by Steve Goodman
CPA, MBA – President & Chief Executive Officer
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The Need for LTCi
According to an August 31, 2017 article by Christine Benz for Morningstar (http://news.morningstar.com/articlenet/article.aspx?id=823957), the following statistics identify the need for Long Term Care insurance (LTCi).
- 46.7% of men turning 65 will have a need for long term care in their lifetimes.
- 57.5% of women turning 65 will have a need for long term care in their lifetimes.
- 22% of people over 65 who are in the highest income quintile will need two years or more of long term care in their lifetimes.
- 31% of people over 65 who are in the lowest income quintile will need two years of more of long term care in their lifetimes.
- 10% of all Americans over 65 have dementia due to Alzheimer’s.
- 38% of all Americans over 85 have dementia due to Alzheimer’s.
- 35% projected increase in Alzheimer patients between 2017 and 2030.
- $30 billion in US long term care spending in 1980.
- $225 billion in US long term care spending in 2015.
- 15.2% of all Americans turning 65 between 2015 and 2019 will spend at least $250,000 in long term care costs over their lifetimes.
- $217,800 is the estimated end of life care cost for a patient’s final five years of life without dementia.
- $341,600 is the estimated end of life care cost for a patient’s final five years of life with dementia.
- $164,250 is the average private room nursing home cost in Manhattan, NY in 2016.
- $63,875 is the average private room nursing home cost in Monroe, LA in 2016.
- 46% of all caregivers provide assistance to those with Alzheimer or dementia.
- 125 insurers offered standalone LTCi in 2000.
- Less than 15 insurers offered standalone LTCi in 2014.
- 7.25 million Americans have LTCi in 2014.
History of LTCi
The insurance industry introduced LTCi in the late 1970s. In its early years, only a handful of companies offered this insurance. By the late 1980’s/early 1990s, demand for LTCi had grown substantially. The industry took notice. Many companies entered the business.
The healthcare industry also took notice. It began to expand its long term care healthcare options beyond nursing homes. The industry began aggressively promoting assisted living facilities, ‘home’ healthcare, adult day care, and other services. The insurance industry adapted their policies to include a wide range of care services. They increased their potential liabilities while competing for premium dollars.
The original buyers of LTCi were younger and healthier than the LTCi buyer of today. For several years, the industry continued to compete aggressively for LTCi business without a proper understanding of their true costs. Eventually, those who bought their policies in their mid-50’s reached retirement age and beyond. They began to use the policies. The insurance companies soon determined that they had seriously mispriced their policies.
Losses mounted causing roughly 90% of the carriers to stop selling new policies. Some companies went out of business forcing state insurance guarantee agencies to assume the liabilities. Others simply refused to pay resulting in lawsuits, unpaid healthcare providers, and aging seniors without access to long term care. The largest LTCi insurer, Genworth, has agreed to be purchased by a Chinese company to avoid bankruptcy. The acquisition has been in review by the US government for over a year. If the merger is denied, and if Genworth fails, states will be forced to absorb huge liabilities. If the states pay, they will compensate policyholders at a reduced benefit level. This has been the pattern established with previous LTCi insurer bankruptcies. To recover their losses, states will be forced to raise the fees they charge insurers by many folds. The net effect will be to further tarnish the LTCi product and make an already high-priced insurance policy even more expensive.
As of 2018, there are less than 15 companies that issue their own policies (some companies market policies serviced and underwritten by others). Premiums, which were never guaranteed, have risen, often by high double-digit and even triple-digit annual percentage increases. Insurance industry marketing studies show that LTCi buyers are now older and wealthier than they were 20 and 30 years ago.
In pricing LTCi policies, the industry made a series of mistakes.
- Insurers over-estimated interest rates. They took in money for many years before payouts were needed. They assumed an ability to invest the premiums at a higher rate than they realized leading to a shortfall in cash reserves.
- The failed to calculate the rate of healthcare cost increases. These costs increased significantly faster than expected.
- They failed to adjust their calculations for longevity increases. While people are living longer, they are not necessarily living healthier. People now live longer with illnesses that formerly resulted in faster deaths.
