Marc Glickman

True or false:

The number one reason consumers are not buying traditional long term care insurance today is because it is too expensive.

Answer:

False.  The number one reason consumers are not buying traditional long term care insurance today is because they are afraid it will become too expensive.

The legitimacy of the LTCI market is being challenged. Advisors are hesitant to recommend traditional solutions even though there is consensus that the need for LTCI continues to outpace the protection purchased. There is no doubt about the benefits provided. Claims satisfaction rates are extremely high and customers continue to retain their policies more often than any other insurance product.  There is also government support for new product purchases. LTCI enjoys myriad tax-favorable purchasing options as well as benefit enhancements from the state partnership programs.  Traditional LTCI remains the least expensive way to access these rich benefits.  The challenge for advisors is addressing the concerns about the stability of prices into the future because the continuing noise about rate increases from legacy products drowns out all of the positives.  

Most advisors are aware that modern LTCI products have dramatically sounder pricing than the prior legacy products.  However, these advisors seek product guarantees and hard evidence having been burnt by prior expectations.  There is good news. Product guarantees have re-emerged in the form of new single-pay and 10-pay traditional LTCI plans as well as lifetime benefit periods being offered once again.  Evidence has also accumulated showing that modern lifetime-pay plans will be much more price stable than any prior product generation.  The evidence comes from two LTCI paradigm shifts that differentiate modern price stable LTCI products from legacy LTCI products.   

The first paradigm shift has been increasingly sound pricing to address a variety of possible future economic and demographic scenarios.  The Society of Actuaries (SOA) recently published a pricing study1 showing that the underlying actuarial pricing assumptions for modern products has been effectively de-risked.  For new products, both the likelihood and magnitude of possible future rate increases are under control.  The logic behind this is intuitive.  The single biggest factor that drove the underpricing of legacy products was the assumption that a small percentage of people would drop their policy each year.  New pricing for today’s products assumes that virtually nobody will drop their policies.  By definition, this past pain point will not cause a future rate increase.  Similarly, expected investment rates are now priced in using today’s record low rates making it much more likely that rate stability could actually improve from increasing rates years from now.

The second paradigm shift has been regulatory protections requiring price stability. This effectively began with policies issued after 2004 with the implementation of LTCI rate stability regulations that incentivize LTCI companies to price policies more responsibly. With the passage of time, there is now accumulated evidence that modern policies sold after rate stability regulations (Post-RS) have outperformed policies sold prior to rate stability regulations (Pre-RS). Public rate increase data shows that over 90 percent of rate increase filings have occurred on Pre-RS policies.

It is important for advisors to understand how modern LTCI products differ from legacy products, so they do not quit on the product at a time when the protection is needed the most and is safest for the consumer to buy. Advisors need to encourage consumers who are wise enough to plan for this need to get asset protection while still young and healthy enough to qualify.  

Paradigm Shift #1–Pricing Rate Stability
Consumers’ caution about LTCI is understandable in light of the rate increases that are now occurring on legacy products. The SOA pricing study analyzed pricing assumptions from legacy policies sold in 2000 (pre-RS), modern policies sold in 2007 (post-RS), and the latest generation pricing assumptions used in 2014.  The pricing of policies sold today is more conservative across every major pricing assumption:

1. Lapse Rates: The biggest reason that companies needed rate increases on legacy policies is because everyone held on to their policies. LTCI struggled under the weight of its own popularity!  Companies now use a lapse assumption of less than one percent per year, leaving no room for this assumption to cause a rate increase.
2. Investment Returns:  The second biggest reason that companies have needed rate increases is continually decreasing interest rates. Interest rates are now running into a fundamental economic floor such that it is much more likely to trend up rather than down.
3. Claim Rates:  Claim assumptions were more aggressive during the 1990s as companies sought to maximize market share. Since then, companies have shifted emphasis to creating a profitable product line. Today, claim assumptions are very conservative estimates of actual experience, with an additional margin for error required by regulation.
4. Increased Confidence:  There is 16 times more policy data and 70 times more claims data available now as compared to 15 years ago.  This lowers the variability of future results and increases confidence in price stability.
5. Likelihood of Future Rate Increases:  The SOA pricing study forecasted the chance of a rate increase for each generation of product pricing.  The study concluded that for the latest generation product pricing there is less than a 10 percent chance that LTCI products issued today will ever need a rate increase. Furthermore, if a rate increase were to occur, the average amount of the increase is likely to be only 10 percent.    

Paradigm Shift #2 – Regulatory Rate Stability 
The National Association of Insurance Commissioners passed the Rate Stabilization Model Act in 2001, and 41 states have adopted a variation of this Act.  The first new rate stabilized products were offered for sale between 2004 and 2006 depending on the insurance company.  As the name implies, companies are required to price more conservatively and are penalized should a rate increase be needed. The direct result is more conservative pricing across the industry to help protect consumers from large future rate increases. The following are all consumer protections for policies filed under Rate Stability Regulations: 

1. Consumer Value:  Rate increases cannot make the price of the in-force policy higher than the rates for applicants of new policies.
2. Company Penalty:  There is a significant penalty associated with future rate increases, so insurers are motivated from the start to price each policy form very conservatively. The formula requires the company to pay out at least 58 percent of the initial premium as benefits.  Any rate increase amount must provide at least 85 percent of the increased premium as benefits. This makes it difficult for a company to profit from the rate increase.
3. Margin for Error:  Pre-RS, insurance companies were prohibited from pricing in any “margin for adverse experience.” Post-RS requires the use of the most current actuarial assumptions and must include an additional margin for error.
4. Certification:  As part of the premium increase approval process, a qualified actuary must certify that no future premium increases are anticipated for the remaining life of that policy form, even if future experience is moderately adverse.

We recently reviewed rate increase data across all states and companies, which was published by the California Department of Insurance in December, 2016.  We reviewed 22 different companies and their subsidiaries selling both pre-RS and post-RS, which together encompass 88 percent of all in-force LTCI policies.  In those states which have enacted the Rate Stabilization regulation, over 91 percent of the rate increases have been on policies that were sold pre-RS.  This includes by definition all policies issued prior to 2004.  Less than nine percent of the rate increase approvals have been on policies sold Post-RS. 

Also, we reviewed the cumulative percentage amount of the rate increases.  The average, cumulative rate increase for policies sold pre-RS was more than double that for policies sold post-RS.  Virtually all of the largest companies have had pre-RS rate increases, but only a few have had post-RS rate increases.  This data suggests that policyholders have been better protected by the Rate Stabilization regulation.  It is important to note that self-funded government programs, such as the Federal LTCI Program or CalPERS, are not subject to Rate Stabilization regulations and can change premiums at the discretion of the self-funding entity.

There is strong evidence that modern LTCI policies will have more stable pricing than legacy LTCI policies.  We expect rate increases on pre-RS LTCI products to continue.  Policies sold in the earliest years of post-RS will likely need modest rate increases that should be less disruptive for consumers.  The latest generation of policies are unlikely to have a rate increase based on the SOA pricing study, but if they do, the rate increase will likely be small.  Companies are now motivated to create stable blocks and profitable business.  This follows the path of individual disability insurance, which also faced parallel issues 20 years ago, but has since rebounded.

This paradigm shift in LTCI comes just in time, as the need is now greater than ever. Advisors would be well-advised not to quit on LTCI now that the product has been legitimized and the opportunity to offer the product is the greatest. 

Reference:
1. https://www.soa.org/Files/Sections/ltc-pricing-project.pdf

Life insurance policies with living benefits, also known as hybrid or combo products, have emerged in popularity with a plethora of variations now available from insurance carriers.  These products complement traditional long term care insurance (LTCI), filling out the continuum of much needed retirement planning solutions.  In this article, I will analyze the main long term care product categories to show:

• Where’s the Beef?  Which insurance products provide most of the long term care protection in the market today as a percentage of premium.¹
• What the latest features and tax incentives available on traditional long term care products are, including the Reverse Combo.
• How traditional LTCI and life combo products fit in your tool kit of customer solutions.

The Spectrum of LTCI Protection
There are a spectrum of insurance products that address long term care protection ranging from pure LTCI to nearly pure life insurance.  We can measure the amount of long term care protection that they provide by estimating what portion of the premium price tag is expected to be paid for long term care relative to acceleration of the life insurance customer’s death benefits.

Insurance premiums are also paid over different schedules ranging from one large single premium to smaller annual premiums over the policyholder’s lifetime.  We can compare single pay products by dividing  by a factor of twelve to the equivalent amount paid on a recurring basis instead.

