A significant portion of long term care insurance premiums are for inflation riders, providing increases in benefit amounts.
The importance of having adequate benefits for a clients future LTC costs goes without saying. But questions are surfacing regarding the current methods, now considered standard, of achieving this goal.
Most LTC policies offer benefit increase options (BIOs) at 5% simple or compound annual growth.
But are actual costs rising at those rates? Some studies indicate yes. But others suggest no, citing growth in the 3% range for the past five years.
No one knows, of course, what we will face in 20 years or more. We may “do the math” and project 5% compound increases for 30 years. But is that realistic or fair to the client? Annuity illustrations in past years reflected 14% compounded growth to age 100. That didnt happen.
Going forward, several factors will impact on the projected need for ever-higher LTC benefits.
Market economics. Throughout the history of our economy, whenever the costs of goods or services have increased to unaffordable levels, lower-cost alternatives have been developed.
That can be seen now with LTC services, with more patients in assisted living facilities than in nursing homes. Ten years ago, none of us were talking about assisted living. In many states, a still-lower level of facility has recently come to the market, with even lower costs.
The message: As the greater portion of LTC services are for custodial care, the market demand will assist in helping these services to be made available at cost levels affordable to the majority.
Low influence of LTC insurance. We are all aware of the small percentage of seniors who have private LTC insurance, and the even lower penetration of the pre-retired community. In view of the demographics of our population, it is obvious that LTC volume could increase many times over, but the coverage could still remain a minor player as regards paying for LTC services.
The “800-pound gorilla” that most influences these cost factors is Uncle Sam, and that is not likely to change.
The message: The “math” may reflect nursing home costs at $800 to $1000 per day, but Uncle Sam wont be paying. As stated by one executive representing the American Health Care Association: “It is meaningless to project those numbers. The system will collapse long before that point–the beds will be empty.”
In summary, we know costs will increase at some rate, but market forces and utilization methods will also change in order to provide LTC services at affordable levels.
Therefore, I would like to see more ingenuity on BIO options from LTC carriers. How about both 3% and 5% for both simple and compound, or inflation growth until benefits are double, (or some multiple) of the original selected amount?
How about enabling the client to switch on and off the BIO, or providing a guaranteed purchase option?
How about a graduated premium option, where the premium increases in conjunction with the benefit, but the client can stop at any time of their choosing? Think about that. Would not lower entry-level premiums result in a far greater number of younger applicants? As incomes rise and the kids leave, small increases in premium along the way can be absorbed.
Considering that most LTC policies today are expense reimbursement, which of the following two options would be better for many working-age client prospects?
1) Paying $1000+ per year lower premiums to start, with 10 to 15 years before reaching the original level premium amount, and re-evaluating at that time; or
2) Paying the much higher level premium so as to pre-fund benefit levels that may never be needed or used.
For prospects with adequate financial resources, current BIO options may be the best approach.
But for LTC insurance to make a meaningful contribution to the needs of our society, it must be affordable to the majority. As premiums for this coverage continue to increase, as surely they will, each element should be examined for reasonable alternatives.
When the actual need for LTC services arrives, our clients will be far better served by having affordable insurance protection in place, as opposed to having been turned away by high premiums, and facing those problems without assistance.
is president of American Insurance Marketing Services, a Montgomery, Ala. firm that does national LTC marketing for PFL Life Insurance Company.His e-mail is
Reproduced from National Underwriter Life & Health/Financial Services Edition, January 21, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.