Why Should You Buy Long-Term Care Insurance?

1. It will help you keep your independence and dignity. Here's how. . . some of you will spend all your assets on care while others plan to give their money away or put it in trust. With no assets you will now qualify for a welfare program called Medicaid. Medicaid typically pays for a semiprivate room in a nursing home, and; not all nursing homes take Medicaid patients. In many states it's not easy to get Medicaid to cover home care or pay for assisted living. Many people want to stay at home, but with Medicaid may not be able to. And assisted living is rapidly becoming a preferred alternative to nursing home care for certain disabilities but Medicaid may insist on a nursing home instead.

A nursing home is not the most desirable place to finish out one's life. For many, a terminal stay in a nursing facility robs them of a purpose in life and strips away their dignity. As an example, have you ever thought of the indignity of being bathed, toiletted or diapered in a nursing home environment? No wonder many people express the desire to die before ever having to go into a nursing home.

For some conditions a nursing home is the only alternative, but for many long-term care patients there are more options than nursing homes. A good long term-care insurance policy covers those options and when all else fails, it pays for nursing homes too.

2. If you are married and you have a need for long-term care, your spouse may be forced to pay for an outside care giver. The cost is likely to come from your combined income and assets. If the need for paid care drags on too long, your spouse may be left with minimal cash assets for future needs. Insurance solves this problem and allows your spouse to keep the assets.

3. Many healthy care-giving spouses won't spend their money and choose to "tough it out" on their own without help. If care of a disabled spouse drags on too long, this can have a devastating effect on the physical and emotion health of the caregiver. Surveys reveal that even though healthy caregivers often don't spend their money for help, they will use insurance if available. Insurance allows the healthy caregiver to buy much-needed respite from paid professionals, while at the same time, retaining the assets and possibly avoiding an early death from the mental and physical stress of caregiving.

4. If your children or extended family promise to take care of you when the time comes, insurance will help them do that. Probably you nor your children have thought of the prospects of moving you from place to place, changing your dirty diapers, cleaning up after "accidents" in the bathroom or helping you with bathing and dressing. Insurance will pay for aides to help with these tasks.

5. If you are single and a need for long-term care arises, insurance can pay for and coordinate that care. With insurance you won't have to feel you would be a burden for family or friends.

6. If you have the desire to leave assets behind when you die, insurance will help preserve those assets from the cost of long term care.

Why Not Buy This Insurance When You're Older?
1. Don't forget that 43% of those needing long term care are under age 65. You may need it now.

2. Roughly every two years insurance companies come out with new policies. Although these policies contain many new benefits and features, they are also more expensive for new people signing up than the previous policy. Estimates are, because of this rate creep, new applicants for long-term care insurance are paying about 5% more each year than applicants at the same age would be paying with older policies. At this rate of increase, ten years from now, a policy for a 50 year old would cost 50% more than an equivalent policy for a 50 year old would cost today.

3. To get long term care insurance you must answer questions relating to your health. If you wait, you may develop a condition that would prevent you from obtaining coverage.

4. The cost of coverage increases with age. For younger ages you can get a rate that is relatively inexpensive. At older ages the rate becomes very expensive.

5. It costs less, over time, buying now than buying equivalent coverage in the future. The 20 year total cost of buying now is less than the 19 year total cost of buying next year, or the 18 year cost of the next year, and so on.

Why Not Invest the Premiums Instead of Buying Insurance?
The invested amount of premiums over 20 years, may be only 5% to 12% of the potential insurance benefit. A 6 year insurance benefit may only yield ½ year of long term care if the premiums are invested instead. Besides, if you invested premiums, where would the money come from if you needed long term care next year or even 5 or 10 years from now? The saved premium account wouldn't have time to grow.

Why Waste Money on Insurance if You Have Assets to Cover the Cost Directly?
The same question could be asked of auto, home owner's or medical insurance. Why not self-insure there as well? You could just as easily pay your medical bills from your pocket. Or pay for damage to your cars and loss of your home out-of-pocket and possibly save a lot of money over time? No matter what the risk, the total cost of premiums over a long period is usually a fraction of the cost of paying a claim from your own pocket. The purpose we buy insurance is to preserve assets by leveraging premiums to buy a benefit at pennies on the dollar instead of paying dollar-for-dollar out-of-pocket for a loss. The probability of a house fire is 1 in 1200, of having a major auto accident is 1 in 240 and of needing long term care is 1 in 2 . With a much higher probability doesn't long term care insurance make as much sense as buying those other coverages?

