It is becoming more and more difficult to adequately insure Americans against the increasing costs of long term care and long term care insurance. These increasing costs have made traditional LTCI expensive in the eyes of many Americans. Agents have had to make compromises in the protection in order to make the premiums affordable for many. The result is the promotion of partial solutions to the long term care need which in many cases will not adequately cover the costs of care.
The growth of hybrid and linked life and annuity products have become more popular than traditional long term care insurance because they offer solutions to two needs at the same time. However, they are therefore generally more expensive than traditional LTCI and provide solutions for only a small segment of the population. Furthermore, they come with their own separate set of advantages and disadvantages which normally lead to other compromises in protection.
Let’s examine the current state of both traditional LTCI and hybrid and linked life and annuity products:
Traditional Long Term Care Insurance
- Rates for traditional long term care insurance have at least doubled over the last twenty years. The causes are well known: The low interest rate environment, near zero lapse rates, higher than expected claims, and the resulting added reserve requirements. Current rates may be more stable, but large rate increases on existing blocs have caused agents to worry that even rates on current policies could be increased substantially in the future. Carriers have retained the ability to raise rates, subject to approval by state insurance commissioners, creating uncertainty.
- The costs of care have risen as expected by four to five percent per year for care in all types of facilities. Home health care costs have risen much more slowly but have spiked recently, especially in states which now require raises in minimum hourly wages. These costs will in all likelihood continue to rise faster than the general rate of inflation.
- Insurance carriers no longer want to be exposed to future claims on policies with five percent compound inflation and have priced them out of the market. The result is that agents must sell policies in which the inflation riders may not keep pace with the increase in costs of care. An alternative is to create more protection by increasing the daily or monthly benefit, but this approach may provide over-protection in the near term and decreasing protection as the policyholder ages.
- The average age of the purchaser of long term care insurance has remained steady at about age 57. Policies would be much less expensive and easier to underwrite were they bought at younger ages, especially under age 50, but this has not happened. Younger prospects have so many other demands on their financial resources, and many don’t have sufficient assets or income to save for the future.
- The average sale for traditional long term care insurance has more than doubled over the last twenty years from about $125 per month to over $250 per month, or over $3,000 per year. This is despite a decrease in the average benefits in policies. How many people, especially couples, can afford $6,000 per year for long term care insurance? Maybe less than 10 percent of Americans would even consider such an expense, as most are having trouble paying their bills as it is. Traditional long term care insurance can now cost $100,000 or more over the life of the policy. Most prospects dislike the idea of spending that kind of money for a benefit they may never use.
- So what compromises are prudent? Three percent compound inflation instead of five percent could well not keep pace with inflation. $2000 per day benefit, or $6,000 per month, is well below the cost of nursing homes in most states, and will also not cover twenty-four hour per day home health care. Two or three-year benefit limits may cover the average period of care, but what about the fifty percent or so of scenarios that are longer than the average period of care? What about the truly catastrophic scenarios that last six to 10 years, scenarios which most prospects mainly want to protect against but would not be adequately protected in most of today’s policies?
- Again, the conclusion is that agents are selling partial solutions to the long term care need.
Hybrid and Linked Products:
- Life insurance with accelerated death benefits has a major flaw in protecting against long term care costs. The death benefit normally does not increase over time. The result is that the death benefit has to be a very substantial one in order to create an adequate long term care solution, thus increasing its cost. In addition, the death benefit can erode substantially if it is in fact required to cover long term care costs. The use of the accelerated death benefit can thus defeat the main purpose of the life insurance: Protecting one’s family if the principal wage earner dies.
- Products with chronic illness or long term care riders can provide more protection against long term care costs than policies with accelerated death benefits. The rates are normally guaranteed. However, the riders create an added expense to the policy one way or the other, whether there is a cost for the rider or whether its costs are imbedded in the cost of the life insurance. Again, the death benefit can erode substantially if it is in fact required to cover long term care costs.
- These products can extend the benefit period of long term care costs, sometimes even providing lifetime protection, mostly now lacking in traditional long term care insurance. They also often offer inflation riders, at least on the rider portion, but these greatly add to the cost and are frequently not sold. Even so, once again, the death benefit has to be a very substantial one order to create an adequate long term care solution.
- Term life insurance can be very inexpensive, and is often sold to younger-aged people. However, term policies normally lapse before the need for long term care arises due to the greatly increased cost of renewing them. Many can be converted to whole life insurance by a certain age, in which case they could provide good long term care protection but at a much higher premium.
- Deferred annuities with benefits for long term care also have a major flaw. The growth in value of the annuity is reduced by the added risk of providing benefits for long term care and grows by a far smaller rate than other annuities. This is true even if there is a separate account for long term care benefits. Thus, the long term care funding can defeat the main purpose of the annuity: Increasing ones guaranteed income for life.
The Resulting Dilemmas For Agents:
The resulting challenge for agents is how to provide adequate long term care protection in the face of these rising costs. There is no easy answer to this dilemma. Agents must design a solution which is saleable and thus often must make compromises in the policy’s protection. These compromises result in truly partial protection, protection which will often cover most of the costs but over a relatively short period of time. One could make the case that, with the exception of the five to eight percent of wealthiest prospects, we are not able any more to adequately protect people against future long term care costs.
There is no easy solution here, either in the private or in the public sectors. Even if we adopt a single payer system under Medicare, as proposed now, there would probably only be partial long term care benefits. Partnership plans involving both the private and public sectors may be the best solution we have come up with thus far, but sales have been disappointing. We have to make the purchase of long term care protection attractive to the middle class. If we can’t, we will be forced to raise taxes to enable the government to take on the entire cost burden.
We only have about ten years to figure this out before many baby boomers need care. The need is greater than ever and growing fast, and our ability to satisfy this need is diminishing.
