U.S. patent application number 13/437654 was filed with the patent office on 2013-05-23 for flexible varying premium option for long term care insurance and critical illness insurance.
The applicant listed for this patent is Robert Yee. Invention is credited to Robert Yee.
Application Number | 20130132123 13/437654 |
Document ID | / |
Family ID | 45877436 |
Filed Date | 2013-05-23 |
United States Patent
Application |
20130132123 |
Kind Code |
A1 |
Yee; Robert |
May 23, 2013 |
Flexible Varying Premium Option for Long Term Care Insurance and
Critical Illness Insurance
Abstract
Flexible, varying long term care insurance programs are
determined. Input variables such as issue age, targeted present
value and year-to-year premium relationship are supplied, as are
some members of a set of process variables. A non-supplied process
variable is calculated based on the input variables and the
supplied process variables. An insurance program based on the
supplied variables and the calculated process variable is then
determined, such that the premium schedule increases (or
alternatively, decreases) over time to at least one leveling point,
at which premiums become level.
Inventors: |
Yee; Robert; (San Francisco,
CA) |
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Applicant: |
Name |
City |
State |
Country |
Type |
Yee; Robert |
San Francisco |
CA |
US |
|
|
Family ID: |
45877436 |
Appl. No.: |
13/437654 |
Filed: |
April 2, 2012 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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12346602 |
Dec 30, 2008 |
8150715 |
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13437654 |
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11291554 |
Nov 30, 2005 |
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12346602 |
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60665211 |
Mar 24, 2005 |
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Current U.S.
Class: |
705/4 |
Current CPC
Class: |
G06Q 10/10 20130101;
G06Q 40/08 20130101 |
Class at
Publication: |
705/4 |
International
Class: |
G06Q 40/08 20120101
G06Q040/08 |
Claims
1. A computer implemented method for calculating a flexible,
varying insurance program, the method comprising the steps of:
receiving, by a computer, a plurality of input variables,
comprising at least an issue age, a targeted present value and a
year-to-year premium relationship; receiving, by a computer, a
plurality of process variables; calculating, by a computer, a
non-received process variable, based on received variables; and
calculating, by a computer, a set of benefits and a corresponding
charge schedule based on the received variables and the calculated
process variable, such that the calculated charge schedule varies
over time but becomes level at at least one specific point,
according to the year-to-year premium relationship.
2. The method of claim 1 further comprising: calculating, by a
computer, a charge schedule comprising at least one period during
which premiums incrementally raise to a leveling point, the
calculated set of benefits and the calculated charge schedule being
informed by prefunding during the at least one period during which
premiums incrementally raise to the leveling point.
3. The method of claim 1 further comprising: calculating, by a
computer, a charge schedule with comprising multiple leveling
points.
4. The method of claim 1 further comprising: calculating, by a
computer, a charge schedule with at least one period during which
premiums decrease to a leveling point.
5. The method of claim 1 further comprising: calculating, by a
computer, a charge schedule wherein premiums incrementally raise to
a single leveling point, at which the premiums become level for the
remainder of the calculated charge schedule, the calculated set of
benefits and the calculated charge schedule being informed by
prefunding during the period during which premiums incrementally
raise to the leveling point.
6. The method of claim 5 further comprising: receiving, by a
computer, three process variables from a group consisting of: a set
of policy features; an initial premium amount; a leveling point;
and an ultimate level premium; and calculating, by a computer, the
fourth process variable of the group based on received input
variables and the three received process variables.
7. The method of claim 6 wherein: the set of policy features
specifies a provision for inflation protection.
8. The method of claim 6 further comprising: calculating, by a
computer, the set of benefits and the charge schedule such that
benefits and premiums can be frozen at any point in the calculated
charge schedule.
9. The method of claim 1 wherein: the varying insurance program
further comprises a varying critical illness insurance program.
10. The method of claim 1 wherein: the varying insurance program
further comprises a varying long term care insurance program.
