U.S. DEPARTMENT OF THE TREASURY

Long-Term Care Insurance: Recommendations for Improvement of Regulation i

U.S. DEPARTMENT O F THE TREASURY

Long-Term Care Insurance:

Recommendations for Improvement

of Regulation

Report of the Federal Interagency Task Force

on Long-Term Care Insurance

AUGUST 2020
U.S. DEPARTMENT O F THE TREASURY

Long-Term Care Insurance:

Recommendations for Improvement of

Regulation

Report of the Federal Interagency Task Force on

Long-Term Care Insurance

Steven T. Mnuchin

Secretary

Michael Faulkender

Assistant Secretary for Economic Policy

Acknowledgments

The Federal Interagency Task Force on Long-Term Care Insurance consists of representatives 

from the U.S. Department of the Treasury (Treasury), the U.S. Department of Health and Human 

Services (HHS), the U.S. Department of Labor (DOL), and the Office of Management and 

Budget (OMB). Secretary Mnuchin and Treasury Assistant Secretary Michael Faulkender would 

like to thank the following individuals for their service as members of the Task Force and their 

contributions to this report:

Treasury: Jason Brown, Diana Furchtgott-Roth, Anne Hall, Alex Hart, Eda Herzog-Vitto, Gillian 

Hunter, Louisa Quittman, Shanthi Ramnath, Bruce Saul, Steven Seitz, Angela Walitt, and Harlan 

Weller

HHS: William Marton and Mary Nugent

DOL: Jeanne Klinefelter Wilson

OMB: Amy Batchelor and Rebecca Spavins 

Secretary Mnuchin and Assistant Secretary Michael Faulkender would also like to thank 

Treasury staff members Bruce Saul and Elizabeth Sawyer for supporting the Task Force and 

leading Treasury staff’s work on the report.
Long-Term Care Insurance: Recommendations for Improvement of Regulation iv

Table of Contents

Executive Summary ...................................................................................................1

Introduction......................................................................................................................... 1

Scope and Objectives of the Task Force............................................................................. 2

Long-Term Care Insurance in the United States................................................................. 2

Review of the Process for this Report................................................................................. 3

Summary of Analysis and Recommendations.................................................................... 4

The Role of Insurance in Long-Term Care..............................................................10

Prevalence of Need for LTSS ........................................................................................... 10

Projections of Demand for LTSS...................................................................................... 12

Financing of LTSS............................................................................................................ 14

Factors Impeding the Market for Private LTCI................................................................ 19

Innovation and Product Development .....................................................................23

Combination Products....................................................................................................... 23

Other New Product Designs.............................................................................................. 27

Regulatory Efficiency and Alignment .....................................................................34

Inflation Protection ........................................................................................................... 34

Other Consumer Protections............................................................................................. 37

Review and Approval of Rate Increases........................................................................... 37

Financial Literacy and Education ............................................................................40

Reviewing the Federal Role in Financial Education......................................................... 40

Stakeholder Recommendations Relating to Education..................................................... 41

Best Practices for Financial Education ............................................................................. 42

Tax Incentives..........................................................................................................44

Current Tax Rules Regarding LTCI ................................................................................. 44

Analysis of Tax Incentives Considered ............................................................................ 48

Alternative Financing Approaches ..........................................................................55

Front-End Benefit Options................................................................................................ 55

Back-End (Catastrophic) Options..................................................................................... 58

Comprehensive Options.................................................................................................... 59
Long-Term Care Insurance: Recommendations for Improvement of Regulation v

Appendices...............................................................................................................60

Appendix A: Participants in the Engagement Process...................................................... 60

Appendix B: Summary of Analysis and Recommendations............................................. 61
Long-Term Care Insurance: Recommendations for Improvement of Regulation v

Abbreviations

Acronym Abbreviation

ACI Annual Compound Inflation

ADLs Activities of Daily Living

AGI Adjusted Gross Income

CBO Congressional Budget Office

CDC Centers for Disease Control and Prevention

CMS U.S. Department of Health and Human Services, Centers for 

Medicare & Medicaid Services

Code Internal Revenue Code

DOL U.S. Department of Labor

DRA Deficit Reduction Act of 2005

EBSA U.S. Department of Labor, Employee Benefits Security 

Administration

EPDV Expected Present Discounted Value

ERISA Employee Retirement Income Security Act of 1974

FIO U.S. Department of the Treasury, Federal Insurance Office

FLEC Financial Literacy Education Commission

FSA Flexible Spending Arrangement

HDHP High-Deductible Health Plan

HHS U.S. Department of Health and Human Services

HIPAA Health Insurance Portability and Accountability Act of 1996

HRS Health and Retirement Study

HSA Health Savings Account

IADLs Instrumental Activities of Daily Living

IRA Individual Retirement Account

LTC Long-Term Care

LTCI Long-Term Care Insurance
Long-Term Care Insurance: Recommendations for Improvement of Regulation vi

Acronym Abbreviation

LTCI Model Act NAIC Long-Term Care Insurance Model Act

LTCI Model Regulation NAIC Long-Term Care Insurance Model Regulation

LTCSA Long-Term Care Savings Account

LTSS Long-Term Services and Supports

MA Medicare Advantage

NAIC National Association of Insurance Commissioners

NAIC 2017 List Long-Term Care Federal Options Presented by the NAIC in April 

2017

NHEA National Health Expenditure Accounts

Partnership program Partnerships for Long-Term Care Federal-State Program

SECURE Act Setting Every Community Up for Retirement and Enhancement Act 

of 2019

SOA Society of Actuaries

SSA U.S. Social Security Administration

Task Force Federal Interagency Task Force on Long-Term Care Insurance

Treasury U.S. Department of the Treasury
Long-Term Care Insurance: Recommendations for Improvement of Regulation 1

Executive Summary

Introduction

In July 2018, the U.S. Department of the Treasury (Treasury) convened a federal interagency 

task force on long-term care insurance (Task Force) in response to recommendations in 

Treasury’s October 2017 Report on Asset Management and Insurance (Insurance Report).

1

 The 

Insurance Report identified the challenges of financing long-term care (LTC) as a matter of 

national interest requiring a coordinated response from the federal government, while affirming 

the primary role of the U.S. states as insurance regulators in the United States. Accordingly, the 

Insurance Report recommended that Treasury convene the Task Force to develop policies to 

complement reforms at the state level relating to the regulation of long-term care insurance 

(LTCI). The Insurance Report stated that the Task Force should coordinate its work with the 

ongoing work of state insurance regulators and the National Association of Insurance 

Commissioners (NAIC).2

The Task Force consists of representatives from Treasury’s Office of Economic Policy 

(including the Assistant Secretary for Economic Policy, who chairs the Task Force); other 

Treasury offices (Tax Policy, Consumer Policy, and the Federal Insurance Office (FIO)); the 

U.S. Department of Health and Human Services (HHS); the Centers for Medicare & Medicaid 

Services (CMS); the U.S. Department of Labor (DOL); and the Office of Management and 

Budget. 

Since its inception in 2018, the Task Force has identified and analyzed proposed reforms to the 

regulation of LTCI and consulted with a range of stakeholders. The Task Force concludes that 

LTCI can play a role in providing financial protection against LTC risks and helping individuals 

plan their financial future. To that end, this report describes the work conducted by the Task 

Force and presents its recommendations to improve the regulation of LTCI in the United States. 

In making these recommendations, the Task Force does not intend to either promote or 

discourage LTCI over other solutions to the challenges of financing LTC. Implementation of the

recommendations will remove barriers to innovation and increase regulatory efficiency and 

alignment, potentially making LTCI more affordable and accessible while allowing the market to 

continue shaping the evolution of this product line. 

 1 U.S. Department of the Treasury, A Financial System That Creates Economic Opportunities: Asset Management 

and Insurance (Treasury, October 2017), 163 [hereinafter Insurance Report], available at: 

https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-That-Creates-EconomicOpportunities-Asset_Management-Insurance.pdf.

2 Treasury, Insurance Report, 144. The NAIC is the U.S. standard-setting and regulatory support organization 

created and governed by the chief insurance regulators from the 50 states, District of Columbia, and five U.S. 

territories.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 2

Scope and Objectives of the Task Force

The Task Force determined that its primary objectives were to analyze, evaluate, and make

recommendations concerning:

• The LTC federal policy options presented to federal agencies and Congress by the NAIC 

in April 2017 (NAIC 2017 List);

3

• Other potential new federal policies, or modifications of existing policies, to complement 

state-based regulation of LTCI; and

• The manner and degree to which current laws and regulations appropriately recognize 

and respond to newer product designs and features in the LTCI market. 

In conducting its work, the Task Force focused on federal laws and regulations relating to the 

private insurance market. The Task Force also examined certain state laws and regulations, 

primarily those referenced in federal laws. 

The Task Force substantially completed its analysis and recommendations prior to the onset of 

the COVID-19 pandemic. The pandemic is likely to affect the provision of LTC and the market 

for LTCI, but the full effects will continue to emerge over time.

4

 For these reasons, this report 

does not seek to assess the potential impacts of COVID-19 on LTC or LTCI. 

Long-Term Care Insurance in the United States

The terms “long-term care” (LTC) and “long-term services and supports” (LTSS) cover a range 

of services provided to people with long-term physical or cognitive limitations. The private 

insurance industry typically uses LTC as a shorthand term, while academic and public policy 

literature, as well as some governmental publications, typically use LTSS. With some

exceptions, this report generally adopts LTC.5

Most LTC is not medical care, but rather assistance with the basic personal tasks of everyday 

life, such as bathing, dressing, using the toilet, transferring (to or from bed or a chair), caring for 

 3 National Association of Insurance Commissioners, Long-Term Care Innovation (B) Subgroup: Federal Policy 

Options to Present to Congress (Kansas City: NAIC, April 2017), 2, available at: 

https://www.naic.org/documents/cmte_e_res_mech_wg_related_federal_policy_issues.pdf. 

4 Treasury will continue to monitor the effects of COVID-19 on insurance products and markets, including LTCI. 

COVID-19 disproportionally affects older adults and individuals with chronic illnesses or other high-risk health 

conditions, making the LTC population (particularly those in nursing homes or assisted living facilities) more 

vulnerable to the virus than the general population. Relevant factors with respect to the pricing of LTCI include 

mortality, policy lapses, the incidence of claims, utilization of benefits, and changes in interest rates. See Andrew 

Dalton et al., “Pandemic Risk on LTC Insurance Reserves,” Milliman, April 2020, available at:

https://us.milliman.com/en/insight/pandemic-risk-on-ltc-insurance-reserves. 

5 The Role of Insurance in Long-Term Care and the Alternative Financing Approaches sections generally adopt 

LTSS.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 3

incontinence, and eating.6 Approximately half of Americans turning age 65 today will need

some type of LTC in their lives. The older a person is, the more likely it is that he or she will 

need LTC at some point. The Congressional Budget Office (CBO) has projected that U.S. 

spending on LTC for the elderly (age 65 and above) will increase from 1% of gross domestic 

product in 2010 to 3% in 2050. 

Based on data from the National Health Expenditure Accounts (NHEA), the Medicaid program 

was the largest payer of LTSS expenses in 2018 (total payments of $159.1 billion), followed by 

out-of-pocket spending by individuals ($55.0 billion). By contrast, based on industry data, 

private LTCI paid $10.3 billion in claims in 2018.

Private insurers began offering LTCI in the 1970s in response to demand for financial protection 

against the risk of having to enter a nursing home. Sales of new policies peaked in the early 

2000s, but have since declined as numerous insurers decided to exit the market due to the poor 

financial performance of the product line. The market remains in flux, with sales of traditional, 

standalone LTCI continuing to drop while “combination” insurance products have become more 

popular with consumers.

7

 The role of the private insurance market in addressing the growing 

need for LTC will largely depend on the four main subject areas examined in this report: 

innovation in product design and delivery; the efficiency and effectiveness of regulation; 

education and awareness with respect to LTC needs and planning; and federal income tax 

treatment of LTCI. 

Review of the Process for this Report

For this report, the Task Force consulted with a wide range of stakeholders, including consumer 

and other advocacy groups, trade groups, insurance companies and insurance product 

distributors, actuaries, academics, legal experts, state insurance regulators, the NAIC, and other

stakeholders with relevant knowledge. See Appendix A for a list of organizations and individuals 

providing input to the Task Force. The Task Force also reviewed data, research, and 

publications from both public and private sector sources.

On July 25, 2019, the Task Force held a public meeting at Treasury to obtain additional input for 

this report. Topics discussed at the meeting included the social need for LTC; the individual 

private LTCI market; employer, group, and worksite LTCI products; state regulation of LTCI;

the federal government and LTCI; and federal-state partnerships and other financing approaches.

 6 “Long-Term Care – The Basics – What is Long-Term Care?” LongTermCare.gov, U.S. Department of Health and 

Human Services, last modified October 2017, available at: https://longtermcare.acl.gov/the-basics/what-is-longterm-care.html. 

7 In this report, “traditional” or “stand-alone” LTCI refers to policies that provide only LTCI coverage, as 

distinguished from “combination” policies or other product designs that combine LTCI with other coverages, such 

as life insurance or an annuity.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 4

Through a posting on Treasury’s website and an announcement at the public meeting, the Task 

Force offered the public an opportunity to provide written comments. The Task Force received 

comments from a total of 16 consumers and consumer advocacy groups, actuarial organizations, 

and industry experts and consultants.

8 This report addresses several recommendations from the 

comments, and incorporates certain data and other information provided by commenters. 

Summary of Analysis and Recommendations

The Task Force organized its analysis and recommendations into four subject areas:

• Innovation and Product Development – product development and other innovation in 

the private market, including policies that combine LTCI with other types of insurance 

products or product features offering alternatives to traditional, stand-alone LTCI.

• Regulatory Efficiency and Alignment – improvements in regulatory efficiency and 

alignment with respect to LTCI, including inflation protection requirements, harmony 

between federal and state laws and regulations, and cross-state subsidization and other 

issues relating to state regulatory review and approval of premium increases.

• Financial Literacy and Education – the appropriate federal role in financial literacy and 

education relating to LTC needs and LTCI.

• Tax Incentives – current tax law treatment of LTCI and proposals to provide additional 

tax incentives for the purchase and use of LTCI.

Although public programs providing LTC benefits were not in scope for specific 

recommendations, the Task Force also reviewed several proposed public insurance options as 

described in the Alternative Financing Approaches section of this report.

Appendix B presents the analysis and recommendations of the Task Force and identifies the 

policymakers and other stakeholders the Task Force considers well positioned to implement each 

recommendation. Following publication of this report, Treasury will continue to monitor 

implementation of the recommendations. 

Innovation and Product Development

In response to the decline in the market for traditional LTCI, insurers have introduced alternative 

product designs and new features to both increase the consumer appeal of LTCI and improve the 

financial returns on LTCI for insurers. These designs and features include combination products, 

limited LTCI, group products, and incidental benefits. 

Innovation and product development have the potential to significantly strengthen the private 

LTCI market and better address the LTC needs of consumers. Accordingly, the Task Force 

 8 See “Public Comments Received by the Task Force,” U.S. Department of the Treasury, August 2019, available at: 

https://home.treasury.gov/system/files/226/Public-Comments-Received-by-the-Task-Force.pdf. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 5

recommends that federal and state policymakers foster a regulatory environment that encourages 

flexibility, experimentation, and innovation in product design to improve consumer choice and 

access to benefits, while appropriately protecting the rights of consumers and the solvency of 

insurers. 

Combination Products

Insurers have introduced a variety of products that combine LTCI with different types of 

insurance, primarily life insurance and annuities. These combination products offer potential 

advantages to consumers and insurance distributors, but also present challenges for these groups

due to their complexity and the wide range of combinations available. Although claims 

experience on these relatively new products is limited, companies report that the incidence of 

claims and other actuarial results to date have been positive.

Policymakers could benefit from analysis of the impact of combination products on the market 

for LTCI risk protection. The Task Force recommends that actuaries, academics, and other 

stakeholders explore such an analysis, with coordination by FIO. 

Limited LTCI Products

Compared to traditional LTCI, “short” or “limited” LTCI policies (i.e., policies that pay benefits 

for less than 12 months) generally have lower benefits, but also typically have no deductible or 

waiting period, as well as less stringent underwriting and lower premiums. Because limited 

LTCI emerged later than traditional LTCI, regulation of this market is less mature than the 

traditional market. In late 2018, the NAIC adopted a model act and model regulation for this 

product. However, the states generally have not yet adopted either model. 

The Task Force recommends that federal policymakers work with their state counterparts and 

with private sector stakeholders to evaluate and monitor the market for limited LTCI, including 

potential impacts on the risk pool for longer-term products and on Medicaid. The Task Force 

further recommends that state legislators and insurance regulators take steps to better streamline 

and standardize the regulation of this market. 

Group Products

The Task Force considered two policy proposals for LTCI group products that were included 

under the NAIC 2017 List, both involving the fiduciary provisions of the Employee Retirement 

Income Security Act of 1974 (ERISA). The first proposal is to create a safe harbor to remove 

potential exposure to ERISA fiduciary liability as a factor in employers’ decisions not to offer 

LTCI to employees. The second proposal is to permit 401(k) and individual retirement account 

(IRA) participants to purchase LTCI within their accounts. The objective of both proposals is to 

promote a more viable group LTCI market by increasing employee participation, resulting in a 

larger and more favorable risk pool for insurers and, potentially, lower premiums.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 6

Based on stakeholder input and an assessment of the market and legal landscapes for the 

employer market, the Task Force does not recommend either option because it is uncertain 

whether either proposal would have a meaningful impact on participation levels. 

Incidental Benefits

Under most LTCI policies, the insured is not eligible to submit a claim for benefits until he or 

she becomes “chronically ill” as defined under state insurance laws and the Internal Revenue

Code (Code). Some stakeholders proposed that Congress should amend the Code to permit 

payment of incidental benefits (such as home assessments to identify safety hazards, home 

modifications, or caregiver training for family members) from a LTCI policy prior to the onset of 

chronic illness, without causing the policy to forfeit its tax-qualified status. 

Supporting the ability of those needing LTC to remain in their homes could benefit both 

consumers and insurers. Accordingly, the Task Force encourages industry, federal 

policymakers, and other experts, in consultation with consumer representatives, to identify and 

assess research-based evidence of cost-effective interventions. If cost-effective incidental 

benefits are identified, Congress could consider amending the Code to permit payment of those 

benefits under a tax-qualified LTCI contract prior to the insured becoming chronically ill, subject 

to a monetary cap and other conditions set by regulation.

Regulatory Efficiency and Alignment 

The Task Force considered various recommendations to improve the efficiency and effectiveness 

of regulation of LTCI at the federal and state levels, including federal policies identified in the 

NAIC 2017 List.

Inflation Protection Under the Health Insurance Portability and Accountability Act of 1996 

(HIPAA)

Because LTCI policies often remain in force for many years, purchasers of LTCI face a 

significant risk that inflation will erode the value of their benefits over time. Under current state 

laws and regulations, insurers must offer policyholders the right to purchase a policy feature that 

increases benefits at an annual compounded rate not less than 5%. In 2006, when it codified 

requirements for tax-qualified LTCI as part of HIPAA, Congress incorporated the 5% compound 

standard through reference to the 1993 version of the NAIC Long-Term Care Insurance Model 

Regulation (LTCI Model Regulation).

