TJT Client Advisory Services

The Paradox of Long-Term Care Insurance

Eyeing 21st century America rationally, long-term care (LTC) insurance would seem to be an idea whose time has come. Life expectancy is increasing, so more people will reach a point where they’ll decline physically or mentally and, thus, will require constant help. One recent study found that direct health care expenses for dementia, including nursing home stays, were $109 billion in 2010—greater than the cost of care for heart disease or cancer. Medicare covers medical but not custodial care; Medicaid is available only to the impoverished. That should leave a need for LTC insurance, a need that companies in a free enterprise economy would rush to meet. Logical or not, LTC insurance seems to be sputtering. Major insurance companies are trimming policy features or raising prices—or both. Some insurers are dropping out of the LTC market altogether. For consumers, though, the need for LTC insurance still exists. Indeed, this year may be the time to buy, while certain policy attributes are still available.

 Age-old problems

Some of the woes now facing LTC insurance can be traced to the relative newness of this coverage. The first policies were introduced in the 1960s, with some major insurers launching their product lines in the 1970s and even the 1980s. They expected substantial “lapse rates,” meaning that many consumers would pay premiums for a few years and then stop paying before collecting any benefits. In practice, lapse rates have been scant because aging consumers held onto their policies, so insurers are facing a future in which they’ll be obligated to pay more claims than they anticipated. With LTC insurance, companies face claims many years in the future. Therefore, they primarily invest the premiums they collect in high quality, long-term bonds. Today, long-term Treasuries yield a meager 2%–3%, whereas the costs of long-term care are increasing in the neighborhood of 5% a year. Insurers caught in this squeeze essentially see three choices: raise premiums that consumers pay, trim the benefits offered in LTC policies, or drop out of the LTC business.

 Final fling?

None of the choices mentioned in the previous paragraph are good news for consumers. If fewer companies offer LTC policies, the lack of competition is likely to keep prices high and policy benefits low. Nevertheless, some observers believe that this is a good time to buy LTC insurance. Why? Because policy changes typically must be approved by state regulators, and such approval might take many months. For example, LTC policies now are usually gender neutral. That is, men and women pay the same price for comparable coverage. However, women live longer than men, on average, and industry data shows that women have been more likely to receive benefits from LTC policies. Therefore, LTC insurers are applying for rate changes that would charge women more than men. According to the American Association for Long-Term Care Insurance, women probably will pay 20%–40% more than men for coverage once the new rates are in effect, so women in the market for this coverage might want to act soon. (Men, on the other hand, may decide to wait to see if their premiums come down.) Beyond gender-based pricing, future LTC policies may be more expensive with fewer benefits than those currently on the market. Insurers are starting to require physical exams for applicants, which could make LTC insurance more costly for people with medical conditions. This year could be a window of time to buy LTC coverage at a relatively modest price before new rules take effect.

Copyright AICPA