From the September 2005 issue of Investment Advisor • Subscribe!

The Care Calculation

Sales are down and premiums are up for long-term care insurance, but the cost of long-term care continues its steep increase

Sales of long-term care insurance (LTC) have been plummeting. In 2004, sales of individual LTC policies dropped 25% over 2003 sales, marking the biggest decline since LIMRA International started tracking individual LTC sales in 1988. According to LIMRA, 29% fewer consumers bought LTC insurance in 2004 than they did in 2003.

Why the dramatic drop in sales? Brian Peterson, VP of long-term care sales for Allianz Life Insurance in Minneapolis, chalks it up to consolidation in the insurance industry--with fewer insurers offering LTC insurance--a tougher underwriting market, and higher premiums. Investment advisors and financial planners, too, are doing little to bolster sales. In fact, more consumers are now getting LTC coverage through their employers than they are via an advisor, says Robert Davis, president of Long-Term Care Quote (www.longtermcarequote.com), who advises consumers and advisors on LTC insurance policies. More employers are starting to offer LTC coverage, Davis says, because of the tax advantages.

Many advisors are not recommending LTC insurance to clients because they don't understand it, says Arthur Stein, a planner with First Financial Group in Bethesda, Maryland, who specializes in LTC insurance. Advisors "treat [LTC] with a different set of standards than with other forms of insurance, and there's no reason to," Stein says. "LTC meets all the standards of insurance, and it gives protection that people want in other aspects of their lives." Ninety-five percent of Stein's clients have LTC coverage, he says, with most of them opting to buy at a younger age than was previously true, around 54.

Moreover, many advisors, Stein says, are erroneously recommending self-insurance instead of LTC. Davis agrees that there is a real lack of understanding among advisors about the advantages of LTC coverage. Davis says because LTC can be complicated to understand, he encourages advisors to outsource LTC coverage to an independent agent or agency that specializes in LTC insurance. "Planners need to understand that LTC insurance protects assets," not only the clients', but also the planner's assets under management, he says. "A planner would hate to see a client be forced to pay out from $50,000 to $100,000 per year of their assets for a long-term care need."

The Cost of Care--and LTC Premiums--Are Rising

Having to pay that much out of pocket for long-term care would even be on the low end, depending on where you live. According to Genworth Financial's 2005 Cost of Care Survey, the average annual cost for a private room at a nursing home is now $69,400, or $190 per day, a 6% increase over 2004 rates. If you live in Alaska, which has the highest rates, you'd fork over $201,000 per year for a private room. Costs for similar care in New York City, the second highest, will run about $134,000 annually. Assisted living facilities are cheaper, but their rates have also increased. An average annual stay at an assisted living facility costs $30,300, a 5% increase over Genworth's 2004 survey rates. "LTC insurance is anti-nursing home" coverage, Stein says, because while it does pay for a nursing home, "people get it because it pays for home care and assisted living facilities--the two places where people want to receive care."

Premiums on what are dubbed new-generation policies are spiking as well, with insurers charging anywhere from 10% to 40% more than they were three to five years ago, Davis says. But existing policyholders generally aren't affected by the higher rates, notes Stein. Insurers are not only jacking up premiums to react to lower interest rates, but they're also charging more because they've finally figured out how to price LTC policies. "Carriers now are much more aware of where they need to price LTC insurance because--unlike in the past when they did not share data with each other--they are doing a far better job of sharing actuarial results and claims results that are needed in order to make more accurate assumptions as to how to price LTC policies," he says. The silver lining for consumers is that "somebody buying a policy today can be more confident that the premium will remain the same year after year."

LTC policies with accelerated pay options, like the "10-pay" and the "paid up at 65" policies, are growing in popularity. According to LIMRA, sales of accelerated pay policies were up more than 30% in the first quarter of 2005. Despite the fact that the premiums are higher for accelerated pay policies, "more people in the workplace are buying policies at a younger age knowing they want to pay them off before they retire," Davis says. Compared with a typical policy that charges level-premium payments of about $1,800 per year, a 10-pay policy would cost $4,500 per year. The benefit of paying more, however, is that the client "knows they have a guaranteed, paid-up policy, and the carrier can never cancel or charge them additional premium," Davis says.

Michael Crifasi, a planner with CEI Financial Planning in Sandy Springs, Georgia, says he likes to sell 10-pay policies to clients "10 years before retirement because they're at their peak earning years and they can afford the extra amount." Other popular policies are ones with non-level payments, he says, for which a client pays double the premium the first year, and then gets a discount of as much as 25% for the rest of the policyholder's life. A 10-pay or non-level policy would probably work better for a self-employed business owner with a questionable retirement income than it would for someone with a well-defined benefit plan, like state or government employees, he says. A small business owner would be more "afraid of the damage that long-term premiums" would cause to his retirement lifestyle, Crifasi says.

Despite the rising premiums and lower sales, long-term care insurance may get some assistance from Washington. Bipartisan legislation, the Caregiver Assistance and Relief Effort Act, H.R. 3254, sponsored by Reps. Bob Menendez (D-New Jersey) and Illeana Ros-Lehtinen (R-Florida), which would allow LTC premiums to be tax-deductible and provide tax credits to individuals caring for ailing family members, may be just the boost the LTC industry needs. The bill was introduced on July 12, and was referred to both the Ways and Means Committee and the Education and Workforce Committee.

For a complete directory of long-term care insurance and their offerings, please click here

Washington Bureau Chief Melanie Waddell can be reached at mwaddell@investmentadvisor.com.

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