11. At least one non-transitory computer readable storing a
computer program product for calculating a flexible, varying
insurance program, the computer program product comprising: program
code for receiving, by a computer, a plurality of input variables,
comprising at least an issue age, a targeted present value and a
year-to-year premium relationship; program code for receiving, by a
computer, a plurality of process variables; program code for
calculating, by a computer, a non-received process variable, based
on received variables; and program code for calculating, by a
computer, a set of benefits and a corresponding charge schedule
based on the received variables and the calculated process
variable, such that the calculated charge schedule varies over time
but becomes level at at least one specific point, according to the
year-to-year premium relationship.
12. The computer program product of claim 11 further comprising:
program code for calculating, by a computer, a charge schedule
comprising at least one period during which premiums incrementally
raise to a leveling point, the calculated set of benefits and the
calculated charge schedule being informed by prefunding during the
at least one period during which premiums incrementally raise to
the leveling point.
13. The computer program product of claim 11 further comprising:
program code for calculating, by a computer, a charge schedule with
comprising multiple leveling points.
14. The computer program product of claim 11 further comprising:
program code for calculating, by a computer, a charge schedule with
at least one period during which premiums decrease to a leveling
point.
15. The computer program product of claim 11 further comprising:
program code for calculating, by a computer, a charge schedule
wherein premiums incrementally raise to a single leveling point, at
which the premiums become level for the remainder of the calculated
charge schedule, the calculated set of benefits and the calculated
charge schedule being informed by prefunding during the period
during which premiums incrementally raise to the leveling
point.
16. The computer program product of claim 15 further comprising:
program code for receiving, by a computer, three process variables
from a group consisting of: a set of policy features; an initial
premium amount; a leveling point; and an ultimate level premium;
and program code for calculating, by a computer, the fourth process
variable of the group based on received input variables and the
three received process variables.
17. The computer program product of claim 16 wherein: the set of
policy features specifies a provision for inflation protection.
18. The computer program product of claim 16 further comprising:
program code for calculating, by a computer, the set of benefits
and the charge schedule such that benefits and premiums can be
frozen at any point in the calculated charge schedule.
19. The computer program product of claim 11 wherein: the varying
insurance program further comprises a varying critical illness
insurance program.
20. The computer program product of claim 11 wherein: the varying
insurance program further comprises a varying long term care
insurance program.
Description
PRIORITY CLAIM
[0001] This application is a continuation of commonly assigned,
co-pending U.S. patent application Ser. No. 12/346,602, filed Dec.
30, 2008, entitled "Flexible Varying Premium Option for Combination
Products Including Long Term Care Insurance," the entirety of which
is hereby incorporated by reference (the "FIPO for Combination
Products Application"). The FIPO for Combination Products
application is a continuation in part of commonly assigned,
co-pending U.S. patent application Ser. No. 11/291,554, filed Nov.
30, 2005, entitled "Flexible Varying Premium Option for Long Term
Care Insurance," the entirety of which is hereby incorporated by
reference (the "FIPO for LTCI Application"). The FIPO for LTCI
Application claims the benefit under 35 U.S.C. .sctn.119(e) of U.S.
Provisional Patent Application Ser. No. 60/665,211, filed Mar. 24,
2005, entitled "Long Term Care Insurance, A New Premium Paradigm:
Increasing Premiums with Cap at Later Ages," the entirety of which
is incorporated herein by reference.
TECHNICAL FIELD
[0002] This invention pertains generally to calculating insurance
programs, and more specifically to methodology for providing
flexible increasing premium options for long term care insurance
policies.
BACKGROUND
[0003] Long-Term Care Insurance (LTCI) policies cover services
including nursing home stays, assisted living facility stays, home
health care, adult day care and personal care services. Subject to
benefit eligibility requirements, policies typically reimburse
actual long-term care expenses up to a specified daily maximum for
a total amount up to a specified lifetime maximum, with indemnity
and disability benefit payment plans also available.