9

The NAIC and Congress based the 5% compound inflation standard on inflation rates that 

prevailed in the 1980s and 1990s. Since then, particularly following the financial crisis, this 

standard has become a costly feature that increases premiums to levels most consumers will not 

 9 HIPAA amended the Code to add Section 7702B, which sets forth the requirements for a “qualified long-term care

insurance contract.” See 26 U.S.C. § 7702B(a)(1).
Long-Term Care Insurance: Recommendations for Improvement of Regulation 7

accept. The Task Force concludes that inflation protection requirements under HIPAA and state 

insurance laws should be revised to increase the efficiency and effectiveness of regulation. 

To both address outdated inflation protection requirements and provide flexibility to adapt 

inflation protection to evolving economic conditions, the Task Force recommends that Congress 

amend the Code to authorize Treasury to set inflation protections for tax-qualified LTCI. 

Inflation Protection Under the DRA

In the early 1990s, four states (California, Connecticut, Indiana, and New York) implemented a 

federal-state program known as “Partnerships for Long-Term Care” (Partnership program). As 

part of the Deficit Reduction Act of 2005 (the DRA), Congress extended the Partnership 

program nationwide, subject to specified conditions including inflation protection and other 

consumer protections.

10 The states have adopted widely varying inflation protection 

requirements for LTCI policies under the Partnership program, resulting in a regulatory 

patchwork with uneven consumer protections and additional complexity that makes it more 

difficult to write LTCI. Additionally, high inflation protection mandates in some states may 

raise the costs and reduce the attractiveness of Partnership policies.

The Task Force recommends that state policymakers—legislators, state Medicaid directors, 

insurance commissioners, and the NAIC—improve regulatory efficiency and effectiveness by 

harmonizing and streamlining inflation protection requirements under the Partnership program. 

Alternatively, Congress should consider delegating to HHS the authority to set Partnership 

program inflation protection requirements. 

Other Consumer Protections

Apart from inflation protection, both HIPAA and the DRA mandate compliance with certain 

consumer protections contained in the NAIC Long-Term Care Insurance Model Act (LTCI 

Model Act) and the LTCI Model Regulation. However, the DRA defines “model regulation” 

and “model Act” by reference to the NAIC models adopted as of October 2000, while HIPAA

defines these terms by reference to the January 1993 versions. This cross-referencing in two 

federal statutes of two outdated and conflicting versions of NAIC models creates confusion and 

adds complexity to conducting LTCI business. 

The Task Force recommends that Congress consider options to address this regulatory 

inefficiency. For example, as one option, Congress could consider giving Treasury the authority, 

in consultation with HHS, to set consumer protection standards using one version of the LTCI 

Model Act and LTCI Model Regulation for purposes of both tax qualification under HIPAA and 

Partnership eligibility under the DRA, with flexibility to update the standards periodically (e.g., 

every 10 years).

 10 See 42 U.S.C. § 1396p. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 8

Review and Approval of Rate Increases

The authority of state insurance regulators to review and approve proposed rate increases for 

LTCI before the insurer implements those changes is a critical factor in the LTCI marketplace. 

Due to the non-uniform nature of the state-by-state rate increase process, policyholders in states 

where regulators have approved rate increases may subsidize the cost of premiums for 

policyholders in other states where regulators have either approved limited increases or rejected 

rate increases in their entirety. 

In 2019, the NAIC identified the regulation of LTCI as the organization’s top priority. The Task 

Force recommends that the NAIC and the states maintain their focus on LTCI and continue

working together in 2020 to develop a consistent national approach to regulatory reviews of 

LTCI rate increase requests. The Task Force also recommends that FIO continue to monitor and 

report on this issue.

Financial Literacy and Education

The NAIC 2017 List included a federal education program around retirement security and the 

importance of planning for potential LTC needs. In 2019, Treasury released a report (Financial 

Literacy Report), laying out an appropriate federal role for financial education based on a 

literature review and consultations with experts and stakeholders inside and outside of the 

government.11 In the Financial Literacy Report, Treasury recommended that the primary federal 

role in this area should be to empower financial education providers, as opposed to attempting to 

reach every American household directly. 

The Task Force recommends that Treasury, HHS, DOL, and other agencies, working through the 

Financial Literacy Education Commission (FLEC), assess federal education resources on LTC 

needs and planning, and modify, update, and supplement these resources as needed.

Tax Incentives

The NAIC 2017 List included consideration of more generous tax incentives for the purchase of 

LTCI. Multiple stakeholders encouraged the Task Force to consider a range of amendments to 

tax laws or regulations aimed at increasing the take-up of private LTCI. The Task Force 

analyzed several potential new tax incentives and other potential tax reforms.

In its analysis, the Task Force took into account that the Code already provides favorable income 

tax treatment to LTCI. The Task Force concludes that the proposed incentives, in general, would 

reduce tax revenues and primarily benefit higher-income taxpayers, and may not be fully 

effective in targeting lower and middle-income individuals who need financial protection against

LTC risks. Finally, the proposals would increase the complexity of the Code and could, in some 

 11 U.S. Department of the Treasury, Federal Financial Literacy Reform: Coordinating and Improving Financial 

Literacy Efforts (Treasury, July 2019) [hereinafter Financial Literacy Report], available at:

https://home.treasury.gov/system/files/136/FFLRCoordinatingImprovingFinancialLiteracyEfforts.pdf. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 9

cases, be difficult to implement, monitor, and enforce. For these reasons, the Task Force does 

not recommend adoption of any of the proposed additional tax incentives, with the exception of 

the proposal to eliminate the additional tax on early withdrawal of funds from an IRA, 401(k), or 

403(b) account that are used to pay LTCI premiums. 

Alternative Financing Approaches 

Experts and policymakers have proposed a range of alternative approaches to the financing of

LTC, including public programs administered by the federal and state governments. Most of 

these approaches have focused on either front-end insurance (providing limited coverage for 

short, initial durations) or back-end or catastrophic insurance (coverage for longer durations 

beyond a specified level of need or cost). The Task Force does not recommend pursuing any 

particular alternative financing approach at this time. Policymakers and stakeholders should 

continue to develop, monitor, and analyze LTC and LTCI reform proposals—including those 

discussed in this report—to better understand the advantages and disadvantages of specific 

options, tradeoffs, program costs, and distributional impacts.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 10

The Role of Insurance in Long-Term Care

As the elderly population continues to grow in both size and as a percentage of the overall 

population, the need for LTSS becomes increasingly important for social welfare. This section 

discusses the prevalence of need, projected future demand, and financing of LTSS, including the 

roles of public programs and the private LTCI market. The section concludes with an overview 

of supply and demand factors impeding the private market. 

Prevalence of Need for LTSS

The terms “long-term care” or “long-term services and supports” encompass a wide variety of 

services provided to individuals with long-term physical or cognitive limitations who need help 

with certain daily activities. These activities include “activities of daily living” (ADLs) and 

“instrumental activities of daily living” (IADLs). 

HIPAA defines ADLs as six basic activities:12

• Eating

• Toileting

• Transferring

• Bathing

• Dressing

• Continence

The IADLs include activities necessary for independent life such as paying bills and managing 

money, medication management, meal preparation, shopping, and using the telephone. 

LTSS, therefore, include services such as direct physical assistance with ADLs, meal provision, 

housekeeping services, and transportation services, as well as medical services. These services 

and supports can be provided in individuals’ homes or in institutional settings such as assisted 

living facilities or nursing homes. Individuals’ needs for LTSS vary widely, ranging from roundthe-clock assistance with all six ADLs to assistance with one or two IADLs.

Table 1 provides summary statistics on the prevalence of difficulty with at least one IADL, the 

prevalence of needing assistance with two or more ADLs, and the use of home health care in 

approximately the previous two years among individuals age 60 and above in the Health and 

Retirement Study (HRS) during 2016.13 The prevalence of difficulty with IADLs and the need 

 12 26 U.S.C. § 7702B(c)(2)(B).

13 The HRS is conducted every two years and follows individuals over time, with new respondents added each round 

to replace deceased respondents. Questions about medical utilization focus mainly on utilization since the previous 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 11

for assistance with ADLs rise sharply in both sexes above age 75. The share using home health 

care in the previous two years rises in parallel with the need for assistance with daily activities.

Women above age 85 have the highest need for LTSS; around half in this group report having 

difficulty with at least one IADL, and nearly a quarter need assistance with two or more ADLs.

A lower share (17%) used home health care in the past two years. 

Table 1: Prevalence of Serious Disability and Use of Long-Term Services and 

Supports Among Those Age 60 and Over

Share Having 

Difficulty with at Least 

One IADL (%)

Share Needing Help 

with Two or More of 

Five ADLs (%)

Share with Home 

Health Care Use in 

Past Two Years (%)

Whole 

Sample 16 5 3

Female

60-69 11 3 0

70-84 18 5 3

85+ 50 24 17

Male

60-69 9 2 1

70-84 15 3 2

85+ 39 16 10

Notes: The sample consists of respondents in the 2016 HRS age 60+. The sample size is 13,153. All means 

are weighted using sample weights for the 2016 wave. For purposes of the HRS, IADLs include preparing 

hot meals, shopping for groceries, using the telephone, managing medications, and managing money. ADLs 

include dressing, bathing, eating, transferring into or out of a bed or chair, and using the toilet. 

Table 2 shows statistics on nursing home use and estimated spending on stays in excess of 90 

days in the previous two years among HRS respondents age 60 and over.14 The table focuses on 

stays longer than 90 days to illustrate exposure to financial risk for stays not covered by 

insurance (private LTCI plans generally have an exclusion period of 90 days). As Table 2

shows, spending on nursing homes is estimated to be only about $2,900 on average over two 

years across those age 60 and over. However, this average figure encompasses a wide range of 

 

interview (approximately two years earlier) for continuing respondents and in the last two years for new 

respondents. For more information about the HRS, see “The Health and Retirement Study – About,” available at:

https://hrs.isr.umich.edu/about. 

14 Because the HRS tracks only the total number of nights in a nursing home in the past two years, not whether any 

particular stay is longer than 90 days, the table may slightly overstate the risk of long-term stays. The HRS assumes 

$225 in spending for one night in a nursing home based on the average cost according to HHS. See

“LongTermCare.gov – Costs of Care,” available at: https://longtermcare.acl.gov/costs-how-to-pay/costs-ofcare.html. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 12

spending. Among these individuals, the risk of having a long nursing home stay is low, but the 

average cost of a long-term stay is approximately $112,000. 

Table 2: Spending on Stays of More Than 90 Nights in a Nursing Home

Mean Number of 

Nights in a Nursing 

Home in Excess of 

90 Nights in the 

past Two Years

Estimated Mean 

Spending on 

Stays of More 

Than 90 Nights 

Across Whole 

Sample ($)

Share with More 

Than 90 Nights 

in a Nursing 

Home in past 

Two Years (%)

Mean 

Spending for 

Those with 

More Than 90 

Nights ($)

Whole Sample 13 2,898 2.6 111,744

Female

60-69 2 407 0.3 136,629

70-84 11 2,545 2.7 94,150

85+ 105 23,651 18.8 125,957

Male

60-69 3 636 0.7 91,578

70-84 9 1,916 1.8 108,315

85+ 51 11,584 11.4 102,047

Notes: The sample consists of respondents in the 2016 HRS age 60+. The sample size is 13,153. All means are 

weighted using sample weights for the 2016 wave. Returning respondents were asked about nursing home 

utilization since their previous interview approximately two years earlier; new respondents were asked about 

utilization in the past two years.

Projections of Demand for LTSS

The share of the U.S. population who are elderly is expected to rise steadily throughout most of 

the twenty-first century. In their 2019 report, the trustees for Social Security project that the 

ratio of the number of people age 65 and over to the number of people age 15 through 64 (the 

aged-dependency ratio) will rise from 0.268 in 2018 to 0.425 in 2075, an increase of nearly 

60%.15

Accordingly, the demand for LTSS is projected to rise in upcoming years. The CBO projected in 

2013 that spending for LTSS for the elderly (age 65 and above) will rise from 1.3% of gross 

domestic product in 2010 to 3% in 2050, if age- and sex-specific rates of impairment are held 

 15 Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Insurance Trust Fund, The 2019 

Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability 

Insurance Trust Funds (Board of Trustees, April 2019), available at: 

https://www.ssa.gov/OACT/TR/2019/tr2019.pdf. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 13

constant over time and the increase is due solely to the aging of the population.

16 If increased

obesity results in higher age-specific impairment rates, spending for LTSS for the elderly will 

rise to 3.3% of gross domestic product in 2050, according to the CBO. These estimates do not 

include the value of informal care. The CBO also projected that the share of nonelderly adults 

engaged in caregiving, either formally or informally, will increase from around 5% in 2010 to 

10% in 2050, if impairment rates are held constant, and to 11% under the more pessimistic 

scenario of increasing impairment rates.

Dementia, LTSS, and LTCI

Dementia is a general term for impairment in a person’s ability to remember, think, or make 

decisions that interferes with performing everyday activities. Alzheimer’s disease is the most 

common type of dementia. According to the Centers for Disease Control and Prevention (CDC), 

5.8 million Americans have Alzheimer’s, and the number of individuals with dementia is 

expected to triple over the next 40 years. Deaths from Alzheimer’s in the United States 

increased by 145% from 2000 to 2017, making Alzheimer’s the sixth leading cause of death (and 

the third leading cause when combined with other types of dementia). Part of the increase may 

be due to a greater emphasis on reporting dementia and Alzheimer’s disease as a cause of death. 

In any case, the burdens of dementia fall heavily on families and other caregivers—more than 16 

million Americans provide unpaid care for people with Alzheimer’s or other dementias.17

The CDC estimates that in 2016, the percentage of LTSS users diagnosed with Alzheimer’s 

disease or other dementias was 41.9% for residential care community residents, 44.5% for 

hospice patients, and 47.8% for nursing home residents.18 Because a diagnosis of severe 

cognitive impairment triggers coverage under most LTCI policies, many LTCI claims (roughly 

half, according to some industry sources), are filed by policyholders with Alzheimer’s or other 

dementias. Therefore, dementia already accounts for a large portion of LTCI claim payments. 

While there is evidence that the prevalence of dementia is declining in the United States,19

population aging is likely to increase demand for LTSS in the future, which may in turn increase 

 16 Congressional Budget Office, Rising Demand for Long-Term Services and Supports for Elderly People (CBO, 

June 2013), available at: https://www.cbo.gov/publication/44363. 

17 See “Promoting Health for Older Adults,” Centers for Disease Control and Prevention, last modified September 

2019, available at: https://www.cdc.gov/chronicdisease/resources/publications/factsheets/promoting-health-forolder-adults.htm; “What Is Dementia?” Centers for Disease Control and Prevention, last modified April 2019, 

available at: https://www.cdc.gov/aging/dementia/index.html; Alzheimer’s Association, 2019 Alzheimer’s Disease 

Facts and Figures (Chicago: Alzheimer’s Association, 2019), 24-25, available at: 

https://www.alz.org/media/Documents/alzheimers-facts-and-figures-2019-r.pdf; Ellen A. Kramarow and Betzaida 

Tejada-Vera, “Dementia Mortality in the United States, 2000-2017,” National Vital Statistics Reports 68, no. 2 

(March 2019), available at: https://brainhealthinstitute.rutgers.edu/wp-content/uploads/2019/03/DementiaReport_March-2019.pdf; “Alzheimer's Disease and Healthy Aging,” Centers for Disease Control and Prevention, 

last modified September 2019, available at: https://www.cdc.gov/aging/aginginfo/alzheimers.htm. 

18 “National Center for Health Statistics: Alzheimer’s Disease,” Centers for Disease Control and Prevention, last 

modified March 2016, available at: https://www.cdc.gov/nchs/fastats/alzheimers.htm. 

19 Kenneth M. Langa et al., “A Comparison of the Prevalence of Dementia in the United States in 2000 and 2012,” 

JAMA Intern Med. 177, no. 1 (January 2017): 51-58, available at: https://www.ncbi.nlm.nih.gov/pubmed/27893041. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 14

demand for financial protection against LTSS risks. In addition, higher than expected claims,

together with other factors, have led many insurers to set aside more assets to cover future

liability and to increase premiums on both in-force and newly issued policies. Notwithstanding 

these challenges, the social need for protection against the costs of LTSS for dementia is also a 

major opportunity for insurers to develop new products and services to improve the quality of 

life of a large and growing segment of the U.S. population.

Financing of LTSS

Payment Sources

Public financing of LTSS in the United States is provided largely through the Medicaid program.

To be eligible to receive LTSS through Medicaid, individuals generally must be 65 or over (or 

found to be disabled by the Social Security Administration (SSA)), and must meet tests designed 

to limit benefits to individuals with very low income and wealth. Because Medicaid is partly 

financed by the states, eligibility and benefits vary, but rules follow broad federal guidelines. 

Formulas for determining Medicaid eligibility are complex; in general, single individuals with 

more than $2,000 in assets, other than their home and car, are not eligible.

20 All states must 

cover nursing home care through Medicaid, and nearly all offer some level of home- and 

community-based care through waivers provided by CMS.

21

Based on data from the NHEA, Medicaid was the largest payer of LTSS expenses in 2018 (total 

payments of $159.1 billion), followed by out-of-pocket spending ($55.0 billion).22 By contrast, 

an industry association estimates that private LTCI paid $10.3 billion in claims in 2018.23

 20 Married couples with both spouses applying for nursing home coverage are allowed $3,000 in countable assets to 

qualify for Medicaid. However, if only one spouse applies, the non-applicant is permitted to transfer a specified 

amount of assets (from $25,728 to $128,640 in 2020) to the non-applicant spouse. See “2020 SSI and Spousal 

Impoverishment Standards,” CMS, available at: https://www.medicaid.gov/sites/default/files/2020-01/ssi-andspousal-impoverishment-standards_0.pdf. In addition, the value of the applicant’s primary home does not count 

against the asset limit. 

21 Section 915(c) of the Social Security Act, 42 U.S.C. §1396n, establishes standards for these waivers.

22Amounts provided by CMS Office of the Actuary. For information about the NHEA, see “National Health 

Expenditure Data: Historical,” CMS, available at: https://www.cms.gov/Research-Statistics-Data-andSystems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical. Although 

the NHEA tracks Medicare spending, that program only covers home health and skilled nursing care for a relatively 

short period (100 days) following an acute episode such as surgery. Out-of-pocket expenses are likely understated 

in the NHEA because it does not include payments to independent home health care providers. One study using the 

National Long-Term Care Survey suggests that nearly half of LTSS (as measured by hours of care) are paid for out 

of pocket. John Ermisch and Alexander L. Janus, “Who pays for home care? A study of nationally representative 

data on disabled older Americans,” BMC Health Services Research 15, no. 301 (July 2015), available at: 

https://bmchealthservres.biomedcentral.com/articles/10.1186/s12913-015-0978-x. 

23 “Long-Term Care Insurance Industry Paid $10.3 Billion in Claims in 2018,” American Association for LongTerm Care Insurance, last modified January 2019, available at: https://www.aaltci.org/news/long-term-careinsurance-association-news/long-term-care-insurance-industry-paid-10-3-billion-in-claims-in-2018. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 15

The Value of Informal Care

Notably, statistics on LTSS spending omit the value of informal (and unpaid) care. Estimates of 

the value of this care range widely depending on the value attributed to the unpaid hours from

caregivers. A 2013 study estimated that the total value of informal care for those age 65 and 

over in 2011 was $234 billion, while a 2015 study estimated that value to be $522 billion for the 

same year.24 The difference between the two analyses rested largely on whether to value the 

caregivers’ hours at the wage of a home health aide or at the actual or imputed wage of the 

caregiver, which gives a higher value for their time in most cases.

