actuarial certification is also required from the insurer in order to file for approval of a premium increase request. Within the actuarial certification the insurer’s actuary must certify that:

• No further premium-rate schedule increases are anticipated if the requested premium-rate schedule increase is implemented and the underlying assumptions, which reflect moderately adverse conditions, are realized; and

• The premium rate filing complies with the provisions of the California Insurance Code.

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In addition to the actuarial memorandum and actuarial certification, the rate increase request must also include a statement that the renewal premium rates are not greater than the new business rate. REQUIRED FOLLOW-UP REPORTING AFTER A RATE INCREASE IS APPROVED California Insurance Code Section 10236.15 Insurers are required to file annual projections, which include a comparison of actual results with projections contained in the rate increase request. These reports are required to be filed with the Commissioner for three years after implementation of an approved rate increase request. The commissioner can extend the required reporting period beyond three years. In reviewing these annual projections, the commissioner may determine that the premium increase was greater or less than needed and may require the insurer to adjust the premium or initiate other actions to reduce the difference between actual results and projections included in the premium-rate increase request. The Commissioner may limit the marketing of new applications to the products subject to recent premium rate schedule increases. If it is determined by the Commissioner demonstrates that an insurer persistently files inadequate premium schedules, the Commissioner may prohibit the insurer from filing and marketing comparable coverage for up to five years; or offering similar policy forms. Life insurance policies that accelerate benefits for long-term care are not covered by this section co the California insurance Code. LONG-TERM CARE RATE AND HISTORY GUIDE ONLINE Listed on the California Department of Insurance website is a “Long-Term Care Rate and History Guide” which has the following consumer guidelines related to rate history and rate increases:

• Rate increases are not a sign of a “bad” policy, and the absence of a rate increase is not a sign of a “good” policy. Conversely, just because a company has not had any rate increases does not mean that it will never raise its rates.

• Rate increases are a function of a very complicated process companies use to try to limit risk of paying out more benefits than the premiums they collect. Some companies screen people very carefully, rejecting anyone who might have a pre-existing health condition. This “screening process” is called medical underwriting. Companies may also price their policies very conservatively to avoid any future increases, and their premiums may be higher as a result. Other companies may do neither of these things.

• Consider how a company “underwrites” applicants. While it may be harder to get

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coverage from a company that uses strict underwriting, the risk of later rate increases may be less.

• If a person has a health condition and a company agrees to issue him or her a policy anyway, the person may want to plan for later increases if he or she buys from one of these companies. Agents are expected to tell their clients all about medical underwriting by the companies the clients are considering.

• When a person buys long-term care insurance, he or she should expect to keep it for life. Individuals need to choose a premium they will be able to afford to pay each year, far into the future.

• When deciding how much premium is affordable, it’s a good rule of thumb for individuals to build into their calculations and planning an extra amount of 10 to 20 percent as a cushion against the shock of future increases. If no increase occurs later, then they will not have lost anything.

• Potential clients should be advised to question their agents about rate increases before they complete an application. They can also write a letter to the company and ask the same questions, then keep the company’s letter with their policy if they decide to buy it.

NON-FORFEITURE BENEFIT Non-forfeiture benefits are designed to pay some residual benefit to an individual who pays long-term care premiums for an extended period and then cancels their policy. With non-forfeiture benefits the longer an individual has paid premiums the greater the benefit will be. The reason(s) that a policy owner cancels their policy can vary, but often it is due to increasing premiums. Many insurers offer a non-forfeiture benefit to consumers for an additional premium. While non-forfeiture benefits vary, they typically take two different forms. Return of Premium: A return of premium non-forfeiture benefit returns a percent of the total premiums paid over the life of the policy to the policyholder when the policy is lapsed or surrendered. Any previous claims paid are deducted from the amount returned to the policy owner. NOTE: This type of non-forfeiture benefit in not allowed in a tax-qualified long-term care policy. Shortened Benefit Period: This type of non-forfeiture benefit pays a benefit (at the daily benefit rate of the policy) for a specified period upon lapse or surrender. REQUIRED OFFER OF NON-FORFEITURE BENEFIT California Insurance Code Section 10235.30 requires insurers to offer a shortened benefit period non-forfeiture option to all prospective policy owners and specifies minimum standards for this required benefit offer. Insurers may charge an additional premium for this required offer of a non-forfeiture

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benefit and the benefit must meet the following standards:

• Eligibility for the benefit must begin no later than after ten years of premium payments.

• The lifetime maximum benefit can be no less than the dollar equivalent of three months of care at the nursing facility per diem benefit contained in the policy or the amount of the premiums paid, whichever is greater.

• The lifetime maximum benefit may be reduced by the amount of any claims already paid.

• The lifetime maximum benefit amount must increase proportionally with the number of years of premium payment.

• All benefits covered in the policy and any riders are considered payable for qualified claims.

• Cash values, extended term, and reduced paid-up forms of non-forfeiture benefits are not allowed.

Life insurance policies that offer accelerated benefits to cover long-term care are exempt from the requirement to offer a shortened benefit period non-forfeiture benefit. CONTINGENT NON-FORFEITURE BENEFIT Even with rigorous measures to promote rate stability, long-term care policies can have rate increases, and some consumers are unable to continue their policies due to the premium increases. As an additional measure to protect policy owners who cannot afford to pay an increased long-term care premium, California requires all long-term care policies to offer a contingent non-forfeiture benefit. California long-term care policies are required to offer a contingent non-forfeiture benefit for those individuals who opt not to purchase a non-forfeiture benefit. The insurer may not charge an additional premium for this contingent non-forfeiture benefit. This benefit is triggered when the premium is increased to a level that results in a cumulative increase equal to or greater than a specified percentage the original premium, and the policy owner elects not to pay the higher premium and/or allows their policy to lapse.

The table below shows the cumulative increase in policy premiums necessary to trigger the required contingent non-forfeiture benefit.

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Policy Issue Age

Cumulative% Increase

over Premium at

issue

Policy Issue Age

Cumulative% Increase

over Premium at

issue 60 70% 71 38% 61 66% 72 36% 62 62% 73 34% 63 58% 74 32% 64 54% 75 30% 65 50% 76 28% 66 48% 77 26% 67 46% 78 24% 68 44% 79 22% 69 42% 80 20% 70 40% 81 19%

CONTINGENT NON-FORFEITURE BENEFIT EXAMPLE The specified trigger percentage for an individual who purchased a policy at age 61 is 66 percent (from table above). If a premium increase for this individual would result in premiums that are 66 percent (or more) higher than the original premium at issue, the individual must be provided with a contingent non-forfeiture benefit if they decide not to pay the newly increased premium and/or let their policy lapse. Insurers must offer the following options to the insured as a contingent non-forfeiture benefit:

• The option to lower the current policy benefits to a level that would result in premiums not being increased; or

• The option to convert to a paid-up status with a shortened benefit period. If the policyholder lapses the policy after a significant premium increase without electing either of these options, this is the default option the insurer must provide.

Agents selling long-term care policies should be familiar with this required contingent non-forfeiture benefit and be able to explain it to prospective policy owners. CALIFORNIA GUARANTEE FUND The California Life & Health Insurance Guarantee Association (the guarantee association) was created in 1991 when the California legislature enacted the California Life and Health Insurance Guarantee Association. The guarantee association is composed of all insurers licensed to sell life insurance, health insurance, and annuities in the state of California. Each insurer licensed to sell life & health insurance (including long-term care) is required to be a member of the guarantee association and must pay an assessment to help fund the guarantee association. In the event that a member insurer is found to be insolvent and is ordered to be liquidated by a court, the Guarantee Association Act enables the guarantee association to provide protection to California residents who are

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holders of life and health insurance policies, and annuity contracts, with the insolvent insurer. The protection provided was originally set at $200,000 in 1991 and is indexed to inflation. It is considered an unfair trade practice to communicate (oral or print) the existence of the California Life and Health Insurance Guarantee Association for the purpose of selling or inducing to purchase any form of insurance covered by the association. LTC POLICIES MUST COMPLY WITH CHAPTER 2.6 OF THE CIC Chapter 2.6 is the portion of the California Insurance Code that covers long term care insurance. In order to ensure that all long-term care policies fully comply with this chapter section 10233.7 of the California Insurance Code (which is near the front of Chapter 2.6) states the following: Excerpt from CIC 10233.7. No policy may be advertised, marketed, or offered as long-term care or nursing home insurance unless it complies with this chapter. CONTRASTING DIFFERENT LTC SERVICE CARE SETTINGS There exists a wide array of services that are provided to recipients of long-term care services and these services can be provided in a number of care settings. In addition several terms are often used for the same service or care setting. It is easy for the consumer and the agent to be confused as to which services and care settings are covered. The goal of this short section is to differentiate between skilled nursing facilities and residential care facilities. Residential Care Facilities for the Elderly - sometimes called "Assisted Living" or "Board and Care" facilities - provide a level of care that includes assistance with some activities of daily living, while allowing residents to be more independent than in most nursing homes or skilled nursing facilities. While Residential Care facilities are licensed by the State of California they are not considered Skilled Nursing Facilities. To begin we will review the section of CIC Chapter 2.6 that defines Long-Term Care Insurance. As you read the definition below note that the definition tends to focus more on the services provided than the care setting. Section 10231 of the California Insurance Code defines Long-Term Care Insurance as follows

10231.2. "Long-term care insurance" includes any insurance policy, certificate, or rider advertised, marketed, offered, solicited, or designed to provide coverage for diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care

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services that are provided in a setting other than an acute care unit of a hospital.

According to California code, long-term care insurance includes all products containing any of the following benefit types: Coverage for institutional care including

• Care in a nursing home, • Convalescent facility, • Extended care facility, • Custodial care facility, • Skilled nursing facility, or • Personal care home;

Coverage for home care including • Home health care, • Personal care, • Homemaker services, • Hospice, or • Respite care; or

Coverage of community-based care including: • Adult day care, • Hospice, or • Respite care.

Long-term care insurance includes disability based long-term care policies but does not include insurance designed primarily to provide Medicare supplement or major medical expense coverage. Next we will review the definition of the most common care types provided in a home or community care setting. DEFINITION OF HOME OR COMMUNITY BASED SERVICES

(1) "Home health care" is skilled nursing or other professional services in the residence, including, but not limited to, part-time and intermittent skilled nursing services, home health aid services, physical therapy, occupational therapy, or speech therapy and audiology services, and medical social services by a social worker. (2) "Adult day care" is medical or nonmedical care on a less than 24-hour basis, provided in a licensed facility outside the residence, for persons in need of personal services, supervision, protection, or assistance in sustaining daily needs, including eating, bathing, dressing, ambulating, transferring, toileting, and taking medications. (3) "Personal care" is assistance with the activities of daily living, including the instrumental activities of daily living, provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical

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direction. "Instrumental activities of daily living" include using the telephone, managing medications, moving about outside, shopping for essentials, preparing meals, laundry, and light housekeeping. (4) "Homemaker services" is assistance with activities necessary to or consistent with the insured's ability to remain in his or her residence, that is provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. (5) "Hospice services" are outpatient services not paid by Medicare, that are designed to provide palliative care, alleviate the physical, emotional, social, and spiritual discomforts of an individual who is experiencing the last phases of life due to the existence of a terminal disease, and to provide supportive care to the primary caregiver and the family. Care may be provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. (6) "Respite care" is short-term care provided in an institution, in the home, or in a community-based program, that is designed to relieve a primary caregiver in the home. This is a separate benefit with its own conditions for eligibility and maximum benefit levels.

The California Insurance Code also prohibits insurance companies from placing unreasonable conditions or limitations on home care.

PROHIBITED HOME CARE LIMITATIONS AND EXCLUSIONS (c) Home care benefits shall not be limited or excluded by any of the following:

(1) Requiring a need for care in a nursing home if home care services are not provided. (2) Requiring that skilled nursing or therapeutic services be used before or with unskilled services. (3) Requiring the existence of an acute condition. (4) Limiting benefits to services provided by Medicare-certified providers or agencies. (5) Limiting benefits to those provided by licensed or skilled personnel when other providers could provide the service, except where prior certification or licensure is required by state law. (6) Defining an eligible provider in a manner that is more restrictive than that used to license that provider by the state where the service is provided. (7) Requiring "medical necessity" or similar standard as a criteria for benefits.

Not only are certain limitation and exclusions on home care prohibited but the California Insurance Code also requires the benefit levels for home care to stay within certain levels

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as compared to institutional care benefits within the same policy.

BENEFIT AMOUNTS: INSTITUTIONAL CARE VERSUS HOME CARE Every comprehensive long-term care policy or certificate that provides for both institutional care and home care and that sets a daily, weekly, or monthly benefit payment maximum, shall pay a maximum benefit payment for home care that is at least 50 percent of the maximum benefit payment for institutional care, and in no event shall home care benefits be paid at a rate less than fifty dollars ($50) per day. Insurance products approved for residents in continuing care retirement communities are exempt from this provision. If a California LTC policy covers institutional care (nursing home care) to also cover assisted living care in a residential care facility.