The 2015 industry LIMRA surveys for traditional LTCI and combo long term care provide total sales figures for each segment. Applying the adjustment for single pay to determine the recurring long term care protection provided across the spectrum of insurance products as shown in the following chart.

Traditional LTCI:  As the purest form of long term care coverage, virtually 100 percent of premiums are dedicated to long term care.  Traditional LTCI allows consumers to leverage the most long term care protection per premium dollar. 

The newest traditional product on the market provides two people residing in the same household LTCI coverage under a joint policy.  As an example of leverage provided by traditional LTCI purchased today, both individuals would be covered for up to a total of $438,000 of tax-free benefits for a single premium of $29,000 if both are age 50 or $38,000 if both are age 60.  $438,000 is equal to the total benefit pool available using the sample benefits selected:  3 year benefit period x $200/day x 365 days x 2 people.  

Lifetime benefits on this product cost exactly double what three year benefits cost.  Most traditional LTCI products are purchased with a 90 day waiting period “deductible.”  Inflation protection is also very common and desirable in the higher-end market to keep up with the cost of care over time.  Some carriers have gravitated toward more limited benefits or providing short term care, so that individuals can get at least some coverage at a lower target premium.  However, a new carrier has emerged with popular high-end features such as lifetime benefits, 10-pay and single pay options.  

Many people are surprised by the amount of leverage still available on traditional LTCI.  It’s all a matter of perception.  Ten years ago, prices were half of what you see today for the same benefits, with rate increases slowly bringing them back to today’s rate adequacy. 

Insurance carriers have learned the hard way from legacy products that traditional LTCI can only be offered to healthy individuals who plan well in advance of the need.  Policyholders have confirmed that the coverage has tremendous value based on customer retention at higher renewal rates than any other insurance product.  In addition, customer’s claim satisfaction rates are likewise favorable.  Couples get the best deal because they subsidize the cost by taking care of each other before tapping into their benefits.  Good news is that new products sold today have a record low likelihood of requiring future rate increases based on a recent Society of Actuaries study.

The Beef:  There were a total of 104,332 traditional LTCI policies sold in 2015, accounting for $261 million of lifetime recurring premiums.  The first single pay alternative in many years recently became available late in 2016.

The ideal client is using traditional LTCI as a leveraged way to protect assets in retirement.  While the hope is that the benefits will never be needed, the coverage provides a safety net for a catastrophic event.  This concept is reminiscent of term life or disability income insurance and can be thought of as the next phase for retirement planning.

It is estimated that the total target market is over 10 million for those in the right age range who are currently healthy with assets to protect, and do not already have a long term care plan in place.

Traditional LTCI has many built-in advantages provided by the government to incentivize long term care planning.  Among the most popular are:

• Traditional LTCI benefits are generally received tax-free.
• LTCI premiums may be fully tax deductible for business owners with a full or partial tax deduction for the employee, and without discrimination requirements.
• Traditional LTCI premiums can be paid directly using non-qualified annuity or non-qualified life insurance cash values through a tax-free 1035 exchange
• Pre-tax HSA funds can be used for LTCI premiums.
• Public-Private LTCI partnership programs are available protecting assets in Medicaid situations.

Traditional LTCI—Reverse Combo
A new concept released in 2016 that has reinvigorated interest in the traditional LTCI product is offering a rider to provide a return of premiums (ROP) paid back to the policyholder upon death and an option to surrender the policy for a return of 80 percent of the premium. I call this feature the reverse combo because it offers a life insurance-type benefit on an LTCI-based product instead of a long term care rider on a life insurance based product.

The reverse combo provides greater long term care coverage and less life insurance than life combos with the wide flexibility of traditional LTCI designs. There is also a version of the policy that provides both ROP and all long term care claims without offset.  The product provides about 60 percent of premiums dedicated to long term care protection.  Often advisors lead with the reverse combo design and then find customers choosing lifetime benefits in lieu of ROP for roughly the same cost.

Life Insurance with LTC Extension of Benefits (EOB) Riders
The next product in the spectrum of providing long term care coverage is life insurance with an acceleration of the death benefit upon meeting the long term care trigger.  Once the cash value is exhausted, the policy provides an extension of benefits (EOB) to continue to pay long term care benefits up to a specified benefit period.  Another way to think of this is that the first two years is the long term care deductible where the customer is spending down the life insurance death benefits before the extended long term care coverage kicks in.  This funding mechanism results in an estimated average of 27 percent of premiums dedicated to long term care protection with a range of about 10 percent to 40 percent depending on how much EOB and inflation protection is purchased.

Life insurance with EOB inhabits an important part of the long term care spectrum because it offers a variety of niches where traditional LTCI products have receded:

• Alleviates concerns about rate increases on traditional LTCI products that do not have single premium or 10-pay options;
• Allows life insurance asset accumulation with account value growth and the ability to take out loans;
• Offers effectively a longer deductible than can be provided on traditional LTCI; and,
• Allows individuals with some health conditions no longer acceptable for traditional LTCI to obtain coverage.

The Beef:  There were a total of 25,471 life with EOB rider policies sold in 2015, accounting for $193 million of lifetime recurring premiums.   Applying 27 percent of those premiums as covering long term care protection results in $52 million of long term care protection sold in 2015.

Life Insurance with LTC Acceleration of Benefits (AOB) Riders
Life insurance with acceleration of benefits (AOB) is a more limited version of the EOB rider, because only the life insurance death benefit can be accelerated for long term care.  Once that death benefit is exhausted, no more long term care coverage is provided.  A multitude of carriers offer versions of this feature on a variety of life insurance products because the cost of the AOB rider is on average only about seven percent of the premium.  The popularity of this product is part of the trend to expand the availability of benefits for asset based life insurance and can be done at relatively low cost for the carriers.  The products with these features in most cases utilize life insurance underwriting, which then provides access to this coverage for individuals with health conditions who might not have otherwise qualified for traditional LTCI or life insurance with EOB riders.

The Beef:  There were a total of 109,615 life with AOB rider policies sold in 2015, accounting for $388 million of lifetime recurring premiums.   Applying seven percent of those premiums as covering long term care protection results in $27 million of long term care protection sold in 2015.

Life Insurance with Chronic or Critical Illness (CI) Riders
This product is a cousin to the life with long term care rider concept in that it provides a lump sum percentage of the life insurance death benefit for an individual with a permanent end of life need.  The rider can be added for an average of three percent additional premium because the acceleration period is shorter.  Underwriting is simplified and agents need not be specially trained in long term care.  However, the product cannot be advertised as long term care coverage nor does it have the regulatory protections of long term care products.

The Beef:  There were a total of 94,154 life with CI rider policies sold in 2015, accounting for $533 million of lifetime recurring premiums.   Applying three percent of those premiums as covering “long term care” protection results in $16 million of long term care protection sold in 2015.

Where’s the Beef?
Life insurance with AOB and CI riders represent the fastest growing segment of the long term care continuum with more carriers offering these features every year.  Similarly, the number of traditional LTCI carriers has been decreasing although a new carrier entered the LTCI market during the summer of 2016 for the first time in nearly a decade.  Surprisingly, despite these trends, nearly 75 percent of long term care protection still originates from traditional LTCI and for good reason.  Traditional LTCI is still a highly desirable product from a leverage and tax advantaged standpoint and fulfills a clear purpose.  Healthy customers leading with the need for long term care protection will get the most value from traditional LTCI and life with EOB riders.  Similarly, customers primarily needing life insurance now have a multitude of options available to them and can find policies that fill a variety of needs especially if there are health concerns. 

Footnote:
1. Based on 2016 Society of Actuaries Life and Annuity Symposium – Session 65: https://www.soa.org/Professional-Development/Event-Calendar/2016/las/Agenda-Day-3.aspx

I recently attended an LTCI brokerage conference featuring the latest product designs from a variety of carriers. A walk through the aisles was much like a walk through Willy Wonka’s Chocolate Factory where, despite general perception, there is more to a chocolate bar than just sugar and chocolate.  Likewise there is more to LTCI policy designs than just a limited, cookie-cutter approach. You have options. Multitudes of them. 

Granted, we all know that the number of companies offering stand-alone LTCI products has decreased significantly over the past decade. Yet as the remaining carriers have begun targeting different market segments, specialized product designs have become more common.  Now the age of imaginative product designs has commenced–from traditional higher-end products aimed at affluent buyers, to more basic affordable products for the middle market.  From programs catering to worksite sales with simplified underwriting, to others providing dividends or benefit credits that mimic dividends. 