A later study, in 2018, noted that the method used by the 2013 and 2015 analyses to estimate the 

value of informal care does not take into account the effects on caregivers from future foregone 

wages from leaving employment, the value of foregone leisure time, or intrinsic benefits to 

caregivers from caregiving.25 Using methods designed to account for these other costs and 

benefits, the 2018 study found that the value of informal care in 2011 was $277 billion. In all 

three of these studies, the estimated total value of informal care in 2011 exceeded formal 

spending on LTSS for the elderly (age 65 and above) in that year, which the CBO estimated to 

be $192 billion.

Private LTCI

Since the 1970s, private insurers have offered LTCI to protect against the financial risk of high 

LTSS expenditures. Unlike short-term medical insurance or publicly-funded Medicaid, the 

structure of LTCI relies on the pre-funding of benefits. Typically, purchasers buy LTCI at 

relatively younger ages, in their 50s or 60s, and then hold the insurance while paying premiums 

for a lengthy period, often over twenty years.

The private market for traditional individual LTCI is in steep decline. After rising from 380,000 

in 1990 to a peak of 754,000 in 2002, the number of individual LTCI policies sold declined to 

129,000 by 2014.26 As shown in Figure 1, based on sales reports from the LIMRA 

organization,27 this downward trend accelerated over the five-year period from 2014 to 2018, as 

 24 CBO, Rising Demand, 2; Amalavoyal V. Chari et al., “The Opportunity Costs of Informal Elder‐Care in the 

United States: New Estimates from the American Time Use Survey,” Health Services Research 50, no. 3 (June 

2015): 871-882, available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4450934/. 

25 Norma B. Coe, Eric B. Larson, and Meghan M. Skira, “A Comprehensive Measure of the Costs of Caring for a 

Parent: Differences According to Functional Status,” Journal of the American Geriatrics Society 66, no. 10 

(September 2018): 2003-2008, available at: https://onlinelibrary.wiley.com/doi/full/10.1111/jgs.15552. 

26 Marc A. Cohen, “The State of the Long-Term Care Insurance Market,” in The State of Long-Term Care 

Insurance: The Market, Challenges and Future Innovations, ed. by Eric C. Nordman (Kansas City: NAIC and the 

Center for Insurance Policy and Research, May 2016), 7-29, available at:

https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf. 

27 LIMRA is a worldwide research, consulting, and professional development trade association focused on the life 

insurance industry. It is a recognized source for product data and other metrics in the U.S. life insurance, annuity, 

and LTCI markets.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 16

the industry sold only 67,000 individual policies in 2017 and 57,000 in 2018.

28 In addition, as 

shown in Figure 2, individual new annualized premiums fell to record lows, below $200 million, 

in 2017 and 2018. Meanwhile, Figure 3 shows that the level of combined premiums paid by inforce policyholders has increased only modestly in recent years. Lower sales have occurred even 

as the share of the population in the age group most likely to purchase private LTCI, those age 

60 to 69, rose from 9.5% in 2010 to 11.4% in 2018, based on Census population estimates.

 28 The market for employer-sponsored group LTCI has fallen even more precipitously, with annual new lives 

insured reaching 140,000 in 2012 before declining to 22,000 by 2015. Currently, only one carrier continues to offer 

employer-sponsored group LTCI. This discussion does not include LTCI products offered to employees through 

employers at the worksite.

0

50,000

100,000

150,000

200,000

250,000

New Lives Figure 1: Individual LTCI New Lives

Source: LIMRA.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 17

Table 3 shows ownership rates of private LTCI in the 2016 HRS for respondents age 60 and 

above, by gender, marital status, age, and wealth quintile. Overall, 11.4% of those age 60 and 

over own a private LTCI policy. Men own policies at a slightly higher rate than women, and 

married people are more likely to own a policy than are unmarried individuals. Ownership rates 

0

200

400

600

800

1,000

1,200

$ Millions Figure 2: Individual LTCI Annualized Premiums

Source: LIMRA.

0

2,000

4,000

6,000

8,000

10,000

12,000

$ Millions Figure 3: Individual LTCI Premiums in Force

Source: LIMRA.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 18

rise by wealth quintile, with around one-fifth of the top quintile having bought policies compared 

to only 6-7% of the bottom two quintiles. Ownership rates also rise with age, up to age 85. 

Additionally, Table 3 updates a 2011 study that reported the same statistics for respondents in the 

2008 HRS.

29 Compared with 2008, overall ownership rates declined slightly by 2016, from 

13.8% in 2008 to 11.4%. The declines from 2008 to 2016 were driven by those age 60 to 69, the 

group most likely to purchase new LTCI; ownership rates among those age 70 and over rose 

between 2008 and 2016. This finding is consistent with reports from the industry, as shown in 

Figures 1-3, that sales are in sharp decline and the number of in-force policies has plateaued.

In summary, older individuals are exposed to financial risk from the consequences of serious 

disability. This exposure may be increasing over time, as sales of new policies decline and the 

age 60 to 69 cohort appear to be less likely to purchase LTCI than previous cohorts. The 

eligibility requirements for Medicaid and the limited and declining purchasing of private LTCI 

imply that a large proportion of LTC costs are paid for out-of-pocket by individuals not covered 

by Medicaid.

Table 3: Private Long-Term Care Insurance Ownership Rates Among the Elderly

 Percentage by Wealth Quintile

Whole Sample Top Fourth Third Second Bottom

Whole Sample 11.4 21.8 12.7 9.8 6.5 6.1

By Gender

Men 12.0 23.6 13.4 10.8 6.6 6.7

Women 10.8 20.0 12.0 8.7 6.5 5.3

By Marital Status

Married 12.7 21.8 12.8 9.3 7.3 6.1

Single 9.5 22.0 12.6 10.6 5.7 6.1

By Age Cohort

60-64 9.9 18.4 11.6 7.4 5.5 5.4

65-69 13.3 22.9 13.2 10.3 8.1 8.0

70-74 15.1 27.5 12.9 14.5 8.3 5.6

75-79 17.2 29.2 20.9 16.4 7.4 6.4

80-84 18.9 31.3 17.5 18.6 12.3 12.4

85+ 16.0 30.2 21.3 10.1 9.0 8.3

Notes: The sample consists of respondents in the 2016 HRS age 60+. The sample size is 13,271. All means are 

weighted using sample weights for the 2016 wave. Wealth is defined as total non-housing wealth. 

 29 Jeffrey R. Brown and Amy Finkelstein, “Insuring Long-Term Care in the United States,” Journal of Economic 

Perspectives 25, no. 4 (Fall 2011): 119-42, available at: https://www.aeaweb.org/articles?id=10.1257/jep.25.4.119. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 19

Factors Impeding the Market for Private LTCI

The utilization statistics in Table 2 show that individuals over age 60 face a risk of having to stay 

a greater number of nights in nursing homes, thereby incurring significant expenses. 

Furthermore, nursing homes represent only a part of spending on LTSS; as Table 1 shows, a 

small but significant share of individuals also use paid home health care or require assistance 

with two or more ADLs.

Standard economic models suggest that in the presence of potentially severe financial risk, 

individuals should be willing to pay to insure themselves against that risk. However, private 

LTCI appears to be underutilized relative to the potential demand and relative to the market for 

short-term medical insurance. Factors impeding the development of the market can largely be 

divided into the supply side and the demand side.

Supply-Side Factors

• Asymmetric information and adverse selection. Like other insurers, LTC insurers face 

the challenge of managing their risk pool when individuals purchasing insurance know 

more about their own risks than the insurer. This asymmetry of information between 

seller and buyer likely leads to buyers purchasing insurance only when they believe the 

benefits they will receive outweigh the premiums they will pay. This tilts the market 

towards buyers with higher average costs, driving up premiums and further limiting the 

pool of potential buyers. 

o Underwriting. LTC insurers manage adverse selection with medical underwriting, 

i.e., the practice of assessing applicants for policies for medical issues likely to result 

in future use of LTSS. A 2016 study found that between 2000 and 2009, 

underwriting standards tightened and the share of applications rejected for failing 

underwriting rose.

30 Another 2016 study found that 20-25% of applicants for private 

LTCI are ultimately rejected on medical grounds. 31 More recent data suggests that 

firms may be starting to relax underwriting standards by reducing requirements for 

medical testing in the past few years.32

• Moral hazard. Beneficiaries of insurance incur a lower cost for services covered by 

insurance and, as a result, may use those services more than they would if they did not 

have insurance--a phenomenon is known as “moral hazard.” A 2019 study found 

evidence of significant moral hazard in the use of home care (and, potentially, nursing 

 30 LifePlans, Inc., “Tolerating Risk: A Look at LTC Underwriting Strategies,” Behind the Data, January 2011.

31 Portia Y. Cornell et al., “Medical Underwriting in Long-Term Care Insurance: Market Conditions Limit Options 

for Higher-Risk Consumers,” Health Affairs 35, no. 8 (August 2016): 1494-1503, available at: 

https://www.healthaffairs.org/doi/10.1377/hlthaff.2015.1133. 

32 Chris Giese, Allen Schmitz, and Claude Thau, “2019 Milliman Long-Term Care Insurance Survey,” Broker World 

Magazine, July 2019, available at: https://brokerworldmag.com/2019-milliman-long-term-care-insurance-survey/. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 20

homes) among owners of private LTCI. 33 Another study, which surveyed private LTCI 

claimants, found that the majority reported they would have used less paid care if they 

had not had insurance.34 Insurers must take moral hazard into account when pricing 

plans, which may raise premiums above what some purchasers are willing to pay.

The issues of adverse selection and moral hazard are common to all insurance markets and not 

unique to private LTCI. Other insurance markets, however, have features that address adverse 

selection, such as a mandate for the purchase of insurance or a subsidy, both of which have the 

effect of improving the risk pool. For example, automobile owners in all states are required to 

purchase liability insurance, and employers usually subsidize health insurance they offer to 

employees.

In addition, management of these supply-side factors can impose significant administrative costs 

on private LTCI, resulting in low comprehensiveness (share of LTSS spending paid for by 

private LTCI) and high “loads,” which is a measure of the difference between the expected 

present discounted value (EPDV) of future benefits received and the EPDV of future premiums 

paid over the life of the policy.

Demand-Side Factors

• Use of substitutes for private LTCI

o Medicaid. As discussed above, Medicaid covers LTSS for individuals with very low 

income and assets. Therefore, Medicaid pays for some services that would be 

covered by private LTCI, which reduces the incentive to purchase private LTCI. 

According to studies conducted by the same authors in 2008 and 2011, for the lower 

60% of the wealth distribution, it is rational not to purchase actuarially fair private 

LTCI because of the availability of Medicaid.

35 For example, for a 65-year-old 

woman at the median of the wealth distribution, 75% of the EPDV of the benefits of a 

private LTCI policy would be paid for by Medicaid in the absence of the policy, 

significantly reducing the policy’s net financial benefit. Other papers have 

maintained that, in practice, the effect of Medicaid may not be as pronounced. A 

2018 paper modeled the effects on private LTCI purchase, savings, and nursing home 

 33 R. Tamara Konetzka et al., “Moral Hazard and Long-Term Care Insurance,” The Geneva Papers on Risk and 

Insurance: Issues and Practice 44, no. 2 (April 2019): 231-251, available at: 

https://link.springer.com/article/10.1057%2Fs41288-018-00119-1. 

34 Marc A. Cohen, Jessica S. Miller, and Xiaomei Shi, “Following an Admissions Cohort: Care Management, Claim 

Experience and Transitions among an Admissions Cohort of Privately Insured Disabled Elders over a 16 Month 

Period,” Office of the Assistant Secretary for Planning and Evaluation, May 2007, available at: 

https://aspe.hhs.gov/system/files/pdf/75086/16moclm.pdf. 

35 Jeffrey Brown and Amy Finkelstein, “The Interaction of Public and Private Insurance: Medicaid and the LongTerm Care Insurance Market,” American Economic Review 98, no. 3 (June 2008): 1083-1102, available at:

https://www.aeaweb.org/articles?id=10.1257/aer.98.3.1083; Brown and Finkelstein, “Insuring Long-Term Care,” 

119-42.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 21

entry by single elderly women if Medicaid is assumed to be unavailable. The study

found that the main effects were increased savings and reduced nursing home entry,

with only a small increase in private LTCI purchase.

36

o Unpaid care. As discussed earlier in this section of the report, the aggregate value of 

unpaid care is likely higher than the value of paid care. A 2015 study found that the 

presence of LTCI coverage leads to reduced reliance on informal care, fewer children 

residing with parents, and a greater likelihood that children will be in the formal labor 

force.37 These results suggest that the ability to receive informal care from family 

results in lower demand for private LTCI. Similarly, a 2012 survey found that 

respondents who reported receiving care from family were less likely to buy private 

LTCI.38

• Bequest motives. Some sellers of private LTCI present the preservation of assets for 

heirs as a reason to purchase the product. A 2018 study, however, suggested that a desire 

to leave assets to heirs can suppress demand for private insurance because these motives 

reduce the negative consequences of postponing consumption in order to save.

39

• Lack of information and awareness. Two surveys, one published in 2012 and the other 

in 2015, have studied individuals’ awareness of LTC needs and financing.40 In general, 

respondents exhibited low knowledge of LTC costs, ways to finance those costs, and

private LTCI. For example, the 2015 survey found that only 20% of respondents 

correctly estimated the average cost of a month in a nursing home and only 25% correctly 

identified Medicaid as the government program that pays the most for LTSS. In the 2012 

survey, 72% of respondents reported they knew only “a little” about private LTCI, while

29% believed incorrectly that Medicare covered LTSS. 

• Lack of trust in insurers. The same surveys assessed respondents’ level of trust in LTC

insurers as low. In the 2015 survey, 32% of respondents agreed with the statement “I do 

not trust private insurers.” In the 2012 survey, 46% of respondents agreed with the 

statement “I am concerned that an insurance company might deny reasonable claims for 

 36 Geena Kim, “Medicaid Crowd-Out of Long-Term Care Insurance with Endogenous Medicaid 

Enrollment,” Journal of Human Capital 12, no. 3 (Fall 2018): 431-474, available at: https://doi.org/10.1086/698134. 

37 Norma B. Coe, Gopi Shah Goda, and Courtney Harold Van Houtven, “Family Spillovers of Long-Term Care 

Insurance,” National Bureau of Economic Research, Working Paper no. w21483 (August 2015), available at: 

https://www.nber.org/papers/w21483. 

38 Jeffrey R. Brown, Gopi Shah Goda, and Kathleen McGarry, “Long-Term Care Insurance Demand Limited by 

Beliefs about Needs, Concerns about Insurers, and Care Available from Family,” Health Affairs 31, no. 6 (June 

2012): 1294-1302, available at: https://doi.org/10.1377/hlthaff.2011.1307. 

39 Lee M. Lockwood, “Incidental Bequests and the Choice to Self-Insure Late-Life Risks,” American Economic 

Review 108, no. 9 (September 2018): 2513-50, available at: 

https://www.aeaweb.org/articles?id=10.1257/aer.20141651. 

40 Brown, Goda, and McGarry, “Long-Term Care Insurance Demand,” 1294-1302; “Findings from the Survey of 

Long-Term Care Awareness and Planning,” Office of the Assistant Secretary for Planning and Evaluation, July 

2015, available at: https://aspe.hhs.gov/system/files/pdf/110366/SLTCAPrb.pdf. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 22

long-term care,” while 58% of respondents expressed concern that their premiums would 

increase. In addition, policyholders in recent years have experienced a number of 

unexpected premium rate increases, and this history is likely an impediment to growing

the market for private LTCI.

• Premiums, costs and loads. Lower demand for LTCI is likely attributable in part to the 

high level of premiums charged under new LTCI policies compared to older designs.

41

Premiums vary widely and are based on multiple factors, including the insured’s age, 

gender, and health, the period of coverage selected, the elimination period, and the 

premium for optional riders. The administrative costs and high loads of private LTCI 

also play a role in limiting demand.

42 For additional information on LTCI pricing, see 

the “Premium Increases on LTCI” box in the Regulatory Efficiency and Alignment 

section of this report. 

 41 A recent report estimates that in 2019 the average individual LTCI policyholder paid $3,036 during the first year 

of coverage, 2% more than in 2018. LIMRA, U.S. Individual Long-Term Care Insurance (Annual Review 2019), 3.

42 The 2012 survey reported that, in response to open-ended questions, the most common reason cited for not 

purchasing private LTCI was the cost. The authors noted, however, that this answer does not distinguish among 

potential inhibitors such as lack of actuarial fairness, administrative costs, and affordability of premiums.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 23

Innovation and Product Development

In response to the decline of LTCI in the traditional market, insurers have introduced alternative 

product designs and new features to both increase the consumer appeal of LTCI and improve 

financial returns on this product line for insurers. In addition, insurers and industry experts have 

researched and proposed new designs and features that have not been introduced in the market 

for several reasons, including regulatory considerations and uncertain demand from consumers 

and insurance distributors. This section of the report describes several innovations that have 

generated activity and attracted attention from insurers, consumers, regulators, and other 

stakeholders. 

Recommendation: Overall, the Task Force believes that innovation and product development 

have the potential to significantly strengthen the private LTCI market and better address the LTC 

needs of consumers.

43 Accordingly, the Task Force recommends that federal and state 

policymakers and regulators foster a regulatory environment that encourages flexibility, 

experimentation, and innovation in product design to improve consumer choice and access to 

benefits, while appropriately protecting the rights of consumers and the solvency of insurers. 

Combination Products

Insurers have introduced a variety of products that combine LTCI with other types of insurance. 

One popular “combination” or “hybrid” product combines a life insurance policy with a rider 

that accelerates payment of the death benefit for qualifying “chronic illness” (as defined under 

federal tax law) needs.44 Another common design features a life insurance policy that 

accelerates the death benefit for qualifying LTC needs. These accelerated chronic illness or 

accelerated LTC riders limit the payout to 100% of the death benefit amount. Insurers also offer 

life insurance policies with extension of benefits riders that allow payouts higher than the death 

benefit.45 Finally, some insurers offer deferred annuity contracts with LTC riders that also allow 

payouts exceeding the death benefit. 

Figures 4-6 present data for combination products during the five years from 2014 to 2018. Life 

combination products generated $4.3 billion in premiums in 2018, which is 2% lower than in 

 43 The NAIC has studied and commented on the important role of innovation in LTC financing. For example, a 

2016 study by the NAIC’s research arm aimed to stimulate debate to support innovation and the future development 

of LTC. See National Association of Insurance Commissioners and the Center for Insurance and Policy Research, 

The State of Long-Term Care Insurance: The Market, Challenges and Future Innovations, ed. by Eric C. Nordman 

(Kansas City: NAIC and the Center for Insurance Policy and Research), May 2016, available at:

https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf. As another example, the NAIC 

2017 List was produced by the NAIC’s Long Term Care Innovations (B) Subgroup. 

44 Chronic illness riders may have triggers identical to traditional LTCI (i.e., severe cognitive impairment or inability 

to perform two ADLs), but they are regulated differently for federal tax law and state law purposes, and cannot be 

marketed as LTCI. 

45 Stakeholders indicated that some EOB riders pay up to two or three times higher than the death benefit amount.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 24

2017 but almost 80% higher than $2.4 billion in premiums in 2014. New policy counts increased 

2% year-over-year in 2018, with over 400,000 policies sold, a fourfold increase compared to the 

number of new policies sold in 2014. Measured by new lives insured, life combination products 

constituted more than 87% of the market for individual LTCI solutions in 2018.

46 Annuity 

combination sales reached $575 million in 2018, 4.5% higher than the prior year, while the 

number of contracts sold grew from 4,940 to 5,130, or 4%. 