REQUIREMENT FOR ASSISTED LIVING BENEFIT

The following section of the California Insurance Code sets the requirements for policies that cover confinement in a nursing facility (Nursing Home) to also cover care in a residential care facility (Assisted Living). This code section also sets a minimum benefit amount for assisted living as a percent of the benefit payable for institutional care. CIC 10232.92. REQUIRED RESIDENTIAL CARE FACILITY COVERAGE Every long-term care policy or certificate covering confinement in a nursing facility shall also include a provision with the following features: DEFINING RESIDENTIAL CARE FACILITY Care in a residential care facility must be covered. "Residential care facility" means a facility licensed as a residential care facility for the elderly or a residential care facility as defined in the Health and Safety Code. Outside California, eligible providers are facilities that meet applicable licensure standards, if any, and are engaged primarily in providing ongoing care and related services sufficient to support needs resulting from impairment in activities of daily living or impairment in cognitive ability and which also provide care and services on a 24-hour basis, have a trained and ready-to-respond employee on duty in the facility at all times to provide care and services, provide three meals a day and accommodate special dietary needs, have agreements to ensure that residents receive the medical care services of a physician or nurse in case of emergency, and, have appropriate methods and procedures to provide necessary assistance to residents in the management of prescribed medications. COVERED EXPENSES IN A RESIDENTIAL CARE FACILITY

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All expenses incurred by the insured while confined in a residential care facility, for long-term care services that are necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, needed to assist the insured with the disabling conditions that cause the insured to be a chronically ill individual, must be covered and payable, up to but not to exceed the maximum daily residential care facility benefit of the policy or certificate. There shall be no restriction on who may provide the service or the requirement that services be provided by the residential care facility, as long as the expenses are incurred while the insured is confined in a residential care facility, the reimbursement does not exceed the maximum daily residential care facility benefit of the policy or certificate, and the services do not conflict with federal law or regulation. DIFFERENCE BETWEEN ASSISTED LIVING AND SKILLED NURSING CARE A clear understanding of terminology is essential when families are making life decisions. The following is an explanation of two types of long term care facilities. Both provide long term care to the residents, but they vary in the level of services. Long-term care comprises the personal care and other related services provided on an extended basis to those who can no longer perform everyday tasks for themselves. Long-term care services can be received in a variety of settings including a person’s home, an assisted living facility, a nursing home, and other settings. ASSISTED LIVING SERVICES IN A RESIDENTIAL CARE FACILITY Assisted living (also called Board and Care) is a portfolio of services that focus on maintaining each resident’s independence and dignity. It is a type of healthcare designed for the individual’s daily needs which may include bathing, dressing, balancing a checkbook, medication reminders, etc. Twenty-four-hour supportive services are available to meet planned and unplanned needs. Residents in assisted living may have their own rooms, suites or apartments. They may also share their quarters with their spouses or roommates. Some residents may suffer from Alzheimer’s disease or other memory disorders; many assisted living facilities provide special units to care for such residents. Residential Care Facilities offer an alternative to those who no longer want to live alone but do not need 24-hour skilled nursing care. NURSING HOMES AND SKILLED NURSING FACILITIES Nursing home services provide personal care, 24-hour skilled nursing care, medical care, rehabilitation services, and assistance with activities of daily living. Personal care includes toileting, continence, eating and transferring. It includes additional help for residents with cognitive impairment, which may include memory loss or dementia. These services may be short or long term in duration. Many nursing homes provide respite care (short-time supervision while the family or caretaker is away). The level of care provided is more skilled in a nursing home with nurse supervision on a 24-hour basis.

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FACILITIES OFFERING MULTIPLE LEVELS OF CARE Some larger facilities provide both assisted living and skilled nursing services within the same facility the different care units may be designated as separate wings of the same facility.

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Chapter 6 PARTNERSHIP FOR LONG TERM CARE AND ALTERNATIVES TO LTCI CALIFORNIA PARTNERSHIP FOR LONG-TERM CARE In 1994, the state of California established a long-term care insurance partnership program designed to encourage the purchase by resident of long-term care insurance. This “California Partnership for Long-Term Care” program was created by the California Department of Health Services (DHS) in conjunction with the state of California, the California Public Employees Retirement System (CalPERS), and private insurance companies. The concept of long-term care partnerships dates back to 1987 when the Robert Wood Johnson funded a $14 million demonstration project on the concept. The first state to establish a long-term care partnership was Connecticut in 1992 followed by New York and Indiana in 1993 and California in 1994.These four states are considered the pioneers of the long-term care partnership concept. HOW LTC PARTNERSHIPS WORK These Partnerships for Long-Term Care can be described as agreements between private insurance companies, state governments, and residents of those states whereby individuals purchase private long-term care policies and are rewarded (how they are rewarded varies from state to state) should they ever need Medicaid assistance with long-term care costs. The insurance companies are required to structure their partnership long-term policies within certain parameters, provide required consumer disclosures, and adhere to market conduct standards. To receive the reward (some degree of asset protection should they apply for state medical expense assistance (Medi-Cal)) the resident must purchase a partnership long-term care policy. The state government, for their part in the partnership, must reward the resident for having insured their potential long-term care needs to the required level by allowing assets to be retained by the insured resident should they apply for medical expense assistance.

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The concept of the partnership is to provide a mechanism for the state medical assistance program (Medi-Cal in California) to work together with private long-term care insurance companies to help a larger sector of the population solve the long-term care equation. There are many individuals who currently can’t afford to pay the costs associated with long-term care but possess assets in excess of eligibility limits for assistance. FEDERAL BARRIERS TO PARTNERSHIP EXPANSION The Omnibus Budget Reconciliation Act of 1993 limited most states from adopting partnership programs and thus slowed the spread of the partnership concept beyond the initial four states. With the passage of The Deficit Reduction Act of 2005 (DRA) many of the barriers were removed and more states are now able to establish a long-term care partnership program. CHOICE AFFORDED BY A PARTNERSHIP PROGRAM In the absence of the California Partnership, residents have three basis choices to finance the costs of long-term care: 1) Pay for needed care out of assets and income, which can cause significant shrinkage in assets even to the point of financial destitution. 2) Attempt to transfer assets to prior to needing long-term care services. The most common method is via gifting to children or a trust. The downside to this approach is that in order to successfully divest yourself of assets you must give up control of your major assets. Many individuals have engaged in this type of planned impoverishment only to never need long-term care services. DRA increased the “look back” period during Medicaid the application process and it is now 60 months on all transfers which increases the likelihood of a transferee being considered ineligible for Medicaid assistance due to uncompensated transfers. 3) Buy a traditional long-term care insurance policy. This is a sound approach but the policy holder still runs the risk that they will exhaust the policy benefits and still need care or the amount of benefit purchased is not sufficient to cover the cost of the care. This is most likely to occur when someone (due to affordability issues) decides not to buy the inflation rider or buys less daily benefit than is needed to cover the cost of care, or buys a short benefit period. 4) The California Partnership adds a fourth alternative. You purchase a Partnership policy. If you need long-term care services and the policy pays benefits then for every dollar of benefits paid by the policy, you are able to exclude one dollar in assets from the “asset test” that is imposed when qualifying for Medical assistance. (It should be noted at this point that only assets are sheltered by the California Partnership…the income test is not affected).

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EXAMPLE Assume you purchase a Partnership long-term care policy with a three year benefit period and a $140/daily benefit amount. If you need long-term care services and this policy pays, at the end of three years it will have paid $153,300 in benefits. If after the three year period you still need care and apply to Medi-Cal assistance when determining eligibility your total countable assets will be reduced by $153,300. In other words, for each dollar paid by your partnership long-term care policy one dollar of assets will be protected from the spend down and asset recovery processes. STATE TO STATE RECIPROCITY Stet to state reciprocity among state long-term care partnership programs allows owners of partnership long-term care policies who have purchased a policy in one state—but move to the other—to receive asset protection if they qualify for Medical assistance in their new locale. While Partnership policies are portable from state to state, if the holder of a California partnership policy benefits or otherwise needs to apply for Medicaid benefits for LTC, he or she will have to return to California in order to take advantage of the special Medi-Cal asset protection (more on this is the Appendix under Attachment C). Reciprocity is an attractive feature for many consumers, especially those who do not currently know where they will reside in future years. The DRA requires the HHS secretary (in consultation with National Association of Insurance Commissioners, policy issuers, states, and consumers) to develop standards of reciprocal recognition under which benefits paid would be treated the same by all such states. States will be held to such standards unless the state notifies the secretary in writing that it wishes to be exempt PARTNERSHIP GOAL The goal of California’s Partnership program is to encourage the purchase of private long-term care insurance coverage, thereby reducing reliance on Medi-Cal and other public assistance programs. Because private insurance policies rather than Medi-Cal will cover long-term care costs, the financial burden on the state will be eased. In turn, consumers who purchase long-term care partnership policies will be able to exempt a larger portion of their assets should they ever need to turn to Medi-Cal for assistance. TYPES OF PARTNERSHIP POLICIES AVAILABLE There are two basic choices of partnership policies available in California: Nursing facility and residential care facility only policy: This type of policy covers skilled, intermediate, or custodial care in a nursing home or similar facility. These policies also pay for board and care in a residential care facility.

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Comprehensive policy This type of policy must include the following benefits:

• Coverage in a residential care facility • Coverage for home health care • Coverage for adult day care • Coverage for personal care (assistance with ADLs) • Coverage for homemaker services • Coverage for hospice services • Coverage for respite care.

A policy that only offers home care is not available under the California Partnership. UNIQUE REQUIREMENTS OF PARTNERSHIP LTCI POLICIES To be a partnership certified LTCI policy the contract must meet certain minimum requirements. Following is a brief summary of required elements that must be in all partnership LTCI policies. Automatic inflation protection: Increases the daily maximum amount, all other benefit maximums, and the maximum lifetime benefit by 5 percent every year. Daily Nursing facility benefit: This benefit must pay at least 70 percent of the average daily private pay rate in a California nursing facility. For example, because the costs in California for a private nursing facility averaged $250 a day (in 2011), coverage in a nursing facility for a partnership policy can be no less than $175 a day (70 percent of $250, rounded). Monthly home and community care benefit: (only in comprehensive policies) This benefit provides a monthly benefit cap (as opposed to a daily benefit cap).

Example An insured buys a partnership policy with a $65 daily benefit for home and community-based care. The policy provides a monthly “bucket” of $1,950 ($65 time 30 days) to be used for home and community care. So if the insured doesn’t need care for certain days (weekends where family members provide the needed care) the unused portion of benefits in the “bucket” are still available. This affords the insured a flexible way to combine formal and informal care and to reduce out-of-pocket expenses while maximizing policy benefits.

Waiver of premium provision This waives the payment of policy premiums, after a specified waiting period, when the insured is receiving benefits from the policy. Care management/coordination provision: This provides coverage for a health care professional to evaluate the insureds particular care services required and develop a plan of care.

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PARTNERSHIP ASSET PROTECTION FEATURE

As discussed earlier, partnership policies provide asset protection when the insured requires long-term care services and has these services paid by the partnership policy. For each dollar of benefits paid by the partnership policy the insured may protect one dollar of assets should they ever need to apply to Medi-Cal for assistance with the costs of LTC services. Assets protected by the partnership policy are excluded from both the eligibility criteria and estate recovery.

Example California resident, Mary Doe purchases a long-term care partnership policy and subsequently requires long-term care services and receives policy benefits for a period of five years. At the end of the five year benefit period the partnership LTC policy has paid $300,000 and is exhausted. Since her partnership LTC policy has paid $300,000 towards the costs of her long term care services, Mary can protect $300,000 of countable assets plus the normal Medi-Cal allowance during the Medi-Cal eligibility determination process. These same $300,000 in assets will also be protected from estate recover at Mary’s death.

AGENT TRAINING REQUIRED TO SELL PARTNERSHIP POLICIES

In order to sell partnership LTCI agents must complete specific training requirements in addition to the eight hours of general long-term care continuing education (CE) required to sell any long-term care policy. The additional partnership training requires an initial eight hours of training which can only be completed in a classroom environment. After completing the initial eight hours of training agents selling partnership policies must complete an additional eight hours of partnership classroom training during each subsequent two year renewal period.

ALTERNATIVES TO THE PURCHASE OF LONG-TERM CARE INSURANCE

The are a number of ways for an individual to handle the potential of needing long-term care services other than purchasing long-term care insurance. The availability of some of the different options are conditioned on the financial resources of the individual and or their family.

LONG-TERM CARE POLICIES ARE NOT FOR EVERYONE

Even with all the statistics on aging and needed care, long-term care insurance is not for

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everyone; for many people, it is not a good idea. To find out if your client is really a good candidate for a long-term care policy and, if so, to help them select the appropriate policy requires a full financial analysis.

Buying a policy is a function of age, health status, overall retirement objectives, income and wealth. If the only source of income is a minimum Social Security benefit or Supplemental Security Income (SSI), it would not be in a client’s best interest to purchase a long-term care policy.

Long-term care policies are only for people with significant assets they want to preserve for family members, to assure independence and not burden family members with nursing home bills.

INCOME AND SUITABILITY

Income level is an important part of determining suitability for a long-term care policy.

If an individual’s income exceeds the costs associated with long-term care they may not qualify for Med-Cal. Residents in this situation should consider purchasing partnership or non-partnership long-term care insurance policy including an adequate benefit amount and duration along with an inflation rider.

The consumer must be able to afford the premium for the long-term care policy now and have sufficient income levels to continue to afford the policy premiums in the future. Premiums for long-term care policies can be increased if the insurer can demonstrate that they have exceeded the required loss ratio. Generally speaking an individual (or couple) with income below the current Med-Cal income caps may not be able to afford the coverage. If a consumer has income below these levels and a modest amount of assets they would probably qualify for Med-Cal assistance easily and the purchase of a long-term care insurance policy may not be appropriate.

FAMILY PAID LTCI PREMIUMS

In some situations an individual might have other family members that can assist with paying premiums on their long-term care policy. Occasionally the children of the insured will be motivated by several factors to help a parent afford a long-term care policy.