This year, for the first time in a decade, a new carrier has entered the LTCI marketplace offering a stand-alone product with lifetime benefits, 10-pay, single pay, return of premium available with and without a claim’s offset, cash surrender options, and an emphasis on selling compound inflation protection.  These benefits, all of which used to be routinely offered, have either disappeared or been deemphasized as the LTCI market contracted over the past decade.  With all of the additional sales opportunities utilizing these features once again available, many agents are beginning to feel like a kid in a candy store.

“We’ll begin, with a spin…”

Sales Opportunities with Limited Pay and Richer LTC Benefits

The Reverse Combo.  The emerging popularity of life combo products has actually opened up new, competitive possibilities for the stand-alone product.  Taking the stand-alone LTCI base product and adding both a return of premium rider and a cash surrender option creates a product that mimics life combo products.  Since the base policy is an LTCI policy with the life insurance benefits added on, I call this product, the “Reverse Combo”.

Life insurance regulations require the life combo product to have cash values at certain minimum levels and death benefits at levels in excess of those cash values.  This means that clients buying a life combo product primarily for the LTCI protection wind up paying for much more life insurance protection than they ideally want.  These clients also may not get ideal LTCI coverage because life combo products often cannot offer the full range of inflation protection options or premium payment options that create more LTCI leverage.  The reverse combo product, on the other hand, follows LTCI product regulations, which have no minimum cash values, death benefit, or premium payment requirements.  Thus, the cash surrender option can be graded up over a period of years and the return of premium can be designed as a second-to-die benefit, freeing up significant cost savings to fund increased LTCI coverage.  Also, the more flexible reverse combo regulations allow both death benefits and LTCI claims to be paid out, so clients need not spend their own life insurance benefits first to pay for long term care costs.  The reverse combo can be purchased in any combination of inflation options, benefit periods, and premium payment options, with or without the cash surrender values in order to customize LTCI coverage more precisely to the client’s needs.

“What we’ll see, Will defy explanation…”  

Executive Carve-Outs. For the past several years 10-pay premium options and lifetime benefit periods have been unavailable on LTCI products.  This had minimized the use of a popular tax advantaged sale—offering key executives employer paid and fully deductible LTCI benefits without any tax ramifications to the recipient.  However, with 10 pay and lifetime benefits available once again, this tax incentive may become popular with those agents operating in the advanced underwriting, upper income markets.  Here’s the basic premise:  Corporations can create a substantial executive benefit using pre-tax dollars by deducting the cost of the 10-pay LTCI premiums as a normal and ordinary business expense, so that the benefit is fully paid up for the key executives during their working lifetimes.  Perhaps the most amazing aspect of this sales opportunity is that the business expense deducted by the company is not viewed by the IRS as imputed income for the key executive, nor is it subject to any employer discrimination testing, and all of the reimbursed LTCI costs are tax-free when paid to the insured.    Also, the policies are fully paid up after the tenth year and no longer at risk for future rate increases since no future premiums are ever due.

Advanced Executive Carve Outs Using Full Return of Premium.  There are other possible creative variations on the executive carve out concept.  Here is one idea to test with your accountant.  Full return of premium does not require the client to use the death benefit before LTCI claims are paid.  Therefore, a solution similar to COLI is available.  The corporation purchases a 10-pay with the full return of premium and assigns the ROP benefit to the corporation.  The corporation is guaranteed to receive all premium payments back and thus may be able to hold the full amount of those premium payments as a corporate asset on the balance sheet in addition to the cash asset generated by the actual tax savings received from deducting the 10-pay premiums.  

“If you want to view paradise, Simply look around and view it…”

1035 Exchanges.  The Pension Protection Act, passed in 2006 with a delayed effective date until 2010, allows another significantly tax-advantaged sales opportunity for stand-alone LTCI policies.  For individuals who own a non-qualified annuity, they can take the principal and deferred tax buildup of the annuity and execute a 1035 tax-free exchange to pay the premiums for the stand-alone LTCI policy.  Since the stand-alone benefits are received tax-free, the deferred interest on the annuity is never subject to future taxation.  While this benefit has been available in the stand-alone market since 2010, tracking and administering the annual cost basis associated with paying premiums each year is onerous for both the company and the insured.  However, by using a single pay stand-alone LTCI policy, the deferred tax buildup is immediately eliminated and there are no remaining cost basis issues.  There are also advanced possibilities using this concept in combination with the return of premium, but, as always, please consult your tax advisor.

“Wanna change the world?  There’s nothing to it…”  

There are in fact many different LTCI solutions available to serve the 78 million baby boomers approaching retirement–a group which represents about a quarter of the U.S. population.  Many of these boomers are currently dealing with the burden of having to pay for long term health care costs for one of their relatives.  The majority of this fast growing demographic does not realize that looming long term care costs can be solved with an array of insurance solutions already available in the market.  I expect to see continued innovation addressing many of these market segments with carriers gravitating toward the solutions that prove most popular.  The government also has been receptive over the past few years to support private alternatives and increase existing tax incentives, as the majority of the long term care burden eventually falls on state and federal budgets through Medicaid.  Luckily, this looming crisis can still be prevented from becoming a catastrophe.  The cost of insuring against this future risk is accessible to many Americans as long as they plan in advance, while still young and healthy enough to obtain coverage. 

Today’s long term care insurance (LTCI) industry has transformed.  Pricing is now more conservative because interest rates are at historical lows, lapse rates have been effectively de-risked, and both mortality and morbidity reflect more conservative best estimates.  There is significant sales opportunity, as an increasing number of baby boomers reach the primary selling ages for LTCI, due to the the limited penetration of this potential market. Yet there is still significant reluctance for insurers to offer LTCI when they have seen peer carriers exit due to underperformance of their legacy products.  Furthermore, agents have seen rate increases on the prior generation of products, and due to that experience, mistakenly expect rate increases to occur on current products.  The industry is tasked with demonstrating beyond any reasonable doubt that LTCI new business sold today is not only safe and profitable for insurers but, more important, that it is price stable for agents to sell and their clients to buy.

A recent study of new business pricing by The Society of Actuaries (SOA) provides the best evidence yet that there is significant and mostly unrecognized safety in current industry pricing.

SOA LTC Section Pricing Project
The SOA Pricing Project looked to quantify the effects of today’s more conservative pricing.  The study asked the following questions:  For stand-alone LTCI, how stable are premiums on new blocks given assumptions currently in use today?  What was the probability of a rate increase for policies issued in 2000, 2007, and 2014, using only the data that was available in each of those time periods?  If a rate increase did prove necessary, what magnitude would likely be necessary? And, finally, what is the remaining downside exposure of each of the assumptions in use today? 

Six of the largest insurers selling LTCI now as well as in 2000 and 2007 participated in the study.  Each company provided the SOA researchers with its actual pricing data for December 2000, December 2007, and June 2014.  The SOA then combined the data from these six insurers to arrive at the average LTCI product.

Description of the Methodology
LTCi products must meet state specific minimum requirements before being approved for rate increases.  In today’s regulatory environment, lapse, mortality, and morbidity are considered to be justifications for rate increases because they directly impact the total claim dollars paid out.  Interest rates are typically not used as justification because the insurer bears both the opportunity and risk should investments turn out to be better or worse than expected.

The SOA Pricing Study simulated possible variations in lapse, mortality, and morbidity for each of 2000, 2007, and 2014 pricing periods.  For each simulation, the resulting profit was examined.  If the simulation resulted in profits that were negative, then the scenario justified a rate increase.  The researchers also calculated the extra premium that would be required in the rate increase scenario in order to bring the scenario back to breakeven.

Pricing Study Results

The chart shows the results from all simulations.  Given the more conservative assumptions for pricing in 2014, only 10 percent of scenarios require a rate increase compared with 40 percent of scenarios in 2000.  Given what is known today, rate increases are much less likely.  Furthermore, there is much more data available today to validate the assumptions, with 16 times more policy data in 2014 compared to 2000 and 70 times as much claims data for claims at advanced ages (over 80) of policyholders utilizing their benefits the most.

Finally, if a rate increase is needed, policyholder disruption is minimized.  Of the 40 percent of scenarios needing a rate increase in 2000, the average increase was 34 percent.  Of the 10 percent of scenarios needing a rate increase in 2014, the average increase was only 10 percent.

