What is the state of long term care insurance? It’s hard to say. The need for this unique protection is growing as our citizens age but, in my opinion, discussion about long term care has diminished. The insurance industry has failed to provide a long term care solution which is being accepted by the public.
However, changes are happening, and we may shortly see a rebirth of this product. Let’s first examine the reasons for the lessening of our conversation about long term care. Then let’s look at the potential for future growth.
First, the long term care insurance industry made some critical errors in pricing the product a generation ago. It assumed that the high interest rates of the last part of the twentieth century would continue into the twenty-first, but interest rates have moderated. It assumed that lapse rates would be six or seven percent, similar to the life insurance industry, but they have been one percent. It assumed an insufficient utilization factor of the insurance, as claims turned out to be higher and of longer duration than projected.
These assumptions resulted in a severe underpricing of the product, and this led to large rate increases which are still occurring. The design of the product should probably have mirrored health insurance where the initial premium would have been low and small annual rate increases would be assumed. This structure would have given the product more initial pricing appeal and acceptable pricing flexibility.
Many agents were encouraged by the representations of a major carrier which boasted of no previous rate increases, and assured their prospects that rates would therefore hopefully not increase over time. This turned out to be misleading and incorrect.
The result was income losses for the carriers and a public relations disaster. Over a hundred insurance carriers exited the industry, and some even went bankrupt. The industry was considered to be untrustworthy and more concerned with its own profits than the welfare of its policyholders. Today’s rates are considered to be too expensive and still unreliable. Overlooked are the billions of dollars paid out in claims and the many stories of people whose assets have been protected.
Second, the overall social and political environment has discouraged people from thinking about their long term care needs. These issues have become uppermost in our minds. The main current motivation of many Americans is just trying to pay their bills and reducing their debt. For them, the future will have to wait for a calmer and more prosperous period.
Finally, the cost of long term care protection has become so high that, thus far, federal and state governments have been unable to provide a solution. Many bills to cover the costs of care have been introduced, and there has been some helpful legislation around the edges including the creation of public-private Partnership policies. The legislation which came closest to providing a significant long term care solution was the federal Class Act ten years ago, but it failed for lack of funding. Many bills have been introduced each Congressional session since, but have gone nowhere.
Meanwhile, the insurance industry has attempted to find solutions other than traditional long term care, sales of which are five percent of what they were fifteen years ago. Hybrid life and annuity/long term care insurance policies have provided an expensive but useful solution to two different needs at the same time. At least 30 percent of life insurance policies now have long term care riders or chronic illness riders. These products have resulted in increased sales, although in many instances, a chronic illness rider is bought as a nice extra to a life insurance policy and not as an important component. These new products could cause a revival of public interest in long term care solutions, but most people cannot afford their cost.
Now let’s discuss the potential for future growth. The cost of long term care has become too high for either private insurance or any government to provide a solution for the vast majority of Americans. There needs to be a true public/private partnership which could share the cost, now well into the hundreds of billions of dollars annually. We now have a fresh example of how this public/private partnership could evolve.
Last year, the State of Washington passed the Washington LTC Trust Act and established the Washington Cares Fund. This mandatory program, now slated to begin on July 1, 2023, imposes a .58 percent payroll tax for all adult W–2 employees in Washington State. This would pay for some long term care services for a short period, increase the long term care conversation, and encourage citizens to purchase wrap-around private long term care insurance
The only way to permanently opt-out of the payroll tax was to have other long term care insurance in force by November 1, 2021. Washingtonians do not pay income tax and rebelled against the idea of being taxed. About one-seventh of the eligible population, almost 500,000 people, suddenly bought private long term care insurance, and many others couldn’t buy it because carriers were overwhelmed and ceased sales.
However, many people only bought private long term care insurance in order to opt-out of the tax, not to buy long term care protection, thinking they could lapse their policies early in 2022. It now appears that the State will amend the Act to include some recertification of policies, and a lapse will lead to an imposition of the tax.
The combination of a public and a private long term care insurance program is very complex and contains a number of imperfections. Nevertheless, the Washington LTC Trust Act appears to be on its path with some revisions to implementation. If it works, it will save the State many millions of Medicaid dollars and provide at least a partial long term care solution to its citizens. It will become more popular over time as people receive its benefits and augment their coverage with wrap-around private insurance.
Twelve other states are now considering programs similar to Washington State’s, including the large states of California, New York and Illinois. California has created a Long Term Care Insurance Task Force which is directed to report its recommendations to the Governor and the Legislature by the end of the year.
Thus far, it appears that the California Task Force will recommend an opt-out provision similar to that of Washington’s, allowing opt-out only before enactment of the bill. If this occurs, I believe that as was the case in Washington, there will be a new gold rush in California…to buy long term care insurance and opt-out of the tax. The Task Force still has to wrestle in 2023 with the high-cost issues, sensitive in a State with such high taxes as it is. It will probably have to cut the cost of the current recommendations by as much as half in order to have a plan which would be politically acceptable. Passage by the Legislature and signature by the Governor are still many months away, but in my opinion, passage is likely.
If either California, New York or Illinois pass an act similar to that in Washington, major changes will occur. Other states will do the same. There will be large efforts to educate the public and much conversation about long term care will ensue. Carriers will design new wrap-around policies, and long term care sales will increase dramatically.
This change is not going to happen overnight. Legislation will take time. Carriers may be slow to adjust. It may take several years before the long term care insurance industry becomes a significant part of our conversation. However, the potential for major growth exists. The seeds for change are beginning to germinate. Stay tuned!