The long-term care (LTC) insurance market is broken: Premiums are unaffordable for many, benefits are being pared back, and the number of policyholders has plummeted. Yet 70% of adults will require paid-for senior care services during their later years.
What can the insurance industry do? How can we widen coverage and ensure more Americans enter retirement with the financial protection they need?
See also: The Crisis in Long-Term Care
The Current State of LTC Insurance
There is no single cause of the decline in LTC insurance coverage. Demographic changes, inaccurate actuarial models. and ill-fitting regulation all played a role.
A large factor has been the continual increase in life expectancy over the last five decades, and those extra years usually require extensive – and costly – senior care.
Actuarial models failed to fully account for the change with the policies that were being sold in the '80s and '90s. Later, books began to mature, and claims ramped up as policyholders aged into senior care, forcing carriers to aggressively increase renewal premiums across the board, often by as much as 40% in a single year.
But it wasn’t entirely the fault of poor actuarial models; regulation was also culpable. Many states modeled their regulations for long-term care insurance after those for health and life insurance, mandating minimum loss ratios. While this might work in theory, it failed to account for the unique nature of long-term care insurance, where policies take decades to mature. During the initial years, claims are infrequent, resulting in deceptively low loss ratios. However, a dramatic uptick in costs follows as policyholders age and the high price of senior care kicks in. Regulations failed to provide the necessary flexibility to anticipate and account for that surge in future claims, leaving insurers unable to properly price policies over time.
The result has been a market where dozens of carriers have exited, and the few that remain price policies at premiums that are unaffordable for many Americans.
Product Innovations in LTC Insurance
Thankfully, we’re beginning to see some product innovation within the LTC market, which is opening up access once again. Hybrid life/LTC policies have been growing in popularity. They can often provide better value than two separate policies.
They can also offer greater perceived value to policyholders, given that hybrid policies often provide for partial return of premium. Legacy standalone LTC policies were usually offered on a use-it-or-lose-it benefit basis, meaning that the purchaser might never see a penny of the premiums they spent decades paying.
Carriers are also offering greater flexibility when it comes to payment windows. Following the conventional wisdom of waiting until you’re around 55 years of age to get LTC insurance often means that premiums are out of reach. Carriers are responding by extending payment windows, with many now offering windows up to age 100, with premiums designed to be affordable relative to typical retirement incomes.
See also: The Future of Caregiving
Consumer Education and Engagement
The average consumer is unfortunately very ill-informed. A worryingly high percentage believe that Medicaid will pick up the tab for their senior care costs. It won’t. Others, meanwhile, are under the impression that their health insurance will provide cover for the care they’ll need. Again, it doesn’t. And to top it off, most Americans are severely underestimating the typical cost of senior care.
Awareness drives action, and as an industry, the insurance world, from brokers to agents, needs to do a better job at educating their clients about their likely care needs in later life, the cost of this, and the coverage available. One of the quickest wins here would be to challenge the conventional wisdom that consumers should wait until their mid-50s to take out LTC cover. Introducing the idea of LTC coverage to people in their 30s and 40s should become the new normal, as this will drive down annual premiums and open up access.
New Distribution Strategies
Lastly, there has been a quiet evolution in employer-sponsored LTC insurance programs. There is a misconception that LTC insurance is no longer offered by employers. “True group” LTC plans are generally no longer offered, but these have been replaced by individual plans, also known as “multi-life” LTC.
These plans arguably offer a win-win for consumers and insurers. Individual policies allow for more effective underwriting and pricing among carriers, while offering more flexibility and policy benefits to policyholders.
The LTC insurance market is starting to self correct, after decades of declining sales and big losses. Continued innovation and a more informed public will help to ensure more Americans have the coverage they need for their golden years.