Pricing Assumptions
The study further examines the underlying assumptions to better understand the reason for the dramatic change in outlook.  Key assumptions for LTCI product performance include voluntary lapse, mortality, claim cost per person (otherwise known as morbidity), and interest rates.  Lapse and mortality impact how many total individuals will be around at advanced ages to utilize benefits.  As people age, morbidity comprises the likelihood of a claim and the severity of the claim both in terms of how long the claim lasts and dollars per day that are paid out. Interest rates play a role in determining how many dollars will be available to pay claims once the premiums collected are invested over a long time horizon.  A review of the variability of each of these assumptions demonstrates the stability of product prices.

The Consequences of Fewer Voluntary Lapses
Voluntary lapses occur when individuals stop paying the premiums on their policy. In the 1980s and 1990s, insurers assumed that individuals would lapse at moderate rates that were derived from health insurance policies.  The SOA study demonstrated that after the first few years of owning the policy, LTCI insurers used an average lapse rate of 2.8 percent in pricing new products in 2000. However, by 2014, insurers were using far lower expected lapse rates–down to 0.7 percent.  This turned out to be one of the biggest contributors to the underpricing of legacy products. When fewer policies lapse than expected, more policyholders remain to utilize benefits.  The difference in 2.8 percent compared to 0.7 percent per year, over a 30 year time horizon, results in twice as many people remaining in the pool to be eligible to receive benefits.  The good news is that the absolute limit is zero percent lapse, or everyone paying premiums for life, which in practice will not occur.  Therefore, there is now virtually no voluntary lapse risk remaining for new business pricing.

The Consequences of Lower Mortality
Mortality is the term used to explain the number of deaths in a given period.  Much like low lapses, lower than expected mortality had an adverse impact on the pricing of legacy products.  People have been living longer primarily due to advances in medicine.  As a result, legacy product pricing did not account for greater utilization of claims by people at older ages.  Today’s product pricing better accounts for policyholders’ longevity.

The Dynamics of Claim Cost Per Person (Morbidity)
Morbidity is the average cost per claim multiplied by the likelihood of the claim at a given age.  For example, if at age 80 the average claim costs $100,000, and there is a three percent chance of a claim, then the claim cost per person at that age is $3,000. Assumed average cost per claim used in pricing has increased significantly in 2014 pricing, particularly at older ages, as people have been living longer on claim. However, the likelihood of a claim at a given age has been trending downward as medical advances have improved health and delayed the onset of claims.  From 2000 to 2014, the morbidity assumption used in pricing has increased roughly 25 percent in total.  Insurers with better underwriting have experienced better morbidity results in the form of lower overall number of claims.

This experience has led to the mainstream adoption of more rigorous underwriting, with medical records, prescription drug checks, cognitive screens, and MIB all being used more frequently.  Standards have also tightened for achieving the best premium rate class.

How is Future Mortality and Morbidity Improvement Considered?
There is evidence that mortality and morbidity improvement is occurring together within the population.  There is less data on insured lives available, as it is difficult to separate the effect of improvement from changes in underwriting protocols.  It is clear that mortality and morbidity improvement occur together because they are driven by the same underlying health dynamics.  The effect of simultaneous mortality and morbidity improvement is an overall reduction in claim costs.  This manifests itself in a delay in onset of claim, which allows insurers to collect more premium to invest to accumulate greater assets.  Most companies currently assume no morbidity or mortality improvement to be more conservative in pricing.  Since more than half of LTCI claim costs are driven by Alzheimer’s or related dementias, claim costs would be significantly lower than priced should a breakthrough occur in treatment or prevention of this disease.

The Impact of Low Interest Rates on Pricing
Investment income is directly related to the level of interest rates and is a key pricing factor because premiums are invested for 30-50 years until claims are paid.  Although today’s pricing uses current low interest rates, interest rates ten years and beyond are what matter most for profitability.  This is because most premiums are received, invested, and reinvested not once the policy is issued, but during the next several decades before claims are paid out.  The low interest rate environment will likely see some volatility over the next several decades.  Even if low interest rates persist, downside risk is limited by the floor on the bond rates demanded by investors to compensate them from credit and inflation risks.  The rates used in pricing products in 2000 were 1.8 percent higher than the rates in products priced in 2014.

Reflecting on the SOA Pricing Study
It is notable that, since 2007, all of the major LTCI assumptions used in pricing have become more conservative.  Lapse rates have been virtually de-risked, interest rates are at historical lows, while mortality and morbidity reflect more conservative best estimates with deliberate additional margins where there is less experience.  Is LTCI new business sold today safe for insurers to offer and stable for consumers to purchase?  The Pricing Study demonstrates that the new product is safer than in any previous product generation.  Carriers now price products based on significantly more conservative assumptions. Premiums on products sold today are double what they were on the same benefits from just a few years ago.  At the same time, the product is still affordable since consumers have opted for shorter benefit periods and lower inflation increases as evidenced by the average premium per sale remaining essentially the same.  Many insurers offering products in the retirement markets who are overlooking the favorable conditions for LTCI today are missing out on a prime opportunity. 

Of all the features de-risked during this latest cycle in LTCI product design, lifetime benefit periods stand out in the hearts and minds of veteran agents, as well as their best clients. Only a decade ago, sales of lifetime benefits alone, as measured in premium volume, equaled the total stand-alone industry production for all of 2014. Yet, as the distribution of this product feature has dwindled, the need for lifetime benefits has only grown.

It looks doubtful that existing carriers are positioned to bring back one of the benefits that inflicted many of the wounds on their in-force policies. In part, this is a casualty of the overall trend to put the product into the smallest box of potential outcomes so that the product will not lose money in any plausible scenario. This is largely a reaction to the pressures on corporate management from analysts, shareholders and rating agencies who have developed a particularly vitriolic view of lifetime benefits. Offering protection forever sounds scary, but is it really?

What if the root cause of the problem was not really the lifetime benefit itself? Lifetime benefits can now be viewed in a different light as the result of the largest, most recent study to date compiled by the Society of Actuaries (SOA)¹ The results from this study shocked many of the experts in the LTCI actuarial community when they were first announced at the Intercompany Long Term Care Insurance Conference held in late March 2015.

This article will help explain why bringing lifetime benefits back to the market has the potential to be a game changer. In particular, there has been divided opinion for years on two key actuarial assumptions. In the process of examining these assumptions, the SOA study has begun to point to the true causal factors. By dispelling the myths and replacing impressions with facts, we can break the “carrier barrier” and once again offer lifetime benefits in stand-alone LTCI products.

Carrier Barrier Concern #1:

Do Lifetime Benefits Result in More

Claims Than Limited Benefits?

Carriers have had differing experiences with lifetime benefits among their more troubled products of the past. For some carriers, lifetime benefits had more claims (in actuarial lingo: higher “incidence rates”) than limited benefits sold on those same products. One common explanation for this phenomenon was that policyholders wanted to conserve limited benefits, so that they would be available later in life when really needed. Yet, for other carriers with healthier lives, data showed that those blocks had better incidence rates on lifetime benefits than expected. It was then argued, from this observation, that people who could afford the higher premiums also had other resources at their disposal and would use their LTCI policy as a last resort. How could both interpretations be correct?

Using a statistical technique more common to the property and casualty industry, the recent SOA study revealed insight on the contradictory data:

3.1.5 Sample Model Discussion

“Certain results of the model were discussed in depth among the steering committee and other team members. An example of this is the impact of benefit period on incidence rates.

The final model has a slight difference between limited and lifetime benefit periods. The expectation prior to the study was that lifetime benefit periods would have materially higher incidence rates than limited benefit periods. Though this relationship was observed in some of the participating companies, not every participant’s data exhibited this relationship. When all of the data was aggregated, the relationship of higher incidence for lifetime benefit period was no longer present.

This was an example of the strengths of the model, but illustrates its limitations as well. The models and relationships therein were developed based on the aggregate data without regard for the relationships inherent in specific companies’ data. For this reason the same relationships may not exist for each company in the long term care industry.

There was significant discussion around this topic that provided potential explanations for the differences of this relationship from expectation. A (non-exhaustive) sample of potential drivers of the benefit period relationship in this model include:

 • The mix of companies participating in the study; and

 • Differences in underwriting protocols by company.

This relationship is an example of a potential difference between an individual company’s result and the aggregate model. Other differences could be length of underwriting differences by policy duration. Some companies may have differences for five or 10 or 25 years, for example, based on their underwriting.”

