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April 11, 2016

Can Long-Term Care Insurance Survive?

Summary:

The answer is yes, but a lot of mistakes have been made, and the industry still needs to sort itself out.

Photo Courtesy of Mark Hillary

Why are long-term care insurance premiums rising faster than a speeding elevator? And what will become of the long-term care insurance marketplace? If you are interested in long-term care insurance, what’s going on and what may happen, read on.  If you have no interest in long-term insurance, then this is not the article you are looking for. (The next edition will take a closer look at the insurance consumer Bill of Rights).

Why Would Anyone Want Long-Term Care Insurance?

One of the largest projected expenses for the average American in retirement is medical expenses, with estimates approaching a total of $250,000.

Medicare and Medicare supplements provide coverage for medical expenses that are typically short-term or one-time, such as an annual physical, medical test or surgical procedure. Long-term care insurance provides coverage to pay the costs of service such as nursing home, in-home care and skilled nursing facilities that are not covered by Medicare or Medicare supplements. These costs are quite high—hundreds of dollars a day.  To see what the average cost of care in your area is, visit the Genworth Cost of Care page here.

The odds of needing some form of long term-care insurance can reach 50% or more, with an average claim period of two to three years (depending on the statistics you look at). According to the U.S. Department of Health and Human Services (HHS), by 2020, about 12 million Americans will require long-term care.

See Also: What Features of Long-Term Care Should You Focus On?

Long-term care insurance premiums will typically be in the thousands of dollars a year. However, just like with any other type of insurance, it is about the leverage of protecting against a risk—a simple financial calculation: Can you afford to pay for the risk in the event of a claim out of pocket and can you afford to pay the premiums? In terms of leverage, if you have a long-term care insurance policy with a total benefit pool of $250,000 and an annual premium of $5,000, the annual premium is 2% of the total benefit pool. If 2% sounds like good leverage to you, this policy makes sense.

The Big Question: Why Are Long-Term Care Insurance Premiums Rising? 

There are multiple layers to this questions, but the main underlying factor is that the first long-term care insurance policies offered by insurance companies had unlimited benefit periods on a type of coverage where they had minimal historical data. Think about it this way: If I offered you a bet on a football game this weekend with the provision that, if you win, I’ll pay you $100, and, if I win, you’ll pay me a $1 a month for the rest of my life. Now, that’s a great bet for me if my team consists of all-pros and your team consists of benchwarmers. Without knowing who is on your team, would you make this bet? There’s no need to answer; of course you wouldn’t.  Yet this is exactly the bet insurance companies made, just with much bigger numbers. And, unsurprisingly, this business model hasn’t been profitable for them.

There are some other major factors to consider, such as the prolonged historically low-interest-rate environment where insurance companies have not been able to make their historical investment returns. (This is something that no one could have foreseen.)

Another major factor is that insurance companies counted on a certain percentage of people lapsing (terminating) their policies at some point. Again, the insurance companies made this prediction without much historical data. And guess what? Policy owners actually liked and valued the coverage they purchased, and they have kept their long-term care insurance policies in force, despite some significant rate increases.

Premiums have had to be increased because, at the end of the day, it is in everyone’s best interest for insurance companies to be profitable. If an insurance company is not profitable, it will go out of business and will not be able to pay claims, which is definitely a problem.

Rate Increase Oversight and Perspective

Rates for in-force policies have been increased and will almost certainly face future increases; older policies still are priced lower than what a current policy would cost. Premium increases on long-term-care insurance policies have to be approved, in most states, by the state insurance commissioner. When faced with a rate increase, policyholders will need to consider whether their benefit mix makes sense and fits their budget. These are the “visible” rate increases.

If you have a long-term care insurance policy with a mutual insurance company where the premium is subsidized by dividends, you may not have noticed (or been informed) of a reduced dividend scale. When an insurance company reduces its dividend scale, it does not have to get approval from anyone or disclose that it has reduced its dividends. Reduced dividends mean a higher premium. This is a hidden rate increase.

As mentioned, policies issued today have significantly higher premiums than those issued in the past. Some rate increases are attributed to companies “catching up” on premiums to get closer to current premiums they hope are more accurate. The bottom line is that insurance companies are trying to bring the premiums on older policies into line with their current pricing on new products. The closer that pricing gets, the less likely it is there will be future premium increases. So, if you have an older policy (even if you’re faced with a significant premium increase), keep in mind you’ve gotten a discount on past premiums. While that’s not comforting in the face of a premium increase, it will help put things into perspective.

Insurance departments will approve premium increases so that they are sufficient to meet anticipated claims. Any increase granted must apply equally to all policy owners from the requested class of policies, and the carrier must keep the policy in force if the premium payments are made. Changes in age or health have no bearing on the contract premiums once issued; the policy may only be canceled if premiums are not paid. Nearly all existing long-term-care insurance policies have had one or more rate increases granted.

Please keep in mind that rates on other types of insurance also increase over the years, some slowly like auto insurance and homeowners insurance and some rapidly like health insurance.  Inflation affects everything. There are no nickel candy bars any more. This is all about the value of the coverage and the leverage of your premium to the total benefit pool.

Options When You Have A Premium Increase

When you have a premium increase, you should always start by reviewing your coverage and deciding whether you still need the current coverage or whether you can make changes. For example, because the average claim period is two to three years and there is a much longer benefit period, is the trade-off in premiums for the longer benefit period worth it? It is important to understand that, once a change is made, it cannot be undone, so be sure you are comfortable with any modifications.