AFFORDABILITY OF PARTNERSHIP POLICIES

Since a long-term care contract must meet several specific requirements in order to be a partnership policy the costs to afford a partnership policy can be higher than a long-term care policy that does not meet these requirements. Most notable of the partnership requirements (from a premium standpoint) is the requirement for inflation protection. Adding an inflation protection component to a long-term care policy will increase premiums. Since an owner of a long-term care policy will most likely be paying premiums during a period when they are living on a fixed income the ability to initially and continually afford premiums for a long-term care policy should be a major

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consideration during product selection.

OTHER WAYS TO MANAGE THE COSTS OF LONG-TERM CARE SERVICES

Many of the alternatives to the purchase of long term care as a method of addressing the costs associated with long-term care services were addressed in Chapter 1 of this text (pages 12 thru 30). Below is a list of those potential methods that were addressed earlier:

• Medicare benefits • Medicare supplemental insurance • Home equity conversion mortgage • Reverse annuity mortgage • Commercial reverse mortgages • Accelerated death benefits • Viatical settlements • Life settlements • Savings and personal resources • Traditional annuities • Annuities with LTC riders • Life insurance with a long-term care benefit • Medi-Cal to pay long-term care costs

Each of these methods that could potentially manage costs associated with long-term care services has merits, trade-offs and limitations. It should also be noted that the purchases of a long-term care policy does not guarantees the policyholder they will not need and eventually qualify for Medi-Cal.

ADDITIONAL ALTERNATIVES TO THE PURCHASE OF LTCI

INFORMAL CARE BY FAMILY OR FRIENDS

In some situations family members or friends may be in a position to provide care for an individual. The ability of family or friends to provide care may depend on the level of skill required to perform the care that is needed. Given that the need for long-term care services can increase if the underlying reasons for needing the care accelerate the family or friends may not be able to continue providing needed care. For this reason the care needs of the individual may outgrow the informal care provided by even the best intentioned family or friends. On the other hand it is entirely possible that informal care provided by family and friends will be sufficient for all care needed by the individual.

RETIREMENT HOMES AND CONTINUING CARE COMMUNITIES

Continuing Care Retirement Communities (CCRC) offer three distinct levels of care:

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• Independent living • Assisted living • Nursing home care

These three levels of care are provided in a single setting. CCRCs usually require the payment of an upfront entry fee, plus monthly maintenance fees, in exchange for a living unit, meals, and health care coverage, up to the nursing home level. Some communities offer their services on a month to month rental basis with health care coverage being paid for at the time of need rather than on the basis of the coverage afforded by the traditional entry fee or "life care" endowment. For the individual with the financial resources to afford a CCRC it can be an attractive way to “age in place”. Some advantages of this approach are:

• Living amongst piers • The close proximity of care facilities • Having a meal plan for those who don’t wish to (or can’t) cook

LIFE CARE COMMUNITIES

A life care community is similar to a CCRC except that it is subject to additional licensing requirements in California.

In 1991 the state of California passed legislation which defined what a retirement community had to provide in order to advertise themselves as a "life care" community. In that legislation it said that a "life care" community had to provide:

• Guaranteed health care coverage for life - no exceptions;

• A guarantee that if the resident's resources were exhausted that they cannot lose their residence or their benefits( i.e. they must be financially subsidized by the retirement community) ;

• The retirement community must have a nursing facility within the community itself .

• The residence (apartment) that they occupied when they entered the community cannot be taken from the resident for any reason.

FRATERNAL, RELIGIOUS, UNIONS ORGANIZATIONS PROVIDING LTC SERVICES

There are numerous religious organization, fraternal benefit societies and unions providing long term care coverage to their members. The ways they provide these benefits vary from actually maintaining facilities to arranging group LTCI.

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REFERRAL TO HICAP

As mentioned in an earlier Chapter. One way a California agent can assist a consumer with decisions related to long-term care and insurance in general is by referring them to HICAP.

HICAP (the Health Insurance Counseling & Advocacy Program) HICAP which is administered by the California Department of Aging is staffed by trained volunteers providing free and objective information and counseling about Medicare and other senior related health care issues, including long-term care. These trained volunteer counselors can answer questions and help one understand their Medicare rights and benefits, including how to appeal denials of coverage; Medicare supplemental insurance (Medigap policies); Medicare Advantage plans; employee and retiree coverage; and long-term care insurance.

HICAP also offers legal help and representation at Medicare appeals or administrative hearings.

HICAP counselors do not sell, recommend, or endorse any insurance product, agent, insurance company, or health plan.

California agents selling long-term care insurance are required to know the name address and telephone number of the local HICAP program in their area. The appendix to this course contains a county by county list of HICAP local programs

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Chapter 7 CALIFORNIA DEPARTMENT OF INSURANCE AUTHORITY AND ADVERTISING RULES

CHAPTER LEARNING OBJECTIVES

After reading this chapter, you will have a thorough understanding of the following: • The authority held by the Insurance Commissioner with regards to enforcement

and regulation. • The penalties and fines that can be incurred as a result of violating insurance

law. • The hearing process and the rules regarding giving notice for an alleged

violation. THE INSURANCE COMMISSIONER In order to properly regulate adherence to insurance laws, the Commissioner is granted certain powers of authority and supervision. The Commissioner is able:

• To Bring actions and assess penalties against any (agents, brokers, insurers, and other entities) who violate California insurance law.

• To license insurance companies, agents, and brokers and to supervise them. • Supervise the marketing activities of an insurer. • To order reasonable attorney fees to be paid to the prevailing part when a

violation has occurred. The ability to assess penalties is also held by California courts, district attorneys, city attorneys, and the Attorney General. The ability to assess penalties includes the ability to order reasonable attorney’s fees to the prevailing party. (CIC 10234.2) ANNUAL REPORT Each year the Commissioner compiles a report that is sent to the Legislature. This report is compiled through the cooperation of a task force, which includes representatives PENALTIES A broker, agent, or other entity (other than an insurer) found to have committed such a violation is liable to incur a monetary penalty according to the following criteria:

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• $250 minimum fine for the first offense. • $1,000 - $25,000 fine for a subsequent or knowing violation. • Up to $5,000 for inappropriate replacement of long-term care coverage.

Insurers incur penalties according to the following criteria:

• $5,000 minimum fine for the first offense. • $10,000 minimum for a subsequent or knowing violation. • $10,000 - $500,000 for a violation in a manner indicating general business

practice. The fact that a violation occurred as the result of a general business practice reflects the magnitude of the violation and therefore reflects the amount of the fine as well.

All penalties are paid to the Insurance Fund. OTHER REMEDIES According to CIC Section 10234.4, in addition to the penalties listed above, the Commissioner may take the following steps when a violation has occurred:

• Suspend or revoke the license of any agent, broker, or other producer that has been licensed by the Department.

• Suspend or revoke the certificate of authority to transact disability insurance. • Order any broker, agent, insurer, or other entity determined by the

commissioner to be engaged in the business of insurance, to cease marketing in California a particular policy form of long-term care insurance or to cease marketing any long-term care insurance.

• To take such actions as are necessary to comply with the California Insurance Code.

NOTICE Before a penalty may be assessed, any broker, agent, dealer, or other entity is granted due process by means of a written notice and a public hearing (if requested). The notice and hearing process is detailed below (as described in CIC Section 10234.5):

• Written notice, served by registered mail, must include: A summary of the facts establishing reasonable cause that a violation has occurred. Citation of the code section or other standard allegedly violated. A statement of the commissioner's intent to assess a penalty including the amount of the penalty, or to seek another remedy. A statement of the respondent's right to elect any of the following:

• To accept assessment of the penalty or other remedy as stated in the notice.

• To respond to the charge in writing, after which the commissioner may issue a final order or set a hearing.

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• To request, within 10 days of receipt of the notice, a public hearing.

HEARING PROCEDURE If the respondent requests a public hearing within the 10 day time period, or if the commissioner so orders, a public hearing must be held before the Administrative Law Bureau within 30 days after the noticed is served (CIC 10234.5). Within 20 days following the hearing, the judge must issue findings of fact as well as a proposed order. Within 30 days following the hearing, the commissioner must either issue his or her final order or allow the proposed order to become the final order. The 30 day limit may be extended if the judge finds good cause to reconsider the details of the hearing.

The commissioner’s final order may contain one or more of the remedies listed above. The amount of the penalty is not necessarily limited to the amount stated in the notice to the respondent.

LAPSE & REPLACEMENT DATA

Insurers are required to maintain records of each agent’s replacement sales. These records must show the number of replacement sales as a percentage of the agent’s total annual sales. These records also contain the total number of lapses of long-term care policies sold by the agent, also demonstrated as a percentage of the agent’s total sales for the year. This information is used in an annual report which must be filed by June 30 of each year. (CIC 10234.86) Every year insurers must make an annual report that is due by June 30th. This report lists the following information:

• The 10 percent of its agents in the state that have the highest percentage of lapses and replacements.

• The number of lapsed policies sold as a percentage of the total number of policies in force in the state. The number of lapsed policies must be calculated for each policy form in the state.

• The number of replacement policies sold as a percentage of total annual sales and as a percentage of the total number of policies in force in the state.

ADVERTISING GUIDELINES AND MARKETING PRACTICES TOPIC LEARNING OBJECTIVES This section discusses the rules and requirements regarding the marketing of long-term

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care products. These rules protect consumers and promote fair advertising. By the end of this section, readers should be able to distinguish which advertising rules apply to them and how it these rules affect them. They should also have a fuller understand of the importance of fair and honest marketing practices. ADVERTISEMENTS MUST BE FILED Before an insurer can advertise or market any long-term care product, any advertisement that is intended for use in California must be submitted to the insurance commissioner. Insurers must submit a copy of the advertising materials to the commissioner at least 30 days before the ad can be used, and must keep a copy of the ad on file for at least three years. Advertisements must comply with all California laws regarding advertising as well as the two following rules (CIC 10234.9):

• An advertisement designed to produce leads must prominently disclose that "an insurance agent will contact you" if that is the case.

• An agent, broker, or other person who contacts a consumer as a result of receiving information generated by a cold lead device, must immediately disclose that fact to the consumer.

The term “cold lead device” refers to marketing methods that do not explicitly state the intention to solicit insurance policies. AGENT MARKETING An agent can advertise the fact that they sell long term care insurance but must first get permission from the insurer before referring to an insurer in their advertisement or letter. Many insurers will restrict the agent to using preapproved marketing letters that only discuss the need for LTCI in general terms and do not explain benefits in detail or give rate information. Any advertisement used by the agent should be filed with the California Department of Insurance by the insurer at least 30 days prior to use. MARKETING GUIDELINES Insurers providing long-term care coverage must establish marketing procedures that:

• Ensure that any comparison of its policies by its agents or other producers will be fair and accurate.

• Ensure that excessive insurance will not be sold or issued.

To avoid unfair policy comparisons and for the general benefit of the consumer, agents must provide applicants with the California Department of Aging Shopper’s Guide prior to any application. In order to avoid selling excessive insurance, agents should try to determine the applicant’s existing coverage, for example determining whether the applicant has accident and sickness coverage.

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Insurers are also required to place a notice on the first page of the policy and certificate or outline of coverage. This notice must state: "Notice to buyer: This policy may not cover all of the costs associated with long-term care incurred by the buyer during the period of coverage. The buyer is advised to review carefully all policy limitations." (CIC 10234.93) USE OF SENIOR RELATED DESIGNATIONS California regulates the use of senior designations by requiring that an agent can not use any senior designation unless:

The organization conferring the senior designation meets all of the requirements for education requirements for designation attainment and has been accredited by the National Commission for Certifying Agencies or an approved federal agency.

The designation organization must maintain a code of ethics approved by the Commissioner. A list of currently approved designations is published in the California Department of Insurance website.

The organization has applied to and been approved by the Commissioner.

The agent must be authorized by the designation organization to use the designation.

The agent using the designation has been licensed to sell the type of insurance related to the designation for a minimum of four years.

The agent must follow all requirements for the written use of the designation as required by California law.