 46 Source: LIMRA. 

2,000

2,500

3,000

3,500

4,000

4,500

2014 2015 2016 2017 2018

$ Millions Figure 4: Life Combination Premiums

Source: LIMRA.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 25

Combination products offer potential advantages from the consumer perspective, particularly for 

those consumers who are deterred by the “use or lose” aspect of stand-alone LTCI policies. The 

underlying life insurance policy builds cash value and provides a death benefit even if the 

policyholder does not make a claim for LTCI expenses. The ability to combine different 

coverages into a single policy, with one purchasing decision instead of two or more, appeals to 

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2014 2015 2016 2017 2018

New Lives Figure 5: Life Combination New Lives

Source: LIMRA.

400

425

450

475

500

525

550

575

600

2014 2015 2016 2017 2018

$ Millions

Figure 6 : Annuity Combination Premiums

Source: LIMRA.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 26

some consumers. In addition, consumers may perceive that premiums for stand-alone LTCI, or 

for both a life insurance policy and a stand-alone LTCI policy, are too expensive and that a 

combination product is more affordable.47 

On the other hand, navigating the market for combination products can be challenging for both 

consumers and distributors. Because these products differ from each other in their basic designs 

(accelerated benefits, extension of benefits, and either a life insurance or an annuity chassis), 

pricing, and features, selecting an appropriate solution to an individual’s particular needs can be 

highly complex. For this reason, the quality of consumer information and education, the clarity 

of marketing materials, and the training of insurance producers are important attributes in the 

market.

From the insurers’ perspective, combination products are less risky than LTC stand-alone 

products.48 According to a 2017 survey of 11 insurers in the LTCI market, the incidence of 

claims and other actuarial results with respect to combination products have been positive for 

insurers.

49 Given their consumer appeal, lower risk profile, and favorable actuarial experience, 

combination products are likely to continue growing in variety and volume (although cost may 

limit their upside potential).50 

Recommendation: Policymakers could benefit from analysis of the impact of combination 

products on the market for LTC risk protection. To the extent that combination products are 

attracting purchasers who would otherwise buy stand-alone products, they are not necessarily 

expanding overall LTCI coverage. However, if combination products are attracting consumers 

who would not otherwise buy LTC protection, on balance they likely are increasing coverage. 

The Task Force recommends that actuaries, academics, and other stakeholders explore such an 

analysis, with coordination by FIO. 

 47 Comparative pricing between combination products and stand-alone LTCI is not straightforward because the 

products provide different coverages with different features and payment structures. For a comparison of premiums 

and benefits under life combination products, annuity combination products, and stand-alone LTCI at issue ages 50 

and 65, see Carl Friedrich et al., “Unlocking Potential – New Combination Long-Term Care Insurance Solutions 

Show Promise,” Contingencies Magazine, May/June 2019, Figures 2 and 3, available at: 

http://contingencies.org/unlocking-potential-new-combination-long-term-care-insurance-solutions-show-promise/. 

48 See “Quantification of the Natural Hedge Characteristics of Combination Life or Annuity Products Linked to 

Long Term-Care Insurance,” Milliman, March 2012, available at: 

https://www.soa.org/globalassets/assets/files/research/projects/research-2012-03-quant-nat-hedge-report.pdf. 

49 Friedrich et al, “Unlocking Potential.” 

50 Earlier versions of life combination products were largely funded by single premiums, requiring large up-front 

payments compared to a recurring premium design. A 2018 LIMRA market overview found that in 2017, the 

average single premium for a life combination product with an extension of benefits rider was $91,000, well beyond 

the price range of the middle market (households with annual income of $35,000 to $99,999). However, the 

overview noted that newer recurring premium policies offer more affordable premiums, and that life combination 

products with chronic illness or LTC acceleration riders can be less expensive. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 27

Other New Product Designs

“Morphing” Policies

Innovation and experimentation in the LTCI market extend beyond combination products. The 

NAIC 2017 List included allowing products that begin as life insurance (or other type of 

coverage, such as disability or chronic illness) and later automatically convert (“morph”) into 

LTCI at a pre-determined date, such as after the policyholder reaches a certain age. In addition, 

the Society of Actuaries (SOA) has developed a product concept it refers to as “LifeStage 

Protection,” an insurance policy that starts as term life insurance during prime income-earning 

years and switches to LTCI in later years.51

The Task Force is not aware of any insurers that have developed and launched a morphing 

product such as LifeStage Protection. The level of potential demand from consumers and 

insurance distributors is uncertain, and it is possible that insurers are hesitant to incur the expense 

of fully developing this type of product due to uncertainty regarding its regulatory treatment 

under state law.52 At the same time, state regulators may be reluctant to define precisely how 

they would treat the product if they do not have access to product specifications or a policy 

form.53 

Limited LTCI

“Short” or “limited” LTCI policies have attracted attention from some insurers and consumers as 

a lower-cost alternative to traditional products. This interest is reflected in the NAIC 2017 List, 

which includes the option of “allowing shorter maximum benefit plans (<1 year) to be tax 

qualified to incent market expansion through lower-price, shorter duration policies.” Unlike 

traditional LTCI, which must provide coverage for a period of not less than 12 consecutive 

months, limited LTCI typically stops providing coverage after one year from the commencement 

of benefit payments.54 

 51 “Society of Actuaries Drives Innovation in the Long-Term Care Market; Conceptualizes New, Low-Risk Products 

That Could Help Ease Industry Challenges,” Society of Actuaries, July 2018, available at: 

https://www.soa.org/globalassets/assets/files/resources/research-report/2018/ltc-market-fact-sheet.pdf; see also

Treasury, “Public Comments,” Society of Actuaries.

52 State law uncertainty derives from the absence of product specifications and policy forms tailored to this new 

product concept. At the federal level, the Task Force did not identify any federal income tax barriers to the 

morphing product concept.

53 Several states have demonstrated openness to considering innovative product designs. For example, the state of 

Minnesota has been directly involved in developing LifeStage Protection and has stated that “there appear to be 

pathways available to overcome potential regulatory hurdles.” See “LifeStage Protection Product Final Report,” 

Minnesota Department of Human Services, December 2018, available at: https://mn.gov/dhs/assets/LifeStageprotection-product%E2%80%93final-report_tcm1053-373463.pdf. 

54 Under the NAIC’s LTCI Model Act, a policy does not meet the definition of “long-term care insurance” unless it 

provides coverage for not less than 12 consecutive months for each person covered. National Association of 

Insurance Commissioners, Long-Term Care Insurance Model Act (Kansas City: NAIC, Quarter 1 2017), Section 

4.A, available at: https://www.naic.org/store/free/MDL-640.pdf?10. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 28

Although metrics for this market are not widely published, one insurance association estimates 

that:

• Almost half (49%) of traditional LTCI claims last one year or less; 

• The typical limited LTCI policy provides coverage for one year or less;

• The majority of limited policies have no deductible or elimination period, while about 

94% of traditional policies feature a 90-day waiting period before benefits can be paid; 

• Most applications for limited policies have seven to ten health questions with no 

additional underwriting requirements; 

• The typical buyer of limited LTCI is between the ages of 65 and 74 and has a net worth 

of less than $500,000;

• A typical premium at age 65 is $105 monthly; and

• Typical benefit amounts are $100, $150, or $200 per day.55 

Based on these estimates, limited LTCI may be an alternative to traditional policies for 

individuals who cannot afford the higher premiums charged for traditional products. However, 

consumer representatives note that limited LTCI policies may not pay for coverage outside of 

nursing homes, such as assisted living or home care, and likely do not provide adequate 

protection against a catastrophic LTCI event.56 In addition, some insurers and insurance 

regulators have expressed concerns that the labels “short long-term care” or “limited long-term 

care” are counter-intuitive and inherently confusing for consumers, and that policies with shorter 

benefit periods are susceptible to misunderstanding and inappropriate marketing practices.57 

In late 2018, the NAIC adopted the Limited Long-Term Care Insurance Model Act and the 

Limited Long-Term Insurance Model Regulation.58 In general, these models track those for 

traditional LTCI, with adjustments to reflect a benefit period of less than twelve months. In 

particular, the models contain substantially the same consumer protections as their traditional 

 55 “National Advisory Center for Short-Term Care Information,” American Association for Long-Term Care 

Insurance, last accessed February 2020, available at: https://www.aaltci.org/short-term-care-insurance/. 

56 Ellen Stark, “Long-Term-Care Insurance Gets a Makeover,” Consumer Reports, August 2017, available at: 

https://www.consumerreports.org/long-term-care-insurance/long-term-care-insurance-gets-a-makeover/; Eleanor 

Laise, “Short-Term-Care Insurance Policies on the Rise,” Kiplinger, October 2015, available at: 

https://www.kiplinger.com/article/insurance/T027-C000-S004-short-term-care-insurance-policies-on-the-rise.html. 

57 Allison Bell, “Short-Term Care Insurance Faces a Name Fight,” ThinkAdvisor, May 2018, available at:

https://www.thinkadvisor.com/2018/05/30/short-term-care-insurance-faces-a-name-fight/?kw=%27ShortTerm%20Care%20Insurance%27%20Faces%20a%20Name%20Fight&et=editorial&bu=TA&cn=20180530&src=E

MC-Email&pt=LifeHealthNewsFlash. 

58 National Association of Insurance Commissioners, Limited Long-Term Care Insurance Model Act (Kansas City: 

NAIC, Quarter 4 2018), available at: https://www.naic.org/store/free/MDL-642.pdf; National Association of 

Insurance Commissioners, Limited Long-Term Care Insurance Model Regulation (Kansas City: NAIC, Quarter 4 

2018), available at: https://www.naic.org/store/free/MDL-643.pdf. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 29

counterparts, except that insurers must offer inflation protection at a 3% annual compound rate 

instead of a 5% annual compound rate. However, the states generally have not yet adopted either 

model.59

Recommendation: The Task Force recommends that federal policymakers work with their state 

counterparts and with private sector stakeholders to evaluate and monitor the market for limited 

LTCI, including potential impacts on the risk pool for longer-term products and on Medicaid. 

The Task Force further recommends that state legislators and insurance regulators take steps to 

better streamline and standardize the regulation of this market. 

Group Products 

The Task Force considered two policy proposals for LTCI group products that were included 

under the NAIC 2017 List, both involving the fiduciary provisions of ERISA. ERISA safeguards 

the participants and beneficiaries of employee benefit plans by imposing standards of care and 

loyalty on plan fiduciaries, and by holding fiduciaries accountable when they breach those 

obligations. ERISA does not require any employer to establish a plan, but does require those 

who establish plans to meet certain standards. 

One policy proposal is to create a safe harbor to remove potential exposure to ERISA fiduciary 

liability as a factor in employers’ decisions not to offer LTCI to employees, including offering it 

on an automatic enrollment or “opt-out” basis. A second policy proposal is to permit 401(k) and 

IRA participants to purchase LTCI within their accounts (“Retirement Plus”). The objective of 

both proposals is to promote a more viable group LTCI market by increasing employee 

participation, resulting in a larger and more favorable risk pool for insurers and, potentially, 

lower premiums. 

Recommendation: Based on stakeholder input and an assessment of the market and legal 

landscapes, the Task Force questions whether either proposal would have a meaningful impact 

on participation levels. Accordingly, the Task Force does not recommend either proposal.

In general, while automatic enrollment has increased employees’ participation in 401(k) plans,60

the effect may not be the same with respect to LTCI. Low take-up rates for LTCI appear to stem

at least in part from low demand for these products, as reflected in some stakeholders’ comments 

to the Task Force. Currently, employees generally must affirmatively enroll or “opt-in” to LTCI 

and shoulder the entire premium cost without favorable tax treatment. According to the U.S. 

 59 Utah adopted the Limited Long-Term Insurance Model Act in April 2020. Utah Code Ann. §§ 31A-22-2001-

2006.

60 See Brigitte C. Madrian and Dennis F. Shea, “The Power of Suggestion: Inertia in 401(k) Participation and 

Savings Behavior,” The Quarterly Journal of Economics 116, no. 4 (November 2001): 1149-1187, available at: 

https://www.ssc.wisc.edu/~scholz/Teaching_742/Madrian_Shea.pdf. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 30

Bureau of Labor Statistics, 17% of civilian employees had access to LTCI in 2019.

61 Employee 

take-up rates are typically between 5% and 7% based on a report from the NAIC and the Center 

for Insurance Policy and Research in 2016.62

Without higher demand for LTCI on the part of employees, the Task Force does not expect 

employers to choose to provide LTCI as part of their compensation package. The Task Force 

considers it unlikely that employers would default a percentage of their workers’ payroll towards 

contributions for LTCI premiums, regardless of a fiduciary safe harbor. Similarly, with respect 

to the purchase of LTCI as a 401(k) plan “investment” option, the Task Force questions whether

employers or workers would be willing to increase their contributions to the plan to fund LTCI 

premiums or replace current contributions to retirement savings with LTCI premium payments.

In addition to considerations of employee demand, 401(k) plans and LTCI impose different 

obligations on plan sponsors, as discussed below. 

Fiduciary Safe Harbor

The NAIC 2017 List suggests “addressing concerns that may prevent an employer from 

providing LTCI on an opt-out basis by providing a safe harbor to limit the employer’s fiduciary 

liability.”63 The Task Force recognizes both employers’ concerns and the power of automatic 

enrollment to promote participation in many contexts, but generally considers it unlikely that this 

proposal would promote a significant increase in demand for LTCI.

As an initial matter, the proposal is premised on the possibility that potential exposure to ERISA 

fiduciary liability may be a significant factor in employers’ decisions not to offer LTCI,

especially with respect to opt-out arrangements where the employee is not making an affirmative 

choice to participate. Similar concerns about long-term fiduciary liability exposure for selection 

of the insurance provider have been cited as an obstacle to employers offering annuities in 

401(k) plans, but efforts to address the issue in that context to date have not had a significant 

effect on availability or use of annuity options in 401(k) plans.

64 

 61 “Table 41. “Health-related Benefits: Access, Civilian Workers, March 2019,” Bureau of Labor Statistics, 

available at:https://www.bls.gov/ncs/ebs/benefits/2019/ownership/civilian/table41a.pdf.

62 NAIC and CIPR, State of Long-Term Care Insurance, 10.

63 The NAIC 2017 list additionally proposes expanding “catch-up” contributions to retirement plans and allowing 

LTCI purchases through a cafeteria plan. These are primarily tax-related rather than ERISA-related proposals, and 

as such are addressed in the Tax Incentives section of this report.

64 In 2008, DOL issued a rule that provides plan fiduciaries with the steps they should take when selecting annuities 

in such cases. In 2015, DOL publicly emphasized that, under this rule, a fiduciary decision is evaluated based on the 

information available at the time the decision was made, and not on subsequent events (e.g., an insurer’s subsequent 

failure, which was not foreseeable at the time of the decision). See 29 CFR § 2550.404a-4; “Field Assistance 

Bulletin No. 2015-02,” Employee Benefits Security Administration, July 13, 2015, available at: 

https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2015-02. This rule 

and guidance, however, are generally perceived to have stopped short of fulfilling employers’ wishes for bright-line 

safe harbor criteria. Congress responded to these concerns in the Setting Every Community Up for Retirement and 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 31

In circumstances where workplace LTCI is not covered by ERISA, a fiduciary safe harbor would 

be of no consequence. ERISA includes a statutory enumeration of classes of benefits it covers, 

including retirement, medical benefits, and benefits in the event of sickness or disability, but 

does not explicitly include LTCI benefits.65 Therefore, whether LTCI constitutes an ERISAcovered benefit depends, in part, on whether particular LTCI benefits fall within the scope of one 

of the listed classes of benefits. Further, the statutory definition covers enumerated benefits only 

when they are offered as part of a covered “employee benefit plan,” which requires a certain 

level of involvement by the employer. A DOL regulation provides conditions under which 

voluntary arrangements funded entirely with employee contributions are not treated as ERISAcovered employee benefit plans.66

Potential conflicts with state wage payment laws pose a challenge to mandating auto-enrollment. 

DOL has taken the position that ERISA generally preempts state laws that limit, prohibit, or 

regulate an employer’s adoption of automatic enrollment arrangements in connection with an 

ERISA-covered plan, or from making related deductions from employee wages for contributions

to such a plan.67 

Finally, the success of an existing statutory safe harbor for 401(k) default investments may not 

provide evidence for the likely success of a safe harbor for LTCI.

68 As described below, there 

are three important differences between this 401(k) precedent and a potential safe harbor for 

LTCI. 

First, the current 401(k) safe harbor for default investments is narrower than the contemplated 

LTCI safe harbor insofar as it addresses only the selection of the broad types of investments 

 

Enhancement Act of 2019 (SECURE Act). Section 204 of the SECURE Act amended ERISA to provide a statutory 

safe harbor for complying with ERISA’s prudent person standard of care for the selection of an insurer to provide a 

guaranteed retirement income contract. There is no data yet available on whether this statutory version of a 

fiduciary safe harbor will materially affect employers’ decisions to offer annuity options in 401(k) plans or 

employee use of such options.

65 See U.S. House, H.R.2 – Employee Retirement Income Security Act (Washington: 93rd Congress, 1974), Sections 

3(1) and 3(2).

66 These types of voluntary group and group-type insurance programs are not treated as ERISA plans if the employer 

merely offers such insurance for employee purchase by payroll deduction and neither endorses nor helps pay for the 

insurance. See 29 CFR 2510.3-1(j).

67 While ERISA generally does not preempt state criminal laws of general application, it generally does preempt 

state civil laws that otherwise would interfere with automatic enrollment in ERISA-covered welfare plans. For a 

fuller discussion of this topic, see “Information Letter 12-4-2018,” Employee Benefits Security Administration, 

December 2018, available at: https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/informationletters/12-4-2018. 

68 A 2006 federal pension law amended ERISA and the Code to add a fiduciary safe harbor and other provisions to 

facilitate automatic enrollment in, and automatic payroll withholding contributions to, 401(k)-type plans. U.S. 

House, H.R.4 – Pension Protection Act of 2006 (Washington: 109th Congress, 2006); U.S. House, ERISA, Section 

514(e). That law addressed two obstacles to automatic 401(k) plans: fiduciary concern about the selection of default 

investments and state wage payment laws. The 2006 law charged DOL with issuing a fiduciary safe harbor for 

qualified default investments, and preempted state wage payment laws for plans that operate within the safe harbor.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 32

(generally, a diversified mix of stocks and bonds) available under the plan.69 Default options are 

also easier for plan sponsors to implement for 401(k) plans than for LTCI. Employers who offer 

LTCI have to consider whether, or under what circumstances, automatic enrollment in LTCI 

would be appropriate for their workforce in light of variation in employees’ circumstances and 

needs. 

Second, the current 401(k) safe harbor bears less weight than its potential LTCI counterpart

because 401(k) participants can more easily shift out of default investments, while LTCI 

participants are more constrained. 

Third, as noted above, it is unclear how many of these LTCI arrangements would be covered by 

ERISA. For these reasons, while the 401(k) fiduciary safe harbor is generally regarded as a 

success in increasing participation in 401(k) plans, an LTCI safe harbor would likely be less 

effective. 

In summary, even if Congress or DOL could craft an appropriate fiduciary safe harbor, there 

remains substantial doubt regarding whether it would materially expand the demand for LTCI. 

Demand is low in the marketplace and it is unclear whether concern for fiduciary liability is an 

important driver in employers’ decisions on LTCI. The lack of employer and employee demand, 

as reflected in some stakeholders’ comments to the Task Force, also would likely continue to 

discourage employers from deciding to auto-enroll employees (and direct a portion of their pay) 

into LTCI.70 

Retirement Plus

The SOA, in its comment letter to the Task Force, references its “Retirement Plus” proposal.71 

The proposal would make LTCI available as an option within a 401(k) or IRA, with premiums 

deducted directly from the account balance. However, the Task Force notes that adding LTCI as 

a 401(k) “investment” option would likely require changes to current law. 