The following are options when you have a premium increase:

  • Pay the increased premium.
  • Reduce the daily/monthly benefit amount.
  • Increase the waiting period.
  • Shorten the benefit period.
  • Change the inflation rider 
(e.g. go from compound to simple or reduce inflation percentage from 5% to 4%).
  • Change/remove other riders.
  • Terminate the policy.
  • If your policy has a non-forfeiture benefit that allows for a “paid-up reduced benefit,” consider this option: You’ll get at least some value for the premiums you’ve paid. But remember, once you accept the option, the policy will not be reinstated. Some states are now requiring all new policies to include this feature. (It’s relatively rare in older policies.)

New Long-Term Policy Designs (Hybrid/Combination Products)

With all the issues in the traditional long-term care insurance marketplace, there are very few companies selling individual long-term care insurance policies. Instead, insurance companies have come out with whole new types of products: hybrids and combinations. For instance, you can purchase a life insurance policy or an annuity with a long-term-care insurance rider. Other options are a life insurance policy or annuity that is combined with a long-term-care policy. (Rather than the long-term-care insurance being part of the rider, it is part of the policy.)

While, in theory, these sound like great ideas, they ignore some simple facts:

  • There may be no need for life insurance or an annuity, but you will be paying for the life insurance or annuity in addition to the long-term care insurance component.
  • Some require an up-front lump-sum premium payment.
  • These policies are complex and opaque. There are multiple variables to these policies that the insurance company can change and that will affect the performance of the policy—many of which do not have to be disclosed to the policy owner and do not show up anywhere. The more complex the product, the greater the chance that something won’t work properly.

Considering that insurance companies are still working on accurately pricing long-term-care insurance products and that universal life insurance policies are having issues (see: Will Your Life Insurance Policy Terminate Before You?), it is hard to imagine that combining two problematic products will magically work out.

The big selling point for these policies is that, with a traditional long-term-care insurance policy, the policy owner does not get anything back if there is no claim made. However, there is no expectation with any other type of insurance (except for life insurance) that there is a return if a claim does not occur, and most homeowners, for example, are happy when their house doesn’t burn down even though they don’t get any payout from their insurer.

Lessons Learned and a Positive Outlook For Long-Term Care Insurance?

There is no doubt of the importance of a thriving private sector long-term-care insurance marketplace. Public policy would seem to favor long-term-care insurance paid for by the private sector.

The Internal Revenue Service (IRS) is increasing the amount people may deduct from their tax returns this year when buying long-term-care insurance or paying monthly premiums. Check out the IRS page on long-term care Insurance premium deductibility here .

The Bipartisan Policy Center (BPC) released its first set of recommendations calling for increasing access to the private insurance market. BPC initiatives call for increasing access to the private insurance market, improving public programs such as Medicaid and pursuing a catastrophic insurance approach for individuals with significant long-term-care needs such as Alzheimer’s or a debilitating physical impairment. These proposals were developed by former U.S. Senate Majority Leader Tom Daschle along with Bill Frist, another former U.S. Senate majority leader, former U.S. Secretary of Health and Human Services Secretary and Wisconsin Gov. Tommy Thompson and Alice Rivlin, the former director of the Office of Management and Budget. They aim to address the needs of America’s seniors and specifically target middle- and lower-income individuals and families. Daschle said, “Today, families and caregivers are becoming impoverished by the financial demands of long-term care … Since there is no single, comprehensive solution to solve this unsustainable situation, our strategy calls for a combination of actions that could help ease the extraordinary financial burdens Americans are facing.”

If the BPC has its way, these retirement long-term-care policies would be sold on federal and state health insurance exchanges. The question is whether this can be accomplished. Part of the Affordable Care Act (ACA, aka Obamacare), the Community Living Assistance Services and Supports (CLASS) program established a national, voluntary insurance program for purchasing community living services and supports that is designed to expand options for people who become functionally disabled and require long-term help. Unfortunately, this program was abandoned because it wasn’t financially feasible.

History repeats itself

Back in the 1980s, insurance companies made similar poor product design decisions with individual disability income insurance. Unsurprisingly, claims experience was not great, and a number of companies left the marketplace. Is this sounding familiar?  The current individual disability insurance marketplace has returned with more sensible products, where the companies do full underwriting, offer benefits that are less than earnings and do not guarantee the premiums. A great read on this is: IDI Déjà Vu: Optimism For The LTCI Industry, by Xiaoge Flora Hu and Marc Glickman.

The long-term-care insurance industry is making similar changes to its products, which should buoy the marketplace. Products are being priced based on actual experience, policies are being fully underwritten and unlimited benefits are no longer available.

Smarter product design, better risk selection and a strong need should result in a solid long-term-care insurance marketplace. As America continues to age, there will be a stronger need for the coverage. It may take a few years, but there is a future for long-term-care insurance. The only real question is when.

Let me know what you think.

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About the Author

Tony Steuer connects consumers and insurance agents by providing “Insurance Literacy Answers You Can Trust.” Steuer is a recognized authority on life, disability and long-term care insurance literacy and is the founder of the Insurance Literacy Institute and the Insurance Quality Mark and has recently created a best practices standard for insurance agents: the Insurance Consumer Bill of Rights.

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