It’s increasingly evident that the long term care insurance industry has not provided an acceptable solution to the long term care conundrum for millions of “middle-class” Americans.
How does one define the middle class? For these purposes, I would define the middle class as families from the eleventh highest percentile to fiftieth percentile in income and assets. Of course, there are variations by states and local areas with their different costs of living, and this definition is imperfect. However, there is at least some potential for these families to protect themselves with a long term care solution. I am assuming that families in the fifty-first percentile to one hundredth percentile in income and assets cannot afford to protect themselves with this insurance and must rely on Government programs.
The need keeps growing as our population ages and more and more people need substantial caregiving. In addition, the costs of care keep rising faster than the rate of inflation and the rate of healthcare costs. This trend is likely to continue for many years.
Most policies that agents and brokers are selling today will not adequately cover long term care costs in the future. Traditional long term care policies are normally being sold containing a $150 to $200 daily benefit, far less than the cost of a nursing facility or twenty-four hour home health care. They also have only three percent compound inflation, which is less than long term care inflation has been historically and likely to be quite a bit less than future long term care inflation. Many policies sold today only cover a limited lifetime benefit, often only three years—about the average long term care scenario.
This means that we can’t reduce benefits to lower the price and have a meaningful policy as a result. Even these policy structures with their compromised benefits are still too expensive for middle class families because they cost anywhere from $2,500 to $4,000 per person. Families have to weigh these costs against their many other obligations, and a far off long term care solution normally gets set aside. This is especially true because most families have very little savings to utilize for what they consider to be discretionary spending.
Hybrids and life insurance with chronic illness riders may be more popular, but they contain their own drawbacks. First, they are more expensive than traditional long term care insurance because they contain two products instead of one. Second, any long term care benefits must first be deducted from the death benefit, impairing the main purpose for which most of these policies are intended. Third, they may not contain some of the main benefits of traditional long term care insurance, such as care coordination and tax deductibility. They are a great solution for the wealthy, but not so great for the middle class.
The middle class is being left behind. What products can we create which will appeal to this huge target market?
- Some states have revised their Partnership regulations to once again design these policies for people with moderate income and assets, the target market for which the Partnership policies were originally intended. They allow inflation riders as low as one percent, and they drastically lower the minimum daily benefit and benefit limit. People can purchase a Partnership plan with these smaller benefits, use up these benefits, wind up on Medicaid, and preserve some or all of their assets. What a great deal!
Unfortunately, the marketing of Partnership policies has not changed, and agents and brokers have not seized this opportunity. Some states are still mired in the old, inadequate regulations, and change comes very slowly. But I believe that Partnership policies are a fine example of a private/public partnership which can work for the middle class. Its weakness is that it is a voluntary plan and needs to be sold, not bought.
- Second, we will see what changes there are in Medicare which could create a long term care opportunity. This assumes that long term care coverage is too expensive to include in a Medicare-for-all plan. But I envision a small long term care benefit for custodial care, either as a rider to the basic Medicare policy or as a separate offering. It could take years to build up the cash reserves to pay for this benefit. A few years ago, an attempt at this in the Class Act failed for lack of adequate funding. However, the need is apparent, and a second attempt could be made at the Federal level.
- Third, individual states are very interested in the new State of Washington Long-Term Care Trust Act. Funded by a .58 percent payroll deduction, it provides for a benefit of $36,500 which will be indexed for inflation. Its big advantage is that it is a mandatory program and will include a younger pool of insureds. This plan has some major weaknesses and may need to be substantially altered to succeed. The benefit is a small one, but it’s the beginning of a long term care solution which could grow and become important.
- Fourth, worksite programs could be the future and could include many citizens in the middle class. Most companies already offer a life insurance program to their employees, and it would be an easy transition to include a long term care rider in an existing whole life policy, or to create a term life policy with an option to convert to a hybrid policy. Long term care protection would have to be conceived as a major employee benefit in order to become important, and it has many competitors in the employee benefit space.
- Fifth, the repricing of traditional long term care insurance could create lower initial premiums which rise slowly every year, similar to health insurance. This concept would better fit the needs of younger prospects who have other immediate needs and don’t want to spend much money initially on a long term care solution. The rate of increase could be variable based on actuarial experience. This structure could open up the whole middle class market if it were presented properly.
- Finally, there may be designs in the works that I don’t know of. This is a time for America to be inventive and create new solutions. I bet these new solutions are already on the drawing boards. I hope so, because the people we are selling this protection to now are not the ones who need it most. It’s the middle class, the people caught between being rich and being poor, who are the most exposed to long term care costs.