Insurers Pair Long-Term Care With Life Insurance To Entice Buyers

As an opinionated financial planner who considers himself almost an expert on insurance and long term care, I take exception to a few of the assertions in this article. However, my purpose in reposting it here is to trigger questions that anyone planning for retirement should ask. And even those already retired. Keep in mind that Medicare pays virtually no long term care benefits and that Medicaid, which does, is funded solely by the individual states in which a participant lives. It is not a federal program.

(Bloomberg News) Pearl Neier, 85, said she decided against long-term-care insurance after hearing about the policies from AARP, the Washington-based group that lobbies for older Americans.

“It was much too high for me,” said Neier, sitting in the sunny dining room of the VillageCare retirement home on West 46th Street, which overlooks the Hell’s Kitchen neighborhood of New York. Neier said her room and board is covered by Medicaid and Social Security.

The insurance industry, which has struggled to persuade skeptics like Neier that they need the policies, has turned to selling combination products that blend long-term-care with traditional life insurance. The policies generally are built using universal life, which has an investment component, and may pay out the death benefit early to help pay for care.

Sales of the hybrid policies, which can cost $100,000 for a maximum monthly benefit of $5,000 and come with sales commissions as high as 8 percent, more than doubled in 2010 at Genworth Financial Inc. Sales of traditional individual long-term-care insurance industrywide dropped 23 percent over the five years ended Dec. 31, by contrast.

“The problem with long-term-care insurance is that the wealthy don’t need it, because they can afford their own care, and the middle class can’t afford it,” said Peter Katt, a fee-only life-insurance advisor based in Mattawan, Michigan. “It’s a small sliver of the population who should even consider it.”

Using Your Money

The contracts generally are designed so that payments for care come dollar-for-dollar out of the death benefit, meaning that a buyer who taps a policy for long-term-care will pass a reduced or no death benefit on to heirs.

“If you give a company $100,000 today then you’ll basically be spending your own money for the first two years of claims,” said John Ryan, an insurance broker and founder of Greenwood Village, Colorado-based Ryan Insurance Strategy Consultants. The median stay in a nursing home among patients who pass away there is five months, according to research by Alex Smith, assistant professor of medicine with the University of California, San Francisco, and Anne Kelly, a social worker who was a student at the University of California, Berkeley, at the time of conducting the research.

The combination insurance may be an easier sell to consumers skeptical of paying for insurance they may never use, said Brian Peterson, president of Charlotte, North Carolina-based NextGen Advisor, which works with financial advisors in evaluating policies. Some insurers, such as Radnor, Pennsylvania-based Lincoln National Corp., are guaranteeing that buyers can get their premiums back at any time before tapping the benefit.

Money Back

“Most people who buy hybrid insurance are not buying it because they want life insurance, they’re buying it because they need long-term-care insurance and the sales pitch that you can get your money back no matter what is pretty compelling,” said Ryan, the Colorado broker.

Traditional long-term-care insurance generally reimburses certain expenses or pays a daily cash benefit for those who require assistance with day-to-day tasks such as dressing and bathing.

About 69 percent of Americans turning 65 today will need long-term care at some point in their lives, according to LeadingAge, a Washington-based lobbying group that represents nursing and retirement homes. The number of Americans aged 65 or older may more than double by 2040 to about 81 million, from an estimated 40 million in 2010, according to the U.S. Census Bureau.

Cost Of Care

The median cost of a private room in a nursing home is $213 a day or about $6,500 a month, according to a May survey by Richmond, Virginia-based Genworth. Assisted-living facilities, which unlike nursing homes generally don’t have round-the-clock skilled nursing staff, charged an average of more than $3,000 a month, according to Genworth.

“A lot of people become convinced, through scare tactics or statistics or whatever the case may be, that they need long-term-care insurance. Then they start looking at policies, which may be prohibitively expensive,” said Scott Witt, founder of New Berlin, Wisconsin-based Witt Actuarial Services, a fee-only insurance advisor.

A traditional long-term-care policy from Springfield, Massachusetts-based Massachusetts Mutual Life Insurance Co. that pays a maximum of $200 a day in benefits over 10 years, with an automatic 5 percent annual inflation adjustment, would cost a 55-year-old couple about $6,700 annually or about $590 per month, according to a quote obtained in April by Katt and confirmed with the company.

Raising Premiums

Neier, the retirement home resident, said she hadn’t thought about the prospect of paying for long-term care until her 70s, when she looked into the policies. She had been paying for her stay at VillageCare, where apartments start at $3,600 a month including some meals, with the proceeds from the sale of her home in Queens, New York, until this year when she qualified for Medicaid, she said.

Companies that underwrite long-term-care policies have had to raise premiums or stop selling the insurance altogether in recent years. That’s because they overestimated lapse rates, or the number of people who allow their policies to lapse, meaning the companies have had to pay out more in benefits than they anticipated, said Carl Friedrich, a principal and consulting actuary for Seattle-based Milliman Inc., a benefits consultant.

