Executive Summary
Insurance functions best when it is used to cover high-cost low-probability risks – the kind that aren’t likely to occur, but would be devastating if they did. Technically, paying insurance premiums on an ongoing basis has a slightly greater expected loss than just retaining the risk, but an appealing trade-off if it means converting a potential financial disaster into a manageable ongoing premium.
Yet when it comes to long-term care needs in today’s environment, what was perhaps once a higher-cost lower-probability event has now turned into a very high-probability event with an increasingly large volume of “lower-cost” claims. As a result, long-term care insurance has begun to morph from effective insurance, into something that looks more like just prepaying long-term care expenses in advance at a high premium rate and with little insurance leverage.
As a result, perhaps it’s time to reform long-term care insurance policies so they once again focus on covering (only) high-impact low-probability events. For instance, what if elimination periods for long-term care insurance were increased to allow for a 2 or 3 year deductible, instead of today’s common 3-month period, and individuals could then take the significant premium savings and use it to cover their care during that time period? Could such an increase in deductibles reduce the cost of long-term care insurance coverage enough to make it affordable once again to most of the general public?
Principles Of Insurance – Insure Again High-Cost Low-Probability Risks
On average, buying insurance is expected to be a losing proposition, financially speaking. Premiums paid (plus foregone growth) should be the less than the expected value of the average claim received from any type of insurance coverage. After all, if claims exceed premiums (plus growth) on average, it’s only a matter of time until the insurance company will just run out of money. Conversely, if the insurance company wants to make profits, the premiums plus growth must exceed the cost of overhead and claims that are paid.
Notwithstanding the fact that insurance should always come out behind, on average, for certain types of risks it still makes sense to insure. The reason is that, for potentially extreme and possibly catastrophic events, it’s better to have a small known loss than a big unknown one. For instance, imagine the choice between taking a 0.1% risk that my $300,000 house will burn down, or just paying $300/year for homeowner’s insurance. In the long run, my expected value is the same for both (at -$300/year), but the former involves a small chance of a financial catastrophe (losing all $300,000 in a single year), while the latter converts it to a “manageable” expense of just $300/year with no exposure to the extreme outcome. For serious risks, that’s a very appealing trade-off, even if most of the time I’m just going to “lose” my premiums.
A key tenet of this type of effective insurance is that the risk being insured should be of relatively low likelihood. If the probability of the risky event – and the associated claim – is high, then there is little leverage to the insurance premiums. Continuing the prior example, if I lived in a high-risk area where the probability of a catastrophic home fire was 10%, my insurance premiums might cost me $30,000 instead of $300. At that point, I could just accumulate enough to replace the property myself every 10 years! What started out as insurance ends up simply being a form of prepaying a ‘known’ future event (as if it’s high enough probability, the odds are overwhelming the risky event will happen, it’s just a matter of time).
Notably, for insurance to really be effective for managing risk, the event should not only be of low likelihood, but it should also be relatively high impact. When insurance covers a relatively high impact event, the cost of operating the insurance company is very small relative to the amount of premiums and potential claims. When insurance covers low-impact events (e.g., low-cost claims), the overhead of the insurance company ends out consuming a larger percentage of the premiums, reducing the implied leverage of the insurance. In such circumstances, insurance is even worse financial proposition; in fact, if the risk was inexpensive enough, it would be much cheaper to simply self-insure it and save the ‘cost’ of insurance company overhead and profits.
The Problem With Long-Term Care Insurance (LTCI)
When long-term care insurance first began, it was intended as a form of coverage to protect against the high-impact but low-probability risk of needing long-term care assistance at an advanced age; one key study (Robinson, 1996) estimated the risk of needing a nursing home at 27% and 44% for men and women respectively. Yet with sustained improvements in medicine over the past several decades, life expectancy has increased, and reached the advanced age where some type of long-term care support is necessary has become increasingly likely.
In fact, the “real risk” of a 60-year-old needing long-term care (and/or of utilizing a long-term care insurance policy) is now estimated to be a whopping 50% (or as high as 65% for a 50-year-old female). In other words, on average one out of every two people now age 60 will end out needing long-term care at some point during their lifetime. Which means, as noted earlier, long-term care insurance may be less like “real” insurance, and more like simply prepaying most of the anticipated expenses of long-term care over time and then just claiming them back later!
