Long-Term Care Insurance: The Application & Underwriting Processes

Underwriting is essentially the acceptance of risk in return for payment. In long-term care insurance, this occurs when an applicant becomes a policyholder, paying the insurance company to accept the risk that may require them to pay out claims on the applicant’s behalf. Many people wonder what the application process and the underwriting process for long-term care insurance are about and how it all works. I’ll discuss all of that in this article.

Why is underwriting necessary?

The answer to this question has to do with how insurance functions. Think of insurance as a pool of money into which different parties have made deposits. These funds can then be used to pay for the financial losses of individual depositors who have had to make a claim due to unforeseen circumstances. In the case of long-term care, the funds could be used to pay for custodial care for the individual policyholders who develop a need for this type of care.

The primary objective of underwriting is to spread the risk among the pool of policyholders as equitably as possible in a manner that is also profitable for the insurance company. The premiums that each policyholder must pay are directly affected by how much money the insurance carrier expects to have to pay out for claims. This means that the insurance company has to manage the risk that it will have to pay money out of that central pool of funds. The more they have to pay out, the higher the cost of the insurance for everyone. Risk management involves analyzing the potential risks for each applicant (and the associated costs of those risks) in order to set premium rates for policyholders and mitigate the potential financial losses for the insurer.

How are long-term care insurance premiums calculated?

To manage the payout risk, each insurance carrier employs underwriting procedures to make sure that applicants with high-risk medical histories are not allowed into the insurance pool, which would thereby drive up the cost for everyone else. Obviously, while the risk taken by the insurer directly informs the premium rates that policyholders must pay, there are different levels of risk which are reflected the different premium rates. This is essentially how a long-term care insurance company determines the premium rate that you will pay, which I will discuss further in a future article.

What underwriting procedures are employed?

The first step of underwriting that all carriers use is the application form where the applicant lists his or her relevant personal health history and authorizes the insurance company to examine their medical records.

Often the carrier will schedule a phone health interview that lasts for about fifteen to twenty minutes. One of the main purposes of this telephone call is to assure the carrier that the applicant does not have any cognitive problems that would become evident in the way the phone conversation is conducted.

Afterward the carrier will often request a copy of the medical records from the applicant’s primary care physician to verify that person’s overall health. If the applicant has been treated by a specialist for any serious illness in recent years, a copy of those medical records may be requested as well.

This is where the whole process can sometimes bog down for a few weeks if the doctor’s office does not process the record request quickly. However, once the carrier receives the medical records, a final underwriting decision usually follows very quickly.

Until next time...Duane

>Duane Lipham is a Certified Long-Term Care (CLTC) consultant.