Why Don't You Get Your Money Back if You Don't Use the Insurance?
This question always begs the underlying reason for it's being asked. In essence the person with this concern is thinking, "it won't happen to me, so it's a waste of money". To play to this objection, many carriers design policies with cash values, life insurance death benefits or return of premium at death. But these features increase premium cost and sometimes make coverage unaffordable. The same question could be asked of all insurance. Why don't we get a refund with term life, health, disability, commercial lines, auto, or homeowners insurance? People seem to take it in stride, paying $80,000 for auto insurance or $20,000 for homeowners insurance over their lifetime. Then when they make a claim, if they ever do, they get their coverage canceled or more likely their rates are increased to cover the cost of the claim. Yet, out of denial or ignorance they can't see why they should pay $40,000 over their lifetime for long-term care insurance where the probability for a claim is higher and the risk of loss is 4 to 10 times higher than the risk of loss with a car or home.

In the past 5 years, 18 major companies have sold out their long term care insurance business , may sell out or are gone from the market. Transamerica was bought by Aegon and recently Transamerica and four other Aegon companies, selling long term care insurance, have pulled out of the market. The long-term care business of Time/John Alden/Fortis was acquired by John Hancock. Travelers sold it's LTCi business to GE Capital. Conseco and Bankers United are also gone. CNA put it's individual life and LTCi business on the block in 2002, but withdrew the sale because of inadequate offers. CNA now offers only group. American Travelers was bought by Conseco. Lincoln Benefit, Farmer's, IDS, TIAA/CREF and AFLAC are also gone. And finally, Penn Treaty Network America, a leading producer selling only LTCi-- but a small company asset-wise-- has run out of capital. It has no deep-pocketed parent company so may be up for sale. Probably no one has kept track of the number of smaller companies selling long term insurance that have pulled out of the market as well.

When the dust settles, if it ever does, 6 companies may represent over 80% of the market: Genworth (formerly GE Capital), Banker's Life, John Hancock and MetLife with Aetna and UNUM/Provident leading producers of group plans.

On the other hand, the future may hold an entirely different scenario. There are a number of large, well-respected and well-funded companies like Prudential, New York Life, Northwestern Mutual, Mass Mutual, Allianz and State Farm who are currently in the market and they are determined to build market share.

These companies have proven in the past they can be successful latecomers to new markets. Their sheer size and financial resources make it possible to carve out significant market niches if they choose to focus those resources directly on long-term care insurance.

TYPES OF LONG-TERM CARE INSURANCE POLICIES

Stand-alone, comprehensive coverage policies represent the bulk of policies sold. These plans strive to cover all long-term care services and are usually purchased with monthly, quarterly, semiannual or annual premiums which are paid for the life of the insured. Abbreviated payment options are also available with policies fully paid up after 20 years, 10 years or 1 year of payments. Comprehensive stand-alone policies are very much like the typical modern group or individual health insurance policy. They try to cover as many different care alternatives as possible.

There are other ways to package long-term care insurance as well. One is as a rider to a cash value life insurance policy. The policy represents 2 separate coverages and the premium is split up to pay for both. This LTC rider should not be confused with the "accelerated death benefit" which is a popular feature of many modern life policies. Accelerated death pays part of the death benefit for terminal illness or doctor-certified, terminal, long-term care confinement while the insured is alive. Since very little long-term care could be certified as terminal, this policy feature is a poor substitute for "real" long-term care insurance.

Another way to package LTC insurance is as an "either/or" feature in life insurance. When the insured dies, a death benefit results. If the insured needs long-term care before death, stipulated benefits are paid instead of life insurance. If all benefits are paid before death, the policy expires. Any benefits not used result in a reduced pay-out at death. These policies can be purchased with periodic premiums for the life of the insured or with a single premium of $50,000 or more.

These policies offer the advantage that the insured is guaranteed a benefit since everyone eventually dies. A disadvantage is that many people who purchase LTC insurance don't need life insurance, but because the policy needs to cover the mortality risk of death as well as the morbidity risk of LTC, premiums are much higher than an equivalent stand-alone LTC policy. Another disadvantage is that underwriting standards for life insurance are more strict than standards for LTC insurance. Many who qualify for LTC insurance would be denied coverage for life insurance.

