The Opening Bell

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Long-Term Care

by Forrest Ryan Bell, CFP®

January 2018

Some years ago, a client came to me concerned about his long-term care policy. He purchased the policy through CalPERS. It would cover much of the cost of long-term care for all of his life, but he had just been informed that his premiums would be going up by 85%. The increase made him want to find a better policy, but he couldn’t. None of the new polices he could obtain were as good as the one he had. The premiums of long-term care policies in general had begun to rise, and the terms of newer policies were less generous.

Most people assume that long-term care premiums rose for the same reason that healthcare costs increased: the underlying care was becoming a lot more expensive. While the cost of delivering long-term care did increase, the increase was tamer than in healthcare. So why did long-term care premiums rise so much? The primary reason was lapse rates.

Lapse Rates

Lapse rates describe the percentage of people who buy a policy but let it lapse before a benefit is paid out. Lapsed policies are hugely beneficial to insurance companies as they increase the funding pool needed to cover payouts while simultaneously decreasing the company’s overall liability. Insurance companies assumed that long-term care policies would have lapse rates similar to other kinds of insurance such as life insurance. But the lapse rate for long-term care policies is much lower. Over time insurance companies learned that consumers cleave to their long-term care policies, and this upset the math. With fewer policy lapses than expected, insurance companies faced higher liabilities. They responded in one of two ways: Many insurance companies — including MetLife, Prudential, Allianz, and John Hancock — stopped issuing new long-term care policies altogether; others responded by increasing premiums and limiting the coverage.

Limiting Coverage

Limiting the coverage of long-term care policies would seem to be a reasonable response. About half of long-term care cases open and close within one year. Nearly 90% of long-term cases open and close within a four-year period. As the statistics suggest, people who require long-term care either recover or get worse and die. That’s why it’s statistically rare to have long-term care needs that exceed

four years. Companies began issuing new policies that limit coverage to three, four, or five years. While these still cover most long-term care needs, such capped policies are clearly less useful to certain consumers.

Many of our clients can use their existing assets to cover a four-year long-term care need. This approach often proves more efficient than buying long-term care insurance. What many of our clients cannot do is pay for a 15-year long-term care need. But there are no traditional/stand-alone long-term care policies that offer lifetime coverage in California anymore. Instead, this void has been filled in California by hybrid policies.

Hybrid Policies

Hybrid policies are a form of life insurance, but they have two parts: a base policy and a rider. The base policy is a whole life insurance policy or a universal life insurance policy with a specified death benefit. Consider the hybrid policy offered by OneAmerica. A married couple can keep the policy as a traditional life insurance policy, but if one of them should experience a long-term care event, they can draw down the death benefit as a dollar-for-dollar reduction. The base policy only covers long-term care expenses up to the death benefit and that is where the rider becomes meaningful. For the additional cost of a long-term care rider, the couple receives financial support for long-term care for their entire lives. Before you get too excited, however, you should check out the cost of a hybrid policy:

OneAmerica Asset Care hybrid insurance policy
Assuming a married couple, ages 60 & 62, both non-smokers and in good health:
Initial Premium – $200,000.
Whole Life Insurance Death Benefit – $285,900.
Lifetime Continuation of Benefits Rider – $8,500/month for life

Will I Need Long-Term Care?

According to a J.P. Morgan study, 35% of men age 65 will need some kind of long-term care at some point in their lives. For women age 65, 73% will need long-term care at some point in their lives. Accordingly, a married couple will likely see at least one spouse need long-term care. These statistics don’t mean you should run out and purchase a long-term care policy, but they should cause people to think. And like the expenses for the more beloved aspirations of travel, weddings, home remodels, car purchases, and gifting, long-term care is an expense you should include in your plans for the future.

 

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