The data demonstrates that underwriting plays a deeper role in the utilization of LTCI benefits than originally thought. For the first time, the SOA Long Term Care Experience Study² subdivided the data based on the underwriting style of the issuing company. As can be seen in Table 1 in column four, annual incidence rates for policies that were not fully underwritten were as much as three times higher than fully underwritten policies. As policyholders get older, the underwriting selection effect reduces in percentage terms, but never fully disappears. On the other hand, the difference in the absolute claims rates continues to increase by age. As seen in column five, at age 50, fully underwritten business has one in 1,000 fewer claims per year, but by age 75, the difference is almost 10 in 1,000 fewer claims per year.

Carrier Barrier Concern #2:

Do Lifetime Benefits Have an

Unlimited Cost per Claim?

The need for stand-alone LTCI is evident and has only grown larger, because long term care services are expensive. According to the recent cost of care surveys, the average cost of a nursing home is $90,000–$100,000 per year, and this cost seems to grow at a rate greater than overall inflation each year. Lifetime benefits appeals to consumers who can afford the coverage because it allows them to protect against a catastrophic multiyear event by replacing an unknown cost with a fixed premium. While it is understood that long term care needs are common, the chance of a catastrophic long term care event is not as well understood. We know that people are living longer and that Alzheimer’s—one of the most costly diseases in the United States—is a growing epidemic. On the other hand, most uses of LTCI are shorter in duration as people either recover quickly from acute conditions or use LTCI for end-of-life care. Once again, we must turn to the data to understand the cost per claim. The largest uncertain component of cost per claim is the amount of time spent on claim (actuarially termed “continuance”).

Historically, it has been difficult for actuaries to measure credible data for the amount of time spent on claim. Not only does it often take many years before policyholders use LTCI, but additional time is needed to collect data about the people who have already been on claim for several years. The new SOA study contained significantly more insured experience simply because more years have passed since the prior study. In particular, the first three years on claim has enough data to help quantify the unlimited risk potential of lifetime benefits.

It turns out that after satisfying the elimination period, roughly 50 percent of individual claims last less than one year. One of the reasons is that recovery from claim in the first year is very common, particularly for people who require care at younger ages. About 80 percent of males and 70 percent of females have claims lasting less than three years. Once policyholders survive the first three years in a disabled state, the remaining length of claim is highly dependent on the age that they went on claim. Younger people already on claim for three years could spend an average of six more years on claim, whereas older claimants might average only two more years or less.

As was the case with incidence rates, underwriting plays a critical role in controlling the risk of lifetime benefits. Full underwriting largely limits claims until they occur at ages at which the catastrophic risk is minimized. To measure the impact of the delay of claim on continuance, I calculated an average length of claim in years from the SOA study continuance rates. The average length of claim was calculated for both the full lifetime claim with no cap, as well as the average length of claim for the first three years only; thus designed to approximate a three-year benefit period (BP).

As can be seen in column two and column five of Table 2, male claimants average between 1.5 and 2.6 years on claim. Female claimants have roughly 50 percent longer claims than males at most ages, with a range of 1.7 to 2.8 years on claim. The differential between males and females has been well understood for many years, and the more recent trend toward gender-distinct pricing captures this fact. However, less commonly understood is the difference between the lengths of the unlimited claim compared to the three year capped claim. As can be seen in column four and column seven, claims at younger ages have much more risk with an unlimited BP, but the difference between lifetime and three-year BP claims converges quickly at older ages. This differential is magnified considering that the policyholders who recover at younger ages have a strong likelihood of requiring care again later in life.

Conclusion

Lifetime benefits have traditionally been most popular among consumers, and especially the well-to-do consumer who represents the most frequent LTCI sale. In the past, more liberal underwriting caused lifetime benefits to be far too risky for carriers to offer. However, a deeper analysis demonstrates that lifetime benefit can still be profitably sold for fully underwritten products because strict underwriting controls both the number of claims and the length of those claims.

Full underwriting significantly reduces incidence rates at younger ages, which is also the epicenter of the catastrophic length of claims for lifetime benefits. Going one step further, there are several other positive impacts, from the carrier’s perspective, for delaying claims by using full underwriting, such as:

 • More premiums collected to fund reserves

 • More investment income earned on money held in reserves

 • Less chance that a rate increase will ever be needed

 • More time for the impact of medical improvements in healthcare to reduce the future cost of care, and in particular,

 • If a breakthrough in Alzheimer’s treatment occurs, as everyone hopes will happen, the resulting morbidity improvement will benefit lifetime benefits the most.

The views expressed here are those of the author, and not of LifeCare Assurance or the Society of Actuaries. Any inaccuracies in interpreting the data are those of the author alone.

Footnotes:

 1. https://www.soa.org/Research/Experience-Study/Ltc/2000-2011-ltc-experience-basic-table-dev.aspx-­Release – Phase 2: Jan – Apr 2015

 2. https://www.soa.org/Research/Experience-Study/Ltc/research-ltc-study-2000-11-aggregated.aspx

In the early 1990s, the Individual Disability Insurance (IDI) industry faced consolidation. Profitability turned negative. Policies sold began to decline. Carriers withdrew from the marketplace. It was a tumultuous time. Now, twenty years later, the standalone long term care insurance (LTCI) market has met a strikingly similar trend. Carriers are leaving the marketplace because of near-zero lapse and unfavorably low interest rates. Prices have been increasing and sales have been declining. Attempts to capture market share have been all but abandoned. Fortunately, an analysis of the DI industry foretells optimism for the LTCI industry. In fact, there may never be a better time for new carriers to enter the LTCI market.

IDI Market from 1980 to Current

The number of IDI policies sold began declining in 1990 due to the financial losses beginning in 1986. Profits as a whole dipped negative from 1986 to 1998. Some companies began to re-assess the viability and potential profitability of the IDI market. Other companies withdrew from the marketplace entirely. Adding to the dismal business climate, the IDI industry had been consolidating—the combined market share for the top 10 companies was 49 percent in 1980 and jumped to 76 percent in 1995. Total sales in 1995 were 23 percent below the highest year of sales in 1988.

Beginning in the mid-1990s, the IDI industry shifted toward less risky policy designs. As a result, profits began increasing. Among the many product design changes, the following became most common:

 • Emphasis on guaranteed renewable policies in place of non-cancelable ones.

 • Benefits limited to age 65 instead of lifetime for certain claim conditions.

 • Reduction of issue and participation limits.

 • Movement back to individual sex-distinct rates.

 • Reduced good health discount and higher premium surcharge for substandard risk class.

As a result, loss ratios and profitability improved. Part of this improvement was due to morbidity improvement. Incidence rates have improved steadily since the early 1990s because of better underwriting and tighter contracts on new business in the IDI industry. Many companies initiated the following on all applications:

 • Blood testing required.

 • Greater scrutiny of medical histories with mental or nervous conditions.

 • Documentation of applicants’ financial income during underwriting.

By the mid-1990s, most IDI companies had also increased the professionalism in their claim areas and invested in claims management with claims investigation specialists, physicians and accountants on staff, and fraud and claim settlement units.

Through product design, tighter underwriting and claim management, IDI insurers in total have experienced more than 10 years of solid profitability since 1999. Sales results in 2003–2012 have been steady, with a small recent dip during the financial crisis that has recovered.

Primarily because of these changes, IDI experienced a revival of profitability and interest from carriers throughout much of the 2000s. This resulted in a steady rise of revenue for almost a decade. Even though companies have tightened underwriting rules, rates have risen, and sales have slowed, profits have increased because of investments in less risky benefit designs and improved claims experience.

LTCI Market Current Status

The long term care insurance market has faced rising claims trends, continuing low interest rates, carriers exiting the market and a host of other factors. This resembles the IDI market in the 1990s. For the LTCI industry, of the 125 carriers that once sold LTCI, there are only 16 insurers selling stand-alone LTCI products today. Annual sales of individual LTCI policies have been declining since 2002. In 2013, approximately five major carriers issue more than 75 percent of all the LTCI sold in the United States, while ten carriers represent more than 95 percent of the current market. Even though prices are increasing, policyholders are purchasing less-robust benefit policies, resulting in a decrease in average premium per new sale and masking the full impact of price increases. Comparing the pricing for the same benefits shows a marked increase in pricing over the past decade. (See LTCI Market Trends Chart on page 72.)

The LTCI industry is following a similar path as IDI to respond to the current market challenge. LTCI offerings are less risky for carriers through:

 • Movement to individual sex-distinct rates.