[0004] LTCI policies typically have premiums payable for life and
cover the risk and cost of long-term care services. While there are
policies that have a limited premium-paying period, such as ten
years or to age sixty-five, the vast majority of policies (more
than 98%) are payable for life based on the issue age of the
insured person. Since the likelihood of using long-term care
services increases with advancing age, it would require
ever-increasing premiums if paid based on attained age. The reality
is that most insureds would be unable to afford this increasing
cost. Consequently, a level premium structure that is higher for
each older issue age of the insured is typically utilized to
address this cost problem. This level premium structure provides
for significant prefunding of the greater cost of claims as people
age.
[0005] In recent years, the average issue age in the individual
LTCI market has dropped from over age sixty-five to under age
sixty. The average time from issue to claim is over ten years. LTCI
has evolved from a means to protect assets of the elderly to a
retirement planning consideration for pre-retirees. Since costs of
long-term care services rise over time due to inflation, it is
common and advisable for pre-retirees to purchase policies that
allow the benefits to keep pace with this inflation. Otherwise, the
policies would reimburse a progressively smaller portion of
long-term care expenses.
[0006] Medicare provides limited coverage for long-term care
expenses for people over age sixty-five. It generally pays for
rehabilitative home health care and a limited portion of costs
during the first 100 days in a nursing home. Medicaid provides
broader coverage but only for the indigent. Private LTCI can
potentially serve as a long-term care financing source for a
significant proportion of the population. However, a policy with
adequate coverage is fairly expensive. For example, the typical
annual premium for an insured at issue age 50 is over $1,200.
[0007] A delay in purchase will result in even higher premiums
later. This is due to the increase in premiums by issue age and the
rising cost of care due to inflation. As well, the health status of
the purchaser might have worsened, resulting in a rejection of
coverage by the insurer.
[0008] Attempts to reduce the otherwise high premium costs are
available in the form of a number of policy options. A policy
without a provision for annual inflation increases may contain an
option that permits periodic future purchases of additional
coverage without evidence of insurability. The amounts of
additional coverage are usually tied to the Consumer Price Index or
set at a flat percentage, such as 5%. The level premiums at the
attained ages of the purchases will apply to the additional
coverage. An inflation variation would allow the premiums for the
subsequent inflation increases to be based on the original issue
age, but at a higher initial level than the corresponding issue age
level premium without this option. Another option provides 5%
annual increases in both the premiums and the benefits. All these
options have no limitation on future premium increases. In later
years when adequate coverage becomes critical, the premiums
required can be prohibitively expensive.
[0009] The expected claims in the early policy years for a
particular policy are substantially less than the level premium and
the reverse is true in later years. This accounts for the
pre-funding aspect in LTCI policies. However, the policy has no
cash value. The insured would have paid premiums significantly in
excess of the costs of coverage if the policy were lapsed during
the early years.
[0010] Due to the low frequency of claims, few insurers have
credible insured experience to determine the premiums accurately.
Insurers are subject to long-tailed risks in claim, mortality,
policy lapse, investment and expense experience. In general,
insurers' experience has been unfavorable as evidenced by rate
increases by a number of insurers on in-force policies as well as
new business. For these reasons, product innovation has been
progressing cautiously.
[0011] What is needed are methods for calculating LTCI insurance
programs that are both profitable to insurers and affordable to
insured parties. Also, the insurance programs should be flexible in
meeting consumer's financial requirements at various stages of
life.
SUMMARY OF INVENTION
[0012] Methods, computer program products and computer systems
calculate flexible, varying long term care insurance programs.
Input variables such as issue age, targeted present value and
year-to-year premium relationship are supplied, as are some members
of a set of process variables. A non-supplied process variable is
calculated based on the input variables and the supplied process
variables. In one embodiment, three of the following four process
variables are supplied: a set of policy features, an initial
premium amount, a leveling point and an ultimate level premium. In
that embodiment, the fourth process variable is then calculated
based upon the other three and the input variables. An insurance
program based on the supplied variables and the calculated process
variable is then determined, such that the corresponding premium
schedule increases (or alternatively, decreases) over time to at
least one leveling point, at which premiums become level. The
calculated program is intended to meet the present and future needs
of the buyer, and yet still hit the target present value so that it
is profitable to the seller. Leveling points can be dates at which
the buyer expects a decrease (or increase) in disposable income,
such as retirement, payoff of loans, children entering or
graduating from college, etc.
