Long-term care insurance is meant to protect one’s finances in the event of a debilitating health issue. Traditional health insurance (and Medicare) do not cover the cost of most long-term care, which can include both shorter term health challenges (e.g., recovering from a stroke) as well as chronic issues or conditions (e.g., dementia). Not only does it provide protection from the depletion of one’s financial assets in order to cover costs, long-term care insurance can also provide intangible psychological benefits to the healthy spouse and family. It may give them peace of mind in the event that difficult decisions must be made to seek professional care for their loved one.
Long-term care insurance has not been around as long as most other types of insurance and is less understood than most. It remains a somewhat controversial product because the industry has changed so much in a relatively short time. Uneasy feelings linger, particularly in light of several recent events. Here are some updates:
- Two huge insurers (Metlife and Prudential) have recently halted sales of new long-term care policies altogether. They cite the following main reasons for exiting the business:
- Investment income – insurers are required by law to set aside reserves from the premiums they collect in the early years of a policy so they can pay future claims. Many of the insurers were projecting to earn about 7.5% per year on these reserves, while low interest rates have driven their investment income down to more like 5% on average. This difference is a significant problem since they derive most of their actual profits from this investment income.
- Lapse rates – Insurers generally project that 5-15% of their policy owners will lapse (i.e. drop) their policy at some point. When someone drops their policy the insurer is then allowed to release the reserves for use in paying the claims of others. The lapse rates have been more like 1-2% on average. The other obvious negative to low lapse rates is that there are more claims to worry about down the road in comparison to previous projections.
- Company expectations – Claims are coming in at a greater rate than projected. In 2002, insurers projected claims for 2032 would be about $232,000,000. In 2011, they projected claims for 2032 to be more like $472,000,000. (source: John Hancock)
- Insurers must apply to the Department of Insurance in each state for their rate increase. The state decides whether or not the insurer is absorbing enough of the loss (i.e., the risk of being in this business), as opposed to making blanket approvals of the increase. The rate increases must be actuarially and legally justifiable to be approved.
- John Hancock, one of the largest insurers in the industry, recently applied for a rate increase in all 50 states. Thirty states have already approved a rate increase (including NC and NJ). The range of their increases is 15-90%, with 40% being the average. They are targeting their older policies for the larger increases.
- Group long-term care plans (i.e., those offered through an employer) will also experience rate increases. John Hancock and Metlife both applied for increases in the 40% range. Unum applied as well, but for a smaller increase. The reason these group plan rate increases should be lower is due to a higher lapse rate when compared to individual policies. The lapse rate is higher because some people stop their policy when changing jobs.
Even given these disconcerting trends in the long-term care insurance world, we still believe that the product makes sense for certain situations. It’s important to try to design and purchase a policy that has a reduced likelihood of rate increases from a company less likely to exit the business. There are ways that we can help you mitigate these risks, so please use us as a resource when considering long-term care insurance. As a fee-only, independent financial planning and wealth management firm, Woodward Financial Advisors is familiar with many different types of insurance, including long-term care.