- They assumed more people would drop their policies that happened in practice. To compound the industry’s problem, some states have enacted requirements that people who drop their policies after paying in for years receive a level of benefits for those payments. The industry assumed those funds would be available to pay those who continued to pay until benefits were required.
As of early 2018, the litigations against many companies continue. The status of the Genworth acquisition remains undecided. Rates have increased substantially and have now begun to level off to single-digit annual percentage increases. LTCi alternatives have captured the lion’s share of consumer demand for LTCi.
What is LTCi?
LTCi is an insurance policy sold to cover an insured’s the need for care usually but not necessarily associated with older age and end of life. LTCi policies cover services that neither Medicare nor medical insurance will cover beyond a short duration based on circumstances. Medicaid will cover some long term care providers but only after the applicant has drained nearly all assets. Facilities geared towards Medicaid patients may not offer a full range of services in an attractive environment. An LTCi policy usually, but not always cover care offered by providers as follows:
- Nursing home – Nursing homes provide a full range of skilled health care, rehabilitation care, personal care, and daily activities. Some nursing homes offer more services than others. Potential residents and their families need to compare the services offered.
- Assisted living – Assisted living facilities are apartment-style units. The facility management will offer a range of services that may include transportation, meals, visiting medical professionals, activities, and other amenities.
- Adult day care services – A program outside the home that provides health, social and other support services in a supervised setting for adults who need some degree of help during the day.
- Home care – Home care is provided by an agency or individual. The contractor provides assistance with Activities of Daily Living (ADL) and routine housekeeping chores.
- Home modification – Home modifications include the installation of grab bars, ramps, and other facilities to make a home more livable for a person with reduced physical capabilities.
- Care coordination – Care coordinators assist policyholders in identifying the appropriate care providers for the policyholder. Care coordinators know the details of the LTC policy, local service providers, and other insurers who may cover various conditions.
- Respite Care – Respite care is a short-term stint, typically 2 to 3 weeks per year, to temporarily provide mental and physical relief for a patient’s home care provider. The respite care can take place in a nursing home, an adult day care facility, or at home.
LTCi Terms and Conditions
Long term care insurance is sold based on many factors. These include the following:
- The applicant’s age and health – long term care insurance go through a medical underwriting process like that used for life insurance. Some people may be rejected due to ill health. Pre-existing conditions may require exclusions for a period of time. Insurance companies price their policies knowing that older people are more likely to require the company to begin paying benefits soon after policy initiation. The younger one is when he/she purchases the policy, the less expensive the annual premium.
- LTCi is more expensive for women than for men. Statistically, women live longer than men. They also require more LTC than do men. When buying life insurance, females pay less due to longevity. When buying LTCi, the same longevity often translates into more years of LTC services.
- Once premiums commence, the policyholders must continue to pay premiums until either death or benefit payments commence. Most policies cease premium payments upon receiving benefits but not all.
- LTCi policies are ‘use it or lose it’ insurance. While easily accepted for many other kinds of insurance, industry studies show that this LTCi provision is unpopular with consumers. Many LTC alternatives are structured to provide a meaningful payback in the case that LTC insurance is never needed.
- Benefit periods are the customary way that policies are defined. Policies are sold in years of benefits. Some policies offer a fixed dollar amount of benefits that equates to a time period. The fixed dollar amount allows a person to extend their benefit period if they receive a graduated level of care (and cost) as they age.
- The elimination period is the LTCi equivalent of a deductible on auto, homeowners, or medical insurance policy. The typical period is 90 days, but other elimination periods are available. If a policy indicates a 90-day elimination period, the policyholder will not begin to pay until the 91st day after the insured meets the trigger condition and pays for the first 90 days of care out of pocket.
- LTCi policies are offered on a non-guaranteed premium basis. That is, the insurance company can apply to state insurance regulators to raise rates. Rate increases apply to everyone in a state with the same policy and in the same age category. Once a policy initiates, the insurance company cannot treat one person differently providing the premium payments are current.
- LTCi policies are guaranteed renewable providing the policyholder continues to pay for the policy. An insurance company cannot terminate a policy due to an applicant achieving a certain age or health condition. The exception is a fraudulent application.
- LTC premiums are tax deductible as a covered medical expense per IRS regulations. The IRS issues annual guidelines by age that limit the amount of a deduction one may take on their tax return.