ERISA generally classifies plans as providing either retirement or welfare benefits, and includes 

separate provisions tailored for each. ERISA’s fiduciary provisions applicable to 401(k) 

accounts generally speak to the “investment” of “assets” in the account. If ERISA were 

amended to facilitate LTCI within a 401(k) plan, employers still might be reluctant to offer this 

feature, fearing fiduciary liability.

 69 The current 401(k) safe harbor does not address the evaluation of insurers’ claims-paying capability, the amount 

of premiums, or the appropriateness of alternative insurance policy provisions.

70 For example, some stakeholders expressed that employers are disinclined to offer LTCI benefits because they face 

more pressing issues, such as compliance with health care laws. Stakeholders further cited wariness of financial 

products stemming from the 2007-2009 recession as a factor in the low demand for LTCI. 

71 Treasury, “Public Comments,” Society of Actuaries.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 33

Incidental Benefits 

Under most LTCI policies, the insured is not eligible to submit a claim for benefits until he or 

she becomes “chronically ill” as defined under state insurance laws and the Code. Policies 

typically define chronic illness as severe cognitive impairment or the inability to perform without 

substantial assistance at least two ADLs. In order for an LTCI policy to qualify for favorable tax 

treatment under the Code, it must condition the payment of benefits upon certification by a 

licensed health care practitioner that the insured is chronically ill.72

Some stakeholders proposed that Congress should amend the Code to permit payment of 

incidental benefits from a LTCI policy prior to the onset of chronic illness, without causing the 

policy to forfeit its tax-qualified status. These benefits could include limited provision of 

evidence-based, cost-effective incidental benefits that would reduce the likelihood of someone at 

higher than average risk of becoming chronically ill. For example, a LTCI policy could pay for

home assessments or modifications to identify and mitigate fall risks or other safety hazards to 

mobility- or vision-impaired individuals. In addition, incidental benefits might include caregiver 

training for non-professional caregivers, including family, or sharing information regarding local 

LTC providers to policyholders who need or anticipate needing assistance to remain in their 

homes. The rationale for this proposal is that permitting these types of benefits would support 

healthy, independent living and aging in place.

Recommendation: Supporting the ability of those potentially needing LTC to remain in their 

homes could benefit both consumers and insurers. Accordingly, the Task Force encourages 

industry, federal policymakers, and other experts, in consultation with consumer representatives,

to identify and assess evidence of cost-effective interventions. Depending on the results of the 

analysis, Congress could consider amending the Code to permit payment of evidence-based, 

cost-effective incidental benefits under a tax-qualified LTCI contract prior to the insured 

becoming chronically ill, subject to a monetary cap and other conditions set by regulation.

 72 26 U.S.C. §7702B(c)(2).
Long-Term Care Insurance: Recommendations for Improvement of Regulation 34

Regulatory Efficiency and Alignment

The Task Force considered various recommendations to improve the efficiency and effectiveness 

of regulation of LTCI at the federal and state levels, including options under the NAIC 2017 List. 

This section discusses proposed regulatory reforms in the areas of inflation protection, other 

consumer protections, and the review and approval of premium increases on LTCI policies.

Inflation Protection

An LTCI policy is, by definition, a long-term financial obligation of the insurer that issues the 

policy.73 Although the period between issuance of the policy and a claim for benefits will vary 

widely by policyholder, that period can exceed 20 years or more. Accordingly, consumers face a 

significant risk that inflation will erode the value of their benefits over time.

Recognizing this risk, the NAIC included inflation protection as a core consumer safeguard when 

it adopted the LTCI Model Regulation in 1988. Under the LTCI Model Regulation, insurers 

must offer to each policyholder, at the time of purchase, the option to purchase a policy with an 

inflation protection feature that increases benefit levels at an annual compounded rate not less 

than 5%. Insurers must also provide a graphic comparison between the benefit levels of a policy 

that increases benefits over a period of at least 20 years and a policy that does not increase 

benefits. The LTCI Model Regulation further requires insurers to include inflation protection in 

the policy unless the policyholder rejects it in writing.74

Inflation protection is also required under two federal statutes addressing LTCI: HIPAA and the 

DRA. These statutes address two different subjects—tax qualification under HIPAA, and a 

federal-state partnership program under the DRA—and their inflation protections operate 

differently. The Task Force concludes that the efficiency and effectiveness of both statutes can 

be improved, as detailed below.

Inflation Protection for Tax-Qualified LTCI Policies Under HIPAA

As part of enacting HIPAA in 1996, Congress amended the Code to add Section 7702B, which 

sets requirements that an LTCI policy must meet in order to be “qualified” LTCI for purposes of 

the itemized expense deduction and certain other Code purposes. Among these requirements is 

compliance with consumer protections contained in specified sections of the 1993 versions of the 

 73 Under the LTCI Model Act, a “long-term care insurance” policy must provide coverage for not less than 12 

consecutive months for each person covered. NAIC, LTCI Model Act, Section 4.A. However, according to the 

American Association for Long-Term Care Insurance, the average time elapsed between purchase of a LTCI policy 

and eligibility for benefits is 13.4 years. “Long-Term Care Insurance Facts – Data – Statistics – 2019 Report,” 

American Association for Long-Term Care Insurance, last modified October 2019, Figure 13, available at: 

https://www.aaltci.org/long-term-care-insurance/learning-center/ltcfacts-2019.php#2019claims2. 

74 National Association of Insurance Commissioners, Long-Term Care Insurance Model Regulation (Kansas City: 

NAIC, Quarter 1 2017), Section 13, available at: https://www.naic.org/store/free/MDL-641.pdf. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 35

LTCI Model Act and LTCI Model Regulation, including the provision in the LTCI Model 

Regulation requiring insurers to offer 5% annual compound inflation (ACI) protection.75 

Accordingly, although HIPAA does not directly impose a requirement to offer ACI protection, it 

accomplishes the same result by reference to the LTCI Model Regulation.

Because almost all currently sold LTCI policies are tax-qualified under HIPAA, the requirement 

to offer 5% ACI protection is effectively universal.76 For every sale, the insurer or producer 

must explain and graphically illustrate a benefit feature that is misaligned with actual economic 

conditions and that very few consumers accept.77 The benefit is costly, potentially increasing 

premiums by four or five times over a policy with no inflation protection.

78 For these reasons, 

the Task Force concludes that inflation protection requirements under HIPAA and state 

insurance laws should be revised to increase the efficiency and effectiveness of regulation. At 

the same time, the Task Force believes that inflation continues to represent a risk to consumers 

and, accordingly, policymakers should revise the current 5% ACI standard rather than eliminate 

the offer of inflation protection.79

Unless Congress changes the existing statutory structure, with its intertwining of HIPAA and the 

NAIC models, revising the inflation protection standard is dependent upon both (1) the NAIC

amending the LTCI Model Regulation to set a different standard, and (2) Congressional 

legislation amending HIPAA to define the “model regulation” by reference to the updated 

model.80 Finally, even if Congress and the NAIC did so, the revised standard would itself likely 

become outdated and uncorrelated with economic conditions.

Recommendation: To both address the outdated inflation requirement and to provide flexibility 

to adapt inflation protection to evolving economic conditions, the Task Force recommends that 

Congress amend the Code to authorize Treasury to set inflation protections for tax-qualified 

 75 For purposes of these consumer protections, the Code defines the LTCI Model Regulation and LTCI Model Act as 

“the long-term care insurance model regulation, and the long-term care insurance model Act, respectively, 

promulgated by the [NAIC] (as adopted as of January 1993).” 26 U.S.C. § 7702B(g)(2)(B)(i). 

76 Giese, Schmitz, and Thau, “Milliman Survey,” 17.

77 Over time, and particularly in the prevailing interest rate environment following the financial crisis, this 5% 

standard has become an anachronism, with inflation in recent years running significantly lower than 20 years ago 

when the NAIC and (by reference) Congress set the ACI at 5%. See Treasury, “Public Comments,” American 

Academy of Actuaries. Consumers have reacted to this change by increasingly rejecting the initial offer of 5% ACI 

because of the higher premium costs associated with this level of protection. According to one survey, in 2018 only 

2% of LTCI sales included 5% ACI protection, compared to 56% in 2003 and more than 47% each year from 2006 

to 2008. Giese, Schmitz, and Thau, “Milliman Survey,” 11-13.

78 Treasury, “Public Comments,” American Academy of Actuaries.

79 Some stakeholders suggested that inflation in the cost of LTSS might be a more appropriate HIPAA benchmark 

than a fixed percentage or the rate of inflation in the general economy. For estimates of increases in the cost of 

various categories of LTSS from 2018 to 2019, see “Genworth Cost of Care Survey 2019: Summary and 

Methodology,” Genworth Financial, Inc., last modified October 2019, available at: 

https://pro.genworth.com/riiproweb/productinfo/pdf/131168.pdf. 

80 In addition, even if the NAIC and Congress took these two steps, state insurance laws and regulations would 

continue to require the 5% ACI offer until the states conformed those laws and regulations to the revised model.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 36

LTCI. With this authority, Treasury and Congress could coordinate with the NAIC and the 

states to implement changes in inflation protection through the regulatory process without the 

necessity of additional Congressional legislation.

Inflation Protection for the Partnership Program Under the DRA

In the early 1990s, four states—California, Connecticut, Indiana, and New York—implemented 

the Partnership program. The program aims to lower federal LTC costs by encouraging 

individuals who might otherwise “spend down” their assets (in order to qualify for Medicaid) to 

rely instead on a LTCI policy. For every dollar of coverage paid by a Partnership policy, the 

policyholder may disregard one dollar of the asset amount necessary to become eligible for 

Medicaid LTC benefits.81 

The DRA opened the Partnership program to all states, subject to specified conditions including 

inflation protection and other consumer protections.82 The DRA inflation protection rules differ 

from those under HIPAA in three significant ways: (1) under the DRA, inflation protection must 

be not only offered, but also included in the policy; (2) the DRA links inflation protection to 

three age tiers;83 and (3) the DRA does not specify the amount of inflation protection required, 

leaving that issue to the states. 

Based on Treasury staff research, states that have adopted the Partnership program vary widely 

in their inflation protection requirements.

84 This lack of uniformity has created a regulatory 

patchwork with uneven consumer protection standards and additional complexity that makes it 

more difficult to write LTCI. Additionally, high inflation protection requirements may raise 

costs and reduce the attractiveness of Partnership policies. For example, insurers sell almost no 

Partnership policies in California, a populous state that requires 5% inflation protection. 

Although multiple factors can affect sales volume in a given state, the effect of 5% compound 

inflation on pricing is significant.85

 81 See generally “Long-Term Care Partnership Expansion: A New Opportunity for States,” Center for Health Care 

Strategies, Inc., last modified May 2007, available at: https://www.chcs.org/media/LongTerm_Care_Partnership_Expansion.pdf; “Long Term Care Insurance Partnership Plans,” American Association for 

Long-Term Care Insurance, last accessed February 2020, available at: https://www.aaltci.org/long-term-careinsurance/learning-center/long-term-care-insurance-partnership-plans.php. 

82 42 U.S.C. § 1396p. 

83 The DRA requires the policy to provide ACI protection for individuals under age 61, “some level” of inflation 

protection for individuals between ages 61 and 75, and no inflation protection for individuals age 76 and over 

(although inflation protection may be included). 42 U.S.C. § 1396p(b)(1)(C)(iii)(IV).

84 Four require no less than 5%; 17 require no less than 3%; six require no less than 1%; three have other formulas; 

and 17 do not specify a level of inflation protection. Approximately 25 states link the level of protection to either a 

stated percentage or changes in the Consumer Price Index. As an example of additional variations, some states 

specifically prohibit guaranteed purchase options as a means of meeting inflation protection requirements, others are 

silent, and a smaller number specifically allow guaranteed purchase options. 

85 According to one estimate, in early 2019 a typical Partnership policy for a 57-year-old couple in California costs 

$15,099 per year with 5% compound protection compared to $7,312 per year with 3% compound. Louis H. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 37

Recommendation: The Task Force recommends that state policymakers—legislators, state 

Medicaid directors, insurance commissioners, and the NAIC—improve regulatory efficiency and 

effectiveness by harmonizing and streamlining inflation protection requirements under the 

Partnership program. Alternatively, Congress could delegate to HHS the authority to set 

Partnership program inflation protection requirements under the DRA.

86 

Other Consumer Protections

Apart from inflation protection, both HIPAA and the DRA mandate compliance with certain 

consumer protections contained in the NAIC’s LTCI Model Act and LTCI Model Regulation. 

However, the DRA defines “model regulation” and “model Act” by reference to the NAIC 

models adopted as of October 2000, while HIPAA does so by reference to the January 1993 

versions. This federal cross-referencing in two separate statutes of two outdated and conflicting 

versions of NAIC models creates confusion and adds complexity to writing LTCI business. 

Recommendation: The Task Force recommends that Congress consider options to address this 

regulatory inefficiency. For example, as one option, Congress could empower Treasury, in 

consultation with HHS, to set consumer protection standards using one version of the LTCI 

Model Act and LTCI Model Regulation for purposes of both tax qualification under HIPAA and 

Partnership eligibility under the DRA, with flexibility to update the standards periodically (e.g., 

every 10 years). Under this approach, Treasury and HHS could coordinate with the NAIC and 

the states to maintain consistency between federal and state laws with respect to consumer 

protection, without the necessity of additional federal legislation. 

Review and Approval of Rate Increases

In most states, the chief insurance regulator has the authority to approve fully, approve in part, or 

reject premium rate increases proposed by an insurer. The regulator may also condition its 

approval on actions or commitments by the insurer, such as agreeing to withhold requests for 

future rate increases for a specified number of years. The authority of state regulators to review 

and approve proposed rate increases before the insurer implements those changes is a critical 

factor in the LTCI marketplace.

Historically, some state insurance regulators have been more receptive than others to proposed 

rate increases. Policyholders in states where regulators have approved rate increases may 

 

Brownstone, “The California Partnership for Long-Term Care Revives,” Broker World Magazine, February 2019, 

available at: https://brokerworldmag.com/the-california-partnership-for-long-term-care-revives/. In September 

2016, California enacted Senate Bill 1384. This bill requires insurers to offer both 5% compound inflation and at 

least one lower cost option. See California Welfare and Institutions Code § 22005.1(b)(3). To date, the California 

Department of Health Care Services has not issued guidance or regulations identifying a lower cost option. 

86 The DRA already allows the Secretary of HHS to incorporate revisions to consumer protections under the LTCI 

Model Act and LTCI Model Regulation into Partnership requirements. See 42 U.S.C. § 1396p(b)(5)(C).
Long-Term Care Insurance: Recommendations for Improvement of Regulation 38

subsidize premiums in other states where regulators have limited or rejected rate increases.87 

Insurers’ uncertainty concerning regulatory treatment of requested rate increases limits their 

ability to remain active in the LTCI market. In addition, the inability to obtain timely and 

consistent approvals of actuarially justified rate increases may threaten the financial stability of 

in-force blocks of LTCI policies and, in some cases, an insurer itself.88

Premium Rate Increases for LTCI

Insurers set rates, or premiums, for their products based on actuarial assumptions about risk, 

future policyholder behavior, and future economic conditions. The accuracy of these 

assumptions is particularly important for products such as LTCI that remain in force for long 

periods. Primary determinants of pricing for LTCI include morbidity (how many policyholders 

need LTC, and for how long), lapse (how many policyholders voluntarily drop their coverage), 

and interest rates (which determine the amount of income earned by insurers on assets supporting 

their liabilities). Since 2000, all of these factors have gone in an unfavorable direction for 

insurers: morbidity is somewhat worse than expected; voluntary lapse rates are lower than for 

other insurance products; and interest rates are significantly lower than levels assumed in 

pricing.89

As the profitability of in-force LTCI policies has eroded over the past two decades, many 

insurers have increased premiums on those policies, in some cases by a cumulative 100% or 

more. Although regulators often require insurers to phase in these increases over a specified 

timeframe, such as three years, the impact on affordability for policyholders can be severe. In 

addition, repeated rate increases generate both adverse publicity for insurers and distrust among 

consumers and insurance producers, lowering demand for LTCI. 

The financial performance of in-force LTCI policies remains a key issue for the insurance 

industry, investors, regulators, and policyholders. LTCI carriers continue to increase their 

reserves (funds set aside to pay future claims), update their actuarial assumptions, and disclose 

their reserving methodologies in more detail. One rating agency estimates that most insurers will 

 87 See, e.g., Jason Wobelen, “Regulator Rejects LTC Rate Hike, Says Request Biased against Utah Policyholders,” 

S&P Global Market Intelligence, November 2019, available at: 

https://platform.marketintelligence.spglobal.com/web/client?auth=inherit&ignoreIDMContext=1#news/article?id=5

5482328&KeyProductLinkType=2. 

88 Insurers that focus mainly on the LTCI product line may be particularly vulnerable. For example, on February 3, 

2020, the Pennsylvania Insurance Commissioner obtained a state court order placing Senior Health Insurance 

Company of Pennsylvania into rehabilitation. As of December 31, 2019, the company had approximately 54,000 

LTCI policyholders, $2.7 billion in liabilities, and a surplus deficit of $466 million. See Allison Bell, “Pennsylvania 

Puts LTCI Issuer in Rehabilitation,” ThinkAdvisor, February 2020, available at:

https://www.thinkadvisor.com/2020/02/06/pennsylvania-puts-ltci-issuer-in-rehabilitation/. When an insurer is 

liquidated, state insurance guaranty associations pay certain covered claims and fund those payments by assessments 

on solvent insurers in the states of residence of the policyholders. 

89 Marc A. Cohen “The Current State of the Long-Term Care Insurance Market,” presentation to the Federal 

Advisory Committee on Insurance, February 2018, available at: 

https://home.treasury.gov/system/files/311/FACIFebruary2018_UMass.pdf. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 39

not reach their peak reserves for in-force business for another 10 to 15 years.90 Accordingly, 

uncertainty about the profitability of in-force business will persist. This uncertainty, combined 

with negative trends in claims experience as well as ongoing questions regarding the ability of 

insurers to obtain regulatory approvals of rate increases, has led many insurers to exit the LTCI 

market, creating a drain in capital.91 Concerns over the financial solvency of insurers, and the 

potential impact of insolvencies on state insurance guaranty associations, are also important 

considerations for this market. 

In 2019, the NAIC identified the regulation of LTCI as the organization’s top priority, noting 

significant issues posed by the current LTCI environment to both consumers and the state-based 

system of insurance regulation. The NAIC formed an Executive Task Force charged with 

developing “a consistent national approach for reviewing LTCI rates that results in actuarially 

appropriate increases being granted by the states in a timely manner and eliminates cross-state 

rate subsidization.”92 The Executive Task Force is also charged with identifying options to 

provide choices for consumers regarding modifications to LTCI contract benefits where policies 

are no longer affordable due to rate increases. 

The primary work stream of the Executive Task Force is a multistate review of LTCI focusing on 

different actuarial methodologies used by the states. In addition, the Executive Task Force has 

organized five other work streams to:

• explore alternatives for protecting policyholders from caps on state guaranty association 

coverage and potential inequities arising from the states’ inconsistent approaches to

premium rate increase requests;

• ensure policyholders understand their options when faced with a rate increase; 

• evaluate the interaction between rate increase issues and reserving issues; 

• address non-actuarial variances among the states when reviewing rate increases; and 

• consider whether the task force needs additional data to support its work.

