How the Long-Term Care Insurance World Is Changing

My Comments: I’d much rather be talking about something positive and fascinating since it’s Friday. But reality is rearing it’s ugly head once again. I’m almost 75 and have had no LTC event in my personal life. Of course, now that I’ve said that, there may be one just around the corner.

But for all of us, it’s a very real existential threat, one that we have to be aware of, and to the extent possible, one that our children need to be concerned about. It has the potential to disrupt their lives if we have an event.

Most existential threats are dealt with by purchasing insurance. But as the title of this says, there are changes happening. We need to be aware of them. If this raises questions in your mind, I may have good answers for you.

Joseph Gaj – August 9, 2016

By now, most of us have heard the stories of how expensive long-term care insurance policies can cost and how an insurance company can increase the premiums on in-force policies. Furthermore, there seems to be limited carrier options as major players look for the exits and stop offering standalone long-term care products. There are continually new changes to your coverage options as new products are introduced to the market.

First, let us review the basics of long-term care insurance. (For more, see: Long-Term Care: More Than Just a Nursing Home.)

The Basics

What exactly is long-term care? The term comprises a host of services that vary widely. The services range from home care and adult day care to residential care in assisted living or nursing home facilities. But long-term care is generally defined as hands-on assistance provided for an extended period of time to people of any age, though older people are the primary users, folks who can’t take care of themselves due to a prolonged disability, illness or cognitive impairment such as Alzheimer’s disease.

You qualify for long-term care when a physician or other health professional certifies that you are unable to independently perform at least two activities of daily living (ADL)—activities such as bathing, dressing, transferring, toileting, continence and eating. (For related reading, see: Long-Term Care: Traditional vs. Alternative Policies.)

The Risks

Unfortunately, long-term care doesn’t come cheap. According to the Genworth Financial Cost of Care study in 2016, a private room in a nursing home averages $92,378 and a home health aide averages $46,332. In locales with a higher cost of living, those prices can nearly double. You can check the average costs in your area by visiting Genworth’s Cost Calculator.

Contrary to common belief, Medicare and other forms of major health insurance do not pick up the tab because long-term care is not considered a medical expense. Medicare will only cover skilled nursing care and therapy services following a hospital stay. The upshot: unless you’re confident that you can pay for this care yourself (or you qualify for Medicaid, which occurs only when you’ve exhausted your resources and meet this government program’s other eligibility requirements), you should probably consider purchasing long-term care insurance (LTCI).

Now consider that the U.S. Department of Health and Human Services puts the likelihood that the average American turning age 65 will need some form of long-term care at 70%. You have probably been wildly underestimating your own risk, and there is a good chance you will need care at some point in your life. As a comparison, your chance of being in a car accident or a house fire are 25% over your lifetime, but you probably never considered cancelling your auto or homeowners insurance. (For related reading, see: Medicaid vs. Long-Term Care Insurance.)

The Products

Long-Term Care Insurance (LTCi)

Historically, LTCi has been the most popular product to provide individuals protection against the cost of informal custodial care. First introduced in the early 1980s, policies back then were relatively cheap and limited in coverage options.

As the product gained popularity, insurance companies started to make adjustments to appeal to the marketplace, introducing features like comprehensive vs. facility-only, which allowed for caregiving at home and/or facility as opposed to facility only. Furthermore, inflation protection became popular, especially with states passing partnership-qualified programs; these programs protected estate spend-down up to the aggregate policy benefit as long as it had certain features (like inflation protection). Indemnity and lifetime benefits have almost all been replaced by reimbursement policies and limited benefit periods. The industry has been battered by negative claims experience and lower-than-expected lapse ratios, forcing companies to increase premiums on new products as well as existing policyholders and certain major carriers exiting the marketplace altogether.

Currently, there are only a handful of insurance companies offering competitive individual LTCi and with the introduction of some new hybrid products, the expectation that LTCi products will be around much longer is in jeopardy.

Group Long-Term Care Insurance (GLTCi)

Akin to the individual long-term care insurance products, GLTCi has similar features and a use-it-or-lose-it mentality. Typically, GLTCi is offered only at larger employers that have the critical employee mass that would make it worth an insurance company to offer GLTCi to the employees and their significant others. GLTCi usually has a simplified underwriting process and limited features/design to choose including daily benefit, benefit period and inflation protection. The policies are priced based on age bands, but can be repriced upon the end of your employment or if the carrier is approved for price adjustments. These policies are discounted to attract participation and the simplified underwriting have subjected them to price adjustment out of insurance carrier concerns on future liabilities. (For related reading, see: Taking the Surprise Out of Long-Term Care.)

Life Insurance with Long-Term Care Rider

As major LTCi carriers significantly altered their products or left the standalone LTCi market completely, companies started to introduce life insurance riders that could be used for long-term care funding. Most life insurance products have an accelerated death benefit feature built in. Some make you pay for the benefit, which allows for the owner to access a portion of the death benefit prior to death if the insured has chronic illness and/or is terminally ill (expected to die within 24 months). Insurance companies started to add new language to this feature, creating new riders altogether: chronic illness riders, critical illness riders and long-term care riders.

In theory, the riders can be added at time of application and upon medical approval so that the policy owner can access a portion of the death benefit as long as certain conditions are met by the insured medically. The long-term care rider establishes a total benefit amount and a daily or monthly benefit amount and pays out based on the same definition as LTCi. Inflation features are offered and the base life insurance product type may vary from carrier. The advantage of a Life/LTC product is combining two products in one to reduce premium of two standalone products, offers a death benefit to beneficiaries if you don’t use all or any of the LTC benefits available. The disadvantage is it costs more than LTCi alone. Single-pay life insurance policies are available and can work well if you are considering exchanging a cash value-based life insurance policy for the hybrid Life/LTC. (For related reading, see: The Advantages of Indexed Universal Life Insurance.)

Annuity With Long-Term Care Rider

This is by far the most recent product designed to offer an alternative to long term care insurance. Insurance companies have created annuity products with long-term care riders that will immediately provide a pool of LTC benefits 150-200% higher than the initial annuity deposit. The rider has a fee associated with it along with similar daily/monthly benefits and claims qualification definitions. Your long term care benefits are paid tax-free and you have access to the annuity account value absent a long term care event. (For related reading, see: How to Tiptoe Through the Annuity Minefield.)

The major takeaway from this article should be that long term care costs have continued to rise and most individuals underestimate their risk and the cost associated with long term care. In light of insurance companies’ original incorrect actuarial assumptions, the standalone products have become expensive with limited carrier options and, in turn, have caused companies to introduce new products as alternatives. Every individual’s situation is unique and should be reviewed on a case-by-case basis to determine if long-term care insurance is right for you.