Congress may have helped change the way Americans plan for LTC expenses. (AP photo/Jacquelyn Martin)

Long-term care insurance (LTCI) is the best product nobody ever buys.

With people living longer lives and with the cost of health care increasing much faster than people’s ability to save, the need for some kind of funding mechanism for long-term care (LTC) is obvious. And yet, long-term care insurance on its own remains a difficult sell.

Bruce Moon, vice president of product management for OneAmerica speaks with National Underwriter Life & Health about what he thinks has gone wrong with long-term care insurance, and how it can still go right.

Why does LTCI have such persistent problems?
It didn’t start out that way.

Clearly, when the concept was first introduced in the early 1980s, it used the platform of health insurance, so basically, you would pay a premium and if you needed the benefit, it was available to you. But just like some other products in the last 30 years, it ran into pricing difficulties. Some of those were caused by the interest rate environment and a decrease in what companies can invest in. But also, LTC was in competition with companies trying to get the best price and making aggressive assumptions on how many people would keep their policies, and what claims might be.

It was one of those instances where a number of things converged on those types of products, which at the same time were very sensitive to the market. This is an older age market. Because of mis-pricing, you have to go to customers in their 70s, 80s and 90s and tell them that their premium had been $1,000 a year, and now it is $2,200 a year. This is not a workforce where you can tell them to work harder and save more. The failure is making so many consumers pay twice or more than they they thought they would for a product they hope they never have to use. The bottom line with LTC is that you need to have it, but you never want to use it.

When these conditions come together, what kind of policy lapses are we seeing from folks who simply can’t afford their policies anymore?
I can’t speak for the whole industry, but the lapses are still in the 1.5 percent to 2.5 percent range. There are still low lapses and people are hanging on to that coverage even as the price is going up. People think that their policy has some value and they have paid for it. It gets into that senior mindset of “I don’t want to let this lapse and then need this thing when I have a stroke 90 days later.”

From what we’ve heard from our market research, the family is helping elder parents or grandparents to pay their premiums as they go up. That works in a negative direction toward the companies selling those products because truly, they would like to have more people lapse the policies. Then they would have fewer claims to pay in the future.

We have a population that is getting older and increasingly living longer lives, so the likelihood of an LTC claim is getting higher and the claims themselves are getting bigger as the cost of health care goes up. Can a pure LTC policy ever really work in these kinds of conditions?
Given today’s conditions, it’s just very challenging. If we could assume that interest rates would go up, or that the average issue age of LTC products would drop into the 40s or 50s, that would be pretty good. But we don’t know that interest rates will go up any time in the short-term. And we know the reality when somebody is age 40-55 is they have a house payment, a car payment or two, and probably are saving not only for retirement but to put a child or two through college.

You add up all those expenses and you and I both know it’s hard to find the dollars for something like LTCI, which you may not even use for another 35 or 45 years. This is just my personal view, but if things stay as they have been for the last several years, then LTCI in its current form has a very significant life expectancy.

With that in mind, what about hybridizing LTC with some other product?
Hybridizing LTC really started in the late 80s and early 90s when companies were looking at ways to improve life insurance sales and the opportunity was there to tack on a LTC benefit. At that time, we really didn’t have any federal law or guidance on what LTC was or how it was defined, much less that it was taxed from a life insurance standpoint. But what we did know was it was something you could tack onto an existing life insurance policy or buy as part of a new policy. And then what you’re really doing is giving those death-benefit dollars double duty.

If somebody dies in their sleep in their own bed, they have those life insurance proceeds to pass on to their heirs, whether it’s their family, or church or charity. But if they do have some event that would cause them to need care at home or in a facility, they can use that death benefit in advance of death to provide some LTC benefits and offer them something that they wouldn’t have otherwise.

That was the original concept. But then the HIPAA tax law passed in ’96 and took effect in ’97 and part of that was defining what LTCI was—that it was truly available as part of life insurance contracts and actually available on a tax-free basis coming out of life insurance. That was the first milepost that said these hybrid products do have a future in our industry; the government was saying they condoned it, and that such sales made sense.

What happened in the late ’90s and early 2000s was there were companies that moved in and out of those kinds of hybrid LTC products, and then at some point in the mid-2000s, we got into the Pension Protection Act (PPA), which passed in 2006. It further expanded the government’s acceptance of these hybrid policies by putting in specific tax law language on annuities that are funding LTC insurance. So the Pension Protection Act did for annuity hybrids what HIPAA did for the life hybrids.

What we’ve seen now is a two-pronged approach to hybrid products. One still using life insurance but the other using annuities, and both of them are able to use those benefits for the consumer on a tax-free basis. So it becomes very appealing for consumers and certainly appealing to the insurer that doesn’t want to go down the path of the traditional or health-based LTC product.

Hybridization seems like an elegant solution to a market problem: Make LTC part of your annuity or your life insurance and make your money serve those needs. But how do buyers respond to that? Some folks insist that sometimes less is more, simple is good, and people don’t want extra add-ons they may see as a bell or whistle.
When we had meetings with our producers and talked to consumers who bought our asset-backed LTC product or a similar product, the reality is if you don’t have a predisposition to needing some kind of LTC protection then you’re not going to buy these hybrid-type products.

If all you really need is life insurance, the fact that something has a LTC feature to it really doesn’t appeal to you unless you said, “Really what I want is life insurance and the ability to use that insurance before I die, should I ever need LTC.”

I do think that it’s not as much that we’ve expanded the market for life insurance or annuities. I think it’s that we’ve given consumers that are concerned about the risk of LTC a better way to fund for it.

OneAmerica is selling something called asset-based long-term care. As a product category, how does it differ from what we’ve talked about so far?
Most of what we do involves the reallocation of an existing asset. Somebody today may have $100,000 sitting in a CD that renews year after year, and we all know how low interest rates are. But that client has that money in the CD just in case. When you ask them what that “just in case” scenario is, it typically is at a certain age, post-retirement, 65+, and they’ll say, “You know, in case I have some financial issues or problems with health care down the road, I want this money just in case.” They’re not going to say, “Just in case I have a stroke and go into a nursing home.” But it is a “just in case” fund for those expenses that aren’t going to be covered for anything they don’t have covered insurance-wise.

When we talk to those folks with that “just in case” amount, what we’re talking about is the opportunity to take that $100,000 and leverage it through the purchase of life insurance or an annuity to provide a multiple of $100,000 if they ever need it for long-term care. And the good news is, with asset-based approaches, most of them have a return to premium so that if you hold on to this thing for three or four years and for whatever reason, you decide to take that trip around the world or spend that summer in Australia, you can walk away from these products and get no less than your money back.

In that regard, it’s a no-risk situation for the consumer. They put their money into a product that provides them with LTC. If they die in their sleep, it still passes on the death benefit. If they need it for services such as LTC at home or in a facility, it pays for those. And if they decide to walk away, they really don’t lose anything. They don’t gain anything either, but it’s their $100,000 back and the satisfaction of knowing they didn’t make the wrong decision.

For more on the hybridization of LTC products, see Health-LTC multi-tools