Boomers are retiring, people are living longer, and long-term care costs are rising faster than inflation. Yet according to the American Association for Long-Term Care Insurance, Americans only purchased 105,000 new LTCI policies in 2015 – a whopping 86 percent decline from the 750,000 policies purchased in 2000.
From premium hikes to low cost/benefit perceptions among investors, there are myriad reasons why LTCI might be losing its luster. Given the alternatives that have emerged, many clients and advisors are questioning whether traditional LTCI is still viable.
Will high premiums for new policies rise even higher? How can insurers stay profitable in the current market? Will today’s variable policy be affordable in five to 10 years? To help clients answer these questions and make wise investment decisions, advisors need to understand the market’s shaky status.
Premiums on the rise
“Throughout the history of long term care insurance, companies have always tried to price policies so premiums wouldn’t rise – yet every one of them has been forced to raise prices,” says Phil Reames of Reames Financial. Just last year, in fact, the federal government announced that premiums on all its policies – which are operated by John Hancock – would increase by an average of 83 percent.
Why have prices risen so drastically?
“The life insurance industry has over 150 years of records, and they can crunch the numbers and predict costs very reliably,” says Reames. “The LTC industry is newer – just 25 to 30 years old – and insurance companies are finding out that older policies were drastically underpriced.”
With utilization rates of up to 50 percent for couples 65 and older, insurers are facing a major mismatch between income and reimbursements. A 10-year-old policy may have gone for $1,000 to $2,000 per year, while the average assisted living facility charges $3,628 per month in 2016.
Negative consumer attitudes toward LTCI have also created a small pool of disproportionately high-risk buyers.
“A couple in their 50s that’s still healthy rarely sees the need for LTC,” says Reames. “Lots of times, the people buying LTCI are the ones who already have something wrong with them, and that creates a less healthy pool of insured and higher costs.”
Misguided as it may be, most consumers would rather eschew coverage altogether than pay top dollar for insurance they don’t believe they’ll ever use.
In the last few years, sky-high utilization and low demand have also pushed most long-term care insurers out of the market. Both a symptom and cause of increasing premiums, these exits have decreased competition among the few remaining players, all of whom have continued to raise rates.
Newer policies are priced higher at the outset, averaging between $2,000 and $5,000 per year for a healthy 55-year-old couple – but it may not be safe to assume those rates will be any more stable than their older counterparts. Given today’s perfect storm of longevity, utilization and increased boomer retirement, rates will likely continue to rise on both new and old policies.
While traditional LTCI may work for many, it’s not the only option for long-term care coverage. Hybrid life insurance can be a more viable product for insurers to offer and more palatable for clients to buy. Sales of these products risen steadily over the last decade.
Instead of paying out six-figure reimbursements for 10 to 20 years of four-figure premiums, insurers collect large lump sums that may or may not be needed for LTC. Consumers don’t quite get the LTC coverage of a standalone LTCI policy, but they can rest easy knowing their premium payments will never go to “waste.”
Some annuities also offer excellent LTC coverage with little to none of the risk of traditional LTCI.
“Say a couple has significant stock market exposure and is a year away from retirement,” says Richard Petellier, J.D., Senior Associate with the Help to Retire Group. “We can solve two problems at once by moving those assets into an annuity that delivers enhanced payouts if they need long term care later on.”
If they don’t need it, that money will still be available during the annuity’s normal payout period and will be passed onto beneficiaries if it isn’t used during the annuitant’s lifetime.
Planning for the future
Even with all of its downsides, traditional LTC is still a good choice in some cases. One advantage of LTCI is greater LTC-specific coverage per dollar spent, so it may be a wise choice for upper-class clients with significant assets to protect.
“I might use it for a very mature client who knows they have sufficient income and assets combined, so when their premiums increase, they’re not going to lapse the contract,” says Petellier.