WHAT IS A SENIOR DESIGNATION "Senior designation" means any degree, title, credential, certificate, certification, accreditation, or approval, that expresses or implies that a broker or agent possesses expertise, training, competence, honesty, or reliability with regard to advising seniors in particular on finance, insurance, or risk management. PENALTIES FOR VIOLATING CODE RELATED TO SENIOR DESIGNATIONS If an agent violates this rule they are subject to license revocation, a cease and desist order and monetary penalties. OTHER INSURER REQUIREMENTS Insurers must meet several other requirements related to market conduct, disclosure to consumers, and supervision of agents. Insurers are required to submit to the commissioner at least semi annually a list of all agents authorized to solicit individual consumers for the sale of long-term care insurance. Insurers must display prominently on page one of each long-term care policy AND the

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outline of coverage: "Notice to buyer: This policy may not cover all of the costs associated with long-term care incurred by the buyer during the period of coverage. The buyer is advised to review carefully all policy limitations." Insurer must inquire and otherwise make every reasonable effort to identify whether a prospective applicant or enrollee for long-term care insurance already has accident and sickness or long-term care insurance and the types and amounts of any such insurance. Insurers marketing long-term care insurance must establish auditable procedures for verifying compliance with all requirements under California Insurance Code Sections related to advertising and marketing. Insurers must provide to a prospective applicant, at the time of solicitation, written notice that the Health Insurance Counseling and Advocacy Program (HICAP) provides health insurance counseling to senior California residents free of charge. Every agent shall provide the name, address, and telephone number of the local HICAP program and the statewide HICAP number, 1-800-434-0222. Insurer must provide a copy of the long-term care insurance shoppers guide developed by the California Department of Aging to each prospective applicant prior to the presentation of an application or enrollment form for insurance. ADDITIONAL PROHIBITED UNFAIR TRADE PRACTICES The following acts and practices are prohibited in addition to other unfair trade practices, identified elsewhere within the California Insurance Code: Twisting. Knowingly making any misleading representation or incomplete or fraudulent comparison of any insurance policies or insurers for the purpose of inducing, or tending to induce, any person to lapse, forfeit, surrender, terminate, retain, pledge, assign, borrow on, or convert any insurance policy or to take out a policy of insurance with another insurer. High pressure tactics. Employing any method of marketing having the effect of or tending to induce the purchase of insurance through force, fright, threat, whether explicit or implied, or undue pressure to purchase or recommend the purchase of insurance. Cold lead advertising. Making use directly or indirectly of any method of marketing which fails to disclose in a conspicuous manner that a purpose of the method of marketing is solicitation of insurance and that contact will be made by an insurance agent or insurance company. REQUIREMENT TO PROVIDE FOREIGN LANGUAGE DOCUMENTS

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California requires all health insurers (including long term care insurers) to provide certain documents translated to meet the needs of those who are not proficient in English. The determination of the language or languages into which these documents are to be translated is based on the size of the company’s insured population and the languages that are predominant among the insured population. Upon request, an insurer must provide written translation of a requested document within 21 days. The following are the documents subject to this regulation: • Applications • Consent forms • Letters containing important information regarding eligibility or participation criteria • Notices related to the denial, reduction, modification, or termination of services and

benefits • Notices pertaining to the right to file a complaint or appeal • Notices that provide information about the availability of free language assistance Translated documents must not include an insurer’s explanation of benefits or other claim processing information unless the document requires a response by the insured. If an insured requests a translated document, all timeframes and deadlines related to the document shall begin to run upon the insurer’s issuance of the translated document to the insured. CCR 10-2538.5

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Appendix REQUIRED ATTACHMENTS ATTACHMENT A:TAX TREATMENT OF LONG-TERM CARE INSURANCE & EXPENSES Introduction

Federal and state tax codes have a purpose beyond raising revenue. Public policy is often served by providing economic relief to taxpayers or motivation for particular behavior. The 1996 Health Insurance Portability and Accountability Act (HIPAA – Public Law 104-191, 110 Stat. 1936, 2054 and 2063) is one of the most far-reaching laws passed by Congress in the latter part of the 20

th

century. The effects of HIPAA are so complex that federal and state governments as well as the insurance and health care industry continue to grapple with it.

By including long-term care insurance in HIPAA, Congress attempted to fulfill a number of different public policy objectives including: (1) classifying long-term care costs as a medical expense thus providing taxpayers with some economic relief; (2) categorizing long-term care insurance as accident and health insurance thereby providing clarity as to the tax treatment of premiums and benefits; and (3) providing the general public an incentive to purchase private long-term care insurance.

In addition, as Federal and State governments recognized that long-term care expenses were having a significant financial impact on state Medicaid (Medi-Cal) budgets, Congress was attempting to shift the financial burden of Medicaid to the private sector by providing general tax incentives to purchase long-term care insurance in anticipation of the huge number of baby boomers who may need care in the future.

Note: The information provided in this treatise gives a broad description of the tax issues

related to long-term care insurance. Since most agents are not Certified Public Accountants (CPA’s) or tax preparers, they should be very cautious and understand their limitations in advising insureds about their specific tax situation and circumstances. Agents should always refer clients to insured’s tax advisor for the final analysis of tax impact of long-term care insurance and expenses. Additionally, there are several examples provided in this Attachment that should be included in the course.

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HIPAA Definitions for Long-Term Care Insurance Introduction The Internal Revenue Code (IRC) allows deductions for medical and dental expenses under certain circumstances (IRC Sec. 213d). Prior to the passage of HIPAA, a broad range of long-term care expenses were generally not deductible. Part of Congress’ intent in enacting HIPAA was to provide tax relief to individuals and families that were incurring long-term care costs. However, part of the challenge facing legislators was determining which expenses would qualify.

Qualified Long-Term Care Services/Chronically Ill Individual The broad and expanding nature of long-term care expenses made it difficult to stipulate a “laundry list” of qualified services. The IRS defines “qualified long-term care services” as: Necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, rehabilitative services and maintenance and personal care services required by a chronically ill individual pursuant to a plan of care prescribed by a licensed health care practitioner.

This is a broad universe of potential services. To control when the cost of long-term care services could receive favorable tax treatment, Congress established a threshold for initiating benefits by tying services to a state of disability defined as a chronically ill individual. A chronically ill individual must be certified by a licensed health care practitioner within the previous 12 months as meeting one of the following tests:

The insured is unable, for at least 90 days, to perform at least two activities of daily living (ADL’s) without substantial assistance from another individual, due to loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing and continence. (See Internal Revenue Service Notice 97-31, issued May 6, 1997 or California Insurance Code (CIC) section 10232.8(e)(1 – 6) for the definitions of the ADL’s.)

The insured requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment. Federal and State laws require the certification of the insured’s status as a “chronically ill individual” to be renewed annually. It is only when an insured meets this definition that favorable tax treatment for the cost of long-term care services will be granted.

Licensed Health Care Practitioner The Internal Revenue Service defines licensed health care practitioner (LHP) in very general terms. It may include doctors, nurses, social workers, chiropractors, Christian Science practitioners, mental health professionals, and other licensed therapists. IRS Publication 502 includes an extensive list of licensed health care practitioners. California Insurance Code section 10232.8(c) narrows the list by specifying the role of the LHP in the certification, assessment, and plan of care of the insured for the purposes of the claims process. The LHP must be independent of the insurance company and “must not be compensated in any manner that is linked to the outcome of the certification”.

90-Day Certification for Activities of Daily Living

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Congress intended to limit long-term care costs to those associated with chronic illness. A clinical definition of chronic illness is one that is expected to last 90 days or more. Some expenses for acute or short term illnesses were already deductible as a medical expense. If policy makers had ignored the distinction between acute and chronic, it could have had the unintended consequence of allowing taxpayers to deduct expenses associated with short-term disabilities due to the broad nature of the definition of a qualified long-term care service.

Therefore, a taxpayer who wishes to deduct qualified long-term care expenses using the ADL definition must have a licensed health care practitioner certify that the insured is likely to need substantial assistance for at least 90 days. Keep in mind, the requirement concerns the likelihood of needing care, not the actual receipt of care. In fact, there is no requirement that the person actually receives the full 90 days of care. The insured must be recertified by the LHP (licensed health professional) at least annually.

IRS Publication 502 stipulates that the 90-day certification period is not a deductible period for people who have long-term care insurance. Long-term care insurance can still pay benefits following the deductible period of the policy, if any, as long as the certification stipulates that the person is likely to need qualified long-term care services for at least 90 days. The certification may also be done retroactively in the event a claim is not filed until after the deductible period in the policy has been met. Substantial Assistance For the purposes of the activities of daily living, IRS Notice 97-31 (1997) allows substantial assistance to be defined to mean both hands-on assistance and standby assistance. Hands-On Assistance: means the physical assistance of another person without which the individual would be unable to perform the ADL.

Stand-By Assistance: means the presence of another person within arm’s reach of the individual that is necessary to prevent, by physical intervention, injury to the individual while the individual is performing the ADL. Severe Cognitive Impairment and Substantial Supervision Notice 97-31 defines a severe cognitive impairment “as a loss or deterioration in intellectual capacity that is similar to Alzheimer’s disease and like forms of irreversible dementia and is measured by clinical evidence and standardized tests that reliably measure impairment in short-term and long-term memory, orientation to people, places or time and deductive or abstract reasoning.” Note that the 90-day certification by a LHP is not a requirement for qualification under the cognitive impairment trigger. Similar to the ADL qualification however, the insured must be recertified every 12 months to ensure that they still qualify for benefits. Taxpayers and tax preparers must document an ADL or cognitive impairment consistent with HIPAA rules in order to deduct long-term care expenses as a medical expense. Many tax preparers miss this point and it could be a critical matter during a tax audit.

Tax Qualified Long-Term Care Expenses

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Introduction Prior to HIPAA, neither long-term care insurance premiums nor benefits were addressed in the Federal tax code. There was uncertainty as to whether LTC insurance would be classified as accident and health insurance or disability insurance for the purposes of both the deductibility of premiums and the taxation of the benefits. However, the common belief was that as long as premiums were paid with after-tax dollars, benefits would be tax free.

HIPAA requires that long-term care insurance policies comply with its guidelines to be considered “qualified” long-term care insurance. Policies that do not meet these requirements are considered to be non-qualified long-term care insurance policies. Premiums paid for a non-qualified policy are not presumed to be deductible as accident and health insurance. However, HIPAA was silent as to the tax treatment of benefits received from non-qualified policies issued after January 1, 1997. To date, the Department of the Treasury has not issued an opinion on this conflict and Congress has not taken the matter up again leading to continued speculation about the tax implications of these benefits.

Benefits Congress created a generalized structure to which qualified products must adhere. For purposes of HIPAA, a qualified long-term care insurance product must pay benefits using no less than 5 or no more than 6 of the following activities of daily living: eating; toileting; transferring; bathing; dressing; and/or continence.

HIPAA stipulates that generally, long-term care insurance policies that use the HIPAA definition of a chronically ill individual will be “qualified long-term care insurance” and that long-term care expenses incurred by a taxpayer who qualifies as a chronically ill individual will be deductible as a medical expense.

Tax qualified long-term care insurance is treated the same as an accident and health insurance policy. Some of the rules include: 1) long-term care insurance benefits pass tax-free; 2) premiums are generally deductible-premiums paid by an employer for an employee are 100 percent deductible and do not count as income to the employee; 3) per diem and cash method policy benefits received are subject to an annually adjusted amount -- $280/day in 2009 (indexed upwards annually by approximately 5 percent); 4) certain limitations apply to individuals, sole proprietors, owners of S-corporations, and LLP’s; 5) qualified long-term care insurance cannot be included in a Section 125 Cafeteria Plan or flexible spending arrangement; 6) qualified long-term care insurance policies may not use “medical necessity” as a benefit trigger and must coordinate benefit payment with Medicare.

Required Consumer Protection Qualified long-term care insurance policies are required to meet specific consumer protection guidelines of the 1993 National Association of Insurance Commissioners Model Act and Regulations for Long-term Care Insurance. Many of the consumer protections in the NAIC Models had already been adopted in California with the passage of Senate Bill 1943, Chapter 1132, Statutes of 1992, that included protections related to the following: guaranteed renewal or non-cancellation of the policy; prohibitions on exclusions and limitations; extension of benefits and conversions; replacement; unintentional lapse; post-claim underwriting; requirement to offer inflation protection and rejection by consumer; restrictions on preexisting conditions and probationary periods;

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disclosure; and, non-forfeiture provisions.

IRS Reporting Mechanism HIPAA also establishes a reporting mechanism for benefits received under all long-term care insurance policies. Similar to disability insurance, if a policyholder receives benefits from a long-term care insurance policy, they will receive an IRS 1099 LTC Form issued by the carrier. Benefits reported on the 1099 must also be reported on IRS Form 8853. The 1099 form must identify the method of benefit payment (reimbursement or per diem) but does not need to determine the tax qualified status of the actual long-term care insurance policy from which the benefits were paid. Form 8853, which contains the medical savings and the IRS 1099 information, adds additional questions to the taxation of non-qualified benefits because it provides a vehicle for these benefits to be taxed. Despite continuing confusion, neither the Department of the Treasury nor Congress have clarified this matter. Exceptions to “Favored” Tax Status Long-term care insurance benefits that are part of a life insurance or annuity contract may not receive the same favored tax status as benefits received from a tax qualified long-term care insurance policy. If the benefits constitute an advance payment of death benefit, then it is likely that they will not be taxed as income. If, however, the benefits received are part of the accumulation value of the contract, taxes may be payable. In no case are the premiums paid for life insurance or annuity contracts, which include long-term care insurance benefits, deductible as tax qualified long-term care insurance premiums.

Tax Treatment of Pre-1997 Long-Term Care Insurance Policies

Introduction Congress realized that there were many long-term care insurance policies issued prior to January 1, 1997, that would not comply with HIPAA. Either their benefit structures or payment mechanisms were inferior to its guidelines or, in the case of California, the benefit triggers were considered too generous. Legislators left it to the Department of the Treasury to establish guidelines for “grandfathered” policies. In its interim directive on tax qualified long-term care insurance (Notice 97-31, May 1997), the Department of the Treasury indicated that long-term care insurance policies issued prior to January 1, 1997, meeting “long-term care insurance requirements of the State in which the contract was … issued” would be grandfathered in for the purposes of tax qualification unless the policyholder made a “material change” to the policy.

Definition of “Material Change” Although the interim directive did not define “material change”, the final regulations issued in December 1998 identified criteria for which a “material change” would result in a policy losing its tax qualified status. The following are treated as “material changes” and considered issuance of a new contract with the resulting loss of tax qualified status:

A change in terms of a contract that alters the amount or timing of an item payable by

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either the policyholder, the insured or insurance company;

A substitution of the insured under an individual contract;

A change (other than a non-material change) in the contractual terms or in the plan under which the contract was issued relating to eligibility for membership in the group covered under a group contract.

The following, however, are actions that are not considered “material changes” and will not jeopardize the policy’s grandfathered status: Regarding premiums: a change in the mode of premium payment; an increase or decrease in premiums for all contracts that have been issued on a guaranteed renewable basis; a reduction in premiums due to the purchase of a long-term care insurance policy by a member of the policyholder’s family; a reduction in premium due to a reduction in coverage made at the request of a policyholder; a reduction in premiums that occurs because the policyholder becomes entitled to a discount under the issuer’s pre-1997 premium rate structure (such as a group or association discount or change from smoker to non-smoker status); the addition, without an increase in premiums, of alternative forms of benefits that may be selected by the policyholder.

