By Louis H. Brownstone
There has been a confluence of cost factors over the last few years which have made it very difficult for agents to propose robust long-term care solutions for most of their clients. Let’s examine these factors, first for traditional long-term care insurance, then for hybrids and linked products, and finally look at the resulting dilemmas for agents.
TRADITIONAL LONG-TERM CARE INSURANCE
- Rates for traditional long-term care insurance have at least doubled over the last 20 years. The causes are well known: the low interest rate environment, near zero lapse rates, higher than expected claims, and the resulting added reserve requirements. Current rates may be more stable, but large rate increases on existing blocs have caused agents to worry that even rates on current policies could be increased substantially in the future. Carriers have retained the ability to raise rates, subject to approval by state insurance commissioners, creating uncertainty.
- The costs of care have risen as expected by 4% to 5% per year for care in all types of facilities. Home health care costs have risen much more slowly, but have spiked recently, especially in states which now require raises in minimum hourly wages. These costs will in all likelihood continue to rise faster than the general rate of inflation.
- Insurance carriers no longer want to be exposed to future claims on policies with 5% compound inflation, and have priced them out of the market. The result is that agents must sell policies in which the inflation riders may not keep pace with the increase in costs of care. An alternative is to create more protection by increasing the daily or monthly benefit, but this approach may provide over-protection in the near term and decreasing protection as the policyholder ages.
4.The average age of the purchaser of long-term care insurance has remained steady at about age 57. Policies would be much less expensive and easier to underwrite were they bought at younger ages, especially under age 50, but this has not happened. Younger prospects have so many other demands on their financial resources, and many don’t have sufficient assets or income to save for the future.
- The average sale for traditional long-term care insurance has more than doubled over the last 20 years from about $125 per month to over $250 per month. This is despite a decrease in the average benefits in policies. How many people, especially couples, can afford $6,000 per year for long-term care insurance? Maybe less than 10% of Americans would even consider such an expense, as most are having trouble paying their bills as it is.
HYBRIDS AND LINKED PRODUCTS
Hybrids and linked life insurance and annuities are being utilized by many agents to solve a long-term care need as well as a life insurance or annuity need. However, they come with their own separate set of advantages and disadvantages. Let’s examine these.
- These products attempt to sell two different pieces of protection in one product. This solution can be great for the policyholder. However, these products incur more risk for the insurance carrier, and are therefore generally more expensive than traditional long-term care insurance. A possible exception is coverage for a single female, whose cost for traditional long-term care insurance is higher than for single males but whose cost for life insurance is lower than for single males.
- Life insurance with accelerated death benefits has a major flaw in protecting against long-term care costs. The death benefit normally does not increase over time. The result is that the death benefit has to be a very substantial one in order to create an adequate long-term care solution, thus increasing its cost. In addition, the death benefit can erode substantially if it is in fact required to cover long-term care costs. The use of the accelerated death benefit can thus defeat the main purpose of the life insurance, protecting one’s family.
- Products with chronic illness or long-term care riders can provide more protection against long-term care costs than policies with accelerated death benefits. The rates are normally guaranteed. However, the riders create an added expense to the policy one way or the other, whether there is a cost for the rider or whether its costs are imbedded in the cost of the life insurance.
- These products can extend the benefit period of long-term care costs, sometimes even providing lifetime protection, mostly now lacking in traditional long-term care insurance. They also often offer inflation riders, at least on the rider portion, but these greatly add to the cost and are frequently not sold. Even so, once again the death benefit has to be a very substantial one order to create an adequate long term care solution.
- Term life insurance can be very inexpensive, and is often sold to younger-aged people. However, term policies normally lapse before the need for long-term care arises, due to the greatly increased cost of renewing them. Many can be converted to whole life insurance by a certain age, in which case they could provide good long term care protection, but at a much higher premium.
- Deferred annuities with benefits for long-term care also has a major flaw. The growth in value of the annuity is reduced by the added risk of providing benefits for long-term care, and grows by a far smaller rate than other annuities. This is true even if there is a separate account for long-term care benefits. Thus, the long-term care funding can defeat the main purpose of the annuity, increasing ones guaranteed income for life.
THE RESULTING DILEMMAS FOR AGENTS
- The resulting challenge for agents is how to provide adequate long-term care protection in the face of these rising costs. There is no easy answer to this dilemma. Traditional long-term care insurance is normally the lower cost option. However, robust protection with traditional long-term care insurance now can cost over $100,000 during the life of a policy. Most prospects dislike the idea of spending that kind of money for a benefit they may never use. The hybrid and linked products are more appealing to prospects, but they normally cost more.
- How much in benefits should one consider to be adequate protection? Here come the compromises: 3% compound inflation instead of 5 % compound inflation could well not keep pace with inflation; $200 per day benefit, or $6,000 per month, is well below the cost of nursing homes in most states, and will also not cover 24 hour per day home health care. Ninety-day elimination periods make some sense but could result in high costs during the first 90 days of care. Two- or three-year benefit limits may cover the average period of care, but what about the 50% or so of scenarios that are longer than the average period of care?
- These compromises result in truly partial protection, protection which will cover most of the costs, but over a relatively short period of time. What about the truly catastrophic scenarios that last six to 10 years, scenarios that most prospects want protection for but would not receive in most of today’s policies? Are agents going to be sued by their clients because their assets were not adequately protected?
- One could make the case that with the exception of the 5% to 8% wealthiest prospects, we are not able to adequately protect people against future long-term care costs. There is no easy solution here, either in the private or in the public sectors. The need is greater than ever and growing fast, and our ability to satisfy this need is diminishing.
Louis H. Brownstone is chairman of California Long Term Care Insurance Services, Inc., located in Burlingame, California. California Long Term Care is the largest independent specialist long term care insurance agency in California, and is broker for a group of high-producing long term care specialist agents. Brownstone is also very active in NAIFA, the National Association of Insurance and Financial Advisors.