 • Reduced good health discount and spousal discounts.

 • Virtual elimination of the unlimited benefit periods and limited payment plans.

 • Increased pricing on COLA policies incentivizing lower inflation protection.

 • Lowered max issue and participation limits.

In addition to product changes, the LTCI industry has reduced sales on higher risk riders, tightened policy language and, most important, increased rigor in LTCI medical underwriting. Medical record verification is now a more universal underwriting requirement for LTCI applicants. Many companies also require face-to-face cognitive assessments at certain ages, prescription drug checks and paramedical exams.

 Ironically, because of the industry’s increased focus on underwriting, the most popular benefits of the last decade—unlimited benefits and limited payment plans—can now be priced at healthy levels for carriers. Early results from the recently released actuarial intercompany experience study show a significant reduction in claim frequency using now standard underwriting practices to avoid anti-­selection.1 While policyholders do continue to use benefits for longer stays, and the need for catastrophic protection remains, the most expensive claims are concentrated in cognitive conditions for which there is now better pre-screening. As important, policies are now priced at such low lapse and interest rates that there is little chance for these assumptions to cause adverse results. New carriers can offer these features at a higher margin and capture significant market share because existing carriers are cautious due to legacy experiences.

Conclusion

The IDI of twenty years ago bears a remarkable similarity to today’s LTCI market. IDI legacy issues caused by growing pains in new markets initially resulted in poor financial results. This caused carriers to de-risk products or pull out entirely, which led a new group of carriers to profit from lessons learned. Similarly, the LTCI industry is experiencing de-risking of products and increase of prices. Should this opportunity entice new carriers into the market, especially with the benefits most popular among agents, growth in the industry will likely return. Consumer demographics will continue to be a driving force for both LTCI and IDI. If consumer education follows, the demographics point to the potential for significant future growth.

Footnote:

 1. https://www.soa.org/Research/Experience-Study/Ltc/research-ltc-study-2000-11-aggregated.aspx

Tiffany Albert, LifeSecure Insurance Company

Barry J. Fisher, LTCP, Broadtower Insurance Solutions, Inc.

Marc Glickman, FSA, MAAA, LTCP, LifeCare Assurance Company

Angie Hughes, LTCP, CSA, Producer’s XL

Alex Ritter, FLMI, LTCP, Art Jetter & Company

Q: What specific challenges do you see to influencing brokers successful with other product lines to commit to having the LTCI discussion with their clients, and how can the industry address them?

Tiffany Albert: Historically, long term care insurance (LTCI) has had a reputation for being a complex and complicated product. As such, brokers who have truly embraced LTCI have established a unique expertise and often choose to sell it exclusively. Similarly, brokers with other lines of business tend to shy away from selling LTCI. More recently, brokers have developed a renewed interest in strengthening their voluntary offerings as a result of the Affordable Care Act (ACA) and are looking to boost their earnings by offering other products. This presents a great opportunity to learn more about LTCI and its benefits.

In selling LTCI, as with any insurance product sales, it is important that brokers invest time in understanding their clients’ needs. LTCI is not a one-size-fits-all type of product. Each plan is custom designed for the client, so having a good line of sight into his financial goals and how much coverage he is seeking is imperative.

LifeSecure remains focused on creating competitively-priced, straightforward product designs. This helps the client to make a buying decision more efficiently and enables the agent to close the sale more quickly. LifeSecure also simplifies the selling process by maintaining the fastest underwriting turnaround time in the industry and by offering an electronic application process.

As carriers, we must continue to offer unique and innovative solutions that help more agents do business in LTCI. We must also ensure we’re providing agents with a strong educational background on LTCI to make it easier for them to sell the product and protect their clients. Our industry as a whole will benefit from having more LTCI experts.

Barry Fisher: Day-to-day compliance burdens, along with the Affordable Care Act (ACA), have, in my opinion, reduced much of the agents’ excess bandwidth to take on new products of any kind. So unless their clients ask for LTCI, it is overlooked. A broker needs to make a commitment of time and effort to successfully take on a new product line such as long term care insurance. It requires new knowledge, CE, and now they also need to understand life insurance and annuities. Brokerage general agents (BGAs) can help agents bridge this gap, but the challenge is there. I also believe that the ACA has sucked discretionary premiums out of everyone’s pocketbook, making it harder to find the money to pay for new insurance. The combination of these factors creates a tough environment for long term care sales.

Marc Glickman: Addressing the following two challenges will allow brokers to more easily commit to the LTCI market:

The first challenge is to simplify the LTCI discussion. By focusing at a high level on the benefits of the coverage, brokers unfamiliar with the LTCI space can more easily educate their clients. Based on each client’s profile, brokers can be prepared to determine which clients are the best leads for different LTCI coverages. For example, although the hybrid life/LTCI market is often suggested as a substitute for standalone LTCI, the two products are clearly geared toward different clientele. Greatly simplified, hybrid products fit those who are already in need of life insurance or annuities but are willing to substitute those benefits for an LTCI benefit should the need arise. On the other hand, stand-alone LTCI is geared toward healthy individuals with assets to protect against a catastrophic event should they outlive their life expectancies. With this mindset, stand-alone coverage that offers comprehensive benefits such as lifetime benefits, 10-pay and single pay are designed to meet the need.

The second challenge is new business price stability. LTCI new business pricing has increased to a point where it is extremely unlikely that future increases will be necessary. In addition, with virtually every major carrier having needed to perform substantial rate increases due to the under-pricing of legacy business, it is important to recognize that even with those increases, premiums for the legacy business are still lower than the current new business premiums.

The legacy business under-pricing was primarily caused by lower lapse and interest rates than originally anticipated. Conversely, current products use lapse and interest rates that are so low it is difficult to develop scenarios in which they will be insufficient on a forward-going basis.

Angie Hughes: What I find in my distribution to be the biggest challenge facing most brokers today in having discussions around LTCI is just that they are successful in other product lines, but with LTCI being a resistant topic for both broker and consumer, why bother. It is, by far, easier to wait for the consumer to ask about LTCI and then give them some quotes than it is to really work up the conversation and present the need for LTCI and what it does for the family once they are in a crisis. With LTCI, you have to be very patient and comfortable with the word “no.” You will be told no far more often than yes, but if we don’t at least give consumers a chance to say no, are we really doing our job? How the industry can help is a double-edged sword. We ask for easier products, fewer moving parts, and then we don’t really like them. We also want rate stability, but what is that anymore? We are living in a challenging time with LTCI sales, and if our hearts believe that this type of insurance can really help families, then we must continue to bring up the topic, have the tough conversations, and just educate families on what really happens when they need help and who actually pays for the care.

Alex Ritter: Consumers have grown increasingly aware of the need for long term care planning. Clients want to have the long term care planning discussion. They will have it with someone. If their broker isn’t talking about it, someone else will.

We need to understand that new business pricing problems are behind us. Older generation policies were subjected to rate increases, and some carriers left the market. However, the carriers selling LTCI today found accurate pricing, solid underwriting and policy design solutions.

Q: What factors should agents consider regarding a decision to address the long term care risk in planning discussions with clients?

Fisher: New product choices mean that consumers have the opportunity to do a lifetime of long term care planning. Agents need to be fluent in general long term care matters, but I don’t think they need to be experts. They should be able to rely on their BGA for detailed support. Sometimes the discussion with the prospect will be about life insurance with coverage for chronic illness as a “bonus” benefit. Other times traditional long term care insurance or linked products where the life insurance is actually the incidental benefit will take center stage. Therefore the broker will need to hone his fact-finding skills so he knows what his client’s needs and focus of attention are.

Glickman: The planning discussion should be designed to understand whether the projected retirement income can support the catastrophic costs associated with long term care, together with the ongoing retirement needs of the healthy spouse. While the answer could be care provided by the spouse or the children, the emotional and physical impact on healthy family members providing that informal long term care needs to be properly understood by the client. If the answer is to use retirement income funding, it needs to be understood how much of those funds can pay for care, what types of services can be afforded, and whether adequate funds will remain for the primary retirement needs. Generally, the availability of LTCI provides significant quality of care improvements with funding for better services/facilities and the ability to remain at home longer.

Hughes: I believe that everyone should hear about LTCI, but not everyone needs to buy it. Probably the first question in deciding on whether or not to continue the discussion is, “Are you healthy enough?” Why go down the painful task of taking an application just to have your client declined due to health reasons? This is where your field marketing office can assist greatly. All carriers have knock-out questions and medications. I would say the next factor would be finances: “Can you afford it?” Now that is the million-dollar question, and you will see great debate around this. At what point should someone rely on aid or self-insure? Again, this goes back to my adage, everyone should hear about it but not everyone will buy. Is something better than nothing? My opinion is yes!