Regarding riders: the addition of a rider to increase benefits under a pre-1997 contract if the rider would constitute a qualified long-term care insurance contract if it were a separate contract; the deletion of a rider or provision of a contract (called an HHS – Health and Human Services – rider) that prohibited coordination of benefits with Medicare.

Other actions include: the effectuation of a continuation or conversion of coverage right under a group contract following an individual’s ineligibility for continued coverage under the group contract; the substitution of one insurer for another in an assumption reinsurance transaction; the expansion of coverage under a group contract caused by corporate merger or acquisition; the extension of coverage to collectively bargained employees; the addition of former employees.

Note: The critical message for consumers is that anytime a consumer considers replacing a policy issued prior to January 1, 1997, great caution must be exercised. A pre-HIPAA policy may contain provisions that might make it easier to qualify for benefits: for example, 2 out of 7 activities of daily living instead of the 2 out of 6 required by HIPAA; a medical necessity benefit trigger that is prohibited in HIPAA; no HIPAA 90-day certification requirement; the benefits of a pre-HIPAA policy do not require coordination with Medicare, which increases the amount available to pay for long-term care.

Long-Term Care Insurance Premium Deductibility

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) and subsequent Department of the Treasury rulings have created four primary deductibility scenarios for tax qualified long-term care insurance. They are: health savings accounts; individual deductibility; deductibility for the self-employed, owners of S-corporations, limited liability partnerships (LLP) and limited liability corporations (LLC); and, deductibility for employee/owners of C-corporations. The tax incentives that allow for premium deductibility may help the self-employed and employees of companies that

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provide employer-paid long-term care insurance. To a lesser extent, some individual taxpayers, who are not self-employed may benefit from the premium deductibility allowed by HIPAA.

Health Savings Accounts (Medical IRA Account) Health Savings Accounts (HSA) and their predecessor MSA’s, were established under HIPAA and more recent reforms. Those consumers under age 65, who are willing to take on the responsibility of a larger medical insurance deductible in favor of lower premiums, are provided a tax incentive to do so. Simply stated, the consumer purchases a qualified high deductible medical insurance plan. They are then allowed to make a pre-tax contribution to their HSA account not to exceed (in 2011) $3,050 (individual) or $6,150 (family). "Catch-Up" contribution provisions allow HSA holders to add an additional $1,000 to their account if they are age 55 or older. The money placed in the HSA account grows tax deferred, similar to an IRA or other qualified retirement plan. The funds accumulated can be used to pay for unreimbursed medical expense allowed by IRC Sec. 213(d), deductibles and coinsurance. The money in the HSA can also be used to pay the premiums on a tax qualified long-term care insurance policy up to the age banded limits listed below.

HSA’s are achieving acceptance in individual and group health insurance markets. Their applicability depends on the regional make-up of the medical care delivery system, the availability of medical insurance plans in an area, and the pricing disparity between conventional “low-deductible” plans and the “high-deductible” plans that qualify for the HSA program. HSA’s represent an opportunity for some consumers to tailor their medical insurance and long-term care insurance priorities in a cost and tax-efficient manner.

Individual Deductibility Taxpayers who itemize their deductions may benefit from the deductibility of qualified long-term care insurance premiums. Based on the taxpayer’s age, only a portion of the long-term care insurance premium is deductible. Taxpayers over age 60 with above average income and assets may be interested in long-term care insurance. These individuals may itemize their deductions because they own property and the standard deduction is not in their best interest. Expenses for medical care and insurance premiums are deductible to the extent that they exceed 7.5% of adjusted gross income. Prior to HIPAA, most taxpayers in this circumstance would not exceed 7.5% of their adjusted gross income in unreimbursed medical expenses. However, with the inclusion of qualified long-term care insurance as an accident and health insurance policy, some taxpayers may benefit.

HIPAA states that premiums for tax qualified long-term care insurance are deductible as an accident and health insurance policy. However, unlike other accident and health insurance premiums, the amount of qualified long-term care insurance premiums is limited by a stipulated age to the amount that can be deducted. In 2010, the age “banded” amounts that may be applied towards the taxpayer's unreimbursed medical expenses are:

Banded Age Limits Individuals/Couples

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Under Age 40 $ 330/$660 Ages 41 - 50 $ 620/$1,240 Ages 51 - 60 $1,230/$2,460 Ages 61 - 70 $3,290/$6,580 Ages 71 + $4,110/$8,220 Individual taxpayers under age 61 who itemize their deductions may not get much of a tax relief by including the allowable long-term care insurance premium amount in their unreimbursed medical expenses. However, someone age 61+ may benefit. Individual taxpayers, who itemize their deductions, may include the cost of tax qualified long-term care insurance as an accident and health insurance premium. The deductible premium amount allowed is limited by the age-banded amount in that tax year.

The following is a thumbnail example of how this may work for a hypothetical husband and wife, both ages 65, who are considering purchasing a qualified long-term care insurance policy with a joint annual premium of $8,000. Assume, for the purposes of this example, that this couple has an adjusted gross income of $100,000 therefore they must exceed $7,500 of un-reimbursed medical expenses before they receive any type of tax relief from these types of deductions.

Amount Allowed For TQ-LTCI: $6,580 Medicare Supplement Premiums $3,600 Medicare Part B Premiums $2,400 Other Allowable Medical Expenses $2,000 (Rx, eyeglasses, dental)

Total $14,580

In this example, the taxpayers would be allowed to deduct $7,080 ($14,580 minus their $7,500 threshold) of un-reimbursed medical expenses. If they are in a combined federal and state income tax bracket of 35%, their tax savings would equal $2,478 ($6,860 x 35%). This would amount to an approximately 30% premiums savings ($2,478 � $8,000). The deductible amount allowed for long-term care insurance premiums is not enough to trigger a deduction for these taxpayers; neither are the stand-alone deductions for the other unreimbursed medical expenses. However, the combination of all of them provides this hypothetical couple with a savings. It is important to note that most agents are not qualified tax advisors and as such need to be cautious in their recommendations. Clearly, if the agent inquires as to the unreimbursed expenses illustrated above they may spot a potential tax savings for the consumer and refer them to their tax advisor.

Agents should always refer clients to insured’s tax advisor for the final analysis of tax impact of long-term care insurance and expenses.

Deductibility for the Self-Employed Premiums for qualified long-term care insurance paid by an employer on behalf of an employee are deductible to the employer as an accident and health insurance premium. That being said, if the employee is an owner of the business entity some limitations apply.

For the purposes of this discussion, self-employed individuals include sole proprietors, partners and owners of S-corporations, limited liability partnerships (“LLP”) and limited

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liability corporations (“LLC”). An owner is defined as any individual who owns 2% or more of the business entity. While these types of business entities can have a separate tax identification number for the reporting of income, the tax return that is filed is informational in nature only. The profit or loss from the business entity is passed through to the owners pursuant to their share of ownership. Typically, in sole proprietorships and partnerships, spouses are not considered owners. If they are on the payroll, they would be considered employees. Spouses of owners of S-corporations, LLP’s and LLC’s are considered owners regardless of their direct or indirect participation in the business’ activities. With respect to accident and health insurance coverage purchased by one of these entities for a non-owner-employee, premiums are fully deductible. There is no imputed income to the employee of premiums and the benefits pass tax free at the time of the claim.

Beginning in 2003 premiums for accident and health insurance are 100% deductible for owners of these entities. It is not necessary for these taxpayers to exceed 7.5% of adjusted gross income to benefit from the tax code for these expenses. Tax qualified long-term care insurance (considered accident and health insurance for these purposes), falls into this general rule and the 7.5% AGI threshold does not come into play. The amount allowable for deduction is limited by the previously discussed age-related schedule.

Consider a self-employed husband and wife, both age 55 who are considering purchasing a tax qualified long-term care insurance policy with a joint annual premium of $4,000 per year. They would be allowed to deduct $2,380 ($1,190 x 2). If they are in the combined Federal and State tax bracket of 35% their tax savings would be $833 or approximately 21% of premium. Additionally, they may save on their self-employment taxes because the premium amount paid by the business entity would be received not as income, but as an employee benefit. This may save this self-employed couple an additional 15% of the premium paid. Individually or combined, these tax savings provides incentives to owners of these entities to purchase qualified long-term care insurance through their businesses.

Agents should always refer clients to insured’s tax advisor for the final analysis of tax impact of long-term care insurance and expenses. Additionally, there are several examples provided in this Attachment that should be included in the course.

Deductibility in Closely-Held C-Corporation The fine-line difference between owners of business entities discussed in the previous section and employee owners of closely-held C-corporations is that for the purposes of paying taxes they are considered employees, not owners. Therefore, premiums paid by the C-corporation for tax qualified long-term care insurance (a.k.a. accident and health insurance) for stockholder employees is deductible to the corporation. There is no imputed income to the employee stockholder for premiums paid and the benefits will pass tax-free at time of claim. Some believe that this tax treatment of accident and health insurance premiums and benefits means that every employee in the company must receive “like” benefits. Others go to the other extreme and tell consumers that they can discriminate as to who receives such benefits. Both are incorrect.

The Internal Revenue Code section 105 clearly indicates that accident and health

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insurance specifically provided to stockholder employees on a selective basis, without creating a distinguishable class of employees who are eligible for the benefit, is not allowed. The class must be based on employment status. It cannot be based on stock ownership. A class of employees such as “officer employees” can be created for the corporation who are eligible for a specific accident and health insurance benefit. However, they must be employees, not just officers or stockholders. Court decisions on this matter go back to 1968. If the closely-held corporation cannot validate a clear class of employees who are eligible for the benefit then the premiums could be treated as dividends to the stockholder-employee and the premiums are not deductible to the corporation. It is therefore incumbent upon agents and tax advisors to be judicious in recommending and establishing classes eligible for coverage. It is also important for the corporation to establish the plan in their Minutes and to clearly identify the classes of employees that are eligible for benefits. Again, once a bona fide class of employees is established, tax qualified long-term care insurance premiums are deductible to the corporation. There is no income imputed to the employee and the benefits pass tax free at time of claim; however it is important to consult with a tax advisor.

New Trends: LTC Insurance, Life Insurance, Annuities & Benefit Riders

The Pension Protection Act of 2006 (PPA), like HIPAA, is an enormous piece of legislation that addresses hundreds of disparate issues. Also like HIPAA, a very small portion (section 844) deals with long-term care insurance and riders that are part of life insurance or annuity contracts. PPA affirms HIPAA as it pertains to life insurance contracts and accelerated benefit riders (ABRs). Over the years, accelerated benefit riders have appeared in various life insurance policies with a promise to pay part of the death benefit (generally 2% to 4% monthly) if a qualifying event other than death occurs; e.g. disability, critical illness, cancer, terminal or chronic illness.

Section 101(g)(1) of the Internal Revenue Code governs the accelerated payment of death proceeds on the life of a terminally or chronically ill insured. HIPAA added section 7702B to the IRC which specified the definition of ‘chronic illness’. Essentially, if the qualifying event for benefits matches the chronic illness definition established by HIPAA, the early payout of the death benefit for long-term care expenses will not be taxed as income. However, the payments cannot exceed the per diem limits ($280 in 2009) and must comply with other provisions of the NAIC Model for long-term care insurance.

Per PPA, the premiums (or charges) for this coverage can be deducted from the internal growth of the annuity without a taxable event (income) to the annuitant. In addition, if the annuitant qualifies for care, the long-term care benefits payments from the annuity will be received income tax free. One of the central points is that the long-term care benefits must be consistent with the HIPAA--if it looks like qualified long-term care insurance, it is qualified long-term care insurance.

A typical product design for a single premium deferred annuity (SPDA/LTCI) combo product will provide a long-term care benefit that is generally a multiple of the annuity account value. The payout will be delivered over a certain number of months, 24, 36 or 48. While examples will vary by insurance carrier, age and health conditions, let’s say that the insured wants $6,000 per month of benefit for 48 months ($6,000 X’s 48 =

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$288,000). To get that $288,000 benefit, the policy holder may have to place $100,000 into the SPDA combo product. A risk charge will be taken from the accumulation of the product to provide the additional $188,000 of coverage.

The first money out of the SPDA to pay the long-term care benefit will be the insured’s initial premium to the plan. If the policyholder dies before their contribution is exhausted a beneficiary will receive the difference. Once benefits are paid beyond the initial premium the insurance company will continue to pay benefits until they are exhausted. The risk charge for the benefit beyond the premium will generally be between one-half to 1.25 basis points. In other words, if a typical SPDA was paying a return of 5.5%, the combo plan may only pay 4.5%. Again, since the long-term care benefit under the program qualifies under IRC section 7702B, the cost of the long-term care benefit will not be a taxable event to the insured. Long-term care benefit payments will reduce the basis of the annuity for income tax purposes. This may create a larger tax burden on heirs of the annuity owner after death..

Here are some key points for agents to think about when discussing “combo products” with consumers:

How insurance agents and financial advisors who have been working primarily in their narrow specialties will be able to help clients navigate this new world of long-term care planning choices. Benefits available with life and annuity/LTCI combos are likely to be limited as to benefits paid at time of claim.

Long-term care benefit qualification must be consistent with HIPAA in order for the combo plan to fall under the PPA guidelines. In order to solicit/sell long-term care insurance in California, Agents need to hold a current license as: Life Agent, Accident and Health Insurance Agent, Life-Only Agent (only if it is a LTC rider on a full life policy), or Fire and Casualty Broker-Agent.