In addition, not only is needing long-term care actually a relatively high-probability event, but – compared to the premiums and costs involved – it may actually be a lower impact event than previously estimated as well. Industry data from AALTCI on long-term care insurance shows that 45% of nursing home stays last 1 year or less, and 75% last no more than 3 years. The probability of a true “high-impact” event – e.g., a 5+ year nursing home stay – is only 12%. (Notably, including care in the home as well, these duration probabilities would be somewhat higher.)
In addition, while AALTCI industry data suggests an average stay of about 2.5 years, a more recent study by Hurd, Michaud, & Rohwedder (2013) suggests that in reality, the average nursing home stay is possibly as short as an average of just over a year. The researchers suggest that previous studies may have failed to recognize how often people enter facilities but then recover to the point that they leave again, which means even those with 2-3 years worth of cumulative stays may be doing it with a series of shorter long-term care events, not a single sustained claim.
The significance of this is that if the need for long-term care is not actually the high-impact low-risk event once thought, but actually a rather high-probability but fairly low-impact event – 50%+ probabilities of needing care with stays averaging little more than a year – then traditional long-term care insurance truly may be little more than prepaying long-term care expenses, and not really functioning as effective insurance at all!
Restructuring Long-Term Care Insurance With High-Deductible Elimination Periods
If the problem with current long-term care insurance is the fact that it’s primarily covering high-probability low-impact events, then its solution is to restructure long-term care insurance to once again cover primarily low-probability high-impact events.
For traditional insurance, the way this is accomplished is by establishing deductibles – a portion of claims that are paid out of pocket, eliminating “small” (and also more likely/frequent) claims, and ensuring that the only claims that occur are the truly large and material ones. And notably, by eliminating the high-probability low-impact events and focusing only on the big claims, the coverage actually gets much cheaper because those big claims are such low probability. Think higher deductibles on homeowner’s or automobile coverage.
In the context of long-term care insurance, the “deductible” is the elimination period – that time period during which the individual is eligible for and receiving care, but is paid out of pocket. With long-term care insurance, the deductible can range from 0 to 365 days (e.g., up to 1 year), though in practice over 90% of long-term care insurance buyers get coverage with a 3-month elimination period. Yet as noted earlier, with an average length of stay in a nursing home at 2.5 years, or possibly as short as just over 1 year, the deductible isn’t actually achieving its purpose of carving out high-frequency “small” claims. (In reality, the cost of long-term care even for “just” 1 year is expensive by most people’s standards; the point here, though, is that when such stays are typical and occur more than 50% of the time, they are “small” claims in the context of long-term care, where a truly “big” expensive claim might be 5+ years of care.)
So what would a more effective, “high-deductible” long-term care insurance policy look like? Imagine a policy that has a 5-10 year (or even lifetime) benefit period, but a 2-3 year elimination period to go along with it. With an elimination period that high, even the “average” stay in a nursing home will fall within the deductible period; the actual probability of ever having a material claim against the long-term care insurance claim would fall dramatically. Yet ultimately, that’s the precise point; by eliminating the “small” events and focusing on the large ones (e.g., a 5+ year claim after a 3-year deductible), the cost of coverage would fall significantly, while simultaneously doing a better job of insuring against the extreme events when they occur (as long-term care insurance has become so expensive that more than 2/3rds of all policies sold have a benefit period of just 4 years or less). In other words, instead of insuring the early years (which is expensive) and self-insuring the later years (which is also expensive), consumers could self-insure the shorter early period (with a longer elimination period) and then have (inexpensive) insurance coverage for the rest!
In other words, if today’s long-term care insurance functions more like a prepayment of long-term care expenses, with the majority of policies sold for little more than the average cumulative duration of claims (and thus producing little actual insurance leverage to protect against the risk of truly extreme events), then raising the deductible through longer elimination periods can shift long-term care insurance back to the true high-impact low-probability catastrophic events. Of course, this still means many/most people will need to save and create reserves to handle that elimination period – but on the plus side, much of it can likely be covered with all the long-term care insurance premiums they would no longer be paying!