Recommendation: The Task Force recommends that the NAIC and the states maintain their 

focus on LTCI and work together in 2020 to develop a consistent national approach to regulatory 

reviews of LTCI rate increase requests. The Task Force also recommends that FIO continue to 

monitor and report on this issue.

 90 “Following the Trail of U.S. Insurers’ Long-Term Care Assumptions,” S&P Global Ratings, January 10, 2019, 

available at: https://www.spratings.com/documents/20184/908539/LifeINSHT_Jan2419_Article4.pdf/2f9c6736-

6f26-36ae-d32e-3f2d8c265818. 

91 The number of insurers offering LTCI policies has dropped from more than 100 in 2000 to only a dozen or so in 

2020. 

92 “Long-Term Care Insurance (EX) Task Force,” National Association of Insurance Commissioners, last accessed 

February 2020, available at: https://content.naic.org/cmte_ex_ltci_tf.htm. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 40

Financial Literacy and Education

Reviewing the Federal Role in Financial Education

The NAIC 2017 List included a federal education program around retirement security and the 

importance of planning for potential LTC needs. In July 2019, Treasury issued the Financial 

Literacy Report, which laid out an appropriate federal role for financial education and considered

the roles of the private and non-profit sectors, and other government entities in this field.93 The 

issuance of the Financial Literacy Report followed a literature review and extensive 

consultations with experts and stakeholders inside and outside of the government. 

In the Financial Literacy Report, Treasury recommended that the primary federal role for 

financial literacy and education should be to empower financial education providers as opposed 

to attempting to reach every American household directly. This federal role could include 

developing and implementing policy, encouraging research, and other activities, such as 

conducting financial education programs and developing educational resources to advance best 

practices and standards. The Financial Literacy Report further recommended that the federal 

government should consider the impact of the lack of financial literacy on households and the 

risk to the economy from negative externalities and market failures.

The Financial Literacy Report defined high-priority areas for financial education, including 

retirement saving and investor education. Treasury noted the significant level and 

interconnection among retirement planning concerns. For example, 25% of Americans have no 

retirement savings, less than 40% of non-retired adults believe they are on track for a secure 

retirement, and many working age Americans face difficult challenges in planning for their old 

age.

94

The Financial Literacy Report also described current federal programs on retirement planning, 

including programs and information provided by DOL’s Employee Benefits Security 

Administration (EBSA) and by SSA. EBSA provides education materials and tools, conducts 

outreach, and answers questions from employers and employees about all aspects of workplace 

retirement savings plans; and SSA conducts outreach through websites, mass media, and inperson events. Other federal agencies promote their retirement planning resources through 

networks of relevant organizations and through social media. However, despite the number of 

programs and resources available, in fiscal year 2017, retirement savings education was one of 

the least-funded financial education priorities in the federal government, totaling less than 1% of 

expenditures on financial education ($2.2 million out of $273 million).95 

 93 Treasury, Financial Literacy Report.

94 Treasury, Financial Literacy Report, 32.

95 Treasury, Financial Literacy Report, 1, 53.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 41

From 2005 to 2010, HHS, along with 24 states and the District of Columbia, participated in the 

Own Your Future Awareness Campaign, which was designed to raise awareness about the risks 

of needing LTC and to encourage LTC financial awareness.96 The National Clearinghouse for 

Long-Term Care Information website was launched in 2006 to supplement the campaign by 

helping Americans actively engage in planning for LTC.97 Through this campaign, 

approximately 20 million households were reached and 1.5 million LTC planning guides were 

distributed.98

A post-campaign survey found that people who received the planning guide were more likely to 

take action (as compared to those who did not), such as reviewing existing coverage, talking to 

an advisor about LTC needs, or buying LTCI.

99 Additionally, a 2004 survey of consumers aged

45 to 70 found that those who had heard about LTC were more likely to request additional 

information, especially those who received direct mail.100 However, there is evidence that those 

who requested the guide would have been more likely to take those steps even without the 

prompt.101

Stakeholder Recommendations Relating to Education

A number of organizations have recommended education as an important way to improve 

awareness of LTCI and LTC planning; however, these recommendations do not provide

evidence or specificity about how to implement education in ways that will have a measurable 

impact.

In 2019, the NAIC organized a Retirement Security Working Group, which drafted a work plan

that includes researching and developing financial education curricula for each life stage from

high school through retirement (financial literacy and decision-making, the time value of money, 

LTC, and debt and credit are subjects to be considered). Additionally, the plan includes 

developing an education campaign targeting employers to provide retirement plans and assist 

 96 See “Empowering Consumers Through Education,” America’s Health Insurance Plans, last modified September 

2018, available at: https://www.ahip.org/empowering-consumers-through-education/. 

97 Section 6021(d) of the DRA directed the Secretary of HHS to establish the Clearinghouse.

98 “Final Report on the “Own Your Future” Consumer Survey,” U.S. Department of Health and Human Services, 

Office of the Assistant Secretary for Planning and Evaluation, last modified November 2006, available at: 

https://aspe.hhs.gov/basic-report/final-report-own-your-future-consumer-survey. 

99 Eileen J. Tell, “The Own Your Future Long-Term Care Awareness Campaign: Implications for CLASS,” CLASS 

Technical Assistance Brief Series, Spring 2011, available at: 

http://www.thescanfoundation.org/sites/default/files/TSF_CLASS_TA_No_13_Own_Your_Future_FINAL.pdf. 

100 Tell, “Own Your Future.”

101 Office of the Assistant Secretary for Planning and Evaluation, “Final Report.”
Long-Term Care Insurance: Recommendations for Improvement of Regulation 42

employees with saving for retirement.102 While these concepts are promising, additional work 

will be needed to develop specifics about how to effectively attain goals through these strategies.

Insurance industry organizations favor more federally-funded education. For example,

America’s Health Insurance Plans and the American Council of Life Insurers recommended restarting the Own Your Future Awareness Campaign, and the National Association of Insurance 

and Financial Advisors similarly pointed to the value of such a campaign.103

In 2018, the Maryland Governor’s Task Force on Long-Term Care Planning recommended 

methods to educate residents about LTC. The group concluded that current workers should be a 

key target of outreach and education, especially through employers, and young people should be 

introduced to LTC planning early.104 Industry stakeholders similarly identified employers as a 

venue for effectively providing education about LTCI at the July 25, 2019 public meeting of the 

Task Force. However, these recommendations reflect a wide variety of strategies and are not 

backed by clear evidence of effectiveness or plans for implementation.

Task Force consultations with consumer advocates pointed to the challenges of LTCI education. 

One group noted that insurance products, including LTCI, can be complex, and emphasized the 

need for understandable, plain language information, and the need to train insurance and 

investment professionals on appropriate application of suitability standards.105 Another 

consumer organization commented that promotion of stand-alone LTCI is not consistent with 

government efforts to help consumers understand lifetime insurance and retirement income 

needs.

106 Finally, a health policy group pointed to the value of personalized assistance with 

navigating the care delivery system at critical points, such as before or after retirement.107

Best Practices for Financial Education

The Financial Literacy Report details best practices for financial education that are applicable to 

educating consumers about LTC planning and LTCI. These include: 

• Provide Actionable, Relevant, and Timely Information. Delivering financial

information in an actionable, relevant, and timely manner results in greater likelihood of 

 102 “Retirement Security Working Group,” National Association of Insurance Commissioners Retirement Security 

(A) Working Group, last modified November 2019, available at: https://content.naic.org/sites/default/files/inlinefiles/Taylor%20Retirement%20Security%20Work%20Plan%20November%202019a.pdf. 

103 Treasury, “Public Comments,” America’s Health Insurance Plans, American Council of Life Insurers, and 

National Association of Insurance and Financial Advisors.

104 Maryland Governor’s Task Force on Long Term Care Planning, Report of the Maryland Governor’s Task Force 

on Long Term Care Planning (Annapolis: October 2018), available at: 

http://dlslibrary.state.md.us/publications/NonMd/SB696Ch212HB953Ch213(2017)_2018.pdf. 

105 Treasury, “Public Comments,” California Health Advocates.

106 Treasury, “Public Comments,” Center for Economic Justice.

107 Treasury, “Public Comments,” Healthsperien.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 43

retention and action. This practice underscores the need for information that is clear and 

provides actionable steps for the consumer at appropriate times in their decision-making. 

• Build on Motivation. Effective financial literacy and education programs capitalize on 

people’s motivations. This may mean that financial education on LTC planning could be 

effectively delivered by trusted sources, such as faith-based or community 

organizations.108

• Make It Easy to Make Good Decisions and Follow Through. The environment or 

context can make it easier for people to carry out their intentions. For example, changing 

the options presented, removing hassles and barriers, and adding supports can help people 

bridge the gap between intentions and actions. Simplifying options is often key to 

helping people make good choices.109

Recommendations: There is a clear need for consumers to plan for retirement and later life, 

including consideration of LTC costs and how to finance those costs. Yet, decisions about these 

topics are complex, unpredictable, and often made more challenging by social and emotional 

hurdles to planning for possible disability. In addition, LTCI can be difficult to understand and 

easy to avoid. These factors likely detract from the effectiveness of financial education focused 

solely on LTC and LTCI. Rather, planning for LTC costs and ways to pay for them should be 

included as part of other financial education on planning, saving, and investing for retirement. 

The Task Force recommends that Treasury, HHS, DOL, and other agencies working through the 

FLEC, assess federal education resources on LTC needs and planning, and modify, update, and 

supplement these resources as needed.110 As part of its efforts to improve consumers’ capability 

in retirement planning, the FLEC should clearly integrate LTC planning into retirement 

education topics. These efforts should be consistent with the recommendations and best 

practices set forth in the Financial Literacy Report. In particular, educational programs and 

materials should be clear, simple, avoid jargon, and point people to concrete actions that they can 

take or avoid. Interagency cooperation is necessary in modifying, updating, and supplementing 

resources, alongside coordination with private sector entities, state government agencies, and 

other appropriate parties.

 108 Although multiple stakeholders recommend that consumers make LTC decisions in consultation with family 

members, a 2014 survey found that barely one-quarter of adults had a detailed discussion about LTC preferences 

with a partner or family member. Benjamin Allaire et al., “Long-Term Care Awareness and Planning: What Do 

Americans Want?” Office of the Assistant Secretary for Planning and Evaluation, July 30, 2015, available at: 

https://aspe.hhs.gov/system/files/pdf/111341/Awareness.pdf. 

109 For the full list of best practices, see Treasury, Financial Literacy Report, 54-58.

110 Congress established the FLEC under the Fair and Accurate Credit Transactions Act of 2003 for the purpose of 

coordinating the federal government’s financial literacy efforts. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 44

Tax Incentives

The Code currently provides favorable federal income tax treatment for LTCI. Multiple 

stakeholders encouraged the Task Force to consider a range of amendments to tax laws or 

regulations aimed at increasing the take-up of private LTCI. This section of the report begins 

with an overview of current tax rules regarding LTCI, and then presents an analysis of various 

tax proposals considered by the Task Force.

Current Tax Rules Regarding LTCI

The Code currently treats a “qualified” LTCI contract as an accident and health insurance 

contract and provides various tax preferences.111 For example, the Code permits individuals to 

deduct premiums paid for LTCI under limited circumstances. It also permits employers to 

provide LTCI to their employees on a pre-tax basis. The requirements for a LTCI contract to be 

tax qualified and the current tax treatment of qualified LTCI are summarized below. 

Requirements for Qualified LTCI Contracts 

The Code defines a qualified LTCI contract as any insurance contract if the only insurance 

protection provided under the contract is coverage of qualified long-term care services.112 A 

qualified LTCI contract also may not provide for a cash surrender value in excess of premiums 

paid under the contract or provide other money that can be paid, assigned, pledged as collateral 

for a loan, or borrowed.113 As discussed in more detail below, premiums paid for a qualified 

LTCI contract are eligible to be deducted as medical expenses, subject to specified, age-based 

dollar limits. In addition, amounts received under the contract generally are excludable from

gross income as amounts received for personal injuries or sickness. 

The Code defines qualified LTC services as necessary diagnostic, preventive, therapeutic, 

curing, treating, mitigating, and rehabilitative services, and maintenance or personal care 

services, which are required by a chronically ill individual, and are provided pursuant to a plan of 

care prescribed by a licensed health care practitioner.114

A “chronically ill individual” means any individual who has been certified by a licensed health 

care practitioner as:

 111 26 U.S.C. §7702B(a)(1). 

112 26 U.S.C. §7702B(b). 

113 In this regard, 26 U.S.C. §7702B(b)(2)(C) permits a refund that does not exceed the aggregate premiums paid 

under the contract upon: (i) the death of the insured or (ii) a complete surrender or cancellation of the LTCI contract. 

Any such refund must be includible in gross income to the extent that any deduction or exclusion from income was 

allowed with respect to the premiums paid. See also 26 U.S.C. §7702B(b)(1)(D) (additional requirements for 

qualified LTCI contracts).

114 26 U.S.C. §7702B(c)(1). 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 45

i. Being unable to perform (without substantial assistance from another individual) at least 

two of six ADLs (eating, toileting, transferring, bathing, dressing, and continence) for a 

period of at least 90 days due to a loss of functional capacity;

ii. Having a level of disability similar (as determined under regulations) to the level of 

disability described in i.; or

iii. Requiring substantial supervision to protect such individual from threats to health and 

safety due to severe cognitive impairment.115

Tax Treatment of LTCI Premium Payments by Individuals

Under current law, qualified LTCI premiums are eligible to be deducted as medical expenses 

only to the extent that total medical expenses, including qualified LTC expenses, exceed the 

threshold of adjusted gross income (AGI). Currently, the threshold is 7.5% of AGI.116 The 

annual amount of LTCI premiums that qualify as medical expenses is capped at an agedependent amount indexed for inflation. This cap on LTCI premiums (Age-Dependent Cap) is 

applied before calculating whether total eligible medical expenses exceed 7.5% of AGI.117 

Table 4: 2020 Age-Dependent Caps

Age at End of Tax Year Maximum LTCI Premium Deduction

40 or less $430

41 to 50 $810

51 to 60 $1,630

61 to 70 $4,350

Over 70 $5,430

Further, an individual taxpayer may claim a medical expense deduction only if itemizing 

deductions on Schedule A of Form 1040. The Tax Cuts and Jobs Act almost doubled the 

standard deduction amount for tax years beginning after December 31, 2017.118 Standard 

deductions for 2020 are:

• $12,400 if the taxpayer is single or uses married filing separately status, 

• $24,800 if the taxpayer is married and files a joint return with spouse, and

 115 26 U.S.C. §7702B(c)(2).

116 For tax years beginning on or after January 1, 2021, the AGI threshold for deducting medical expenses will 

increase to 10% unless Congress chooses to extend the 7.5% threshold. See 26 U.S.C. §213(a) and (f).

117 26 U.S.C. §213(d)(10). 

118 U.S. House, H.R.1 – An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent 

Resolution on the Budget for Fiscal Year 2018 (115th Congress, December 2017).
Long-Term Care Insurance: Recommendations for Improvement of Regulation 46

• $18,650 if the taxpayer is a head of household.

Thus, in order to deduct LTCI premium payments under the existing rules, a taxpayer must have 

a proportionally large amount of medical expenses (to meet the 7.5% of AGI threshold) and have 

sufficient additional itemized deductions for itemizing to be tax-advantageous. As an example, a 

married couple filing jointly for the 2020 tax year that earns $100,000 in annual income may 

include medical expenses in itemized deductions only to the extent that they exceed $7,500 in 

2020. In addition, unless the couple’s total medical expenses were in the range of 32.5% of AGI, 

or $32,500, they would need additional itemizable deductions in order for itemizing to be 

economically advantageous. The increased standard deduction is more tax-advantageous than 

itemizing for many taxpayers. 

For the 2017 tax year (the latest year for which data is available), approximately 10 million tax 

returns claimed an itemized medical deduction.119 It is likely that this number will decrease for 

the 2018 tax year, given the increase in the standard deduction. The extent to which LTCI 

premiums are a component of the itemized medical deduction is not known, but it may be 

relatively uncommon. Individuals in poor health are less likely to qualify for LTCI protection 

due to medical underwriting for these policies, and individuals in good health may be unlikely to 

incur enough out-of-pocket medical expenses to exceed the 7.5% of AGI threshold, particularly 

if they have employer-provided health insurance and pay their own share of health insurance 

premiums pre-tax. 

Restrictions on Retirement Account Distributions

Distributions from qualified retirement plans (such as 401(k) and 403(b) plans and IRAs) prior to 

age 591⁄2 generally are subject to an additional 10% tax on the amount of the distribution, 

although certain exceptions apply.120 The exceptions include distributions to pay premiums for 

LTCI under two circumstances: 

i. Qualified LTCI premiums (up to the Age-Dependent Cap amount) can be paid with 

401(k), 403(b), or IRA distributions with no additional early withdrawal tax to the extent 

that, in combination with other out-of-pocket medical expenses, they exceed the 

threshold for deductible medical expenses.

121 It is not necessary to itemize deductions for 

tax return purposes to obtain this additional tax relief. However, taxpayers would still 

need relatively high total medical expenses to take advantage of this exception. 

ii. Qualified LTCI premiums (up to the Age-Dependent Cap amount), as well as other health 

insurance premiums, can be paid with IRA (but not 401(k) or 403(b)) distributions with 

no additional early withdrawal tax if the policyholder experiences a substantial period of 

 119 “Individual Income Tax Returns Complete Report 2017,” Internal Revenue Service, 91, available at: 

https://www.irs.gov/pub/irs-pdf/p1304.pdf. 

120 26 U.S.C. §72(t)(1).

121 26 U.S.C. §72(t)(2)(B). 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 47

unemployment, regardless of whether the taxpayer’s total medical expenses exceed the 

threshold for deductible medical expenses. 122 This provision can help taxpayers keep up 

with LTCI premiums when the loss of a job interrupts disposable income. 

In 2016, a majority of families at relevant ages held retirement accounts (IRAs, 401(k)s, and 

403(b)s), including 57% of those headed by someone age 35-44, 60% age 45-54, and 59% age 

55-64. Among those holding accounts, the median amounts held at these same ages were

$37,000, $83,000, and $120,000, respectively.

123 These amounts are quite low compared to 

projected retirement income needs. For example, at the federal employee Thrift Savings Plan

annuity rate, $120,000 at age 65 would provide a level annuity of $7,488 each year for life.124

Tax Treatment of LTCI Purchases in the Employment Context

The costs of employer-provided accident and health plans are excluded from employees’ gross 

income and tax-qualified LTCI qualifies as an accident and health plan for this purpose (although 

the employer’s deduction for premiums paid is limited to the Age-Dependent Cap).125 

Accordingly, employers can currently provide LTCI to employees tax-free. However, employers 

cannot currently offer LTCI as part of a cafeteria plan, which is a common vehicle for providing 

employees with benefits for which the employer does not incur additional costs. 

Cafeteria plans (often incorporating a flexible spending arrangement (FSA), discussed below) 

provide employees an opportunity to substitute a portion of their taxable cash compensation with 

one or more qualified benefits on a pre-tax basis.126 If an employee chooses to receive a 

qualified benefit under a cafeteria plan, the fact that the employee could have received cash or a 

taxable benefit instead will not make the qualified benefit taxable. Under current law, qualified 

benefits include most accident and health insurance benefits, including insurance policy 

purchases, adoption assistance, dependent care assistance, group term life insurance, and health 

savings accounts (HSA) (including the ability to use HSA funds to pay for qualified LTC 

services). However, cafeteria plans may not offer LTCI.127 

 122 Generally, the relief from the additional early withdrawal tax applies if the individual receives unemployment 

compensation for 12 consecutive weeks under a federal or state unemployment compensation law in the current year 

(or received it in the preceding year) and the relief extends to distributions for up to 60 days after employment 

resumes. A self-employed individual may be treated as meeting this requirement if the individual would have 

received unemployment compensation under federal or state law but for the fact that the individual was selfemployed. See 26 U.S.C. §72(t)(2)(D). 