[0013] The features and advantages described in this summary and in
the following detailed description are not all-inclusive, and
particularly, many additional features and advantages will be
apparent to one of ordinary skill in the relevant art in view of
the drawing, specification, and claims hereof. Moreover, it should
be noted that the language used in the specification has been
principally selected for readability and instructional purposes,
and may not have been selected to delineate or circumscribe the
inventive subject matter, resort to the claims being necessary to
determine such inventive subject matter.
BRIEF DESCRIPTION OF THE DRAWINGS
[0014] FIG. 1 is a block diagram illustrating determining an LTCI
premium schedule with an increasing pattern, according to some
embodiments of the present invention.
[0015] FIG. 2 is block diagram illustrating a process using a
plurality of variables to calculate an LTCI insurance program,
according to some embodiments of the present invention.
[0016] FIG. 3 is a diagram illustrating the relative degree of
pre-funding for a schedule calculated according to an embodiment of
the present invention and a level premium schedule.
[0017] FIG. 4A is a graph illustrating two level premium policies,
with and without inflation protection, assuming a 5% annual
inflation rate.
[0018] FIG. 4B is a graph illustrating how both premiums and
benefits can be effectively aligned in terms of real dollars,
according to an embodiment of the present invention.
[0019] The Figures depict embodiments of the present invention for
purposes of illustration only. One skilled in the art will readily
recognize from the following discussion that alternative
embodiments of the structures and methods illustrated herein may be
employed without departing from the principles of the invention
described herein.
DETAILED DESCRIPTION
[0020] FIG. 1 illustrates a high level overview of determining an
LTCI premium schedule 100 with an increasing pattern according to
one embodiment of the present invention. In the embodiment
illustrated in FIG. 1, the schedule begins with an initial premium
101 at the first policy year and uses calculated, incremental
pre-funding to increase to a policy anniversary 103 (or other
point) at, for example, a pre-determined attained age or policy
duration, at which point the premium becomes level 105. The level
premium 105 remains in effect from that policy anniversary 103 and
thereafter. Through the use of incremental pre-funding early on,
the schedule can be leveled at the desired 103 point even though
the real cost of the policy benefits increase as the insured party
ages.
[0021] Premiums will generally become level 105 when the insured
party attains an age near normal retirement, after which the
insured will be on a relatively fixed income. However, in other
embodiments of the present invention, other ages as well as non-age
based events can be used to reform the schedule 100 based on the
needs of the insured or group. Any anticipated future event of the
buyer can be met through the use of different premium schedules
100, impacting the timing and amount of pre-funding. For example,
the rate of increase can be set to incrementally raise at the time
of anticipated events which will raise the buyers level of
disposable income (e.g., children graduate from college, home
mortgage is paid off), or level off (or, alternatively, decrease)
in accordance with income lowering events, such as retirement,
children entering college, etc. Specific premium schedules 100 can
be set by the insurers according to various embodiments of the
present invention in order to address the needs of various segment
of the market. The schedule 100 can range from a simple schedule
100 for the group market that, for example, increases every three
years by attained age until age 65 to a more complicated schedule
100 that is customized to an individual applicant in the individual
market.
[0022] Schedules 100 calculated according to the present invention
comprise an alternative to the current issue age level premium
pattern. Such schedules 100 do not affect the underlying policy
benefits. Schedules calculated according to the present invention
lower the premiums for the initial policy years below the
corresponding level premium of a policy with identical benefits.
The ultimate premium will thus be higher than the corresponding
level premium.
[0023] In many but not all embodiments of the present invention,
schedules 100 are calculated for policies with a provision for
inflation protection. Such policies are more expensive than
policies without the inflation protection. For younger issue ages
below fifty, they are more than twice as expensive. Note also that
in some embodiments, under a policy generated by the present
invention, an insured with an inflation protection provision can
choose to freeze premiums at the current level and benefits at a
corresponding level should an unforeseen event occur causing future
premiums increases to be unaffordable.