State Law Impediments to Reforming Long-Term Care Insurance
Unfortunately, while offering policies with much-higher deductibles could help turn long-term care insurance back from prepaying long-term care expenses into “actual” insurance, it’s not as easy as simply having insurance companies issue new/different policies with longer elimination periods for consumers to choose.
The problem is that, in an effort to “protect” consumers, most states actually require all long-term care insurance sold in the state to have an elimination period of no more than 365 days, a remnant of laws passed several decades ago when long-term care insurance was cheap enough that ultra-long elimination periods were never anticipated as being likely/necessary. Yet as long-term care insurance has evolved, these state laws today are requiring elimination periods so “low” that it is rendering long-term care insurance unaffordable for many, which limits the pool of participants, forces industry consolidation, and potentially amplifies the challenges. Imagine a world where state laws prevented anyone from buying automobile insurance with a more-than-$50 deductible, then imagine how expensive automobile insurance would get, and how many people would decide to skip the coverage… and you have an understanding of how originally-well-intended laws have produced a similar effect for long-term care insurance.
Of course, given that the whole purpose of laws limiting elimination periods was to ensure that people don’t buy coverage with a deductible period so large that they go bankrupt waiting to have a claim, policies with longer elimination periods may need to have additional financial underwriting, or some other process to help reduce the risk that people buy untenably long elimination periods. Nonetheless, if the alternative is that people don’t buy coverage at all because the short elimination period is unaffordable, any such solution may be an improvement over the current state of affairs. And the incentive for states is that by having policies with longer elimination periods but bigger (subsequent) benefit periods, there’s a potential reduction in future state Medicaid claims as more people buy coverage, an improvement from now when so many can’t afford coverage, and many who do just buy policies short enough to cover a limited period of claims while they gift away assets to qualify for Medicaid!
Notably, the reality is that most of today’s hybrid annuity- or life-insurance-based long-term care policies actually do offer a form of high-deductible policy – an indirect form of the cash-value-based claims structure, and one that isn’t subject to the existing state laws limiting elimination periods on traditional long-term care insurance. In point of fact, arguably hybrid policies may be increasing popular because they offer a form of high-deductible long-term care coverage that can’t be purchased elsewhere! However, as noted previously on this blog, hybrid long-term care policies ultimately risk being dramatically more expensive for consumers in the long run if/when/as interest rates eventually rise (which for a policy with a multi-decade holding period, is clearly likely to happen at some point) and the cost guarantee turns out to be a mirage. At a minimum, consumers should have the choice of a high-deductible traditional long-term care policy or a hybrid policy, and decide whether they wish to keep control (or not) of their cash value and how it is invested.
The bottom line, though, is simply this – as the nature of our long-term care needs continues to change with advances in medicine and increases in longevity, the nature of our long-term care insurance needs to adapt as well. While early on any long-term care need was presumed to be a high-impact low-probability event, the reality of today’s landscape is that a great deal of what long-term care insurance covers is actually a series of lower-impact high-probability events, for which insurance is poorly suited. By restructuring long-term care insurance elimination periods, the coverage can be adapted back to its primary purpose – to insure against a financially devastating extended long-term care event – and in the process bring down the cost and make the insurance accessible to more people who want and need it!
So what do you think? If you could recommend long-term care insurance for clients with a longer elimination period and a dramatically lower cost, would that be appealing? How much of a premium reduction would you want/need to see to be persuaded of the benefits of longer elimination periods? Do you think that state laws should be adjusted to allow consumers to at least consider long-term care insurance policies with larger deductibles?
I’d love to see the rates that insurance companies would charge for such a structure. Since I do not sell the policies, I don’t care how large the premiums are, but I would love the ability to motivate more clients to consider hedging this type of high-cost risk!
The “partnership” model here in Texas helped a little bit, as you are essentially adding estate asset protection, but still many clients do not see how to fit a “typical” LTC premium into their retirement budget (especially when rates keep getting higher for them during retirement!).
-Elliott
To motivate more clients to “hedge” this “high-cost” risk, refer them to an Estate-Planning Attorney who works with the best LTCi Agent/Broker in their area. There are also numerous “out-of-the-box” solutions in the Life/Annuity arena that may be far more suitable for clients, and a modicum of research should enable you to identify some available there in the great state of Texas. Sorry for voting your comment down, it’s just that IMHO you missed the boat.
