Long Term Care Insurance Cost–It’s Complicated

There’s little doubt you’ve read a great deal of swirling about in the media regarding Long Term Care Insurance (LTCi).

And, you may be asking yourself—should I buy the coverage or not?

As usual, my answer will be…that depends.

If you took the advice of the National Association of Insurance Commissioners, you should not buy long term Care Insurance if:

  • You have limited assets; for example, you don’t own a home
  • You don’t have any heirs who you want to inherit your assets
  • Your income is very low, only social security or SSI (Supplemental Security Income), so that you often have trouble paying for basic needs, such as food, medicine, housing, or utilities.

On the other hand, they say you should consider buying long term care insurance if:

  • You have significant assets and income that you want to pass along to your spouse or heirs
  • You want to pay for your Home Care and not be dependent upon Medicaid or support from your family
  • You want to protect your spouse from a significant drop in income should you need extended Home Care or long-term care in a nursing home

Now that I’ve provided you with some boiler-plate advice from an independent third party resource, I’ll go on with what I really want to discuss in this post.

Why all the fuss about long term care insurance lately?

As of late, long term care insurance has become very popular in the headlines.  That’s mainly because of sharp rate increases, a rise in insurers leaving the market altogether, and the increasing awareness among the public that perhaps this is coverage they should seriously consider—particularly among baby boomers who are dealing with parents who now need some type of long-term care.

Why is everyone leaving?

If you look at statistics from LIMRA, you’ll see that 50% of the top 20 long-term Care Insurance carriers have left the market in the last five years.  In case you’re wondering which companies are left, LIMRA says that for 2011 the top five carriers ranked by premium written were:  Genworth, John Hancock, Mutual of Omaha, Northwestern and Prudential.

Interestingly enough, Prudential announced earlier this year that they are exiting the LTCi market.

But the question remains…why is everyone rushing for the exits?

Well, the typical reasons that are given by the insurers and the industry as a whole are:

1.  The extended period of low interest rates being artificially created by the Federal Reserve has caused undue financial stress on the long term investments of life insurance companies.  We all know that life insurers invest a great portion of their reserves into highly rated Treasury bonds and corporate bonds which are presently paying extremely low rates—short term treasuries are under 1%.

2.  The industry miscalculated how long people would actually live and furthermore, how long people would live while also needing care for Alzheimer’s and dementia.

Both of these points are true.

But I’d like to toss a third reason into the ring…

The companies who’ve issued long term care insurance over the last few decades, grossly miscalculated the percentage of policies that would lapse prior to paying claims.

See, it’s not a widely known fact among consumers that a key component of life insurance company profitability is derived from policies that people quit paying for before the company ever has to pay out any money as a claim.

Believe it or not, they actually plan for this.

Example:  Traditionally, less than 2% of all term life insurance contracts ever pay a death claim.

Now I’m not suggesting the industry uses those sorts of percentages to price long term care insurance, I’m just using those stats as an example to show you that we know it is a component of the overall plan for a product’s profitability.

I don’t have any numbers that I really trust to be 100% accurate for the lapse rates of polices, however, every study I’ve looked at from LIMRA, the SOA, etc. point to a significantly lower lapse rate than was initially projected when the first LTCi policies were issued 40 years ago.

Some of the initial projections were for a 5-7% lapse ratio, current lapse reports vary but all the numbers show the actual lapse rates somewhere between 1-4%.

What does that mean for the consumer?

Well, it means that the insurance companies are not being nearly as profitable as they wanted to be.

Interestingly enough, in a joint study conducted by LIMRA and the SOA from 2006, I discovered this graph that shows an interesting trend in higher lapse ratios among LTCi policies that have lower annual premiums.

long term care insurance cost

It seems the people who pay more for their coverage are less likely to stop paying the premium.  Perhaps that’s because they have a much larger investment in the policy?  My experience has proven that to be true coupled with the fact that these people generally have a higher and more stable income.

Get to the point already

Again, I’m going to make a bold statement…and please understand this is pure conjecture on my part.

I don’t believe that the flock of companies leaving the LTCi market is as much an indication of solvency (their ability to pay claims) as it is a measure of increased pressure on their profitability.

In short, they aren’t making as much money as they wanted to and it’s just not worth the trouble anymore.

For those companies who are left in the market, premiums are increasing dramatically to compensate for the shortfalls in their flawed model.   I’m not sure that you can say long term care insurance is overpriced today as much as I would say that it was underpriced in the past.

The net result is the same—people are being asked to pay higher premiums.

The Conclusion

Does all of this make what otherwise would have been a good thing (purchasing LTCi), now a bad thing?

No.

I have personal experience with this issue that I’ll not write about in depth here, as it wouldn’t be appropriate to do so, but perhaps I will at some later date.  There are definite reasons that are more than logical to consider buying long term care insurance.

Contrary to popular wisdom, I strongly believe that people who have significant assets are those who should consider it most seriously.  Most of us who fit in this category, consider ourselves to be “self- insured”

I urge you to spend some time looking into the matter and actually putting pencil to paper.  There are factors you’re not considering right now, that you should.

Feel free to contact us if it’s something you’re thinking about, we can help you determine if it makes sense for you.  If it doesn’t seem like a good fit for you, we’ll be the first to tell you.


2 Responses to “Long Term Care Insurance Cost–It’s Complicated”

  1. Axl says:

    I’ve been hearing people talk about life insurance with long term care added on as a rider. Is this a good solution? Pros & cons?

    • Brandon Roberts says:

      Hi Axl,

      It’s actually a pretty good way to approach the problem. There are still bona-fide LTCi products that have better contractual benefits. And the real consideration is whether or not those benefits are justified in the LTCi premiums. But as a tool that can store cash, provide LTCi benefits, and comes with the additional benefit of paying out a death benefit instead of being used to cover LTC expenses if you never need it for that purpose, this strategy is quite attractive.

      I’d also suggest many in the industry are pushing in this direction. There’s less reserving hassle with this approach and insurers are hating the way LTCi is tying up their hands.

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