[0024] FIG. 2 illustrates the use of a plurality of variables to
calculate an insurance program 200 (i.e., a set of benefits and a
corresponding premium schedule 100) according to some embodiments
of the present invention. Note that the example of FIG. 2
illustrates variables used for calculating a schedule 100 with
premiums that are raised until a single leveling point 103, as
illustrated in FIG. 1. However, the variables can be adjusted to
calculate schedules 100 with multiple leveling points 103 and/or
one or more increase or decrease points as desired.
[0025] The process of calculating an insurance program 100
according to the present invention can utilize the following
variables: [0026] 1. a set of policy features 201; [0027] 2. the
initial annual premium 101, e.g., payable during the first policy
year; [0028] 3. the point 103 at which premiums become level (e.g.,
the policy anniversary at which time premiums become level); [0029]
4. the amount of the ultimate level annual premium 105; [0030] 5.
the issue age 203; [0031] 6. the year-to-year premium relationship
205 during the period when premiums are increasing; and [0032] 7. a
targeted present value 207 of future premiums.
[0033] The last three variables 203, 205 and 207 are inputs to an
insurance program determination process 208 that are specified
prior to the program 200 calculation. With any three of the first
four variables 201, 101, 103, 105 selected, a value 209 for the
remaining variable of the first four can be calculated. This output
value 209 and the three selected variables define the insurance
program 200 (e.g., in the illustrated example a program 200 with a
schedule 100 that increases during a prescribed period and then
becomes level). Where more complicated programs 200 and/or
schedules 100 are desired, the variables are adjusted accordingly
(e.g., multiple leveling dates, other types of adjustment dates,
etc.).
[0034] Given the supplied inputs, the first four variables, namely,
the policy features 201, the initial premium 101, the leveling
point 103 and the ultimate level premium 105, determine an
insurance program 200. By varying these four factors, an insurance
program 200 can be developed that meets the budgetary requirement
of a potential purchaser. For example, suppose that an initial
premium 101 is desired for a specific plan 201, and a specific
leveling age 103 is selected. The ultimate level premium 105 is
then calculated based on the supplied variables. Alternatively,
given an attained age 103 when premiums will become level, an
ultimate level premium 105 and a specific plan 201, the initial
premium 101 can be solved.
[0035] Each of the variables is now described in greater detail. An
LTCI policy is typically defined by the following features 201:
daily benefit maximum, lifetime benefit maximum, elimination
period, inflation protection option, underwriting risk class, and
other optional benefits. These features can either be inputs to the
calculation process 208 or the output 209. While the invention can
solve for any one or a combination of the features, it is most
convenient to solve for the daily benefit maximum, with other
features specified beforehand. For cost and risk reasons, the
insurer may impose upper and lower limits on the daily benefit
maximum.
[0036] The initial premium 101 can either be an input to the
process 208 or the output 209. As an input, the initial premium 101
is typically expressed as a percentage of the corresponding level
premium for a plan with the identical issue age and policy
features. Insurers incur considerable costs to acquire a policy.
These costs include marketing expenses, underwriting and issue
expenses, commissions, risk-based capital, etc. Accordingly,
insurers may want to set a minimum on the initial premium 101 in
order to recoup the acquisition costs within a reasonable
period.
[0037] The leveling point 103 (e.g., the policy anniversary when
the premium becomes level) can either be an input to the process
208 or the output 209. It can be, for example, any anniversary
after issue. In order to make the initial premium 101 relatively
low and therefore affordable, insurers may require a minimum number
of increasing premium years before premiums become level in the
future.
[0038] The ultimate level annual premium 105 can either be an input
to the process 208 or the output 209.
[0039] Issue age 203 affects the amount of premiums since the
likelihood of claiming for LTC services increases with age. Due to
regulatory constraints, insurers may establish issue age limits
that are different from those for level premium policies.
[0040] The premium relationship 205 describes how the premium of
one year is related to that of the prior year. Basic patterns are:
a constant percentage increase over the premium for the prior
policy year, a constant dollar increase over the premium for the
prior policy year, and increases at the beginning of regular or
irregular intervals but level during the intervals. Any combination
of the basic pattern or other increasing patterns is possible.