Dan, I do work with several of the best estate planning attorneys and insurance agents in the area, and I spent over 7 years in the insurance side of the business, so I have sold the product many times. It is also a part of my evaluation and monitoring of their overall financial plan.
My comment refers to a common objection I saw (and still see), which is the premium. When a client could not afford the premium of a 90, 180, or 365 day elimination period (or refused to pay for it), it would be nice to have a more “catastrophic” coverage like Michael describes.
They would be far better off at that point in time utilizing the type of rider that I refer to which in most (if not all) states is possible to add to Life and Annuity products. And there is IMO regulatory reasons why paying for an insurance policy it’s more likely you will die before ever using is not viewed by those governing bodies as something that should be permitted within a class of product such as LTCi, Elliott.
See my comments to your other response, Dan.
I think the concept is reasonable enough to be effective, but only for a small category of people. In the example you use a 3 year elimination period. That right there would be catastrophic to most people (about 219k at 200/day – not to mention taxes involved if they have to drain retirement accounts). I don’t doubt that statistically people paying for LTCi are coming out slightly under people that self insure. The insurance at least puts a strict plan in place for an event that is likely going to happen, and also benefits a vast number of people who are not a part of the average. I do agree that for those who are responsible enough to self insure or have the assets to easily do it, the longer elimination period could provide for the lower premiums that you discuss.
J Fundal,
People who have a net worth below $200k generally aren’t buying traditional LTC insurance now, anyway. Most sales already tend to be to at least a somewhat higher-net-worth clientele.
For most people in that category, the reality is that Medicaid already is their tail risk insurance.
– Michael
Hi Michael. A 3 year elimination period for a client who goes into a nursing home 20 years from now is going to subject them to, potentially, $550-600K of out of pocket expense before the policy kicks in (I’m using Maine numbers, and care’s pretty expensive her in New England.) That’s a pretty substantial risk, even for a client with $1-1.5M in invested assets. At some point, the extended elimination period becomes counterproductive. If they’re determined to stay in their own home, that price tag could be even higher.
Mike, another approach might be to insure only prolonged medical ailments of dementias such as Alzheimer’s and Parkinson’s. The other two major ailments of the elderly cancer and heart problems are not short terms and could be treated at homes by visiting at physicians, hospitals, and cancer centers . Alzheimer’s disease has a prevalence of 1% among those 65 to 69 years of age and increases with age to 40 to 50 percent among persons 95 years of age and over. Although the mean age at the onset of dementia is approximately 80 years, early onset disease occurring before the age of 60 to 65 years, can occur but is rare. Parkinson’s disease, the second most common neurodegenerative disorder, after Alzheimer’s disease, it’s common version has a prevalence of 0.5 to 1 percent among persons 65 to 69 years of age, arising to 1 to 3 percent among persons 80 years of age and older. These are the major catastrophic cases for which staying in nursing facilities are most important because of the prompt timing of medications requirements in the Parkinson’s case and in the Alzheimer’s prevention of wonderments and getting lost are paramount. The existence of genetic components in these diseases is still debatable. So limiting long term care insurance policies to covering these major maladies could be a solution.
please correct in the above from “are not short terms” to “are more short terms”
Would be interesting for Congress to authorize tax-free withdrawals from traditional IRAs (not Roths) for LTC costs.
Great idea. Such an approach would make planning much more precise. One can easily plan for self-insuring the two or three year elimination period and then pay a lot less for five years of coverage in a home or LTC setting. Tight plan, better protection and easier sell (although I don’t sell insurance). So often one hears of the mind-numbing estimates of lifetime healthcare costs; sometimes including LTC. It doesn’t have to be so difficult. One can PLAN for health insurance and self-insure for the deductibles. Doing that can be quite precise. This approach would give us the same strategy. Now we recommend purchasing the plan they can afford, which we know might not be enough. Following the high-deductible approach we could much better serve clients.