123 “Survey of Consumer Finances – 2016 SCF Chartbook,” Board of Governors of the Federal Reserve System, 

October 16, 2017, 442, available at: https://www.federalreserve.gov/econres/files/BulletinCharts.pdf. The Board of 

Governors of the Federal Reserve System conducts the Survey of Consumer Finances every three years. The Board 

has not yet published the 2019 survey. 

124 Calculated at the current 1.75% interest rate assumption.

125 See 26 U.S.C. §106(a).

126 See 26 U.S.C. §125(f)(1). 

127 See 26 U.S.C. §125(f)(2). 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 48

A Health FSA may be established under an employer’s cafeteria plan, either as one of several 

components or as the sole component. Health FSAs are accounts funded each year with pre-tax 

income (i.e., income that is not subject to federal income and payroll tax) that may be used to 

pay for qualified medical expenses during the relevant year that are not reimbursable by health 

insurance or otherwise. Most common uses are to cover health insurance policy deductibles and 

co-pays, as well as qualified medical expenses that may not be covered by insurance, such as 

vision care. The annual Health FSA funding cap is indexed for inflation, and the maximum 

contribution for 2020 is $2,750. A Health FSA differs from an HSA (discussed below) in that 

HSA balances carry over in full from year to year and can earn tax-free investment income, 

whereas Health FSA annual contributions are generally “use or lose,” with the exception of a 

permissible grace period or carryover limit. An employer may either choose to allow Health 

FSAs a two and a half month grace period at the end of the plan year so that account holders can

use their remaining Health FSA balance to pay for expenses incurred during that extended 

period, or choose to allow account holders to carry over an amount equal to 20 percent of the 

maximum salary reduction contribution for any given plan year ($550 for the 2020 plan year).

Health FSA balances do not accrue interest. Under current law, insurance premium payments, 

including LTCI premiums, are not eligible expenses for Health FSAs. 

An HSA is a tax-advantaged medical savings account available to taxpayers who enroll in a 

high-deductible health plan (HDHP). The funds contributed to an HSA are not subject to federal 

income tax at the time of deposit. Annual contributions in 2020 are limited to $3,550 for an 

individual and $7,100 for a family, with HSA holders age 55 and over being allowed to 

contribute an additional $1,000 per year. Further, individuals eligible for Medicare cannot 

contribute to HSAs. Around 22 million people held an HSA-qualified HDHP in 2017.128

HSAs (in combination with an HDHP) are also available to persons who are self-employed or to 

persons whose employer does not offer a health plan, but most often are offered in conjunction 

with an employer-sponsored HDHP. 

Analysis of Tax Incentives Considered

Based on the NAIC 2017 List (Options 1, 2, 4, and 8) and stakeholder feedback, the Task Force 

considered the following additional tax incentives to encourage the purchase of LTCI:

• Allow a full federal tax deduction for LTCI premiums paid by individuals. 

• Allow increased contributions to an HSA if the HSA is used to fund LTCI premiums. 

• Create a new type of account modeled after HSAs (but without the requirement that the 

account holder have an HDHP) that could be used to fund both direct LTC expenses and 

LTCI premiums. 

 128 “Health Savings Accounts and Consumer-Directed Health Plans Grow as Valuable Financial Planning Tools,” 

America’s Health Insurance Plans, April 2018, available at: https://www.ahip.org/wpcontent/uploads/2018/04/HSA_Report_4.12.18-1.pdf. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 49

• Allow purchase of LTCI through cafeteria plans offered by employers.

• Allow purchase of LTCI through Health FSAs. 

• Allow cash value beyond a return of premium under qualified LTCI contracts.

• Allow retirement plan participants to receive a distribution from 401(k)s, 403(b)s, or 

IRAs to purchase LTCI with no additional early withdrawal tax.

Recommendation: In its analysis of these proposed incentives, the Task Force took into account 

that the Code already provides favorable income tax treatment to LTCI. The Task Force 

recognizes that the proposed incentives could have the beneficial effect of motivating individuals 

to plan their financial future and help protect their retirement savings against depletion by LTCI 

expenses. However, the proposals would likely reduce tax revenues and the amount of the 

reductions could be significant. In addition, the proposals would primarily benefit higher income 

taxpayers with higher marginal tax rates, and may not be fully effective in targeting lower- and 

middle-income families who need financial protection against LTC risks. Finally, the proposals 

would increase the complexity of the Code and could, in some cases, be difficult to implement, 

monitor, and enforce. Accordingly, the Task Force does not recommend adoption of any of the 

proposed additional tax incentives, with the exception of the proposal to eliminate the early 

withdrawal tax if funds from an IRA, 401(k), or 403(b) account are used to pay LTCI premiums. 

Federal Income Tax Deduction for LTCI Premiums 

The Code currently allows taxpayers to deduct a limited set of expenses “above the line” from 

their gross income. These deductions, which reduce AGI, are available irrespective of whether a 

taxpayer claims the standard deduction or itemizes deductions. The permitted above the line 

expense deductions are mostly business expenses or other expenses incurred for the production 

of income, but include other categories of expenses, such as IRA contributions, HSA 

contributions, and student loan interest expense deductions. The Task Force considered a 

proposal to add LTCI premiums (with or without Age-Dependent Caps) as an above the line 

deduction category. 

The argument in support of this proposal is that the current rules regarding LTCI premium 

deductions do not provide an incentive to purchase LTCI for most individual taxpayers, because 

(1) most taxpayers take the standard deduction rather than itemize, and (2) only medical 

expenses in excess of the AGI threshold (7.5%) may be deducted as an itemized deduction—a 

threshold not reached by most taxpayers who itemize deductions.

However, from a tax policy perspective, an above the line tax deduction is a very significant 

subsidy that would decrease tax revenue. Although increasing the number of U.S. persons with 

LTCI may be desirable, it is debatable whether LTCI premiums should have a privileged 

deductibility status compared to other medical expenses (which are subject to the 7.5% AGI cap) 

and other expense categories (such as the charitable contribution deduction) that cannot be 

deducted unless the taxpayer itemizes. As previously discussed, the Tax Cuts and Jobs Act
Long-Term Care Insurance: Recommendations for Improvement of Regulation 50

almost doubled the standard deduction for individual taxpayers. The standard deduction 

simplifies tax filing by not requiring taxpayers to track which of their expenses may be claimed 

as itemized deductions. A separate deduction for LTCI premiums would increase complexity

and largely benefit higher-income taxpayers. 

Increased Contributions to an HSA to Fund LTCI Premiums 

The Task Force considered a proposal to allow increased contributions to an HSA if the HSA is 

used to fund LTCI premiums. Because HSA funds may already be used to purchase LTCI (up to 

the Age-Dependent Cap amounts), this proposal would increase the overall HSA contribution 

allowed (currently capped at $3,550 for an individual and $7,100 for a family, plus an additional 

$1,000 for HSA holders age 55 and over) if the HSA is used to purchase LTCI. This proposal 

would make LTCI more affordable for persons with HSAs who are already maximizing their 

HSA contributions and could stimulate demand for private purchases of LTCI. 

However, HSA contribution limits are already high and the tax treatment for HSAs is currently 

the most generous treatment for health care expenses because it is mathematically equivalent to 

combining tax-free build-up on earnings with an above-the-line deduction for medical care. For 

individuals who use their HSAs to fund medical care a few years in the future, the tax-free buildup on earnings is relatively modest. For LTC, where the build-up can occur over decades, the 

tax-free build-up on earnings combined with tax-free contributions and withdrawals for qualified 

LTCI or LTC services already provide a substantial tax subsidy. 

Furthermore, this proposed change would be likely to primarily benefit persons with relatively 

high incomes who can afford larger HSA contributions, rather than lower- or middle-income 

taxpayers, since this proposal would affect only individuals who already contribute the 

maximum annual amount to HSAs (e.g., $7,100 yearly for a family). In addition, the proposal 

would only help individuals with HSAs, which are limited to those with HDHPs.129 Individuals 

eligible for Medicare, who might be more likely to take advantage of this new rule, cannot 

contribute to HSAs. 

New Type of Account to Fund LTC Expenses and LTCI Premiums 

The Task Force considered a proposal to create a new type of account modeled after HSAs, 

without the requirement that the account holder have a HDHP, which could be used to fund 

direct LTC expenses and LTCI premiums on a pre-tax basis (a LTC savings account (LTCSA)). 

If the HSA model were followed, distributions from an LTCSA would receive more generous tax 

treatment than distributions from other retirement savings accounts because a distribution from a 

401(k), 403(b), or IRA is generally included in income at least in part; in addition, any deduction 

for medical expenses (including qualified LTC expenses) would be subject to the 7.5% AGI 

 129 Approximately 22 million people held an HSA-qualified HDHP in 2017. America’s Health Insurance Plans, 

“Health Savings Accounts,” available at: https://www.ahip.org/wp-content/uploads/2018/04/HSA_Report_4.12.18-

1.pdf. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 51

floor for medical expenses deductions and would not be available to taxpayers who itemize. By 

contrast, a distribution from the LTCSA would be tax-free, provided it was used to pay LTC 

premiums (up to the Age-Dependent Cap) or other LTC expenses. 

This proposal could increase saving for LTC expenses generally, if the contribution limits for 

LTCSAs did not affect the limits for retirement savings accounts. Because the benefit would not 

be limited to persons with HDHPs, it could incentivize LTCI purchases by a larger number of 

taxpayers than the proposal to increase HSA contribution limits. 

However, because the new LTCSA would be available to all taxpayers, and not just taxpayers 

with HDHPs, the tax revenue impact of this proposal would be correspondingly larger. 

Availability of the LTCSA would potentially provide a large tax subsidy that likely would 

benefit mainly higher income taxpayers because individuals with high marginal tax rates are 

most likely to take advantage of this type of account. 

With respect to the use of the LTCSA to pay LTC expenses (as opposed to insurance premiums), 

there is not always a clear line between an LTC expense and post-retirement living expenses 

generally, and people cannot know in advance whether they will need LTC. It may be 

advantageous for most taxpayers to contribute more robustly to existing retirement accounts than 

to isolate a stream of savings specifically for LTC expenses when there is no guarantee that a 

particular taxpayer will incur expenses that clearly qualify as LTC expenses. In addition, if the 

LTCSA were allowed, taxpayers would have an incentive to characterize a larger amount of 

expenses as LTC expenses because LTCSA distributions would often receive more generous tax 

treatment than distributions from retirement accounts. Federal tax authorities would need to

monitor appropriate use and develop rules regarding how to treat unused LTCSA balances, if a 

taxpayer does not need LTC. 

Purchase of LTCI Under Cafeteria Plans

The Task Force considered a proposal to allow employers to add tax-qualified LTCI to the group 

of qualified benefits that employees may receive on a pre-tax basis under a cafeteria plan. Under 

this proposal, LTCI premium exclusions from income could be limited based on the current AgeDependent Caps.

Under current law, employers can provide LTCI to employees outside of a cafeteria plan,

although not very many employers do so. If employers could provide LTCI through a cafeteria 

plan, they might be more likely to offer it. Employees might be more likely to opt to purchase 

LTCI offered on a pre-tax basis under a cafeteria plan. Employers also might be able to 

negotiate more favorable product terms than an individual could obtain independently. Allowing 

the offer of LTCI on a pre-tax basis within cafeteria plans would further encourage employers to 

include information about LTC options in their employee benefits packages.

Like any tax incentive, this proposal would decrease tax revenue to the extent that additional 

employees purchased LTCI through their cafeteria plan. Higher income taxpayers may be most 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 52

likely to take advantage of this new cafeteria plan option, as they can better afford to purchase 

LTCI, whether on a pre- or post-tax basis. 

Employers can already provide LTCI to their employees on a pre-tax basis outside of cafeteria 

plans. It seems unlikely that a statutory change permitting employers to offer LTCI as a pre-tax 

option within a cafeteria plan would also cause employers to make additional contributions to the 

cafeteria plan to help fund the employees’ purchase. If so, the cost of the LTCI cafeteria plan 

offering would still come out of employee pockets (although it would be on a pre-tax basis). 

Purchase of LTCI Through Health FSAs 

The Task Force considered a proposal to add tax-qualified LTCI to the group of expenses that an 

employee can pay with Health FSA funds, subject to Age-Dependent Caps on LTCI premium 

payments. Allowing the funding of LTCI on a pre-tax basis through Health FSAs could 

encourage purchase of LTCI.

One purpose of Health FSAs is to help fund medical expenses not covered by insurance (e.g., 

deductibles and co-pays). The maximum annual contribution to Health FSAs is only $2,750 (for 

2020), and allowing Health FSA contributions to cover premiums would reduce amounts 

available to meet the types of costs that Health FSAs were intended to cover. Unless other types 

of insurance premiums were also eligible for payment from a Health FSA, the proposal would 

privilege LTCI over other types of insurance. In addition, higher income taxpayers may be most 

likely to take advantage of the option to use Health FSA contributions to fund LTCI because they 

can better afford it, even on a pre-tax basis.

Cash Value Under Qualified LTCI Contracts

Under current law, a qualified LTCI contract generally may not provide for a cash surrender 

value or other money that can be paid, assigned, pledged as collateral for a loan, or borrowed. 

As a limited exception, a qualified LTCI contract may provide for a refund that does not exceed 

the aggregate premiums paid on the death of the insured, complete surrender, or cancellation of 

the contract. Any such refund is includible in gross income to the extent that any deduction or 

exclusion was allowable with respect to the premiums paid. In addition, premium refunds and 

dividends credited while the contract is in force may be used to reduce future premiums or 

increase future benefits, but may not be paid out to the policyholder. 

The Task Force considered a proposal to allow cash value beyond a return of premium under 

qualified LTCI contracts. Cash value or cash surrender value is the amount of money the 

insurance company is obligated to pay a policyholder or beneficiary if a life insurance or annuity 

contract is terminated. Policyholders also may be able to borrow against or otherwise benefit 

from the cash value. If the Code permitted qualified LTCI to accumulate cash value, LTCI could 

be more attractive because policyholders could receive a benefit (cash value withdrawal) even if 

they did not become chronically ill. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 53

However, if a qualified LTCI contract were permitted to have cash surrender value beyond the 

limited return of premium currently allowed, it would to that extent be an investment vehicle and 

more closely resemble a type of life insurance contract than an accident and health insurance 

contract. While the Code permits earnings on life insurance and annuity contracts with cash 

value generally to accumulate tax-free, it generally does not permit policyholders to deduct 

premiums paid for life insurance or annuity contracts. Policyholders are also required to pay 

taxes on the investment component of distributions made under life insurance and annuity 

contracts (other than payment of death benefits under life insurance contracts). Congress 

imposed the current cash value restrictions on qualified LTCI in exchange for permitting LTCI to 

receive some of the more favored tax treatment provided to health insurance premium payments, 

including deductions for premium payments under some circumstances and tax-free treatment of

policy benefits when received. Allowing qualified LTCI to have substantial cash value would 

give it more of a life insurance character and undermine the rationale for the tax-favored 

treatment currently accorded to qualified LTCI. 

Receiving 401(k), 403(b), or IRA Distributions to Purchase LTCI

The Task Force considered a proposal to allow retirement plan participants to receive 

distributions from 401(k)s, 403(b)s, or IRAs to purchase LTCI with no additional early 

withdrawal tax. This could be accomplished by adding a new exception to the Code to fully 

exempt distributions from 401(k)s, 403(b)s, and IRAs used to purchase LTCI from the 10% 

additional income tax. The retirement account distributions in many cases would still be subject 

to regular income tax (depending on whether the taxpayer’s retirement account contribution was 

originally made pre-tax or post-tax), but the additional early withdrawal tax would not apply. 

The proposal could lower an obstacle to LTCI affordability (or perceived affordability) for some 

individuals with retirement savings but limited disposable income. 

In some cases, the proposal may provide little or no true economic advantage over using current 

income to pay LTCI premiums. For example, there would be no economic difference for active 

401(k) or 403(b) participants who are contributing more than needed to receive the maximum 

employer matching contributions (and to any active IRA contributor) between taking a 

distribution and alternatively redirecting some contributions to LTCI premiums. On the other 

hand, individuals who wish to contribute just enough to their 401(k) or 403(b) plan to receive the 

maximum employer matching contribution, but who also have limited funds available to pay 

LTCI premiums, might be more likely to purchase LTCI if they had the option of receiving an 

early distribution of previously-contributed funds without the additional 10% early withdrawal 

tax.

Arguments against the proposal include the concerns that too many Americans have insufficient 

retirement savings, an individual who diverts funds otherwise earmarked for retirement income 

to LTCI could erode retirement security, and the proposed exemption would not benefit the large 

minority of families without retirement accounts.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 54

Given that the Code provides exceptions to the additional 10% early withdrawal tax for the 

purchase of LTCI insurance in certain circumstances already (including as medical expenses 

above the itemized medical deduction floor regardless of whether an itemized deduction is 

claimed, as well as health insurance and LTCI premiums for unemployed individuals),130 the 

Task Force recommends that the Code be amended to allow retirement plan participants to 

receive distributions from 401(k)s, 403(b)s, or IRAs to purchase LTCI with no early withdrawal 

tax. This change may make it easier for some individuals with retirement savings, but limited 

disposable income, to pay LTCI premiums, and the individuals most likely to take advantage of 

the early distribution option may be individuals in their mid-to-late 50s when LTCI premiums 

are becoming more expensive, but the individuals are not yet age-eligible to take ordinary 

retirement account distributions. This recommendation will likely have a minimal effect on tax 

revenues as taxpayers most likely to purchase long-term care insurance could avoid the penalty 

by reducing contributions to these accounts, reducing other consumption, or borrowing. 

 130 26 U.S.C. §72(t)(2)(B) and (D).
Long-Term Care Insurance: Recommendations for Improvement of Regulation 55

Alternative Financing Approaches

This section briefly reviews proposals for public insurance approaches to reform in the United 

States organized around the structure of the benefit and how it protects individuals from the 

financial risk of needing LTC. Most of these approaches focus on either front-end insurance 

(coverage of initial LTC costs for mostly short durations or limited scope) or back-end, or 

catastrophic, insurance (coverage beyond a specified level of need or cost for longer durations). 

Very few options provide comprehensive coverage of the entire spectrum of LTC risk. In 

addition, this review is limited to proposals and approaches that include detailed descriptions of 

major program features such as program eligibility, scope of coverage, and, most importantly, 

financing and cost estimates. The Task Force has not attempted to review in detail conceptual 

proposals and ideas that are not supported by specific financing and cost estimates.

Front-End Benefit Options

Options that address initial LTC costs are frequently referred to as front-end coverage 

benefits.131 These options are also typically limited in their duration of coverage. Option 9

under the NAIC 2017 List is a good example of a type of front-end benefit. Specifically, this 

option recommends that policymakers:

Explore adding a home care benefit to Medicare or Medicare Supplement and/or 

Medicare Advantage plans. Medicare provides extensive acute care coverage but more 

limited post-acute coverage (home health and skilled nursing facility care). Medicare 

Advantage and Medigap plans fill the gaps in Medicare coverage. But most LTC 

services are not covered by Medicare, leaving a considerable gap in coverage for postacute care... There has been discussion of adding either something akin to a long-term 

care benefit or, less extensive, new home and community-based benefits either to 

Medicare (which would affect supplemental carriers) or to Medicare Advantage and/or 

Medigap plans.

