LTCI and IP overlap

[Walter Pearson]

Hi there,

I am reading chapter 3, question 3.4.
I can understand that the benefit amounts are independent as IP depends on salary and LTCI on long term care costs. Then the answer goes on to say,
…
“This, and the fact that the IP protection and the LTC benefits do not overlap…”

We can, however, get a situation where an IP claim triggers due to PTD and that long term care is also triggered due to the need for assistance. Doesn’t that mean that the two do actually overlap?

Or is the reasoning that the IP is used for bills etc. whereas LTCI is used for nursing etc.? - i.e. is that the definition of overlapping...

 

[Charlie]

I think what it's getting at is that:

- IP benefits should be used to replace income, ie to continue to pay off loans/mortgages, to buy food/clothes, to pay bills

- LTCI benefits will be used to pay (or contribute towards) the costs of care.

So in this sense, there is no overlap.

Furthermore, IP benefits will be paid to individuals of working age (eg in the UK between the ages of, say, 20 and 65), whereas LTCI benefits are likely to be paid to the elderly (usually to people over age 65). So the benefits probably won't get paid at the same time (in most cases anyway!).

 

[Walter Pearson]

Thanks Charlie
Do you then agree that, failing to specify otherwise, if they mention a LTCI contract, we are to assume that it kicks in after retirement?

 

[Charlie]

I think that claims would definitely tend to be made by people who are older than retirement age.

Thinking about it, if you qualify for a LTCI benefit (ie you fail to perform certain ADLs such as feeding, dressing, washing yourself), then you're probably well past being able to work anyway. I imagine that if you are younger than the normal retirement age, then you've probably already retired early!

In any case, I would probably state any assumptions I made!

 

[Calum]

Well, something like 40% of people in LTC are below 65 (sorry, no source, stated by a lecturer several years ago). A substantial number will have always needed care, but it seems unlikely there is no need at all at pre-retirement ages.

 

[Walter Pearson]

Good points by both of you. Going back to the notes, i read on page 2:

"While in this course we mostly make reference to LTC for the elderly, you should not lose sight of the fact that LTCI benefits can be paid with respect to disability arising at any age."

 

[Charlie]

Interesting!

But even if many of them are younger than 65, I can't imagine that they'd still be working (they may have had to retire early because of their condition, or possibly never been able to work at all), so I guess there's still unlikely to be an overlap in most cases

And for those cases where benefits are being received for both IP and LTC, I think they're supposed to be for different things (as per my first post!)

 

[Walter Pearson]

Clever!
So, just for interest sake:
A working person buys separate IP and LTCI contracts. Gets in a terrible accident and both policies starts paying. Is this an overlap because the same event triggered the benefit? (keeping in mind the different money allocations...)

 

[Charlie]

I wouldn't say this is an overlap BECAUSE the benefits are used for different things.

If an individual had buildings insurance and also life insurance, and there was a fire in the house while the individual was in it, and the individual died and the house burnt down, you wouldn't say the two insurance policies overlapped would you? And they are both triggered by the same event ...

I suppose you could mean different things when you say they "overlap", and one of them could be that they have the same trigger event, but I wouldn't say that's the standard interpretation.

 

[Walter Pearson]

Nice one thanX!

 

[margaret.emery]

Would you need to check the terms & conditions? To retain an incentive to return to work, the IP contract would usually say in the fine print, that the benefit paid would take into account other sources of income e.g. state benefits. Depending on how it was framed, it might pay a reduced amount once the LTCI benefit was taken into account. (& you would also need to check the T&C of the LTCI product, but I imagine that this would be less likely to be an issue.)

 

[Sarah Byrne]

Hi Margaret

As one of the previous posters mentioned, the IP and LTCI benefits are intended to cover different costs that an individual might face if they needed care.

If you imagine a parent of a family has something happen to them (eg a stroke at a young age) that means they have met the criteria required for payouts under both the IP and LTCI parts of a policy. The IP element provides them with a replacement income to pay the mortgage, put food on the table, pay bills etc. The LTCI cover pays for their cost of long-term care. Whilst the income needed in this situation might be a bit lower (one less person living in the family home, potentially) it may not differ significantly compared to an IP claim with no LTCI claim being triggered.

There are obviously a few variations on this which might have different Ts&Cs as you have suggested. For example if care is being provided in the home it's not quite this clear cut.

Hope this helps

Sarah

 

[margaret.emery]

Hi Sarah,

Thank you for your reply - it's very helpful.

I was thinking of the part in the core reading (under "Specific Risk Management Techniques ... etc") where it says:

... Under IP, it is deemed necessary to provide a benefit at such a level that the claimant has an incentive to return to work. Thus [...] insurers impose policy conditions limiting the amount of benefit relative to salary at time of disability. [...] There may also be an offset for State disability benefits or other forms of continuing income. ... Would these "other forms of continuing income" include the benefits from a LTCI product?

Consider the following two scenarios where the policy holder has purchased both IP & LTCI contracts:

1. A professional ballet dancer breaks her foot very badly, and cannot work for a period of one year. This triggers a claim under the IP contract, but as she can hobble around the house on crutches, there is no claim triggered under the LTCI.

2. A professional ballet dancer develops multiple sclerosis. This triggers a claim under the IP contract. As it becomes progressively worse, a claim is also triggered under the LTCI. This causes the her income to exceed the "maximum benefit limit" under the IP contract, and as a result the IP benefits should theoretically be reduced.

Can you comment on whether these two scenarios would be typical/reasonable for IP & LTCI products?

Thank you again for your help with this.

Margaret

 

[Sarah Byrne]

Hi Margaret

The first situation you mentioned below sounds reasonable for an IP claim

Under the second situation it's unlikely the IP benefit would be reduced once the LTCI claim started given they are intended to cover different things. As you mention, IP benefits can be reduced by State benefits and other income the policyholder may be receiving during their period of incapacity. However, the LTCI is intended to primarily meet the costs of care that the individual may require, rather than providing a replacement income. For this reason, both benefits may be able to be received at the same time without it affecting the individual's incentive to return to work under an IP policy.

Obviously, as mentioned previously, this would depend on the T&Cs that were applied to the policy (in particular the definition of income and the treatment of LTCI benefits), along with any legislation in the country etc.

Thanks
Sarah

 

[Charlie]

Hi Margaret,

It does say in Chapter 27 (in the bit you quoted) that:

Under IP, it is deemed necessary to provide a benefit at such a level that the claimant has an incentive to return to work. Thus [...] insurers impose policy conditions limiting the amount of benefit relative to salary at time of disability.

So the insurer would assess salary (and any other income) before a claim commenced, but would be unlikely to review it at a later date - it would be incredibly costly to carry out ongoing financial underwriting for all claimants throughout their claims. Furthermore, the benefit of doing so would be unlikely to outweigh the cost, because - as Sarah says above - the benefits are intended to cover different things, so having a LTCI benefit wouldn't reduce the incentive to return to work.