A third way to package LTC insurance is to integrate it into a single premium deferred annuity. Again, this usually requires a lump sum of $50,000 or more. Part of the earnings on the annuity pay for the morbidity risk of the LTC insurance. Thus an annuity that would normally yield 6% might only yield 4% when combined with LTC insurance. One advantage of this arrangement is that LTC premiums are paid with tax deferred earnings but since they are expensed inside the policy, premiums become tax free. Another advantage is the perception that no money is lost to an LTC policy that may never be used. In fact the lump sum even grows larger. A major disadvantage is that the money is tied up. Removing money will kill the LTC coverage, yet few people have $50,000 lying around that they're willing to tie up and never use. In most cases it's better to fund a stand-alone LTC policy with earnings from a separate investment account. This leaves the account unencumbered. Pending federal legislation will also make investment income used for LTC insurance premiums tax free.

A fourth way to package LTC insurance is combined with a disability income policy. Prior to age 65, the policy can only be used for disability income. Premiums paid after age 65 provide long-term care coverage. Premiums for such a policy will be higher than a stand-alone disability policy since long-term care coverage requires a portion of every premium be set aside as reserve for future claims. 

CHOOSING THE RIGHT CARRIER--YOUR MOST IMPORTANT DECISION

General Observations
As I mentioned in the overview, long-term care insurance is not the cake walk many companies expected. Most carriers anticipated immediate and huge success by expanding into one of the few new market opportunities to come along in the past 20 years. But, despite an aging population and a federal government increasingly reluctant to pay for long-term care, the idea of LTC insurance has not caught on as quickly as the insurance industry had hoped.

True, sales are clipping along at a yearly increase of 21%, but for insurance to really make a difference as an alternative source of funding for long-term care, at least 40% to 60% of those over age 65 should own LTCi. This would create efficiencies of scale allowing premiums to be more affordable and would create a "band wagon" effect ensuring continuing sales of insurance. The truth is, nationwide, less than 10% of individuals over age 65 own LTCi. Participation in large, employer group, voluntary-pay plans, nationally is about 6%.

But rather than despair, I believe LTCi insurance is a product whose time has come. It just may take more time. I also believe employers have a vested interest in promoting long-term care insurance. A survey from the National Family Caregivers Association, released in October, 2000, reported that 54 million Americans are involved in family care giving.

Many of these are full time employees. Estimates of the cost to employers for employees involved in long-term care range from $20 billion to $50 billion per year. It makes sense economically for employers to promote the product. If you believe as I do that insurance can and will make a difference, then you as an employer can help by designing and implementing a good plan from a strong, committed carrier. Or if you already offer a plan, you can add enhancements to improve employee participation.

Company Financial Strength and Size
Financial strength and size are very important. First of all, LTCi is generally considered a product for the aged. It is true that about 40% of long-term care recipients are younger than 65 with a large portion of these under age 35. But many of these people were born with disabilities or developed them early in life.

These disabled generally did not come from the working population. And they make up a tiny fraction of traditional nursing home or assisted living residents. If these younger care recipients need facility care they are accommodated in special intermediate care facilities. Their care is almost always funded by Medicaid or SSI and rarely does the cost come from family or private funds.

Most employees buying LTCi will probably not make claims until age 78, which is the average claims age nationally. In 1999, the average purchaser of group long-term care insurance was aged 43. Thus, the average worker may not make claims for 35 years. (Don't forget that unlike all other group insurance, employees will keep their group LTCi for life. To buy a new policy at retirement age would result in new premiums 6 to 10 times higher). You can see that it is extremely important to pick a company financially strong enough and large enough to be around 35 years from now.

Small poorly rated companies selling only 2 or 3 lines of insurance, including LTCi are particularly vulnerable for the long-term.

This is because few companies have more than 10 years of claims experience. With such limited experience most companies don't have definite actuarial guidelines for the premium reserving required for claims 20 to 30 years from now. If claims experience turns unfavorable, it will take a large company with deep pockets to continue to service claimants. Small, poorly rated companies will have little chance of surviving a bad claims experience.

The second reason for picking strength and size is because of the current market environment. The current market is not large enough for all the players. In 2000, 13 companies controlled about 90% of the market and these carriers continue to consolidate and grow market share by buying out discouraged carrier's business.

The other 10% of the market belongs to over 100 companies. It takes a lot of money to introduce a new product, build market share and reach a critical mass of premium income that eventually starts producing profits. Only large, successful companies have the resources to stay the course and build market share. 

With equities gone south the company can't find additional capital. It must either find a potential buyer or go out of business. Other examples are CNA and Conseco which have been downgraded by the rating agencies due to financial problems. It is likely that part of a management fix from both companies would be a purging of unprofitable lines of business such as long-term care insurance.