If you’re trying to posit that a 2 or 3 YEAR elimination period is worth considering, you need to turn in your credentials. Most males would be dead before they ever got a sniff of any benefit. But, to be fair, they would have paid a hefty sum of premiums over the years, so good for the agent and the carrier. As John McEnroe is one of my memes, I leave you with: “You cannot be serious…!”
“Turn in your credentials” seems excessive for a difference of opinion. If you have a client with significant reserves or capital who can absorb a 2-3 year LTC need but wants to hand over the risk of a more extended situation to a carrier, why should they not have the option to do that?
Because you would tell them about these solutions where they “win” either way (if they need LTC or if they die), Elliott; again, as below, regulatory bodies would not (and should not) look kindly on the kind of – IMO – hare-brained idea of deductible periods LONGER than the average male’s stay in a facility. Don’t you get that?!?!? Try this, and learn about what I refer to, in terms of BETTER plans than that, and you’re welcome: http://www.lifehealthpro.com/webcasts/managing-longevity-risks-with-life-insurance?pc=WL01.07
How do you feel about homeowner’s insurance? Read Michael’s article – odds are long of ever paying a claim, but it’s generally accepted as a prudent premium to pay. How is a LTC with a longer deductible any different?
Your solution assumes a need for life insurance and/or an annuity – what should the client who needs neither do for coverage? My grandfather-in-law was in assisted living for over 10 years – would it have been hair-brained to consider a 2 year elimination period plan since they could afford 1-2 years of out of pocket expense?
I do “get it” Dan and don’t particularly appreciate your tone. I’d enjoy further discussions if you can drop the condescension.
Anyone with assets can utilize an Annuity, Elliott. The problem with your scenario is that the person could have what they believe to be adequate assets at the time of the purchase, and since “claim time” will be years if not a decade or more out, they could easily have market losses, or had a need to deploy the funds elsewhere in the interim. And usually it’s the last gasp, when someone tries to compare insurance types so disparate they require entirely different classes of insurance licensure to even be able to discuss with consumers. Sorry if my tone offends you, I just believe for all the good reasons I’ve stated – and superior alternatives I’ve documented – that the postulation put forth is simply preposterous.
Just because anyone *can* utilize an annuity doesn’t mean everyone *should*. There is no such thing as a perfect solution for all situations.
You paint a certain scenario that does not work out in the client’s favor, but our role as financial advisers is to help clients evaluate their options and provide guidance. If market losses and/or redistribution of assets is not a concern, does the client not deserve the right to hand off a risk they do not desire to retain?
I would appreciate having the option of discussing such a solution with my clients, as one more tool in the tool belt.
Then I would advocate for it with the body that governs LTCi in Texas, the DoI, Elliott – but first you would have to get a carrier to consider the idea, which they won’t.
Dan,
You’re missing the point. A 3-year elimination period would have a drastically different premium structure.
What if the LTC insurance paid lifetime benefits with a 3-year elimination period and cost $500/year (because as you note, even though a claim could be half a million dollars, the overwhelming majority of people will never use it)?
99% of people never have a claim on their homeowner’s insurance either. That doesn’t mean it’s terrible coverage to recommend…
– Michael
Not missing it at all, Michael, and your “pulled from a hat by the seat of your pants” example of a premium for the kind of plan for which you would become an advocate belies your understanding of this market. Are you a licensed Life & Health Agent who currently sells LTCi, or have you ever done so? I seriously doubt it. My parting gift to you is a suggestion – get a job at an LTCi carrier and see if they will go for a plan such as you “hazard” above. Their “sign” to you will be “EXIT…”
Michael, As I am sure you already know, there are (hybrid) policies available today that offer Unlimited lifetime LTC benefit periods with essentially 2 year and 3 year elimination periods.
Jack,
Indeed, this is specifically discussed in the entire second-to-last paragraph of the article. 🙂
– Michael
Yes, and I wish more underwriters would offer the high deductible, unlimited benefit period design—but I guess 1 underwriter is better than 0 underwriters 🙂 Our high net worth clients are receptive to the unlimited BP hybrid model, and many HNW individuals tend to feel the lost investment opportunity cost of their liquid asset is a reasonable tradeoff for receiving the unlimited LTC benefit period. As you have discussed, Michael, insurance is best purchased to address the high impact catastrophic risk and the Unlimited benefit period will satisfy this objective.
