Journal of Financial Planning: August 2015
Long-term care insurance (LTCI) is a young product by industry standards. As such, it continues to grow and evolve at a rapid pace.
The first LTCI policies appeared just 41 years ago, in 1974. Compare that to life insurance, which has been around since the early 1700s. The LTCI industry is still learning and changing accordingly. So where is the product and industry headed in 2015? Here is our take on the trends to watch.
Younger Consumers Are Buying LTCI
Fifteen years ago, typical LTCI buyers were in their 70s. Today, they’re in their mid-50s, according to the June 2012 Long-Term Care Insurance ASPE Research Brief from the U.S. Department of Health and Human Services. There are various theories about this. Anecdotally speaking, many of the younger buyers we talk to have witnessed family members struggling with long-term care issues and they understand the need on a very personal level.
Of course, buying younger has significant advantages, including: premiums are lower; younger people tend to be healthier, so they’re more likely eligible; and buying sooner rather than later keeps acquisition costs down.
More Consumers Are Partially Self-Insuring
Rather than purchase a LTCI policy that will cover 100 percent of potential liability, we’re finding that more clients are self-insuring 25 to 50 percent, often with their planner’s guidance.
They do this by designating part of their assets—Social Security, 401(k)s, savings, etc.—as their long-term care fund. As a result, they’re purchasing policies with lower benefit amounts or shorter durations, so policies are more affordable and better integrated with their overall financial plan.
Costs and Claims Are Rising
In 2014, carriers paid $7.85 billion in LTCI claims, a 5 percent increase over 2013, according to February 2015 data from the American Association for Long-Term Care Insurance (AALTCI). That brings LTCI claim utilization to an all-time high.
In addition, the cost of care continues to increase. According to Genworth’s 2015 Cost of Care Survey, all forms of long-term care—home care, assisted living, adult day care, and nursing facility care—have risen steadily over the past 12 years.
Furthermore, utilization is changing. Forty-one years ago, facility care was the only option. Today, alternatives such as home care and assisted living are increasingly popular. In fact, 70 percent of claims opened in 2012 started as home care or assisted living, as opposed to 30 percent for skilled care, according to the AALTCI 2014 Long-Term Care Insurance Sourcebook.
Premiums Are Rising, But Moderately
When carriers developed the first LTCI products, they based their pricing on incorrect actuarial assumptions. Their benefit utilization projections were low, resulting in higher-than-anticipated claims. That’s why most carriers raised their rates over the last few years, some by 75 to 100 percent.
Now rates are closer to where they should be. In addition, the National Association of Insurance Commissioners (NAIC) recently adopted an amendment designed to protect consumers. States are developing procedures for limiting LTCI rate increases. So although rate increases will be inevitable, they will be more manageable.
Underwriting Refinements Continue
With more claims experience under their belts, LTCI carriers continue to refine their underwriting methodologies. Over the past five years, applicants with health conditions have found it increasingly harder to qualify.
At least one carrier, Genworth, now requires paramedical exams. That same company has updated its underwriting classifications to include family health history, focusing on early-onset coronary artery disease and dementia.
Utilization is influencing rating methods, too. For years, the industry has known that women generate about 65 to 70 percent of claims (see the 2014 Long-Term Care Insurance Sourcebook for more on this). Two years ago, Genworth introduced gender-based pricing, and most of the market quickly followed suit.
Policy Innovations on the Way
Although asset-based plans are on the rise, traditional LTCI carriers are investing in product development. Some of the most intriguing innovations revolve around tweaking the policy elimination period.
Instead of measuring the elimination period in months, one carrier is reputedly developing a dollar deductible, ranging from $100,000 to $250,000. Others are poised to extend the elimination period, which currently maxes out at one year, to longer durations of two, three, and four years. Such initiatives will help lower premiums and may also be underwritten differently.
Since we’ve been receiving requests for longer elimination periods from financial planners and consumers for some time, we have every reason to believe these innovations will be well received in the market.
Asset-Based Plans Are Growing in Popularity
While asset-based plans have been around for more than two decades, they’ve caught fire in the last five years. According to industry estimates, sales of asset-based plans are outperforming traditional LTCI plans. Why? Because compared to traditional LTCI plans, asset-based plans can: offer guaranteed premiums (no increases); offer greater flexibility in premium payment schedules; and guarantee that if LTCI benefits aren’t used, the insured’s beneficiary will receive them in the form of a life insurance or annuity benefit.
Several life insurance carriers have recently introduced their first asset-based life/LTCI products, and more are considering it. With asset-based plans, it’s easier to calculate risk than with traditional LTCI plans, which adds to their appeal.
To those of us in the LTCI industry, this is very exciting news. For more than two decades, we have watched carriers exit our market. For the first time in years, consumer’s carrier choice appears to be expanding. This is a win-win for everyone.