Establishing a home care benefit, a type of front-end insurance option that addresses initial needs

for LTC services, has been an objective of policymakers for decades. For example, the 1993 

Health Security Act included a state-run home care program for persons with disabilities that 

would be funded largely through federal grants. Rather than establishing a new, completely 

independent program, a 2016 report132 recommended adding a home-care benefit to Medicare or,

like Option 9, including it as part of Medicare Supplement Insurance (such as Medigap) policies 

or Medicare Advantage (MA).

 131 Melissa M. Favreault, Howard Gleckman, and Richard W. Johnson, “Financing Long-Term Services and 

Supports: Options Reflect Trade-Offs for Older Americans and Federal Spending,” Health Affairs 34, no. 12 

(December 2015): 2181–91, available at: https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2015.1226. 

132 Karen Davis, Cathy Schoen, and Amber Willink, “Medicare Help At Home,” Health Affairs, April 2016, 

available at: https://www.healthaffairs.org/do/10.1377/hblog20160413.054429/full/. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 56

The home-care benefit proposal would pay for 20 hours per week of home care and other 

services for Medicare beneficiaries with two or more limitations in ADL or severe cognitive 

impairment, a benefit trigger similar to that for tax-qualified LTCI policies. Like Medicare 

Supplement Insurance, people turning age 65 who are eligible for Medicare would have the 

option to enroll in the program without medical underwriting. The home care benefit would be 

financed through a combination of co-insurance varying by income, beneficiary premiums, and a 

payroll tax. Beneficiaries would have a co-pay requirement ranging from 5% of the cost of 

service for low-income beneficiaries to 50% for those with income greater than 400 percent of 

the federal poverty level. The 2016 report estimated that a monthly premium of $35 and a 

payroll tax of 0.35% paid by both employer and worker would cover the public costs of the 

program under specific assumptions.133

One of the policy options explored by the Bipartisan Policy Center in their 2017 report is the 

provision of a limited home care benefit through Medigap or MA plans.134 The basic structure 

of the benefit is similar to the home-care benefit proposal with some significant differences. For 

example, the amount of the daily benefit available to pay for services is much higher, $100 per 

day, but is limited to one year. In addition, enrollees are not eligible to receive a benefit until 90 

days after a documented need for LTC. Most importantly, private insurers rather than the 

government provide the benefit and the program is financed exclusively through premiums paid 

after voluntary enrollment in the program. Assuming a discount rate of 3% and a loss ratio of 

85%, estimated monthly premium costs range from $55 if all eligible beneficiaries enroll at age 

65 to approximately $200 if only 5% enroll at that age. Although the Bipartisan Policy Center

does not specify the participation rate, it estimates that reducing the benefit to $75 per day and 

increasing the elimination period to 180 days could result in monthly premiums of $35 to $40.

Washington State’s Long-Term Services and Supports Trust Program

In 2019, Washington State passed a public LTCI program, the Long-Term Services and Supports

Trust Program.135 Beginning in 2025, the program will pay, per individual, up to $36,500 of 

LTSS received from approved providers. The list of services that can be reimbursed is quite 

broad and includes services and equipment provided in the community (e.g., in-home personal 

care, adaptive equipment and technology, home modifications, respite for family caregivers, 

home delivered meals, transportation, etc.) as well as those provided in assisted living and 

nursing facilities. The program will be funded through a mandatory payroll tax of 0.58% on 

 133 These estimates assume that home care services cost approximately $20 per hour ($15 per hour plus 33% for 

fringe benefits) and that 75% of those eligible for the home care benefit who are not already on Medicaid would 

participate each year. Benefits would, therefore, cost up to $400 per week or $20,800 per year.

134 “Financing Long-Term Services and Support: Seeking Bipartisan Solutions in Politically Challenging Times,” 

Bipartisan Policy Center, July 2017, 22-24, available at: https://bipartisanpolicy.org/wpcontent/uploads/2019/03/BPC-Health-Financing-Long-Term-Services-and-Supports.pdf. 

135 Washington State Legislature, Title 50B Long-Term Care – Chapter 50B.04 RCW: Long-Term Services and 

Supports Trust Program (Olympia: 2019).
Long-Term Care Insurance: Recommendations for Improvement of Regulation 57

employees. Self-employed workers may opt into the program, while persons with LTCI could 

choose not to participate. Payroll tax withholding is scheduled to begin in 2022. 

In order to be a qualified program participant, an individual must have paid the payroll tax for 

ten years (without interruption for five consecutive years) or three years within the last six, and 

worked at least 500 hours during each of those years. Once qualified, an individual is eligible to 

receive a benefit if he or she is 18 years or older, was not disabled before the age of 18, is a 

Washington State resident, and requires assistance with at least three ADLs. Because the 

legislation did not identify specific ADLs, eligibility criteria could be more or less restrictive 

than those for tax-qualified LTCI. The lack of consistency between the two sets of eligibility 

criteria will likely create a barrier to the development of private insurance that supplements the 

benefits of the new program.

In November 2019, a nonbinding advisory measure was included on the state’s general election 

ballot and voters voted against the idea of paying a new tax on wages to fund the program. A 

media representative for the Washington State Office of the Insurance Commissioner said the 

vote was an advisory measure that would not affect the enacted legislation.136

Medicare Advantage

The Bipartisan Budget Act of 2018 amended Section 1852(a) of the Social Security Act to 

expand the types of supplemental benefits that may be offered by MA plans to chronically ill 

enrollees.137 These benefits, referred to as Special Supplemental Benefits for the Chronically Ill 

(SSBCI), include supplemental benefits that are not primarily health-related and may be offered 

non-uniformly to eligible chronically ill enrollees. The purpose of the new category of 

supplemental benefits is to enable MA plans to better tailor benefit offerings, address gaps in 

care, and improve health outcomes for the chronically ill population.

As a result of these changes, beginning in 2020 many MA plans are allowed to cover certain 

“non-primarily health related” items or services as a supplemental benefit for certain 

beneficiaries. This includes adult day health care, home based palliative care, caregiver support, 

in-home support services, transportation, and general supports for living, food, and other 

expenses.138 In general, MA organizations have broad discretion in developing items and 

services they may offer as SSBCI, if the item or service has a reasonable expectation of 

improving or maintaining the overall health or overall function of the chronically ill enrollee. 

 136 Allison Bell, “Wash. State Continues Public LTCI Effort, in Spite of Ballot Measure Results,” ThinkAdvisor, 

November 2019, available at: https://www.thinkadvisor.com/2019/11/26/wash-state-continues-public-ltci-effort-inspite-of-ballot-measure-results/. 

137 U.S. House, H.R. 1892 – Bipartisan Budget Act of 2018 (115th Congress, February 2018).

138 “Implementing Supplemental Benefits for Chronically Ill Enrollees,” Centers for Medicare & Medicaid Services, 

April 24, 2019, available at: https://www.cms.gov/Medicare/HealthPlans/HealthPlansGenInfo/Downloads/Supplemental_Benefits_Chronically_Ill_HPMS_042419.pdf. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 58

Furthermore, MA organizations have broad discretion in determining what may be considered “a 

reasonable expectation” when choosing to offer specific items and services as SSBCI. 

While the 2018 legislation provides increased flexibility to MA plans, it does not change the 

payment structure used to finance supplemental benefits. Medicare pays MA plans a capitated 

amount to provide all Medicare Part A and B benefits. Plans submit bids every year in each 

county of operation and each bid is compared to a payment area’s benchmark, which is the 

maximum amount that Medicare will pay MA plans in that area. CMS also risk adjusts the 

benchmark base rate payments for each enrollee to account for various demographic and health 

status differences. If a plan bids below the benchmark, the plan and Medicare split the difference 

(with the plan’s share known as the “rebate”) between the bid and the benchmark. The rebate 

must be used to lower out-of-pocket costs, provide supplemental benefits, or both. If a plan bids 

above the benchmark, enrollees pay the difference between the bid and the benchmark in the 

form of a monthly premium in addition to the Part B premium.

139

Back-End (Catastrophic) Options

Back-end, or catastrophic, coverage options mitigate the risk of long durations of LTC and 

associated high costs. This approach addresses the risk of an unlikely, but potentially very costly 

and financially ruinous, event. An advantage to focusing on the tail of the risk distribution is that 

the cost of the insurance should be lower than other more comprehensive approaches. Several 

advocacy and non-partisan organizations have supported, at least in principle, the development 

of a catastrophic coverage option, and a 2018 paper proposed and modeled a detailed 

catastrophic insurance option.140 The latter effort is notable because it is one of the few 

catastrophic reform efforts to estimate the cost of the program and explore distributional impacts.

The authors of the 2018 paper maintained that a public catastrophic insurance option could 

provide a platform for private insurers to offer supplemental policies that in combination would 

provide more comprehensive coverage. Their proposed program is structured around a lifetime 

$110 per day cash benefit that would be available once enrollees had a demonstrated need for 

services beyond a specified duration. The 2018 paper referred to this duration as an “income-

 139 “Medicare Advantage,” Kaiser Family Foundation, last modified June 2019, available at: 

https://www.kff.org/medicare/fact-sheet/medicare-advantage/. 

140 See, e.g., Treasury, “Public Comments,” America’s Health Insurance Plans and American Council of Life 

Insurers; Bipartisan Policy Center, “Financing Long-Term Services and Support;” Treasury, “Public Comments,” 

California Health Advocates; Marc Cohen, Melissa Favreault, and Judith Feder, “A New Public-Private Partnership: 

Catastrophic Public and Front-End Private LTC Insurance,” LeadingAge LTSS Center @UMass Boston, Urban 

Institute, and Office of the Assistant Secretary for Planning and Evaluation, last modified January 2018, available at:

https://www.urban.org/research/publication/new-public-private-partnership-catastrophic-public-and-front-endprivate-ltc-insurance; “A Consensus Framework for Long-Term Care Financing Reform,” Convergence Center for

Policy Resolution, last modified February 2016, available at: https://www.convergencepolicy.org/wpcontent/uploads/2016/02/LTCFC-FINAL-REPORT-Feb-2016.pdf; U.S. Senate, Commission on Long-Term Care: 

Report to Congress (September 2013), available at: https://www.govinfo.gov/content/pkg/GPOLTCCOMMISSION/pdf/GPO-LTCCOMMISSION.pdf. 
Long-Term Care Insurance: Recommendations for Improvement of Regulation 59

related waiting period” ranging from one to four years depending on an enrollee’s lifetime 

income.141 The waiting period would begin once an enrollee met the same criteria for LTC

needs found in tax-qualified LTCI policies, i.e., need for assistance with two or more ADLs or 

severe cognitive impairment. A surcharge on the Medicare payroll tax paid by workers age 40 

and older would finance the benefit. The program would be phased in over ten years and 

enrollees would be eligible for benefit after having paid the requisite payroll tax for 40 quarters.

Assuming an average waiting period of 2.2 years, the 2018 paper estimated that the program 

could be funded with a payroll tax surcharge of 1%. Approximately one-third of enrollees would 

eventually receive benefits, and payouts would cover 31% of all LTC costs. Compared to the 

current system, the new program would lead to an increase in overall LTC spending, but family 

out-of-pocket costs would decline by 15% and spending for Medicaid would be 25% lower, 

according to the authors.

Comprehensive Options

Recent LTC reform efforts have generally not focused on covering the full risk and cost of LTC

services. The few full risk options have largely been conceptual and lack critical program 

details, such as specific financing mechanisms and cost estimates. For example, the 2013 Report 

to Congress of the Commission on Long-Term Care outlined a comprehensive Medicare benefit 

for LTSS as a model of what can achieved through social insurance.142 Enrollees would be 

eligible for benefits under roughly the same criteria as those for tax-qualified private LTCI, and 

an increase in the Medicare payroll tax and premiums would finance the program. However, this 

report discussed neither the scope of benefits nor the requisite tax rates and premium amounts. 

In fact, the Commission did not agree on a financing mechanism for any of its proposals and thus

made no formal recommendation.

Recommendation: The Task Force does not recommend pursuing any particular alternative 

financing approach at this time. Policymakers and stakeholders should continue to develop, 

monitor, and analyze LTC and LTCI reform proposals—including those discussed in this 

report—to better understand the advantages and disadvantages of specific options, tradeoffs, 

program costs, and distributional impacts.

 141 The specific waiting period schedule is one year for enrollees with lifetime income in the lowest two income 

quintiles, two years if one’s lifetime income was in the third highest quintile, and three and four years if lifetime 

income was in the two highest quintiles.

142 U.S. Senate, Commission on Long-Term Care.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 60

Appendices

Appendix A: Participants in the Engagement Process

Actuarial Organizations and Consultants

American Academy of Actuaries Oliver Wyman

Milliman Society of Actuaries

Consumer Advocates

AARP California Health Advocates

Alzheimer's Association Center for Economic Justice

Government-Related Entities

National Association of Insurance Commissioners

Industry and Trade Groups

America’s Health Insurance Plans Lincoln National

American Council of Life Insurers National Association of Insurance and 

Financial Advisors

Davis and Harmon New York Life Insurance Company

Genworth Financial O’Leary Marketing Associates, LLC

The Golleher Group, LLC Transamerica Life Insurance Co.

John Hancock

Regulators

Alaska Department of Commerce, 

Community, and Economic Development 

Division of Insurance

Maryland Insurance Administration

Colorado Department of Regulatory Agencies 

Division of Insurance Nebraska Department of Insurance

Connecticut Insurance Department Pennsylvania Insurance Department

Think Tanks

The LeadingAge LTSS Center @UMass 

Boston Urban Institute
Long-Term Care Insurance: Recommendations for Improvement of Regulation 61

Appendix B: Summary of Analysis and Recommendations

Analysis/Recommendation

Implementation

Federal State Other 

Stakeholders

Innovation and Product Development

Innovation and product development have the 

potential to significantly strengthen the private 

LTCI market and better address consumers’ 

needs for LTC. The Task Force recommends 

that federal and state policymakers and 

regulators foster a regulatory environment that 

encourages flexibility, experimentation, and 

innovation in policy design to improve 

consumer choice and access to benefits, while 

appropriately protecting the rights of consumers 

and the solvency of insurers. 

Treasury, 

IRS, HHS, 

DOL

Insurance 

Regulators, 

NAIC

Policymakers could benefit from analysis of the 

impact of combination products on the market 

for LTC risk protection. The Task Force 

recommends that actuaries, academics, and 

other stakeholders explore such an analysis with 

coordination by FIO. 

Treasury, 

FIO

Actuaries, 

Academics, 

Policy Experts 

The Task Force recommends that federal 

policymakers work with their state counterparts 

and with private sector stakeholders to evaluate 

and monitor the market for limited LTCI, 

including potential impacts on the risk pool for 

longer-term products and on Medicaid. 

Treasury, 

IRS, HHS, 

CMS

Insurance 

Regulators, 

NAIC

Industry,

Consumer 

Groups, Policy 

Experts

The Task Force recommends that state 

legislators and insurance regulators take steps to 

better streamline and standardize the regulation 

of the limited LTCI market.

Legislators, 

Insurance 

Regulators

The Task Force considered two policy 

proposals for LTCI group products, both 

involving the fiduciary provisions of ERISA. 

The Task Force does not recommend either 

proposal.
Long-Term Care Insurance: Recommendations for Improvement of Regulation 62

Analysis/Recommendation

Implementation

Federal State Other 

Stakeholders

Supporting the ability of individuals who need 

LTC to remain in their homes could benefit 

both consumers and insurers. The Task Force 

encourages industry, federal policymakers, and 

other experts, in consultation with consumer 

representatives, to identify and assess evidence 

of cost-effective pre-claim interventions under 

LTCI policies. Depending on the results of the 

analysis, Congress could consider amending the 

Code to permit payment of evidence-based, 

cost-effective incidental benefits under a taxqualified LTCI contract prior to the insured 

becoming chronically ill, subject to a monetary 

cap and other conditions set by regulation.

Congress, 

Treasury, 

IRS

Industry, 

Policy Experts, 

Consumer 

Groups

Regulatory Efficiency and Alignment

Inflation protection requirements under HIPAA 

and state insurance laws should be revised to 

improve the efficiency and effectiveness of 

regulation. To both address outdated 

requirements and provide flexibility to adapt 

inflation protection to evolving economic 

conditions, the Task Force recommends that 

Congress amend the Code to authorize Treasury

to set inflation protections for tax-qualified 

LTCI. 

Congress, 

Treasury, 

IRS

Insurance 

Regulators, 

NAIC

The Task Force recommends that state 

policymakers—legislators, Medicaid directors, 

insurance regulators, and the NAIC—improve 

regulatory efficiency and effectiveness by 

harmonizing and streamlining inflation 

protection requirements under the Partnership 

program. Alternatively, Congress could 

delegate to HHS the authority to set Partnership 

program inflation protection requirements. 

Congress, 

HHS

Legislators, 

Medicaid 

Directors, 

Insurance 

Regulators, 

NAIC
Long-Term Care Insurance: Recommendations for Improvement of Regulation 63

Analysis/Recommendation

Implementation

Federal State Other 

Stakeholders

HIPAA and the DRA create regulatory 

inefficiency by incorporating two outdated and 

conflicting versions of NAIC models with 

respect to consumer protections for LTCI. The 

Task Force recommends that Congress consider 

options to address this regulatory inefficiency. 

One option is to empower Treasury, in 

consultation with HHS, to set consumer 

protection standards using one version of the 

LTCI Model Act and Model Regulation for 

purposes of both tax qualification under HIPAA 

and Partnership eligibility under the DRA, with 

flexibility to update the standards periodically 

(e.g., every ten years). 

Congress, 

Treasury, 

HHS

The Task Force recommends that the NAIC and 

the states maintain their focus on LTCI and 

work together in 2020 to develop a consistent 

national approach to regulatory reviews of 

LTCI rate increase requests. The Task Force 

also recommends that FIO continue to monitor 

and report on this issue.

Treasury, 

FIO

NAIC, 

Insurance 

Regulators

Industry, 

Consumer 

Groups

Financial Literacy and Education

The Task Force recommends that Treasury, 

HHS, DOL, and other agencies, working 

through the FLEC, assess federal education 

resources on LTC needs and planning, and 

modify, update, and supplement these resources 

as needed. As part of its efforts to improve 

consumers’ capability in retirement planning, 

the FLEC should clearly integrate LTC 

planning into retirement education topics.

Treasury, 

HHS, 

DOL, 

FLEC
Long-Term Care Insurance: Recommendations for Improvement of Regulation 64

Analysis/Recommendation

Implementation

Federal State Other 

Stakeholders

Tax Incentives

The Task Force considered multiple proposals 

to amend federal tax laws and regulations to 

encourage the purchase of LTCI. The Task 

Force does not recommend adoption of any of 

the proposed additional tax incentives, with the 

exception of the proposal to eliminate the 

additional tax on early withdrawal of funds 

from an IRA, 401(k), or 403(b) account that are 

used to pay LTCI premiums. 

Congress, 

Treasury, 

IRS

Alternative Financing Approaches

The Task Force conducted a high-level review 

of select public insurance approaches to 

financing LTC. The Task Force does not 

recommend pursuing any particular alternative 

financing approach at this time. Policymakers 

and other stakeholders should continue to 

develop, monitor, and analyze LTC and LTCI 

reform proposals to better understand the 

advantages and disadvantages of specific 

options, tradeoffs, program costs, and 

distributional impacts. 

Treasury, 

HHS, 

CMS

Legislators, 

Medicaid 

Directors, 

Insurance 

Regulators