- The trigger condition is the condition that initiates the benefit payments. A typical policy will specify that once an insured has been tested and found incapable of 2 or more Activities of Daily Living (ADL’s) without assistance, then the elimination period begins. The original list of ADL’s used when LTCi was first issued did not include cognitive problems. Newer policies include a loss of cognitive function as a trigger condition. Prospective buyers need to check for the presence of a cognitive condition as a trigger.
Long-Term Care Insurance: Built-in and Optional Benefits
The following are benefits that some insurers have either made standard in their LTCi policies or made available as an option.
- Injury: Additional Benefit — This benefit would be paid in addition to the normal nursing home, assisted living or home health care expenses if an injury caused you to need long-term care. You would have to sustain the injury while the policy is in force and before you become chronically ill.
- Cash Benefit — This benefit of 35% of the home health care maximum would be paid in advance on a monthly basis. You’d receive no other benefits if you’re receiving a cash benefit, and the elimination period does not have to be satisfied to receive this benefit. If you decide to discontinue this benefit, you could receive other benefits on a reimbursement basis.
- Five-Year Rate Guarantee — This benefit will guarantee the initial rate for a period of five years from the date the policy is issued.
- Inflation Protection — This benefit automatically increases your long-term care benefits (both monthly and lifetime) on the policy anniversary date. The inflation rate is preset by contract at the time the policy is issued. Actual LTC cost increases may be higher or lower than the rate specified in the inflation protection rider. Inflation protection is particularly important for policies purchased by people who expect that they are 15 to 20 years or more from any likely LTC need. You can choose from several different inflation protection options:
-Lifetime compounded: You select the percentage by which benefits are increased each year.
-Five percent a compounded-20 year: Benefits are increased by 5% compounded each year for 20 years.
-Five percent simple-lifetime: Monthly benefits are increased by 5% each year, based on their original value. Premiums are adjusted based on the increased benefit amount.
- Shortened Benefit Period/Nonforfeiture — This benefit continues coverage on a reduced basis if the policy is terminated, so long as the policy has been in force for a minimum length of time. Contingent/Nonforfeiture is the default option.
- Restoration of Benefits — This benefit will restore your maximum lifetime benefit if you no longer require long-term care services for at least 180 consecutive days, assuming the policy has paid benefits. Restoration of benefits is only allowed one time during a policy’s term.
- Return of Premium – Some insurance companies have begun to initiate a return of premium feature to negate the ‘use it or lose it’ provision.
-Return of Premium-Full: All premiums paid will be returned if you die while the policy is in force.
-Return of Premium-at Death, Less Claims Paid: All premiums paid, fewer claims paid, will be returned if you die while the policy is in force.
-Return of Premium-at Death Before Age 65, Less Claims Paid: All premiums paid, fewer claims paid, will be returned if you die while the policy is in force but before you turn 65.
- Spousal Shared Care Benefit — If you have exhausted benefits under your policy, you can access benefits under your spouse’s policy (if it’s identical to yours), up to a minimum of 12 times the current monthly benefit. If you or your spouse dies while both identical policies are in force, the surviving spouse may receive what’s left of the deceased spouse’s maximum lifetime benefit. Couples buying policies together are advised to consider this option.
- Spouse Survivorship Benefit — If your spouse dies and the policy has been in force for at least 10 years, no further premiums will be due on the policy.
- Spouse Waiver of Premium — If your premium is waived, your spouse’s premium will also be waived. When these waiver periods end, premium payments for both policies will resume.
- Waiver of Elimination Period for Home Healthcare and Adult Daycare — Policy benefits will begin with the first day of these services, with no elimination period.
CPA, MBA – President & Chief Executive Officer
About Steve Goodman
For more than 30 years, Steven has provided insightful solutions to the challenges of business succession, wealth preservation and charitable planning, focusing on the needs of owners of closely held businesses and high net worth individuals.
He's been featured in the New York Times and is an accomplished speaker and has presented over the years to many organizations and professional groups on efficient business succession, estate planning issues and tax strategies. Steven is a CPA who was vice president of the Trust and Investment Division of JP Morgan Chase and a supervisor for KPMG Peat Marwick, and holds an MBA from Fordham University.