Long Term Care Insurance
A current state of the industry 2011
Being most likely the newest type of insurance on the market today, first introduced in 1968, many of the companies who write long term care coverage are experiencing growing pains.
When these plans were first designed and introduced, they basically paid for care in an environment outside the home, either in a nursing home or assisted living facility. Benefit triggers mimicked Medicare, which required a 3-day prior hospital stay, provided by skilled caregivers. No consideration was given to home care, where most care is received, and unskilled care, which 98% of long-term care is.
Many of today’s policies train and pay children to give care, offer to pay higher benefit for home care, give a cash indemnity benefit for home care, pay first day benefits for home care, pay for care overseas, have built in rate guarantees, have shared contracts that can be used for husband or wife or other relational lifestyles, give you flexible premium payment options for those who still have the financial burden of raising children or paying for the educations. They also offer paid up options for a surviving partner, separate pools of money for uninsurable partners that can be accessed if the insurable partner needs care concurrently.
Some even offer return of premium (less claims paid) if you don’t use it and full return of premium (that returns all premiums even if you go on claim). The latter is often used for Philanthropic use. This way people of means can design policies which can virtually guarantee they will never have to leave their homes for care, and when they pass away, all the premiums paid in can go to the charity or beneficiary of their choice.
The policies of 1968 were like comparing a horse and buggy to a fully loaded Lexus today. The features and benefits continued to evolve, but the actuaries where missing a key component to base their premium structure on; LAPSE RATES. When a policy lapses, the insurance company has no obligation to return premiums. This is pure profit. Therefore, they speculated lapse rates would be around 5-7%. For example: the lapse rate on life insurance contracts has historically been around 20%. However, over the last 40 years, the lapse rates on traditional long term care policies have averaged around 1%.. People keep their policies and claim on them around 40% of the time. This has resulted in tremendous shortfalls in reserves that are required by law to write this coverage. Also, the interest rate environment, where the insurance companies invest these reserves is the worst it has been since these policies have been in existence. As a result; the amount of insurers who write this coverage has declined from 143 in 1990 to 27 in 2011. Also, two of the major carriers that have written a large block of existing business are asking for rate increases from 23-40% on existing policies. My wife and I own one of these contracts written in 1999.
Recently, hybrid policies have been designed to combine the benefits of life insurance, annuities, and long-term care into one contract. The major advantage is: if you don’t use it for long term care, it can come back as a death benefit, be used for income, or you can walk away from the contract, and get your investment back.
The disadvantage is you have to come up with a large amount of money up front, typically $75K or more, but you can walk away from the contract at any time and get your money back. Without conventional coverage, you pay as you go for pure protection against long-term care.
Recently, an industry expert predicted; without people under 40 years of age buying conventional coverage as part of group coverage available from employees or large benefit groups, traditional coverage may cease to exist in 10 years, because insurance companies can’t price it profitably. For those who are on the fence regarding buying this coverage, if you are still healthy, this opportunity may disappear without putting up a large sum up front for hybrid coverage.