Combinations with today's existing premium patterns, such as future
premium decreases or limited premium paying periods, are also
possible. In order to minimize the potential hardship of paying
higher premiums, an insurer may restrict the amount of the annual
increases.
[0041] According to its profit goals, the insurer sets the targeted
present value 207 of premiums. The present value 207 of any
increasing premium schedule 100 is then calibrated to meet this
target 207. The target present value 207 varies by issue age and
policy features as described under the first variable.
[0042] The targeted present value 207 takes into account the
expected time value of money and the expected persistency of
policies. A discount rate determines the expected time value of
money. The discount rate does not necessarily tie to the expected
investment return of the assets in the insurer's investment
portfolio allocated to its LTCI business. A table of expected
mortality rates that vary by attained age and a set of expected
policy lapse rates typically form the basis for the persistency
assumption.
[0043] To determine the targeted present value 207, the insurer
starts with the corresponding level premium for the specific set of
policy features 201. It calculates the projected profits based on
morbidity, persistency, investment return and expense assumptions.
The level premium is adjusted until the desired projected profits
are achieved. Then, the present value of the level premiums,
calculated using the discount rate, mortality and voluntary lapse
rates, is set as the target 207.
[0044] Once an insurer gains sufficient experience from sales of
insurance programs 200 calculated according to the present
invention, refinements can be applied to help achieve the profit
objectives more precisely. For example, instead of using a level
premium, the insurer may use an increasing premium schedule 100
that represents the expected average of all the schedules 100 to be
generated according to the present invention for a specific issue
age 201 and policy features 201.
[0045] In setting the targeted present value 207, the insurer seeks
to strike a balance between desired profit goals and attractiveness
of the resulting premium schedules 100 to the potential purchasers.
A low target 207 will undermine the profit objectives while a high
target 207 will produce an expensive premium schedule 100, which
may not compare favorably with the corresponding level premium.
[0046] Due consideration is also given to the contingency that the
insured can opt to request a freeze in future premiums at the
current level with a corresponding freeze of the daily benefit
maximum and the lifetime policy maximum. This feature is a
desirable part of a LTCI policy with inflation protection provision
calculated according to the present invention. The purpose of this
option is to mitigate potential lapse by the insured when and if
future premium increases become a financial burden.
[0047] Some embodiments of the present invention add an optional
feature for those who lapse their policy, so as to give them credit
based on the value of past premium payments up until the time of
lapse. According to one such embodiment, lapsed policy holders can
still be eligible for benefits up to a paid up amount. This benefit
can be triggered when the lapse occurs because a predetermined
percentage or amount of premium increase is exceeded. In other such
embodiments, the party can be eligible for the benefit when the
lapse occurs for other reasons (or regardless of the reason for the
lapse). In one embodiment with such optional features, the policy
benefits will be paid up to a maximum amount equal to the prior
cumulative premiums paid into the insurance program 200. In another
such embodiment, the policy benefits will be paid up to a maximum
amount equal to a percentage of the prior cumulative premiums paid
into the insurance program 200. In yet another such embodiment, the
benefits are paid up to a maximum equal to the amount of premiums
paid into the program 200 plus a percentage thereof.
[0048] The process 208 employs an iterative procedure to compare
the targeted present value 207 with the present value of future
premiums from the interim premium schedule 100. Once the discounted
value of a schedule 100 matches the target 207, that schedule 100
becomes the solution.
[0049] It will be readily understood by one of ordinary skill in
the relevant art that the steps of this process 208 can be
automated (e.g., performed by a computer program) or performed
manually. At least for the calculation intensive steps, automation
will be far more practical, but is not required. The implementation
mechanics of the execution of the steps of the process 208 will be
readily apparent to those of ordinary skill in the relevant art in
light of this specification.
[0050] For purposes of illustration, some examples of calculating
insurance programs 200 according to various embodiments of the
present invention follow.