Company Commitment to Long-term Care Insurance.
I think it's crucial to pick a carrier that has a long-range commitment to long-term care. Even market leaders such as CNA seem to be rethinking their participation in the market-at least with regard to non-group sales. I believe many carriers are selling the product as a defensive move-they don't want to be left out if sales really start soaring. Without a firm commitment, they won't stay with it if the going gets tough.

A good indicator of the commitment level is to observe the level of resources devoted to a company's long-term care business. For instance Allianz is serious because it dumped its third party administrator and acquired LifeUSA which has an established LTCi administration department. This was an expensive move but one that signals commitment. Northwestern Mutual is serious because it formed a separate company that only sells long-term care. These are but a few examples.

Another indicator of commitment is the amount of market share a company has. Obviously a larger market share is going to commit a company to staying with long-term care insurance because of a substantial financial obligation.

Rate Stability
To the best of my knowledge, no insurance company is selling long-term care insurance with "non-cancellable" premiums-meaning premiums are guaranteed not to increase over the life of the policy holder. For an industry with little claims experience, to guarantee rates for insureds who may not collect for another 40 years, would be committing financial suicide. Some carriers do offer short-term, initial rate guarantees but these are limited.

All policies I've seen, including the ones with limited guarantees, use "guaranteed renewable" premiums. This means, once the coverage is approved, the company cannot increase premiums for an individual policy holder for a change in age or health. The company can, however, file a rate increase for a class of policyholders or all policy holders on a specific contract form in any given state. By the way, it is illegal for any agent of a company to leave an impression with an insured that guaranteed renewable premiums will stay level forever. They might, but that possibility cannot be stated as fact.

The current intent of insurance regulators is to promote rate stability in the LTCi industry, much like the stability we see in life insurance. This is primarily to protect older policyholders on fixed incomes from losing their policies if rates go up. But even the regulators know that a lack of long-term claims experience makes it difficult to predict future claims. Still, companies have been eager to favor public confidence by keeping increases under control. Rates industry-wide have been reasonably stable over the past 10 years. We occasionally read about 70% increases causing a spate of retaliatory law suits, but this is the exception rather than the rule.

It's difficult to identify companies that may have to file for premium increases sometime in the future. Ironically, the companies with the lowest premiums may not be the ones in trouble. There are two tools to use that can give us clues to which companies have adequate premiums and which don't. The first is the "Long-term Care Experience Reports" published annually by the NAIC. The most recent edition shows actual claims loss ratios from 1992 to 2000. Companies with high loss ratios may be more likely to need future rate increases. However, for various reasons, this is not always an accurate predictor.

The second and more useful indicator is the company's underwriting philosophy. Since many group plans are not medically underwritten we can still determine underwriting from the company's approach to obtaining bid information, benefits offered and how aggressively the company tries to increase participation rates. With individually underwritten policies, a recent study by consulting actuaries Millman & Robertson Inc., reports that companies with "loose" underwriting procedures have about 3 times the claims loss ratio in the first three years than those companies with "tight" underwriting.

As a rule, underwriting philosophy combined with loss ratio is a more accurate predictor for rate increases. For policies in-force 5 to 9 years, the average loss ratio for "loose" underwriters was still about 45% higher than "tight" underwriters. It appears that underwriting will have the greatest effect on rate stability.

What Happens if Your Carrier Sells Out or Goes Out of Business?
If you pick a large well-rated carrier with a commitment to LTCi, the scenario above should not happen. However, if your coverage is sold, my experience has been that the acquiring company often respects the rate structure and a rate increase doesn't occur at least for awhile. On the other hand, if the selling company got out because it was unprofitable, then the acquiring company may find it necessary at some future date to raise the rates on the acquired policies. We see this happening for example with John Hancock raising the rates on the policies it acquired from Fortis.

In the event of an insurance company failure, insureds will not lose coverage. The insurance commissioner for the state in which the company is registered, almost always finds a buyer for the defunct company's policies. But even if no buyer is found, then the state guaranty fund still keeps coverage going. All insurance companies doing business in the state are assessed by the fund to continue coverage and pay claims for the defunct company's policies.

You might question why your initial carrier selection is so important with this amount of default protection available. The answer is, if the coverage was to blame for the defaulted company failure, then it won't benefit an acquiring company either. Chances are the new company may follow with a rate increase for existing insureds.

In the case where no buyers are found and the guaranty association gets stuck with coverage, Insureds would be in limbo. No new enrollees could sign on. With no claims department available, getting claims paid would be a nightmare and switching coverage to a new carrier would probably be impossible. Finally, many guaranty associations limit coverage, for example $300,000 total claims per claimant may be imposed.

Bottom line: pick a strong carrier.