In summary, LTCI has changed dramatically over the last 41 years, and there are more changes ahead. But one thing that hasn’t changed is the need for LTC planning.
People are living longer, resulting in a greater likelihood of needing care. Fewer family members can care for loved ones at home. An unplanned long-term care event can decimate the most meticulous financial and retirement plans while placing enormous stress on families. Although not everyone needs long-term care insurance, they do need a long-term care plan.
Brian I. Gordon, CLTC, is president of MAGA Ltd. (magaltc.com), one of the nation’s original long-term care planning specialists.
Murray A. Gordon is CEO of MAGA Ltd. He founded the firm in 1975. Today, MAGA serves financial advisers and consumers, offering long-term care planning solutions, including asset-based and traditional LTCI products.
Sidebar:
Traditional LTCI or Hybrid? Help Your Client Make an Informed Decision
By Kerry Peabody, CLTC
Hybrid life insurance/long-term care policies may be an excellent answer to your client’s long-term care problem, but you must closely examine how they work. Understand how the protection hybrids offer compares to that provided by traditional long-term care insurance, because despite the common accolades of hybrids (for example, stable premiums and ease of underwriting), there may be reasons to stick with traditional LTCI.
Here are some issues to address when considering a hybrid plan:
How Are Benefits Triggered?
Usually, the triggers for hybrid plans are quite similar to the triggers for traditional LTCI, including help with activities of daily living or supervision due to a cognitive impairment. But some hybrid plans require the need to be deemed permanent. Many conditions leading to long-term care are not permanent, so this wording could become problematic for certain clients at claim time.
How Are Benefits Paid?
Many current hybrids do not have a defined long-term care benefit. Instead, they use a “chronic illness accelerated benefit” approach. This means the client can request a lump sum payment or monthly payments, providing some flexibility. Although there’s usually no up-front charge for this type of rider, there is an actuarial charge against the benefit at the time of the acceleration that can be significant. Here’s an example:
- Male, age 60, standard non-tobacco rates
- $250,000 death benefit
- Annual premium $5,172
At age 80, the client needs long-term care; he requests a $30,000 acceleration to help cover those costs. He receives a $30,000 benefit payment, but this reduces his remaining death benefit from $250,000 to $206,099—a charge of $43,901. This is the “price” he’s paid for the rider.
Also, some policies require that a minimum death benefit be retained. In this example, the client must keep at least $50,000 of death benefit active in the policy. So although he purchased a $250,000 life policy, he will be able to receive around $130,000 for long-term care over the life of the policy after the minimum death benefit requirement and actuarial charges are taken into account.
Inflation Protection Riders
With some exceptions, a life/long-term care hybrid typically does not have an inflation-protection rider. If a client buys a $200,000 universal life policy with a 2 percent long-term care rider, it would provide $4,000 a month for long-term care. In 20 years, the benefit would still be $4,000 a month. There is no benefit growth. Of course, if the client buys a $2 million death benefit, they’ll have $40,000 per month available for long-term care costs. Either accept the fact that the LTC benefit will be diluted as time goes on, or buy a much larger life policy from the start.
Long-Term Care Partnership Eligibility
The Long-Term Care Partnership Program allows clients to keep more of their countable assets if they need to apply for Medicaid. A client with a $200,000 partnership-eligible policy would be allowed to keep an additional $200,000 of their own assets, above and beyond the normal Medicaid asset limits. Hybrid life policies do not qualify for the Partnership program.
Is a Need Underfunded?
Don’t try to do two things at once. If a client has a legitimate need for the death benefit, but they rely on a hybrid policy to also fund potential long-term care costs, they could be leaving the need for the death benefit (spousal support, special needs trust, estate taxes, etc.) underfunded.
Tax Benefits in Flux
A client typically will not get an up-front deduction for life insurance premiums, but they may for traditional LTCI, and any benefits paid by a tax-qualified LTCI policy will be non-taxable. The tax handling of many life/long-term care hybrids still has a great deal of ambiguity.
Educate Clients
From a true long-term care protection standpoint, traditional LTCI can provide vastly better protection. But traditional LTCI comes with its own risks, including “use it or lose it” and the potential for rate increases in the future. However, clients with these concerns should keep in mind that pricing assumptions have changed significantly on traditional LTCI policies in the past decade. As a result, drastic rate increases are far less likely on today’s plans.
Life/long-term care hybrids have some advantages, and they may hold an important spot in a client’s comprehensive financial plan. Individual client needs and the impact various products will have at the time of claim need to be thoroughly considered. Don’t simply assume that one product is as good as the other. Do a thorough review of client needs and concerns, and educate them about the impact of the different long-term care products.
Kerry Peabody, CLTC, is an insurance professional who has specialized in LTC options for 20 years. He lives in Scarborough, Maine, and works with advisers throughout northern New England.