We are often asked to advise on whether our clients should purchase long term care insurance. While we are proponents of being self-insured, when it comes to long term care, with steeply rising prices and the fact that 7 in 10 people 65 and older eventually need some form of long-term care, it is worth considering. But traditional long term care policies have received a lot of criticism, and rightfully so. There were over 100 policy providers in 2000 and there are around a dozen today.
First, let’s take a quick look at the history. Private insurance companies began offering LTC insurance in the 1970’s and sales increased until the peak in 2002. From the beginning, they were badly mispriced, severely underestimated the associated healthcare cost of such plans. When LTC insurance first appeared, it was known as “nursing home insurance”, and entering a nursing home was viewed as a last resort. This meant there would be little moral hazard for the “dreaded event” of entering a nursing home and little attention was paid to underwriting.
To sell more policies, in the late 80s to early 90s, insurers began to provide limited coverage for in-home and community-based care. Sales skyrocketed as these plans were now much more appealing, but there were minimal changes to pricing assumptions. The industry shelled out huge sums of money in the form of benefits for relatively cheap plans year after year. They scrambled to make up the difference by increasing premiums and implementing stricter underwriting standards. This is when the six activities of daily living (ADLs) were introduced as eligibility triggers. The 6 ADLs are bathing, dressing, toileting, transferring, eating and continence. In most cases, a policyholder had to be unable to perform at least 2 of the ADLs to receive benefits or have severe cognitive impairment, and this is still the norm today. Despite these changes, most insurers found it impossible to be profitable in the long-term care industry and left the market all together.
Fast forward to the present, the main problem with traditional long term care insurance today is that the premiums have consistently risen while the average policy benefit has decreased. Almost every long-term-care insurer has raised rates at least once, and many are on their second round of price hikes. Rate increases are requested by insurance companies and must be approved by the state insurance commissioner. The good news is 41 states have passed rate stability regulations for LTC premiums. In Georgia, for policies issued after 10/01/08, for an insurance company to request a rate increase, they must decrease the profit levels in their pricing to a pre-determined cap. In addition, under the new rules, insurance companies must have a qualified actuary certify that no premium increases are anticipated over the life of the policy. Determined to not repeat the past, policies issued recently more accurately reflect long term care risk. Recent policies have less than a 10% chance of future premium increases and should there be an increase, it would have to be very modest.
When faced with a premium increase, you have 3 choices: pay the higher premium, scale back your coverage or drop your policy. Some ways to scale back your coverage and therefore lower the cost are adjust the daily benefit amount, shorten the benefit period, lengthen the elimination period, or lower the inflation growth option. According to a 2015 study by the Center for Retirement Research at Boston College, at least 1 in 4 people who buy traditional long-term care policies at age 65 stop making payments at some point. When a policyholder stops making premium payments, no matter how long they’ve owned their policy, all premiums paid and long-term care benefits are forfeited unless a nonforfeiture benefit is in place. Another tough pill to swallow with traditional long-term care policies is the use it or lose it feature. You could pay into the policy for decades and never end up needing long term care.
Now that we’ve discussed many of the shortfalls of traditional LTC policies, an alternative that is currently gaining steam is a hybrid policy. A hybrid policy combines life insurance with long term care coverage. If you end up needing long term care, you use part of the death benefit to help pay for qualified home care or assisted living. If you never end up needing long term care, your beneficiary will receive the death benefit in full. This policy therefore removes the use it or lose it dilemma.
While these policies are typically more expensive up front than traditional policies, you are protected from rate increases as you pay a set cost up front, either lump sum or over a payment plan, and once those payments are made, there are no other payments for the rest of your life. Another benefit to hybrid policies is they have the option to pay indemnity or reimbursement benefits whereas traditional policies only pay reimbursement. With indemnity benefits, a set monthly benefit amount will be paid once you qualify for long term care benefits. You must be healthy to purchase a hybrid policy. Chronic conditions can be deal breakers, especially histories of cancer, stroke, heart attack or bone or joint issues.
So, is long term care insurance something you should buy? As with any form of insurance, risk tolerance comes into play and there’s not a cut and dry answer. The lifetime risk of needing nursing home care is 44% for men and 58% for women 65 and older. The average nursing home stay is 835 days, so a little over 2 years. If you find yourself in a long-term care facility for months, it would cost a lot but probably not devastate your savings. Nursing home care for several years could bankrupt even very wealthy individuals. If you have specific bequeathing plans for your heirs, a hybrid life insurance policy could be a good fit for you. If you are interested in shopping for a traditional LTC insurance policy, there are many factors to consider, but up front in center is the viability of the company you are purchasing from.
