Long-term care insurance is an insurance product that helps pay for the costs associated with long-term care. Typically, an individual requiring long-term care is unable to perform two of the six activities of daily living (“ADL”): dressing, bathing, eating, toileting, continence, transferring (getting in and out of a bed or chair), and walking. The need for long-term care is increasing because people are living longer and as they age, they often need help with ADLs or require supervision due to severe cognitive impairment.
Long-term care insurance is primarily a product aimed at the “mass affluent” market. Individuals and families with limited financial resources are unable to afford long-term care insurance and wealthy individuals and families have the resources to self-insure the risk of needing care. In addition to providing resources for long-term care costs, these policies also are used to preserve family assets so they can be passed to heirs.
Long-term care insurance was first introduced in the late 1970s and without a history of claims experience to draw from when it was introduced, actuaries were forced to price policies based solely on a variety of assumptions. Not surprisingly, these assumptions proved inaccurate. Three assumptions in particular were especially off target:
1) That a significant percentage of long-term care insurance buyers, like buyers of permanent life insurance, would allow their policies to lapse.
2) That the growth of healthcare costs would remain modest.
3) That the insurance companies underwriting long-term care policies would continue to enjoy attractive investment returns on their predominantly fixed-income investment portfolios.
By the 2000s, it was clear that the faulty assumptions listed above, along with others, threatened the solvency of many long-term care insurers. Several exited the line of business altogether and others passed along massive rate increases to their policy holders. The increases were so large that many insureds that had paid for their policies for decades suddenly found themselves unable to afford their revised premium payments and were forced to choose between dropping their policies (sometimes with a return of premiums paid) or accepting less generous benefits.
This experience has tarnished the reputation of the long-term care insurance industry and sadly, the industry continues to struggle with the dynamics of longer life expectancies, lower portfolio investment returns and skyrocketing health care costs. The industry also suffers from a less than stellar record of approving claims. Claimants commonly complain that insurers can find a reason – any reason – to deny a claim. And, to add insult to injury, many long-term experts believe that premium increases north of 30% every 7-10 years should be incorporated into a long-term care buyers’ expectations. (State insurance commissioners must approve price increases and insurance companies prefer to avoid passing along price increases to their insureds frequently.)
This confluence of factors makes the evaluation of long-term care insurance fraught with challenges and the purchase of it difficult to recommend to prospective buyers. In many cases, the need for coverage is clear, but at what cost?
Finally, long-term care insurance arguably is not designed correctly. Most policies that are in force provide coverage for a period of years, usually two to five, following a 90-day waiting period. But the real financial risk of long-term care often is not a need for care for approximately three years, but instead, is one where the need for care is extremely long – perhaps up to 10 years. Few “mass affluent” families can afford a policy with a coverage period this long, but policies with a multi-year waiting period, combined with a long coverage period, do not exist because multi-year waiting periods are prohibited from being sold.
The takeaway on long-term care insurance, therefore, is that while the need for it is growing, the risks associated with buying it are considerable and require careful analysis.