The following is a reformatted version of an article published in National Underwriter Life & Health Magazine Aug. 3, 1998.
Clients who buy long-term care insurance without inflation protection are placing a big bet on the stability of long-term care prices.
Refusing inflation protection may make sense for customers over age 75 and younger customers who expect other assets to grow enough to compensate for erosion in policy benefits, experts said.
Inflation protection “is a very expensive option,” said Thomas Riekse Sr., president of the Heartland Group, Libertyville, Ill.
“It may be that an inflation rider makes the cost prohibitive,” agreed Robert McLellan, senior vice president of marketing at United Insurance Group, South Lyon, Mich. “Something is better than nothing.”
But the experts also agreed that agents who let clients reject inflation protection should be certain the clients-and the clients’ families-understand what they are doing.
Partial coverage of long-term care costs “does make a difference,” said Kim Purnell, a regional marketing director in the Palm Bay, Fla., office of Bankers United/Aegon. “But to me, seeing clients without enough coverage is a gut-wrenching feeling.”
“Only a fool would buy a policy to provide long-term care that does not provide for inflation protection,” Richard Alexander, a San Jose, Calif., trial lawyer, wrote in a report on long-term care insurance fraud.
Mr. Alexander said those best suited for long-term care insurance are middle-income people who have too many assets to qualify for Medicaid but too little cash to feel comfortable about paying for long-term care out of their own pockets.
LifeSpans, a Waltham, Mass., research firm, estimated in 1995 that private long-term care policies cover 1.5 million of the 35 million U.S. adults who are over age 65.
Typical annual costs for a policy that pays a benefit of $100 per day range from $250 for a 40-year-old who rejects inflation protection to $5,600 for a 79-year-old who buys inflation protection, according to the Health Insurance Association of America, Washington.
Insurers offer several ways for customers to protect themselves against inflation. Some customers prepare by buying more coverage than they think they need without adding any inflation protection.
Insurers also offer a choice of plans with 5 percent simple interest and 5 percent compound interest. The simple-interest option increases premiums by about 50 percent, and the compound interest option doubles the premium, agents said.
Some companies give policyholders the right to buy additional coverage over time on a guaranteed-issue basis at market rates. That provision may be a bad choice for clients who will eventually be living on fixed incomes, agents said.
Most long-term care insurers ask applicants who reject inflation protection to sign release forms declaring that they understood what they were doing. Insurers support sales of inflation protection options by paying commissions on the options to agents as long as the options stay in effect, agents said.
Despite the marketing support given to inflation protection options, the options were sold to only one-third of customers who bought policies in the early 1990s, LifeSpans reported.
Jesse Slome, president of Long-Term Care Insurance Sales Strategies, Westlake Village, Calif., said he believes the LifeSpans figures are still accurate. “Agents are not selling inflation protection as an option on the majority of policies sold.” Mr. Slome blamed slow sales of inflation protection options on inaccurate beliefs about inflation. “People are not aware that long-term care costs have risen significantly faster than the Consumer Price Index,” Mr. Slome said.
The CPI, a measure of general U.S. inflation, has increased by 3 percent or less each year since 1991, but nursing home costs have risen 8 percent to 9 percent a year over that period. When Mr. Slome’s company surveyed 400 nursing home administrators, 14 percent predicted prices would increase at least 7 percent a year for the next few years.
Efforts to keep older Americans in their homes and facilities other than nursing homes for as long as possible have helped hold down nursing home occupancy rates and families’ total long-term care costs. But assisted living facilities already worry they are accepting residents who belong in skilled nursing homes, and nursing homes worry they are accepting residents who belong in hospitals.
Crowding and prices could increase dramatically in 2030, when the baby boomers start to turn 85, according to the U.S. General Accounting Office.
Small errors in assumptions about inflation may not do much harm to long-term care insurance policyholders who file their first claims a few years after they buy their policies. But claimants ask for benefits an average of 12 years after purchasing policies. Joshua Wiener, a researcher with the Urban Institute, Washington, told a congressional committee in March that the lag between date of purchase and date of first claim will lengthen as the average age of insureds drops.
The average age of long-term care insurance policyholders has dropped to 67, down from the early 70s a few years ago, according to HIAA.
The average age of insureds at employer-sponsored plans is under 45.
The Lewin Group, a Fairfax, Va., think tank, found prices for long-term care rose 4 percentage points a year faster than overall inflation in the late 1980s and early 1990s.
Mr. Purnell advised agents who want to sell long-term care insurance and inflation protection options to study the products thoroughly. Long-term care insurance “is probably the most complex form of insurance anyone could buy or anyone could sell “
Gene Schmidt, president of Schmidt Insurance, Bismarck, N.D. suggested that agents talk to people close to the person applying for coverage. “Make sure you get the sons and daughters involved,” Mr. Schmidt said.
Spouses, sons, daughters, close friends and others who might help a client who needs long-term care need to know what the long-term policy covers, where it is and what other savings, pensions or other resources may be available for covering long-term care costs, Mr. Schmidt said.
In most cases, an agent should begin by discussing the client’s needs, then move to the subject of inflation, Mr. Schmidt said.
Reproduced from National Underwriter Life & Health/Financial Services Edition, August 3, 1998. Copyright (C) 1998 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.