From the December 2011 issue of Investment Advisor • Subscribe!

November 28, 2011

Class Dismissed

The CLASS Act is gone. But why aren’t people buying private coverage?

The Community Living Assistance Services and Support program, also known as the CLASS Act, was part of the Patient Protection and Affordable Care Act, Obama’s effort at health care reform. It was supposed to provide accessible long-term care insurance for Americans who have not already bought coverage. However, it failed to convince the Department of Health and Human Services (HHS) that it could remain solvent for the 75 years mandated by law and was terminated in October. That leaves a wide swath of people uncovered and likely to remain so.

While LTC insurance is not accessible to everyone—it requires sufficient assets to pay premiums and good enough health to pass underwriting, two things the CLASS Act was supposed to address—many people do not buy policies for reasons that have nothing to do with either factor. Coverage is perceived as expensive, which can be true; however, according to the American Association for Long-Term Care Insurance (AALTCI), the average cost of a policy for a couple aged 55 would be $2,350 combined, for a benefit package that would immediately be worth $338,000 and that would grow to $821,000 at age 85.

Other reasons for not purchasing coverage are perhaps more interesting. HHS issued its findings in a study titled “A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program.” Among men in particular the perception is that they will not need it—a perception not borne out by statistics. Another attitude was that if a policy didn’t pay for everything, it wasn’t worth having. That last is a logical disconnect between LTC insurance and other forms of insurance, none of which cover everything.

A popular statistic shows that one out of two people over 65 is likely to need some amount of long-term care, but according to Jesse Slome, executive director of AALTCI, that includes people needing care for as little as a couple of days to a couple of months, as well as those who truly need care for a long period of time. Still, he adds, 40% of people after age 65 will need two years or more of care.

Women in particular are the most likely to need care, he points out, since they live longer than men. In fact, women make up the vast majority of nursing home residents and have the highest incidence of Alzheimer’s disease.

Regarding people’s disdain for a policy that fails to pay for all the costs of care, Slome points out that people do not refuse to purchase homeowner’s insurance because it does not pay for flood damage, nor do they refuse to have a deductible on a homeowner’s policy or auto insurance policy despite the cost involved. “The truth of the matter is,” he says, “that people buy insurance to transfer some of the risk. Nobody, not even Warren Buffett, buys insurance to cover all of the risk.”

For clients who are unwilling or unable to buy LTC insurance, there are always hybrid products: life insurance with an LTC component. These can help clients who cannot justify the expense of a policy, since the life insurance part offers a benefit they can recognize and the policy itself is often cheaper than a conventional LTC policy. They can also help clients who could not otherwise pass the underwriting requirements for a conventional LTC policy, since the requirements for a life insurance policy are quite different.

Reprints Discuss this story
This is where the comments go.