What sorts of long-term care expenses will the life or annuity combo pay for--nursing home only, assisted living, home care, or all of the above? Will the plan reimburse for incurred cost or provide some sort of indemnity (per diem) benefit based on a day of service incurred? What sorts of assessments and plans of care will the claims process require?

Underwriting criteria will lead to choices of deferral periods based on insured’s health issues. This will be a special challenge to life insurance agents selling annuities, marketers and wholesalers not attuned to underwriting issues in the current SPDA environment.

1035 exchange opportunities are likely to occur (moving cash values from life insurance and annuity contracts to those with LTCI benefits).

Which type of life insurance product, SPDA, fixed, indexed or variable, will be best suited to specific clients? What if they do not perform as anticipated? Will consumers who purchase a combo plan be faced with a lower level of benefits if the underlying life insurance or annuity contract pays the guaranteed rate as opposed to the current rate? Will there be “true-up” provisions which give the insured an ability to “reinforce” their long-term care pay-out in the event that product investment performance doesn’t reach expectations.

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Conclusion

This complex area of law and especially the advent of “combo products” (life and annuity) raise many new questions regarding how agents discuss long-term care needs and solutions with consumers. Full discussion of suitability of specific long-term care products and disclosure of all terms, conditions and protections will become even more important as will suggesting the correct and suitable solution. Finally, all insurance producers should be keenly aware that the information provided in this treatise gives a broad description of the tax issues related to long-term care insurance. Since most agents are not Certified Public Accountants (CPA’s) or tax preparers they should be very cautious and understand their limitations in advising insureds about their specific tax situation and circumstances. Agents should always refer clients to insured’s tax advisor for the final analysis of tax impact of long-term care insurance and expenses.

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INSTRUCTIONS FOR FORM 1099 LTC

INSTRUCTIONS FOR POLICYHOLDER

The instructions below were extracted from the 2011 1099 LTC form. A payer, such as an insurance company or a viatical settlement provider, must give this form to you for payments made under a long-term care insurance contract or for accelerated death benefits. Payments include those made directly to you (or to the insured) and those made to third parties.

A long-term care insurance contract provides coverage of expenses for long-term care services for an individual who has been certified by a licensed health care practitioner as chronically ill. A life insurance company or viatical settlement provider may pay accelerated death benefits if the insured has been certified by either a physician as terminally ill or by a licensed health care practitioner as chronically ill.

Long-term care insurance contract. Generally, amounts received under a qualified long-term care insurance contract are excluded from your income. However, if payments are made on a per diem basis, the amount you may exclude is limited. The per diem exclusion limit must be allocated among all policyholders who own qualified long-term care insurance contracts for the same insured.

See Pub. 525 and Form 8853, and its instructions for more information.

Per diem basis. This means the payments were made on any periodic basis without regard to the actual expenses incurred during the period to which the payments relate.

INSTRUCTIONS FOR INSURED

A payer, such as an insurance company or a viatical settlement provider, must give this form to you and to the policyholder for payments made under a long-term care insurance contract or for accelerated death benefits. Payments include both benefits you received directly and expenses paid on your behalf to third parties.

If you are the insured but are not the policyholder, Copy C is provided to you for information only because these payments are not taxable to you. If you are also the policyholder, you should receive Copy B.

Account number. May show an account or other unique number the payer assigned to distinguish your account.

Box 1. Shows the gross benefits paid under a long-term care insurance contract during the year.

Box 2. Shows the gross accelerated death benefits paid during the year.

Box 3. Shows if the amount in box 1 or 2 was paid on a per diem basis or was reimbursement of actual long-term care expenses. If you are terminally ill, this box may not be checked.

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Box 4. May show if the benefits were from a qualified long-term care insurance contract.

Box 5. May show if you were certified chronically ill or terminally ill, and the latest date certified.

IMPLICATIONS FOR CONSUMER

The 1099 LTC form will be sent to the Consumer by January 31 following each tax year and the consumer will use the document to substantiate the amount of premiums they are deducting from their tax return or the amount of LTC benefits that were paid to or on behalf of them to a third party (usually a provider of LTC services). The consumer must also file federal tax form 8853 to reconcile the payments received and test as to whether the amount received exceeded the allowed per diem exclusion.

IMPLICATIONS FOR INSURER

The insurer must send the 1099 LTC to the policyholder and/or insured by January 31, covering the immediately preceding calendar year. The carrier must also file a copy of this form with the IRS by February 28th. No allowances are made for leap year.

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COPY OF TAX FORM 1099 LTC FOR 2011

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COPY OF PAGE 1 OF TAX FORM 8853 FOR 2011

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COPY OF PAGE 2 OF TAX FORM 8853 FOR 2011

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ATTACHMENT B PROVIDER LEGISLATIVE REFERENCE Understanding of the following Long-Term Care legislation is significant. It provides the evolutionary changes for each law throughout the year.

It is important to know what impact the following pieces of legislation have had on long-term care insurance. To review or obtain copies of the following pieces of legislation, you may log onto the California Legislature’s Web site at http://www.leginfo.ca.gov or you may call the Legislative Bill Room at (916) 445-2645 to order copies of this legislation.

In addition, the Sections 10231-10237.6 of the California Insurance Code also impact long-term care insurance.

1993

SB 1943 (Mello, Chapter 1132, Statutes of 1992) Long-term Care Insurance: Provides that long-term care insurance include insurance designed to provide that coverage, without restriction as to length of coverage, and also includes disability based long-term care policies, and specifies that long-term care benefits designed to provide coverage of 12 months or more that are contained in Medicare supplement or other policies is regulated

Requires associations to be organized and maintained in good faith for a primary purpose other than obtaining insurance.

Require associations to provide evidence that the required provisions of the constitution and bylaws have been consistently implemented.

Requires certain groups to have a main resource source not related to the marketing of insurance, to have outreach methods to obtain new members not related to the solicitation of insurance and to provide benefits or services other than insurance, of significant value to its members.

Requires any policy or certificate limited to institutional care to be called a nursing facility only policy or certificate, one limited to home care to be called a home care only policy or certificate, and would permit only those that provide both institutional and home care to be called comprehensive long-term care insurance.

Requires specific notice regarding untrue statements on an application.

Provides that where an insurer does not complete medical underwriting and resolve all reasonable questions arising from information submitted on or with an application before issuing the policy or certification, then the insurer may only rescind the policy or certificate or deny an otherwise valid claim, upon clear and convincing evidence of fraud or material misrepresentation of the risk by the applicant.

Provides that the contestability period is 2 years and that no long-term care policy or certificate may be field issued.

Requires long-term care insurance that provides home health care benefits or home care or community-based services to provide specific benefits.

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Provides that in every long-term care policy or certificate that provide home care benefits, the threshold establishing eligibility for home care benefits must be at least as permissive as a provision that the insured will qualify if either one of two specific criteria or combination of criteria to be substituted, if the insurer demonstrates that the interest of the insurer is better served.

Provides that long-term care insurance may not provide for benefits based on standards described as “usual and customary” or similar words.

Provides that if a policy replaces another long-term care policy the replacing insurer must waive any time periods applicable to preexisting conditions and prohibitory periods to the extent that similar exclusions have been satisfied.

Imposes requirements relating to marketing practices.

Prohibits certain fair trade practices including cold lead advertising without disclosing that an insurance agent or company will make contact.

Requires prior approval of certain advertisements.

Requires agents to make reasonable efforts to determine the appropriateness of a recommended purchase or replacements.

Requires every long-term care insurer to file is commission structure or an explanation of the insurer’s compensation plan with the Commissioner.

Providers for hearings before an Administrative Law Bureau and the Department of Insurance, except where a fine is over $100,000 in which case the Administrative Procedures Act would be applicable.

Requires every insurer providing long-term care coverage in California to provide a copy of any advertisement to the Commissioner for review at least 30 days before dissemination.

Requires long-term care insurers to establish marketing procedures, submit to the Commissioner a list of all agents and other insurer representatives authorized to solicit long-term care insurance sales, and provide continuing education to those agents or representatives.

Required notice to applicant containing specific information for replacement is to be signed by the agent.

Requires long-term care policies issued to individuals to be either guaranteed renewable or non-cancelable.

Requires group insurance to provide for continuation coverage for the certificate holder.

Makes changes to the long-term insurance act inapplicable to the California Partnership for Long-term Care Pilot Program.

1997

SB 1052 (Vasconcellos, Chapter 699, Statutes of 1997) Insurance: Long-Term Care: Requires every policy that is intended to be a qualified long-term care insurance contract as provided by federal law to be identified as such with a specified disclosure statement, and, similarly would require every policy that is not intended to be a qualified long-term

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care insurance contract as provided by federal law to be identified as such.

Require insurers that offer policies or certificates that are intended to be federally qualified long-term care insurance contracts, including riders to life insurance policies providing long-term care coverage, to fairly and affirmatively concurrently offer and market policies and certificates that are not intended to be federally qualified long-term care. The bill would revise various definitions. This topic requires that a specific shoppers’ guide be provided to prospective applicants.

Requires insurers to make certain reports regarding lapses and replacements.

Requires that premium adjustments be made for replacement policies.

Requires insurers and other marketers of long-term care insurance to utilize specified suitability standards.

Requires that insurers provide notifications regarding denial of claims.

Requires insurers to offer or provide certain rights and benefits in connection with long-term care insurance, including rights to increase and decrease benefits.

Imposes requirements on inflation protection benefits.

AB 1483 (Gallegos, Chapter 700, Statutes 1997) Insurance: long-term care: Requires every policy that is intended to be a qualified long-term care insurance contract as provided by federal law to be identified as such with a specified disclosure statement, including riders to life insurance policies, and, similarly would require every policy that is not intended to be a qualified long-term care insurance contract as provided by federal law be identified as such.

Requires insurers that offer policies or certificates that are intended to be federally qualified long-term care insurance policies to also fairly and affirmatively offer and market policies that are not intended to be federally qualified long-term care contracts.

Sets forth eligibility criteria for policies and certificates intended to be qualified long-term care insurance contracts as provided by federal law as well as for policies and certificates that are not intended to be federally qualified.

Revises various definitions.

SB 527 (Rosenthal, Chapter 701, Statutes of 1997) Insurance: long-term care: Provides that if an insurer provides long-term care insurance intended to qualify for favorable tax treatment under federal law, the insurer must also offer coverage that conforms to the current state eligibility requirements, as specified.

Requires insurers to provide a specified notice at the time of solicitation, and a specified notice in the application form.

1998

SB 1537 (Rosenthal, Chapter 1067, Statutes of 1998) Long-term care insurance: Requires the Department of Insurance to adopt emergency regulations to require

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insurers offering both forms of policies to offer a holder of either form of policy a one-time opportunity to exchange the policy from one form into the other form, if a federal law is enacted, or the United States Department of the Treasury issues a decision, declaring that the benefits paid under long-term care insurance policies or certificates, that are not intended to be federally qualified, are either taxable or nontaxable as income.

Provides for the emergency regulations to require insurers to allow exchanges to be made on a guaranteed issuance basis, but to allow insurers to lower or increase the premium, with the new premium based on the age of the policyholder at the time the holder was issued the previous policy, as specified.

Provides for the exchange to be made by rider to a policy at the discretion of the department, and would also provide that policies may not be exchanged if the holder is receiving benefits under the policy or would immediately be eligible for benefits as a result of an exchange.

Requires insurers to take certain actions to notify holders of these policies and certificates of the availability of the exchange option.

Provides that those provisions apply only to a policy or certificate intended to be a federally qualified long-term care insurance contract.

Requires that outline to include information regarding the toll-free telephone number of the Health Insurance Counseling and Advocacy Program.

Provides that the cumulative premium credits allowed need not reduce the premium for the replacement policy or certificate to less than the premium of the original policy or certificate.

1999

SB 870 (Vasconcellos, Chapter 947, Statutes of 1999) Long-term care insurance: Makes various changes to those provisions, including changes clarifying an insurer's obligations to file, offer, and market policies intended to be federally qualified and policies that are not intended to be federally qualified;

Changes mandating coverage for care in a residential care facility;

Changes relating to coverage for preexisting conditions; changes regarding prohibited policy provisions and prohibited insurer actions in connection with policies; and

Changes regarding the right of a policy or certificate holder to appeal decisions regarding benefit eligibility care plans, services and providers, and reimbursements.

SB 475 (Dunn, Chapter 669, Statutes of 1999) Long-term care insurance: rate guide: data collection:

Requires the Insurance Commissioner to annually prepare a consumer rate guide for consumers for long-term care insurance, as specified.

Specifies the dates and methods for distributing the consumer rate guide.

Requires each insurer to provide, and the Department of Insurance to collect, specified data on long-term care policies and certificates, including all policies, whether issued by

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the insurer or purchased or acquired from another insurer, in the United States, on or after January 1, 1990.

Provides that the data collected are public records open to members of the public for inspection, unless they are a trade secret as defined.

2000

SB 898 (Dunn Chapter 812, Statutes 2000) Long-term care renewal provisions: Requires group long-term care policies and certificates to be either guaranteed renewable or non-cancelable.

Requires approval of the Insurance Commissioner before individual or group long-term care insurance may be offered, sold, issued, or delivered in this state, and would specify the duties of insurers and commissioner in this regard.

Limits premium increases for these policies, as specified.

Requires premium rate schedules and new policy forms to be filed with the commissioner by January 1, 2002, for all group long-term care policies to be sold on or after January 1, 2003, and for all previously approved individual long-term care policies to be sold on or after January 1, 2003, unless the deadline is extended by the commissioner.

