Long-term care insurance has existed in some form since the 1970s. Shortly after the Medicare program was enacted, the insurance industry discovered a marketing opportunity in Part A-the "skilled nursing home care" benefit of the program. This benefit pays for only the first 20 days of skilled nursing home care, so skilled nursing home insurance was invented to pay for what was needed beyond those 20 days. This coverage formed the foundation for today's long-term care insurance. 

Unfortunately, these early policies had significant shortfalls when it came to a policyholder's eligibility to receive benefits. As the name implies, skilled nursing home policies required that a person receive "skilled care" in order to qualify for benefits. Skilled care is uncommon, and it is required for only the most serious health conditions. It can best be described as "short-term care."

In addition, policies required that a person spend at least three days in a hospital before nursing home confinement, or the benefits would not be paid by the policy. Because the criteria were so limiting, these policies rarely paid benefits-even when policyholders received care. Reputable financial professionals offering comprehensive financial planning analyzed the fine print of these policies and rightly advised their clients to avoid the coverage.

There are thousands of these "skilled nursing home" policies still in force. People who purchased these policies are now in their 80s and 90s-ages at which the need for long-term care is more common. Unfortunately, these policyholders and their families are being denied benefits because of the severe restrictions cited above. As claims are denied, the already tarnished reputation of the LTC insurance industry is perpetuated.

But as time has passed, newer and better policies have evolved. In the late 1980s, states began to pass laws that required newly issued LTC insurance policies to pay benefits irrespective of the level of care needed. This legislation required that policies cover all levels of care: skilled, intermediate and-most important-custodial care (the most common type). Because of this legislation, more viable long-term-care insurance finally materialized in the 1990s.

Though it was still imperative to analyze coverage carefully, the policies became much more worthwhile. In 1996, the federal government passed the Health Insurance Portability and Accountability Act (HIPPA), which produced landmark standardization of certain LTC insurance policies. This act made it easier to determine the eligibility requirements for accessing policy benefits.

Still, financial advisors need to be aware that non-standardized LTC insurance policies are still being offered and that some policies still contain unacceptable restrictions for accessing benefits. For example, group long-term care insurance may not offer the protections found in polices issued to individuals. Thus, there is still a place for financial advisors to give clients advice about these policies-to analyze the fine print of those still in force or offer insight on new ones clients might want to purchase.

As with all types of insurance, LTC insurance pays benefits when an "insurable event" occurs. There are two specific ways to become eligible for benefits with this type of policy:

If the policyholder is unable to perform some of the activities of daily living (commonly known as "ADLs"); these include activities most of us perform every day and take for granted; or f the policyholder has lost cognitive abilities.

Inability To Perform Activities
Patients might need help with daily living activities, and thus long-term care, because of an accident; because their health has deteriorated with conditions such as diabetes or heart disease; or simply because they are becoming increasing frail as they age. This means help with bathing, dressing, toileting, continence, moving (from the bed to the chair, etc.) and eating. This is the order in which abilities are typically lost (the reverse order in which we learn them from birth).

At the time of claim on an LTC insurance policy, an assessment will be performed to determine the extent of the policyholder's inability to function without assistance. LTC insurance policies can vary in their requirement regarding the number of these normal daily activities that need to be lost before the policyholder becomes eligible for benefits. For example, some policies require that a policyholder lose three of the six "ADLs" in order to qualify for benefits.

Other policies require that a policyholder lose only two. Still other policies require that two daily living activities must be lost for skilled nursing home care, but three or more must be lost for the patient to access benefits for care in an assisted living facility or care at home.

Recommendation. The best LTC insurance policies pay benefits if a policyholder is unable to perform only two ADLs, regardless of where the policyholder's care is received. You should not allow a client to consider coverage that requires them to lose more than two daily activities before they can collect benefits on the policy, even if these policies have a lower premium. If a client has an LTC insurance policy in force that requires the loss of more than two ADLs before the patient receives benefits, consider shopping for a new policy. However, don't let the clients cancel their old coverage without first performing a full assessment of their current health, the affordability of new coverage and other factors. If replacing the old policy is the most appropriate action, premium payments on any in-force policies should continue to be paid until new coverage is issued.

Cognitive Impairment
You can also collect benefits on an LTC insurance policy if you need assistance or supervision after losing cognitive abilities. It is important that this benefit trigger be included in the eligibility criteria of the policy-whether or not a policyholder needs assistance with the activities of daily living. In other words, never allow a client to consider coverage that requires them to both need assistance with ADLs and have a loss of cognitive abilities before they can collect.

"Cognitive impairment" can include the onset of Alzheimer's disease. Look for a clause in the policy that specifically states the disease is covered. The absence of such a clause is a red flag that the coverage should be avoided. At the same time, some policies may name Alzheimer's specifically, but they will also include a clause in the "exclusions" section that states, "Mental and nervous disorders will not be covered unless the disorder is organically demonstrable." This "weasel clause" can cause problems when a patient makes a claim later because the insurance company could say that the cause of the condition cannot be determined. Most states have banned the use of this language in individual policies being issued today, but in-force policies should be carefully read to assure that the clause is not in the policy language. It is still commonly found in some group LTC insurance coverage. Unfortunately, group coverage can be easily sold to individuals who rarely ask an advisor to scrutinize the coverage details.

The same recommendation made previously about replacement of coverage applies here: If a currently in-force policy contains the "weasel clause," carefully advise the client about their options and never cancel an in-force policy until new coverage is issued.

If your client is looking at group LTC insurance offered through the workplace, there are usually open enrollment deadlines. These are designed to pressure the employee into making a quick decision. Time is of the essence for you as an advisor when clients are being offered the insurance with these deadlines because you don't want them to miss an "opportunity" to obtain "guaranteed issue or modified issue" coverage if they have significant health issues. If you haven't arrived yet at the risk-management part of your process with the client, you'll want to move to that process immediately and perform a policy audit on the group coverage so that the client can be properly advised.