Ritter: With the increased emphasis placed on underwriting, prequalifying a client’s health is crucial. To help brokers maximize placement, we have a brilliant chief underwriter on staff who can help select the right carrier and help place cases. Good field underwriting ensures that the broker’s time is well spent and prevents unwanted surprises for both broker and client.

Understanding client finances, including the ability to pay ongoing premiums, the ability or desire to self-insure, and the amount of assets the client wishes to protect is essential. Understanding the client’s employment and income tax situation can help the advisor direct the most tax-savvy payment method.

Every client has a unique set of circumstances, wants and needs. When brokers have done proper fact finding, we can help them find these value propositions, which close sales.

Albert: As with any product, it starts with knowing your client—not only understanding his financial goals, but also considering things such as age, health and family history. LTCI means different things to different people. Understanding a client’s perspective can help agents present LTCI as a meaningful, easy-to-understand product that is a critical piece of the financial planning puzzle. An agent can also help create a benefit plan that matches a client’s personal needs and budget. Even younger clients are showing a greater level of interest in LTCI as they consider different ways to protect their health and financial futures. LTCI doesn’t have to be an “all or nothing” decision. Remember, when a life-changing event happens, having some coverage is better than having none at all.

Q: What product solutions are helping or could help reduce consumer reluctance to use insurance to address the long term care risk?

Glickman: Life or annuity products with LTCI riders may be helpful in providing a vehicle for self-funding lower cost but higher frequency long term care events. Stand-alone LTCI provides catastrophic coverage, or lower cost solutions for only the long term care expenses.

There are several tax-advantaged ways that stand-alone LTCI can be leveraged:

 1) 1035 Exchanges to Stand-alone LTCI: The IRS allows clients to convert deferred tax gains from an existing life or annuity contract into an LTCI plan on a tax-free basis. Despite pre-tax dollars being used for this purpose, LTCI benefits are received tax free and the client may never have to pay taxes on those capital gains. This tax advantage has been available since 2010, yet has not been utilized much since then.

 2) Reverse Combo: Stand-alone products have often offered return of premium nonforfeiture options. When term life insurance is added to this product as an additional rider, the cash flows are similar to the life hybrid products, but with more LTCI coverage and, often, higher death benefits for similar or lower premiums. This is due to the inherent inefficiencies caused by the MEC contract rules and tax corridors rules, which are not applicable to the reverse combo.

 3) Step-rated COLA: There are standalone LTCI product designs emerging in which premiums can be made much more affordable in early years, only increasing in future years at a slow but affordable level, while the inflation protection continues to increase at a compounded rate.

Hughes: Hybrids and linked benefits seem to lessen the tension when it comes to addressing long term care. I still believe that if you want to solve the long term care risk, then LTCI is the right solution. However, consumers like the “But what if I never wake up and don’t need long term care?” This answers that problem, but rarely have I found that a life without a long term care rider product is less expensive than a comprehensive LTCI solution. I still like to bring up hybrid and linked solutions, as the consumer is more relaxed about talking about death than he is about what happens before we die. We might get sick and need some help—then what?

Ritter: Enabled by state long term care partnerships, matching benefit periods to assets brings about affordable premiums. Short term care plans can get the ball rolling with lower cost and simpler underwriting. Hybrid LTCI linked with life or annuities offers liquidity in return for the consumer self-insuring a portion of the risk. Buying LTCI at work offers convenience and potential tax advantages.

Albert: When LifeSecure entered the market, our goal was to create innovative product solutions that were easy to sell and easy to understand. Having just a few decision points for consumers, competitive pricing and simple features, such as our Benefit Bank and simplified issue multi-life product, have made it easier to introduce the idea of LTCI. Again, carriers must continue to look at forward-thinking, modern approaches to long term care solutions to better meet our customers’ needs.

Aside from products, cultivating a better understanding of LTCI is vital. Groups such as Life Happens are doing a great job at helping consumers understand what’s at stake in long term care situations and how LTCI can help. Carriers and brokers must continue to be advocates for our industry and accelerate efforts year-round to help raise awareness of the risks associated with long term care and the importance of this necessary protection.

Fisher: With the addition of more hybrid and linked planning solutions to traditional choices, suitability becomes a key element in deciding which program is best for the client. “Cost-effectiveness” between various products can be opaque, so clarity for agents and consumers hasn’t necessarily gotten any easier. Ultimately, having more choices is better. Agents should avoid the “panacea trap,” where they believe one solution fits all. Differentiating clients by their life stage is a good general rule of thumb, and listening to what they’re interested in will be the key to success.

Q: Partnering with an LTCI specialist is often proposed as a solution for advisors successful with other lines. What suggestions and/or experience can you share about finding and forming a productive relationship with an LTCI specialist?

Hughes: If I could figure this out, life would be grand! This is easier said than done. The advisors who are successful in other lines really don’t want to bother with a product that they perceive as complicated, expensive and often possibly a point of contention when it comes to the relationship they have with their clients. I can’t say as I blame them, but I do think this is something that can prove to be quite successful if the pairing of professionals works out. I do believe the key to success here is expectations. You have to set the right expectations between both advisors. The expectation that not every case is going to be smooth and the expectation that I’m not going to give you my “A” list of clients right off the bat.

Ritter: A large number of brokers with whom we work sell LTCI. However, some brokers tell us they are so heavily focused on their own specialty that they would rather partner with an LTCI specialist. We have been successful in matching up brokers and LTCI specialists. We find that when a broker refers a client to the specialist, the closing rate is very high.

It is essential that the specialist confirm through word and deed that the client belongs to the broker.

It is not uncommon for a broker to write a substantial life or annuity case based on needs uncovered by an LTCI specialist.

Albert: It is important to work with a licensed and LTCI-certified specialist who understands the industry and the comprehensive array of products currently offered. The specialist should also have relationships with at least a few different carriers so the client has options when it comes to underwriting guidelines and product choice.

In short, anyone exploring a partnership should do his due diligence. If you’re looking for a subject matter expert (SME), make sure that he really is a LTCI SME. It’s also important to research the carriers you’re writing with, the type of policies they sell, and to ensure that they work with similar integrity and principles that you bring to your clients.

Fisher: While I’ve always thought that this sort of relationship is a good thing, most brokers I know don’t want any agent to “get their nose under the client’s tent,” so to speak. Also, at this point, I think the day of the LTCI specialist is coming to an end and I’m not sure how many of those who continue in this area are up to speed on the hybrid and linked choices that are out there today. If agents and advisors really want to do the right thing, I believe they should do it themselves or have someone in their office who specializes in long term care planning.

Glickman: The most successful specialists are expert in understanding needs and solutions, and describing them in a simplified and intuitive way to advisors. LinkedIn discussion groups have become a good resource for finding these specialists and vetting them based on their responses. The remaining challenge is splitting commissions in an equitable way, commensurate with the value that the specialists are providing.

Q: What can LTCI specialists do to influence their peers in other lines to address and provide solutions for the long term care risks their clients face?

Ritter: The LTCI specialist must impress upon his peers the importance of incorporating long term care planning into their practices. The problem of long term care funding in America is not going away.

LTCI offers excellent compensation. Since lapse rates are extremely low, renewals can provide consistent revenue for years to come.

Selling LTCI is the right thing to do. A long care event can have a profoundly negative effect on family finances, quality of life and the disposition of wealth. Financial professionals have a duty to discuss long term care planning with their clients, and they must do their best to ensure that the risk is transferred. [AR]

Albert: It’s as easy as opening the lines of communication, whether the goal is forming a partnership or simply promoting LTCI. In order to bring the best solutions forward, brokers need to commit to being collaborative and reaching across the lines of business. Speaking as someone who has held leadership positions in agent trade associations, I know they can also help by raising the profile of LTCI in our trade groups. Considering the growing need for LTCI, which is not going away, we all need to be industry advocates. Starting the conversation and putting the demand for care, caregiver shortages, long term care risks and statistics in relatable terms will make it more tangible for others and raise awareness of the important solutions carriers and agents are offering.