2001

SB 455 (Committee on Insurance, Chapter 328, Statutes 2001) Health Care: Restores Section 10232.65 to the Insurance Code, which imposes limitations of one month (two months if interim coverage is provided) on the amount of premium that may be collected by a long-term care policy issuer with the application prior to the time the policy is delivered. Requires 60-day notification regarding issuance or non-issuance of a policy and an interest payment made to applicant for failure to notify.]

2002

SB 1613 (Dunn, Chapter 675, Statutes of 2002) Long-term care insurance: Requires the evidence of the continuing education to be filed with and approved by the Insurance Commissioner for specified nonresident licensees.

Requires, until June 30, 2003, the notification to be provided within 18 months if certain conditions are met.

Specifies that an insurer is not prohibited from filing new group and individual policy forms with the commissioner after January 1, 2003.

Authorizes an insurer that has filed premium rate schedules and new policy forms by March 1, 2002, to continue to offer and market long-term care policies approved prior to January 1, 2002, until 90 days after approval of the premium rate schedules and new policy forms or June 30, 2003.

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SB 1974 (Polanco, Chapter 358, Statutes of 2001) Insurance Policies: Authorizes the Commissioner to approve insurance policies and associated materials in languages other than English if certain conditions are satisfied.

2008

SB 483 (Kuehl, Chapter 379, Statutes of 2008) Medi-Cal: home and facility care: This bill requires a recipient of Medi-Cal benefits to disclose any interest he or she or their spouse has in an annuity as a condition of eligibility for medical assistance for home or facility care. The bill would also require the state, as an operation of law, to become a remainder beneficiary of certain annuities, as described, unless the individual notifies the state in writing that he or she prohibits the state from becoming a remainder beneficiary, as provided, and would require the department to inform an individual and his or her spouse of this fact at the time of the individual's application or re-determination of Medi-Cal eligibility. The bill would also require that before any penalties, as provided for in the bill, are imposed that may result in a period of ineligibility for medical assistance for home and facility care, an individual must have the right to demonstrate that a period of ineligibility would be an undue hardship, as defined. It would require the state to provide notice to individuals requesting medical assistance for home and facility care of the undue hardship exception and would require a determination of whether an undue hardship exists to be made before an applicant is denied eligibility for medical assistance for home and facility care. If an individual or his or her spouse notifies the state in writing that he or she prohibits the state from becoming a remainder beneficiary to his or her annuity, the bill would require the annuity to be treated as a transfer of assets for less than fair market value for purposes of determining Medi-Cal eligibility.

2008

AB 2150 (Berg, Chapter 327, Statutes of 2008) Insurance: sales designations An act to add Section 787.1 to the Insurance Code: This bill provides that a broker or agent may not use a senior designation, as defined, unless specified conditions have been met. This bill provides that in determining whether to approve a senior designation for use, the commissioner must ensure that the organization that issues the senior designation fulfills specified requirements. This bill requires certain experience and education, as specified, before the commissioner may approve the use of a senior designation by a broker or agent. The bill specifies the penalties and remedies if its provisions are violated, and makes related changes.

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ATTACHMENT C:CALIFORNIA PARTNERSHIP FOR LONG-TERM CARE

A Program of the State Department of Health Care Services

Lifetime Asset Protection Becomes Affordable for Consumers with Moderate Incomes

Introduction

In September 1994, California implemented a major new program to help people with moderate incomes and assets purchase high quality long-term care (LTC) insurance.

This program, known as the California Partnership for Long-Term Care (CPLTC or Partnership), is a partnership between the State of California and select insurance companies that offer policies containing special consumer protections.

This program also provides education to consumers and special support to insurance agents in an effort to help individuals realize their potential risk of needing LTC, and how high quality LTC insurance provides a viable option for funding these costs.

How Does This Partnership Work?

While the Partnership policy is attractive to wealthier purchasers who tend to buy lifetime coverage, its special asset protection feature is important to people who can only afford policies of shorter duration. The asset protection feature of this program is its guarantee that the State and Federal Government will provide a financial back stop should the LTC benefits provided by a Partnership policy be insufficient to meet the needs of the purchaser. Individuals who buy Partnership policies are entitled to keep additional assets equal to the amount their policy pays out, should they ever need to apply for Medi-Cal for health or LTC benefits. In the absence of such protection, single individuals can only retain $2,000 in non-exempt assets in order to qualify for Medi-Cal benefits. This special asset protection helps assure consumers who can only afford premiums for a one or two-year policy, that should they exhaust their policy benefits they won’t have to become impoverished before they can receive Medi-Cal benefits. Individuals who purchase Non-Partnership policies and use up their policy benefits must “spend down” their assets to poverty level in order to receive Medi-Cal assistance.

This special asset protection provision, only available in Partnership policies, provides one dollar of asset protection for each dollar paid out in Partnership policy benefits. This $-for-$ protection allows for a variety of product designs ranging from one year to lifetime coverage. The Partnership policies offer everyone high quality benefits and $-for-$ asset protection against the costs of LTC, including consumers who can afford lifetime coverage. Most important, however, Partnership policies provide people with moderate incomes the option of choosing a shorter duration policy with the “high quality protection” they need and can afford, and eliminate the fear they might end up in poverty because their LTC costs used up their policy benefits.

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The purchase of "high quality protection,” which includes such provisions as automatic built-in inflation protection, adequate daily per diem, a “monthly” rather than a “daily” cap on home and community-based benefits, care management, etc., is a major objective in the design of the Partnership product. Middle-income individuals with LTC insurance policies without these protections are at serious risk of depleting their policy benefits, becoming impoverished, and having to turn to Medi-Cal to pay their ongoing LTC costs, in spite of having purchased LTC insurance.

The impoverishment protection offered by Partnership policies provides an especially good option for the elderly, who are often less able to afford longer duration high quality policies of four years or more. Here are a few examples on how the Partnership’s special asset protection feature works:

TABLE 1 California Partnership for Long-Term Care

Assets LTC Insurance Payouts

Medi-Cal Spend Down Required

Person A $50,000 $50,000 $0

Person B $200,000 $200,000 $0

Person C $1,000,000 $500,000 $500,000

Person D $200,000 $0 $200,000

In Table 1:

Person A is an unmarried man with $50,000 of savings that would have to be “spent down” to $2,000 to qualify for Medi-Cal. Without LTC insurance, this person could quickly wipe out his savings should LTC be required. Person A, however, purchased a Partnership plan that would pay out $50,000 of benefits, the average costs of a nursing home in his community for a year. Person A uses up all $50,000 of insurance benefits and still needs nursing home care. In applying for Medi-Cal, Person A shows the eligibility worker a form issued by his insurance company indicating a total of $50,000 of Partnership insurance benefits were paid out. Medi-Cal will allow Person A to keep $50,000 in additional savings and still qualify for Medi-Cal. Person A is in a nursing home for a year and a half after applying for Medi-Cal, during which time Medi-Cal paid out $40,000 worth of claims for LTC and other medical costs. At the time of Person A’s death, Medi-Cal begins action to collect from his estate. However, once again, Medi-Cal recognizes that Person A received $50,000 of Partnership insurance benefits, which protected an equal amount of his estate against Medi-Cal estate collection. Person A is able to pass on $50,000 in inheritance to his heirs. Person B has $200,000 of savings and chose to purchase a Partnership policy that would pay out $200,000 worth of benefits, about 4 years of today’s nursing home costs in Person B’s community. Unfortunately, Person B ended up receiving services in her home for a year before spending the last 7 years of her life in a nursing home. The policy benefits of $200,000 were used up after about 4 years. When she applied for

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Medi-Cal she was able to keep an additional $200,000 of savings, and this amount was protected from Medi-Cal recovery in her estate at the time of her death. The money was used to provide for her granddaughter’s college education.

Person C anticipated having assets of $1,000,000 by the time she might need LTC, but chose to protect only a portion of her assets by purchasing a Partnership policy that would pay out $200,000 in benefits. Person C did not need her policy benefits for about 20 years after she purchased the policy. Because of the automatic inflation protection built into the Partnership policy, both the value of the Partnership benefits and the amount of asset protection had grown to $500,000 by the time she went into a nursing home, where she remained for four years before her policy was exhausted. Person C was allowed to keep $500,000 of additional assets at the time she qualified for Medi-Cal. In addition, at the time she passed away Medi-Cal exempted from recovery $500,000 of her estate.

Person D represents an individual who either did not purchase LTC insurance or bought a non-Partnership policy. Person D ended up needing to apply for Medi-Cal to pay his ongoing nursing home costs. However, he was required to “spend down” his non-exempt assets to only $2,000 before becoming eligible for Medi-Cal. His home was considered “exempt” property and was disregarded for the purpose of qualifying for Medi-Cal. When he died Medi-Cal placed a lien against his home, in order to recover the value of the Medi-Cal claims paid during the time he was in the nursing home.

To really appreciate the above examples, it is important to understand the basics of how Medi-Cal eligibility and estate recovery works. Under current law, $2,000 of assets is disregarded as “exempt property” in determining a single person’s eligibility for Medi-Cal. The Medi-Cal applicant’s residence can also be disregarded, as well as one car and a limited number of other assets. Additional assets can be retained if an individual is in a nursing home and his or her spouse is living in the community. The asset protection provided by the Partnership is in addition to any other assets Medi-Cal allows a person to keep and still qualify for Medi-Cal.

What Other Policy Provisions are Unique to Partnership Products?

While the Partnership policy offers excellent protection for everyone, it is specifically designed for individuals with moderate incomes who are unlikely to be able to afford significant rate increases, or out-of- pocket expenses at the time they need LTC benefits. The following provisions are, therefore, included in all Partnership policies:

1) Required inflation protection is set at 5 percent compounded annually. Persons 70 years of age or older have a choice between a 5 percent compound or a 5 percent simple annual inflation adjustment. This inflation protection not only helps minimize out of pocket expenses due to inflation, but also proportionately increases the level of asset protection.

2) Policies can not be sold that provide less than 70 percent of the average daily nursing home costs in the State. For example, in 2009, the average daily private pay rate (ADPPR) for nursing facility care is $220. However, while the 2009 ADPPR for nursing facility care is $220, the minimum daily benefit for Partnership policies that can be sold in

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California is $150 with a $105 (70 percent) Residential Care and Assisted Living Benefit

3) The home and community-based care benefit in the Partnership Comprehensive policy is capped as a “monthly” rather than a “daily” benefit. As an example, a policyholder buys a Comprehensive Policy with a home and community-based care benefit of $55 a day. A person needing home care seldom uses a fixed amount per day. With a “monthly” cap, the policyholder has a $1,650 bucket of money to be used for home care ($55 X 30 days in the month). This provides a flexible way for the policyholder to combine the availability of informal care with formal care, and reduce or avoid out of pocket expenses while maximizing the policy benefits.

4) Care Management/Care Coordination, independent of the insurance company, provides all policyholders with the benefit of having a qualified licensed health care professional evaluate their need for care, and, with the policy holders input, develop a plan of care which lists informal and formal services necessary to help them maintain as much independence in the most efficient way possible. All treatment plans must include a non-inclusive list of providers in the community appropriate to provide the necessary care. Policyholders can also choose to have the care manager/care coordinator help them access the care and monitor the appropriateness of that care. This benefit helps maximize the value of the policy benefits, as well as provide assistance to an individual and most often a family during a time of crisis. Care Management Provider Agencies providing services to Partnership policyholders must be approved by the Partnership to assure they have staff with the appropriate experience and credentials, as well as methods to assure the quality of their services. The State of California has no regulatory oversight of care management organizations other than those that provide services to Partnership policyholders.

5) Prior to 2002 the Department of Insurance (DOI) policy approval process only included the review of policy premiums and actuarial memorandums for Partnership policies. Subsequently, the DOI reviews all policies’ premiums and actuarial memorandums. There are requirements that any request for Partnership rate increases are based on the entire pool of Partnership purchasers, and be subject to a rate cap. Partnership regulations provide for the DOI to disapprove a Partnership policy filing by a company with a history of rate increases.

6) Provisions related to protecting the policyholder against possible lapse were championed by the Partnership, and are now required in all policies being marketed in California. 7) All Partnership policies have the benefit of a stringent review by expert staff at the Department of Heath Care Services (DHCS). In addition, a review is completed on all policies by the DOI to help assure provisions are accurately described in a way that is most understandable by the consumer.

8) In September 2008, California Senate Bill 483 (Chapter 379, Statutes of 2007-2008), was signed by the Governor to implement 2006 changes to federal law. Those federal changes limit the amount of equity individuals can have in their principal residence and receive medical assistance for home and facility care services under the Medi-Cal program. In SB 483, California exercised its option to increase the equity limit from the

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federal minimum of $500,000 to $750,000. SB 483 goes even further by providing complete protection from the equity limit to Partnership policy holders who use benefits under their policies. These new requirements will only be applicable after regulations have been adopted to implement SB 483. The Department of Health Care Services is in the process of preparing regulations as required by SB 483.

What Else is Unique?

1) The DHCS requires agents to take specific continuing education (CE) training to be authorized to market Partnership policies. The training consists of an initial 8 hours of classroom only CE on the Partnership, and thereafter an additional 8 hours of classroom only CE on the Partnership every two-year license approval period. Regulations provide that agents who fail to comply with this CE requirement must not sell Partnership policies, and companies are required to enforce this requirement or jeopardize their relationship with the CPLTC. Also, Partnership course instructors must pass an exam before they are allowed to teach.

2) The DHCS provides services to help agents expand their understanding of the Partnership product, the importance of these quality consumer protections, and ways they can better serve their clients. These services include agent seminars, educational material, agent flyers and newsletters, a web-based interactive tool agents utilize to educate their clients about planning for LTC, and a comprehensive Website (www.dhs.ca.gov/cpltc).