Example 1
[0051] A worker age 50 (the issue age 203) can afford to pay a $600
initial annual premium 101 and a $2,100 ultimate level premium 105
when retired at age 65 (the leveling point 103). A schedule 100 of
a $600 initial premium 101, increasing 8.1% per year (the premium
relationship 205) and reaching a cap premium 105 of $2,100 at
attained age 65 (leveling point 103) can fund coverage with the
following policy features 201: $123 daily maximum, $224,475
lifetime maximum (5 year benefit period), 90 day elimination period
and 5% compounded inflation protection.
Example 2
[0052] A worker age 42 (the issue age 203) can afford a $1,700
annual premium 105 when retired at age 60 (leveling point 103) and
chooses the following policy features 201: $110 daily benefit
maximum, no lifetime maximum, 30 day elimination period and 5%
simple inflation protection. A $873 initial annual premium 101 can
fund that schedule 100, assuming a premium relationship 205 of a
constant percentage premium increase per year.
Example 3
[0053] A worker age 45 (the issue age 203) can afford a $360
initial annual premium 101 and plans to retire at age 62 (leveling
point 103). He chooses the following policy features 201: $130
daily maximum, $237,250 lifetime maximum (5 year benefit period),
90 day elimination period and 5% compound inflation protection.
Assuming a premium relationship 205 of a constant percentage
premium increase per year, the ultimate premium 105 in this
scenario will be $2,271 per year (from age 62 on).
Example 4
[0054] Assume a firm is installing a contributory insurance program
for its employees. The coverage has the following policy features
201: a $100 daily maximum benefit with a lifetime maximum of
$182,500 (5 year benefit period), both amounts increasing 5%
compounded each year, with a 90 day elimination period.
[0055] For issue ages 203 of 60 and under, the firm will pay half
of the premiums calculated according to the present invention until
retirement. The cap age 103 is 65 regardless of when the employee
retires. For issue ages 203 of 61 and above, the firm will pay half
of a traditional, level premium schedule 100 until retirement.
Employees are responsible for premiums after retirement. The firm's
contribution ceases if employment is terminated prior to
retirement.
[0056] The firm sets the initial premiums 101 for the invention
generated schedule 100 by issue age. Premiums increase each year
and reach the ultimate levels 105 at age 65 (leveling point 103).
The initial 101 and ultimate 105 premiums payable by the employees
are shown below in Table 1.
TABLE-US-00001 TABLE 1 Monthly Cap Premium Monthly Monthly Between
Age 65 Cap Premium Issue Age Initial Premium* And Retirement* After
Retirement** 35 $20 $73 $146 40 $22 $63 $126 45 $25 $58 $116 50 $30
$65 $130 55 $37 $72 $144 60 $45 $83 $166 *Matching employer
contributions **Employee only
The schedule 100 generated according to the present invention
allows low contributions by the firm in the early years and
delegates the funding to the employees after retirement.
[0057] Under the current level premium pattern, premiums in the
early policy years (except for the first year) exceed the expected
claims plus expenses. Portions of the excess of premiums over
claims and expenses are set aside as reserves in order to pay
claims in the later years when claims exceed premiums and expenses.
Such pre-funding will be less for policies generated according to
the present invention than corresponding level premium
policies.
[0058] FIG. 3 illustrates the degree of pre-funding 301 during the
first 30 years for a policyholder at issue age 50. The amount of
pre-funding 301 is represented by the area between the schedule 100
calculated according to the present invention or the level premium
and the claims plus expenses.
[0059] Relative to level premium policies, the lower pre-funding
301 provides lower costs of coverage for insureds who lapse or
claim in the early policy years (premiums are typically waived
during claim). Furthermore, lower pre-funding 301 implies lower
reserves in the early policy years.
[0060] In developing a LTCI product, an insurer desires a
reasonable return on its capital investments. For establishing
premiums, return is measured recognizing the time value of money.
Consequently, profit margins in the early policy years have a
greater impact on the return than those in the later years. Thus,
because of the lower premiums in the early years when compared to a
level premium policy with the same benefits, the return from
policies calculated according to the present invention would to be
correspondingly lower, all other things being equal.