LTCI is a much needed product for many Americans, as we are now living longer than any other generation. If you are not offering this to your clients, then someone else may be. [TA]

Fisher: If a long term care insurance specialist really wants to work with other agents, I think they need to prove that they understand all long term care planning options: traditional, hybrid, linked and annuities. They also need to be very careful not to go beyond the “mandate” that’s been given to them by the referring broker. [BJF]

Glickman: Specialists need to make more of an effort to market their services through speaking and networking opportunities with non-LTCI agents. Education about topics that overlap, such as the benefits and limitations of living benefits, is in great demand and will immediately add value for non-LTCI agents. Also, identifying other sales opportunities such as penetration of the executive carve-out benefit market will help expand the need for specialists’ services. [MG]

Hughes: You really do have to set yourself up as “the resource” when it comes to your peers. They need to see that you eat, sleep and breathe LTCI and keep your finger on the pulse of the industry. LTCI is ever-changing these days, so it is important as an LTCI specialist to be just that—a specialist. Some call it a niche market, but I see it as a specialized field that requires time and energy to stay attuned to what’s happening and how the solutions to the long term care risk can be solved in many different ways. I have found that speaking at local organization meetings with absolutely no intent to sell is a great way to set yourself apart. Be active in your town’s local insurance chapters. Get yourself speaking gigs. Everyone wants to hear about LTCI without being sold. [AH]

LTCI actuaries tasked with reviewing the past in order to try and predict the future get a unique glimpse into the successes and failures of different product designs. More emphasis is placed on the failures, since insurance is a business of managing risks. Yet failures are often tied to collective wisdom, which is a difficult trap to escape. Among the challenges of creating a “new” successful product: The most cleverly designed products may never get off the ground if the benefits cannot easily be explained to clients; a unique design, though superior, may fail because the benefits cannot be lined up side by side with existing popular products; and sometimes the product must conform to the consensus of the times, even if that consensus is incorrect.

Much has been made of the design limitations on past products for the LTCI market in particular, such as:

 • Benefits that are “use-it-or-lose-it” upon death

 • Premiums that are forfeited upon lapse

 • Limited benefits, especially when they are needed the most

 • Rates that can (and did) increase when those increases can least be afforded by the policyholder

Recently my company reviewed the experience of our first product series from 25 years ago. It suffered much less from the limitations and faulty assumptions of subsequent LTCI products. It offered an array of innovative benefits that were well ahead of their time:

 • GAC: Guaranteed Assistance Care paid a reduced annuity benefit starting at age 85 to cover any personal assistance not already covered under the nursing home policy and without any activities of daily living (ADL) requirements to qualify. This helped pay for any costs associated with becoming elderly and frail.

 • ROP with COC: This benefit provided a return of premiums, without claims offset, to the beneficiary upon death of the insured, and provided for a continuation of coverage nonforfeiture option upon voluntary lapse.

 • Lifetime Benefit Period: The policy only offered lifetime benefits.

 • CPI Indexed Inflation Protection: The daily benefits increased each year with increases in the CPI, but the premiums remained level.

 • Payment Options: Ten-pay plans and non-level premium options (higher first year, lower renewals) were offered to remove the risk of unaffordable premiums in the later retirement years.

Talk about full retirement protection! Surprisingly after 25 years, the experience on this product compared to expectations was reasonable. It did not suffer as much as other products in the declining lapse and interest rate environment for the following reasons: First, payment options, by nature, were already expected to have lower or no lapses.

Second, the premiums collected were invested long term from the outset because of the built-in incentives to retain the policy. This mitigated some of the interest rate risk. Third, with death and annuity benefits, the product was less sensitive to the mortality assumption.

Finally, and most important, the product utilized rigorous LTCI-specific underwriting. This significantly reduced morbidity anti-selection and kept the risk pool pristine for the eventual benefit of the carrier and its policyholders. Limiting early duration claims had an unforeseen benefit for those policies that elected lifetime pay premiums. The rate increases that occurred because of lower than expected lapse rates were lower in magnitude than other policies of that generation.

Yet sales were not spectacular because richer benefits made the product less competitive. In the late 1980s and early 1990s, premiums were quite expensive compared to competing products without the extra riders. However, by today’s standards, premiums were relatively inexpensive for the protection that they provided. Interestingly, this product shares many similarities with the combination products offered in the market today.

Life and annuity products with LTCI combo riders have become a focus for many companies even if they do not consider standalone LTCI as a product they would consider selling. The insurance industry sees the need for an LTCI product solution for retirement age boomers with no semblance of a public solution on the horizon.

The high-level strategy for combination products in today’s market is to offer very limited LTCI benefits, which enables simplified LTCI underwriting. With only 5 to 15 percent of the policy costs attributable to the LTCI benefits, the life or annuity products to which they are linked can absorb a reasonable amount of morbidity anti-selection. Since the credited interest rate can still be adjusted, these products can still deliver the profitability of the underlying life or annuity product.

There are at least four variations of the life/”LTCI” combo idea, although the last one is the most prevalent:

 1. The least expensive is an acceleration of the death benefit, usually in a lump sum, to pay for a death expected within six months to one year. This variation is usually about 3 percent more costly than the life policy to which it is attached.

 2. The next least expensive is the chronic illness rider. This benefit is usually payable monthly based on the occurrence of a permanent long term care event requiring either loss of two of six ADLs or severe cognitive impairment. Typically, this rider reduces the death benefit dollar-for-dollar, while reducing the cash value on a pro-rata basis. This variation typically costs about 5 percent more than the underlying life policy.

 3. The long term care rider, unlike the two riders described above, is considered LTC insurance for regulatory and agent education purposes. It typically provides for a payout of X percent of the death benefit based on LTCI benefit eligibility without requiring permanent disability. Often, benefits are paid out until the death benefit is exhausted. This variation typically costs about 7 percent more than the underlying life policy.

 4. The most comprehensive version of the life/LTCI combo policy typically builds the long term care rider into the life policy and then offers the policyholder an extension of benefits rider. The policyholder continues to receive LTCI benefits after the death benefit is exhausted, for either limited or unlimited benefit extensions. Typically, this variation costs about 10 to 15 percent more than the underlying life policy.

It is estimated that new sales of the fourth type of life/LTCI combo products reached about $2 billion last year. However, the portion of the premium attributable to LTCI protection is only about 15 percent of the total with the vast majority of it collected on a single premium basis. This $300 million of long term care single pay premium is equivalent to about $30 million of annual pay premium. When compared to annual pay premium of $400 million for standalone LTCI, this only represents about 7 percent of total new LTCI premiums generated. This segment of LTCI premiums, while still small, is growing quickly. Many carriers find themselves needing to offer some type of life/LTCI combo product, even if it is only to prevent losing existing life and annuity product sales to agents who want to offer some type of long term care protection for their clients.

Is there a solution that offers both more LTCI protection and provides carriers with significant profit potential at less risk than LTCI products of the past?

I think so. The potential solution harkens back to the product of 25 years ago. Instead of building a life-based/LTCI combo product, a company could instead build an LTCI-based/life combo product or what might be termed “reverse combo.” This reverse combo would use an LTCI standalone policy and then add on an ROP rider together with a cash surrender option. Because the base policy is LTCI, this approach allows the addition of any type of inflation protection, any type of premium payment pattern, and any amount of decreasing or level term insurance to customize the LTCI benefits and death benefit as desired. In addition, the cash surrender option is not required to meet any minimum cash value tests, and therefore can be much lower or zero for several years.

The higher pricing on life-based/LTCI combo products with limited benefits offers an attractive entry point for a carrier to compete using the reverse combo concept with richer LTCI benefits. Risks on LTCI-based products are lower than ever because the downside risk of the critical lapse and interest rate pricing assumptions have been virtually eliminated. Morbidity risk may still be significant, but when the product is combined with rigorous LTCI-style underwriting, this risk can be mitigated as well. The products can even be designed so that there is little to no risk of future rate increases. Finally, the design of the reverse combo is more efficient than the life-based/LTCI combo counterpart because:

 • Life-based products still carry the burden of having to meet both the modified endowment contract (MEC) and life insurance corridor tax rules. This makes it difficult to design 5 percent compound inflation protection or lifetime premium payments with tax efficiency into the life structure.

 • Assets can be invested long term with no disintermediation risk, since the cash value structure discourages policyholders from early withdrawal of funds regardless of interest rate changes.

 • Death benefits can be customized to policyholder specifications so they can choose the level of LTCI and death benefit they desire.

 • Death benefits can also be designed with no claims offset as well as on a last-to-die basis.

It will be interesting to see how emerging boomers will benefit from these merged products in the future.