I’d love to see a 3 year elimination period policy with unlimited benefit, 250/day benefit, with CPI COLA for under $1200/year for 60 year old. That would be affordable and good financial planning for most upper middle class (and higher) clients! Right now, when I do the math for most of our clients, it is better to self insure and that is a shame…
With all due respect Phil, I cannot imagine your math assumptions are close to being accurate.
It was my observation the last time I priced traditional LTC (admittedly, now several years ago) that by contrast to disability income insurance, the premium differential one would expect for a longer elimination period had not materialized. In other words, not enough premium was saved to warrant going from (for example) a 30 day EP to a 90 day EP. It is possible that pricing will have changed or will in years to come to a degree as to make your premise operable, but I suspect one might need to go a very long EP to find the cost savings you posit.
My experience is that the life/LTC hybrids have rendered the more traditional LTC contracts not viable–they do pretty much as you indicate, which is to say, they prepay the expense. They have however the advantage of a likely transfer of at least some capital to heirs.
I appreciate the different perspective, but isn’t it people that have net worth’s of $500K to $1 Million that really need an LTC policy? As someone below mentioned, a $219K event would be catastrophic to most. Imagine having $500K saved at age 60 in primarily tax deferred accounts and then needing LTC, this is who needs the coverage but probably can’t afford the coverage. Then using hybrid annuities/insurance may be more appealing but in order to get a meaningful LTC benefit you would have to tie up too much money in a hybrid to get a meaningful benefit (for net worth’s of $500K to $1 million). Also, I think the leverage is still there, if you do the math you should pay much less in premiums than an average benefit use period if you buy at age 60 (when most people buy). I do like the idea of increased elimination periods to bring down the price if the family has the discipline.
Neil,
You CAN’T pay less in premiums than the average benefit use. If you do, the insurance company is paying out more than they take in, and they’re going to go bankrupt. Insurance should always be a losing proposition “on average”. See https://www.kitces.com/blog/why-you-should-only-buy-insurance-protection-and-annuity-guarantees-expected-to-lose-you-money-on-average/
The point here is about protecting against true catastrophes. A $200k claim with a $500k net worth isn’t a catastrophe. An $800k claim with a $500k net worth is a catastrophe. So if your choice is buy a $200k policy and then go bankrupt on the subsequent expenses, or buy a policy with a $200k deductible that covers everything and have $300k left over, the high-deductible policy is a win. AND it’s cheaper. Which makes it a win-win. 🙂
Higher-deductible policies allow you to buy MORE total coverage with LOWER premiums. That’s the whole nature of the trade-off of a deductible. You pay more “small” claims but can get larger total coverage for a lower cost.
– Michael
Point taken but you would pay less in premiums (maybe 20 cents on the dollar), if you do have an average stay and bought insurance at the average age. It’s the ages long argument (as I see in your other article you highlight) that if you don’t buy it (insurance) and need it then you lost really bad but if you bought it and didn’t need it then you still lost but not as bad, which risk would you like to take? There is no doubt that the insurance companies aren’t doing it for free, it’s a transfer of risk. And a 500K net worth in tax deferred accounts at age 60 with a 200K after tax LTC need in their late 60’s or 70’s would likely land the family in a negative net worth situation which would be “catastrophic” for most.
I think the point I am making is that the cost is not really “low impact” for those who can’t afford it. It’s only “low impact” for those that can afford the risk and therefor don’t need the insurance. And if we are creating products for people who don’t need to insure then what’s the point anyway?
This discussion makes me so glad I bought LTC insurance in 1999, at the premature age of 44.
My 2015 premium will be $2,200 for a 90/day elimination period, $385/day benefit, unlimited benefit period, optional inflation increases. Met LIfe appealed to raise premiums last year by 40% but my
state’s regulatory board only allowed a 15% increase. At age 59 I was successfully treated
(“cured”) for cancer, but I think that episode might have barred me from purchasing at the “average” age of 60. I do have the assets to self-insure, but I believe I will enjoy my retirement more knowing that I don’t have to save every penny for possible nursing home costs. The peace of mind is worth
the $25,000 I have already paid in premiums. I feel it’s money well spent.