New York-based MetLife Inc., the largest U.S. life insurer, stopped accepting applications for new long-term-care policies at the end of 2010. In February New York-based Guardian Life Insurance Co. of America said it would stop writing new long-term-care insurance policies by the end of the year. Munich-based Allianz SE has sold no new long-term-care insurance since 2009.

Sales Are Up

In 2010 John Hancock Financial Services, a unit of Toronto-based Manulife Financial Corp., filed for permission with state regulators to raise premiums for some of its long-term-care policies by an average of 40 percent. So far 15 states have approved increases. In 2007 Genworth announced it would raise premiums by 8 percent to 12 percent on many of its policies, and in October announced a further 18 percent premium increase for some of its policies.

“Sales have ramped up,” for combination policies during the same period, said Milliman’s Friedrich, who’s based in Lake Forest, Illinois. Sales of hybrid life and long-term-care policies by Genworth increased 124 percent in 2010 compared with 2009, said spokesman Tom Topinka. Genworth estimates that industrywide sales figures for 2010, which are not yet available, will increase by more than 50 percent, Topinka said.

Top-Selling Policy

In 2010 sales of life and long-term-care combination products at New York-based New York Life Insurance Co. jumped 92 percent, said Vice President Michael Lackey. Lincoln sold $108.5 million of MoneyGuard, the top-selling hybrid long-term-care insurance in the U.S. in 2010, a 62 percent increase compared with 2009. Sales of life and long-term-care blended products have increased by 67 percent annually since 2008 at the State Life Insurance Company.

The policies offer a more cost-effective way of insuring against the possibility of a very long nursing home stay than other products currently on the market, said Milliman’s Friedrich.

“We believe the combination policies are poised to take a leadership role in financing long-term care,” said Bruce Moon, vice president of marketing for State Life, a subsidiary of Indianapolis-based insurer and employee-benefits provider OneAmerica Financial Partners Inc.

Extension Of Benefits

Policies may offer an extension of benefits rider so that they’ll continue to pay, up to a certain amount, if a holder spends through their death benefit while receiving long-term care. Sales commissions generally are about 8 percent of the upfront premium, said Ryan, the broker.

“It’s a more ‘affordable’ way for certain people to add long-term care onto their policies,” said David O’Leary, executive vice president and head of the financial protection division of Axa Equitable Life Insurance Co., a unit of Paris-based Axa SA.

For a 60-year-old New York man who doesn’t smoke, putting $100,000 upfront into a Lincoln MoneyGuard Reserve policy would translate into maximum monthly benefits of about $5,000 a month for at least 6 years for a policy with an automatic 5 percent inflation adjustment after the first two years of benefits, according to a quote obtained by Ryan and confirmed with the company. The first $119,460 spent on long-term-care would draw down the policy’s guaranteed death benefit, after which the holder would have an extension of benefits of $238,920 or more to spend if he remained in long-term care, according to the quote.

Class Act

“You have to put up a pretty sizeable amount of cash in order to get a long-term-care benefit that’s meaningful,” said John Sherman, president of the Cincinnati-based LTC Experts, a long-term-care insurance broker.

The health-care law President Barack Obama signed in March 2010 created a program that will pay a daily cash benefit that averages $50 or more to those who can no longer care for themselves, for workers who enroll in and contribute to the program. Details of the plan, called the Class Act, such as the cost of premiums for workers who enroll, haven’t been released, said Lauren Shaham, spokeswoman for LeadingAge.

In April Senator John Thune, a Republican from South Dakota, and Senator Lindsey Graham, a Republican from South Carolina, introduced a bill that would repeal the Class Act.

‘Ponzi Scheme’

“The Class Act is a Ponzi scheme that would make Bernie Madoff blush,” Graham said in a press release. “It’s billed as an insurance program for long-term care, but really it’s just a huge and very costly government accounting trick.”

Medicaid is the largest single payer for long-term care and makes up 42 percent of total spending, according to LeadingAge. Medicare pays for stays of up to 100 days at skilled nursing facilities when medically necessary, after a patient has had an inpatient hospital stay of three days or more, said Ellen Griffith, spokeswoman for the Washington-based Centers for Medicare & Medicaid Services.

To qualify for Medicaid, an individual over age 65 generally would need to have assets of less than $2,000, excluding home equity of up to $500,000, said Molly O’Malley Watts, principal consultant for Watts Health Policy Consulting.

“You truly have to impoverish yourself to qualify,” said Watts, who’s based in Milton, Florida. Medicaid officials will also look at any assets individuals have transferred out of their control in the five years prior to applying for Medicaid. “You can’t transfer all your assets to a child and then qualify,” she said.

Not Bothered

That prospect doesn’t bother Harry Davis, 90, another resident of VillageCare who’s paid for his five years at the center with the proceeds from the sale of his home in Bergenfield, New Jersey. Davis said he has enough money to pay for another four to five years at VillageCare, after which he would go on Medicaid.

“Not that much would change,” said Davis, who owned a home decorating business before he retired. “If I do run out of funds, I’ll still have a place to live.”