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.