[0061] In setting the target present value 207, the insurer has two
mitigating factors that help to offset the effect of lower initial
premiums on margins. First, in most cases, commissions, as a
percentage of premiums, are higher in the first policy year than
renewal years. On a discounted basis, commissions from the
increasing premium schedule 100 calculated according to the present
invention will be relatively lower as a percentage of premiums than
the corresponding commissions from a level premium structure.
Second, the reserves will also be lower, as described above. Since
reserves are part of invested assets, lower reserves will also
result in lower investment returns. However, the net effect, in
general, would be to provide greater margins in the early policy
years for policies generated by the invention than for level
premium policies.
[0062] Thus the present invention lowers the initial cost of
coverage for the insured while maintaining profitability for the
insurer.
[0063] The present invention makes LTCI policy premiums more
affordable now and later. Individuals who cannot afford the level
premiums of current policies with appropriate coverage can purchase
the policies generated according to the present invention. For
those who can afford the level premiums but may have to select
inadequate coverage, the invention enables them to purchase
adequate coverage from the start. The expected increases in future
earning power can offset the increases in future premiums.
[0064] Today's LTCI premium schedules 100 are very rigid (level),
or relatively unknown (additional periodic future purchase
options). An insurance program 200 generated by the invention can
be customized to the purchaser's needs. Moreover, the corresponding
schedule 100 is known at time of issue so that the purchaser can
budget for the future premiums.
[0065] The invention can produce a premium schedule 100 that will
require fewer premium dollars in the early years than a policy with
level premiums. Should the policy lapse in the early years, the
policyholder would have paid less in premiums than with a level
premium policy for the same coverage.
[0066] LTCI is generally characterized by a relatively long period
before claims will be paid. Over time, the effect of increases in
the costs of LTC services due to inflation can be significant. This
effect can be expressed in terms of "real" dollars. That is, what
is a dollar in the future worth in terms of today's dollar? ? FIG.
4A illustrates two level premium policies, with and without
inflation protection, assuming a 5% annual inflation rate.
[0067] Without inflation protection, benefit amounts will erode in
the future. While the benefits will keep pace with inflation under
a policy with inflation protection feature, the insured is
over-paying in real premium dollars in the early policy years,
relative to later policy years.
[0068] By using the present invention, both the premiums and
benefits can be effectively aligned in terms of real dollars, as
illustrated in FIG. 4B.
[0069] In addition, the eventual level premium structure that the
present invention can provide is appropriate for most retirees who
are living within fixed incomes.
[0070] It is to be understood that a general purpose computer can
be programmed to perform the inventive methodology described
herein, and the invention can but need not be instantiated in that
form. Although performing the underlying calculations manually is
possible and is within the scope of the present invention, it is
certainly more convenient and practical to program a computer to
perform at least the calculation intensive steps of the method.
Where this is the case, the inventive methodology can be
instantiated as software, hardware, firmware or any combination of
these. Where the invention or components thereof are instantiated
as software, the software can be in the form of portions in
computer memory (e.g., random access memory of a computer executing
the software) and/or stored on computer readable media such as
magnetic or optical media. Of course, selling or otherwise
commercializing insurance policies calculated according to the
present invention is within the scope thereof.
[0071] Critical illness insurance is a form of insurance that
covers the risk of dreaded ailments such as heart attack, stroke,
cancer, renal failure and major organ transplant. While its
insurance risk coverage is different from LTCI, the premium funding
issues are identical. The invention applies equally well for
critical illness insurance policies as for LTCI policies.
[0072] As will be understood by those familiar with the art, the
invention may be embodied in other specific forms without departing
from the spirit or essential characteristics thereof. Likewise, the
particular naming and division of the processes, variables,
modules, agents, managers, functions, layers, features, attributes,
methodologies and other aspects are not mandatory or significant,
and the mechanisms that implement the invention or its features may
have different names, divisions and/or formats. Accordingly, the
disclosure of the present invention is intended to be illustrative,
but not limiting, of the scope of the invention, which is set forth
in the following claims.
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