3) DHCS collaborates with its issuer partners in finding ways to reach out to Californians with information that will help them become aware of the risks of needing LTC, the benefits of LTC insurance, and the availability of the Partnership policy. Some of the current consumer education and outreach efforts include a consumer website (www.dhs.ca.gov/cpltc), consumer education videos, educational pamphlets, Public Service Announcements on radio and television, participation on radio and television talk shows and other media events, print advertising, publication of articles in magazines and newspapers, participation in health forums, and presentations to consumer groups.

What Types of Coverage is Offered:

Two types of Partnership policies are available: a “Nursing Facility and Residential Care Facility Only” Policy and a “Comprehensive” Policy. The comprehensive policy covers care in a nursing home and residential care facility, as well as the full range of home and community-based care services.

Benefits and Limitations:

All Partnership policies are Tax Qualified which means changes in the tax code now allow taxpayers to deduct some of the costs associated with LTC insurance.

While Partnership policies, like all private LTC insurance policies, are transportable throughout the United States, if a policyholder exhausts the policy benefits or otherwise needs to apply for Medicaid benefits for LTC, he or she will have to return to

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California in order to take advantage of the special Medi-Cal asset protection. Partnership policies are only available to California residents.

REVISED 11/26/2008

Source: California Partnership for Long-term Care. A program of the California State Department of Health Care Services.

FORMS AND LISTS BEGIN ON FOLLOWING PAGE

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LIST OF CALIFORNIA HICAP OFFICES BY COUNTY AS OF 11/5/2011

HICAP Contacts

Alameda Legal Assistance For Seniors

464 7th Street Oakland, CA 94607

(510) 839-0393 (800) 393-0363 (800) 434-0222

Alpine Area 12 Agency On Aging

19074 Standard Road, Suite A Sonora, CA 95370

(209) 532-6272 (800) 434-0222

Amador Area 12 Agency On Aging


(209) 532-6272 (800) 434-0222

Butte

PASSAGES 25 Main Street, Room 202

Chico, CA Mailing Address:

400 West 1st Street Chico, CA 95929

(530) 898-6716 (800) 434-0222

Calaveras Area 12 Agency On Aging


(209) 532-6272 (800) 434-0222

Colusa




(530) 898-6716 (800) 434-0222

Contra Costa Contra Costa County Aging & Adult Services

400 Ellinwood Way Pleasant Hill, CA 94523

(925) 602-4163 (TDD) 335-8730(800) 434-0222

Del Norte Area 1 Agency On Aging

434 7th Street Eureka, CA 95501

(707) 464-7876 (800) 434-0222

El Dorado Legal Services of Northern California

3950 Industrial Blvd., Suite 500 West Sacramento, CA 95691

(916) 376-8915 (800) 434-0222

Fresno Valley Caregiver Resource Center

3845 N. Clark, Suite 201 Fresno, CA 93726

(559) 224-9117 (800) 434-0222

Glenn




(530) 898-6716 (800) 434-0222

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Humboldt Area 1 Agency On Aging

434 7th Street Eureka, CA 95501

(707) 444-3000 (800) 434-0222

Imperial Elder Law & Advocacy

5151 Murphy Canyon Road, Suite 100 San Diego, CA 92123

(858) 565-8772 (800) 434-0222

Inyo Inyo-Mono Area Agency On Aging

163 May Street Bishop, CA 93514

(760) 779-9821 (877) 462-2298 (800) 633-4227 (800) 434-0222

Kern County of Kern Area Agency on Aging

5357 Truxtun Avenue Bakersfield, CA 93309

(661) 868-1061 (800) 434-0222

Kings Kings/Tulare Area Agency On Aging

4031 West Noble Avenue Visalia, CA 93277

(559) 623-0199 (800) 321-2462 (800) 434-0222

Lake Senior Advocacy Services

3262 Airway Drive, Suite C Santa Rosa, CA 95403-2004

(707) 526-4108 (800) 434-0222

Lassen HICAP Services of Northern California

1647 Hartnell Avenue, Suite #8 Redding, CA 96002

(530) 223-0999 (800) 434-0222

Los Angeles City Center For Health Care Rights

520 S. Lafayette Park Place, Suite 214 Los Angeles, CA 90057

(213) 383-4519 (800) 824-0780 (800) 434-0222

Los Angeles County

Center For Health Care Rights 520 S. Lafayette Park Place, Suite 214

Los Angeles, CA 90057

(213) 383-4519 (800) 824-0780 (800) 434-0222

Madera Valley Caregiver Resource Center

3845 N. Clark, Suite 201 Fresno, CA 93726

(559) 224-9117 (800) 434-0222

Marin Senior Advocacy Services


(707) 526-4108 (800) 434-0222

Mariposa Area 12 Agency On Aging


(209) 532-6272 (800) 434-0222

Mendocino Senior Advocacy Services


(707) 526-4108 (800) 434-0222

Merced Merced County Area Agency On Aging

851 West 23rd Street Merced, CA 95340

(209) 385-7550 (800) 434-0222

Modoc HICAP Services of Northern California


(530) 223-0999 (800) 434-0222

Mono Inyo-Mono Area Agency On Aging

163 May Street Bishop, CA 93514

(760) 779-9821 (877) 462-2298 (800) 434-0222

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Monterey Alliance On Aging, Inc.

2200 Garden Road Monterey, CA 93940-5329

(831) 655-4245 (800) 434-0222

Napa Senior Advocacy Services


(707) 526-4108 (800) 434-0222

Nevada Legal Services of Northern California


(916) 376-8915 (800) 434-0222

Orange Council on Aging - Orange County

1971 E. 4th Street, Suite 200 Santa Ana, CA 92705

(714) 560-0424 (800) 434-0222

Placer Legal Services of Northern California


(916) 376-8915 (800) 434-0222

Plumas




(530) 898-6716 (800) 434-0222

Riverside Inland Agency

1737 Atlanta Avenue, Suite H-5 Riverside, CA 92507

760) 779-9821 (800) 434-0222

Sacramento Legal Services of Northern California


(916) 376-8915 (800) 434-0222

San Benito Senior Network Services, Inc.

1777 A-Capitola Road Santa Cruz, CA 95062

(831) 637-0630 (800) 434-0222

San Bernardino Inland Agency

1737 Atlanta Avenue, Suite H-5 Riverside, CA 92507

(951) 241-8723 (800) 434-0222

San Diego Elder Law & Advocacy

5151 Murphy Canyon Road, Suite 100 San Diego, CA 92123

(858) 565-8772 (800) 434-0222

San Francisco Self-Help for the Elderly

407 Sansome Street San Francisco, CA 94111

(415) 677-7520 (800) 434-0222

San Joaquin Legal Services of Northern California


(916) 376-8915 (800) 434-0222

San Luis Obispo Central Coast Commission for Senior

Citizens 528 South Broadway

Santa Maria, CA 93454

(805) 928-5663 (800) 434-0222

San Mateo HICAP/Self Help For The Elderly

1710 S. Amphlett Blvd., #302 San Mateo, CA 94402

(650) 627-9350 (800) 434-0222

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Santa Barbara Central Coast Commission for Senior

Citizens 528 South Broadway

Santa Maria, CA 93454

(805) 928-5663 (800) 434-0222

Santa Clara Council on Aging, Silicon Valley

2115 The Alameda San Jose, CA 95126

(408) 296-8290 (800) 434-0222

Santa Cruz Senior Network Services, Inc.

1777 A-Capitola Road Santa Cruz, CA 95062

(831) 462-5510 (800) 434-0222

Shasta HICAP Services of Northern California


(530) 223-0999 (800) 434-0222

Sierra Legal Services of Northern California


(916) 376-8915 (800) 434-0222

Siskiyou HICAP Services of Northern California


(530) 223-0999 (800) 434-0222

Solano Senior Advocacy Services


(707) 526-4108 (800) 434-0222

Sonoma Senior Advocacy Services


(707) 526-4108 (800) 434-0222

Stanislaus Aging and Veterans Services HICAP

121 Downey Avenue, Suite 101 Modesto, CA 95354

(209) 558-4540 (800) 434-0222

Sutter Legal Services of Northern California


(916) 376-8915 (800) 434-0222

Tehama




(530) 898-6716 (800) 434-0222

Trinity HICAP Services of Northern California


(530) 223-0999 (800) 434-0222

Tulare Kings-Tulare Area Agency On Aging

4031 West Noble Avenue Visalia, CA 93277

(559) 623-0199 (800) 321-2462 (800) 434-0222

Tuolumne Area 12 Agency On Aging


(209) 532-6272 (800) 434-0222

Ventura County of Ventura Area Agency Aging

646 County Square Drive, Suite 101 Ventura, CA 93003

(805) 477-7310 (800) 434-0222

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Yolo Legal Services of Northern California


(916) 376-8915 (800) 434-0222

Yuba Legal Services of Northern California


(916) 376-8915 (800) 434-0222

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REQUIRED FORMAT FOR OUTLINE OF COVERAGE

GENERAL REQUIREMENTS FOR OUTLINE OF COVERAGE

Following is an excerpt from the section of The California Insurance Code detailing the requirements and required Format of the Outline of Coverage. The outline of coverage must be a freestanding document, using no smaller than 10-point type. The outline of coverage shall contain no material of an advertising nature. Use of the text and sequence of the text of the outline of coverage set forth in this section is mandatory, unless otherwise specifically indicated. Text which is capitalized or underscored in the outline of coverage may be emphasized by other means which provide prominence equivalent to capitalization or underscoring. The outline of coverage shall be in the following form: "(COMPANY NAME) (ADDRESS--CITY AND STATE) (TELEPHONE NUMBER) LONG-TERM CARE INSURANCE OUTLINE OF COVERAGE (Policy Number or Group Master Policy and Certificate Number) 1. This policy is (an individual policy of insurance) ((a group policy) which was issued in the (indicate jurisdiction in which group policy was issued)). 2. PURPOSE OF OUTLINE OF COVERAGE. This outline of coverage provides a very brief description of the important 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! 3. TERMS UNDER WHICH THE POLICY OR CERTIFICATE MAY BE RETURNED AND PREMIUM REFUNDED. (a) Provide a brief description of the right to return--"free look" provision of the policy. (b) Include a statement that the policy either does or does not contain provisions

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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 those provisions, include a description of them. 4. THIS IS NOT MEDICARE SUPPLEMENT COVERAGE. If you are eligible for Medicare, review the Medicare Supplement Buyer's Guide available from the insurance company. (a) (For agents) Neither (insert company name) nor its agents represent Medicare, the federal government or any state government. (b) (For direct response) (insert company name) is not representing Medicare, the federal government or any state government. 5. 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.) 6. BENEFITS PROVIDED BY THIS POLICY. (a) (Covered services, related deductible(s), waiting periods, elimination periods, and benefit maximums.) (b) (Institutional benefits, by skill level.) (c) (Noninstitutional benefits, by skill level.) (Any benefit screens must be explained in this section. If these screens differ for different benefits, explanation of the screen should accompany each benefit description. If an attending physician or other specified person must certify a certain level of functional dependency in order to be eligible for benefits, this too must be specified. If activities of daily living (ADLs) are used to measure an insured's need for long-term care, then these qualifying criteria or screens must be explained.) 7. LIMITATIONS AND EXCLUSIONS. (Describe: (a) Preexisting conditions. (b) Noneligible facilities/provider. (c) Noneligible levels of care (e.g., unlicensed providers, care or treatments provided by a family member, etc.). (d) Exclusions/exceptions. (e) 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 (6) above.)

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THIS POLICY MAY NOT COVER ALL THE EXPENSES ASSOCIATED WITH YOUR LONG-TERM CARE NEEDS. 8. 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: (a) That the benefit level will NOT increase over time. (b) Any automatic benefit adjustment provisions. (c) 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. (d) If there is 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. (e) And finally, describe whether there will be any additional premium charge imposed, and how that is to be calculated.) 9. TERMS UNDER WHICH THE POLICY (OR CERTIFICATE) MAY BE CONTINUED IN FORCE OR DISCONTINUED. (a) Describe the policy renewability provisions. (b) For group coverage, specifically describe continuation/conversion provisions applicable to the certificate and group policy. (c) Describe waiver of premium provisions or state that there are no waiver of premium provisions. (d) State whether or not the company has a right to change premium, and if that right exists, describe clearly and concisely each circumstance under which the premium may change. 10. ALZHEIMER'S DISEASE, ORGANIC DISORDERS, AND RELATED MENTAL DISEASES. (State that the policy provides coverage for insureds clinically diagnosed as having Alzheimer's Disease, organic disorders, or related degenerative and dementing illnesses. Specifically describe each benefit screen or other policy provision that provides preconditions to the availability of policy benefits for that insured.) 11. 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. 12. ADDITIONAL FEATURES. (a) Indicate if medical underwriting is used. (b) Describe other important features.

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13. INFORMATION AND COUNSELING. The California Department of Insurance has prepared a Consumer Guide to Long-Term Care Insurance. This guide can be obtained by calling the Department of Insurance toll-free telephone number. This number is 1-800-927-HELP. Additionally, the Health Insurance Counseling and Advocacy Program (HICAP) administered by the California Department of Aging, provides long-term care insurance counseling to California senior citizens. Call the HICAP toll-free telephone number 1-800-434-0222 for a referral to your local HICAP office."

Documents

CALIFORNIA 8 HR LONG-TERM CARE - Success CEHow to gain Maximum Knowledge from this course! In order to enhance the learning and knowledge process, this course incorporates several