Our firm helped develop this concept over 25 years ago by combining life insurance with a long-term care rider. The money deposited into the life insurance policy is worth double at death or long-term care need. When LTCi is needed the life insurance is tapped to cover the first 2 or three years. When that runs out, the real LTCi insurance steps up. The cost to have that “extension rider” is very, very small compared to the LTCi policies sold today. If no LTCi is ever required or not needed for a particularly long time, the unused life insurance benefit is paid to the heirs.
Now there are annuities that accept a deposit of some of our savings then make available a long-term care policy that will pay benefits for life after a 3 year wait. The annuity interest is competitive with other savings options and tax shelters the accumulation. The premiums you pay out of pocket are very much less than a traditional LTCi policy and can even provide lifetime benefits for an individual or a couple. The premiums for these riders are tax deductible up to the annual guideline IRS limits.
Not only do these make sense, the public loves them and the sales of these products have been
steadily rising for 25 years.
Fully agree Michael, BUT in the 90’s, 3 year elimination periods and lifetime coverage standalone policies were offered by a number of companies. However, they were withdrawn, I believe, because they were deemed too risky for the smaller potential premiums they might generate.
Hi,
Thanks, for sharing this useful information, Can you guide me what is the difference between term insurance. or life insurance plans .
I’m not sure if lengthening the elimination period would lower the premium enough to make it worthwhile. I am reviewing a Mutual of Omaha long-term care insurance quote for a 61 year old male. With a 90 day elimination, the premium is $179.48 per month. With a 365 day elimination period, the premium is $170.51 per month. With that small difference in premium, I am recommending the client go with the 90 day elimination period. Would an insurance company lower the premium enough to make a two or three year elimination period affordable? I’m not so sure.
For a 60 year old today, the projected cost of care 25 years from now (assumes conservative 5% Medical Cost Index), will easily exceed $200,000 annually.
If you purchase a LTCi policy with a 2 or 3 year waiting period, you self-pay $400-600,000 of your LTCi costs?
Basically, your self insured “deductible” is a half a million dollars, or more? Really?
Plus, you have also paid your LTCi premium for the preceding 25 years as well?
Given this high cost deductible, I’d rather just pay the annual premium on my policy with a three month waiting period, and move on with my life.
And a LTC event is not a low probability event whatsoever. 70% of care is initially in home care, morphing into assisted living care, and finally into nursing home care.
Millions of Americans are and will experience this type of care continuum.
Moreover, as longevity increases, LTCi costs will encompass not only the diseased, but also the superannuated elderly. Namely, people who require care in their 90’s simply due to advanced old age.
When you pay your stand alone LTCi policy premium, your premium becomes your “cost of care”.
And best to purchase your policy from a AAA rated mutual carrier which has never increased their rates on existing Policy-owners, and, also provides for annual dividends to actually reduce your policy premiums.
Up until recently, my annual policy dividend was equal to 30% of my annual premium. It’s only courtesy of the FED and their smothering of interest rates, that my dividends have been reduced. However, as interest rates rise again in the future, I anticipate participating in a reduced premium once again, via the dividend.
Finally, by not self paying my $500,000 to $600,000 deductible mentioned above, I increase my family legacy ambitions.
I would buy a plan that takes over after my five-year LTC plan ends. Sort of LTC umbrella insurance.
For years I was a risk manager with a major LTCi provider. So I have a deep understanding of how these products are priced and managed. Despite the insistence of a few of the commenters, a multi year elimination period is a great idea for some potential purchasers.
One major challenge, however, is how agents think about LTCi. As a risk manager I was shocked to hear agents talk about high deductible policies without a lot of features as “The Chevy” and the products with low deductibles and many additional features as “The Cadillac.” This is not when discussing the products with clients, but when discussing them internally. I am convinced that this mindset limited their ability to think about the needs of high net worth (HNW) clients. Many agents would only show high net worth clients the “Cadillac” policies. This is akin to only selling high net worth clients “at the money” financial options instead of “out of the money” options. What many HNW clients want to do is buy out the catastrophic tail risk, and a high deductible LTCi policy would help do that.
Does Mr. Bleth believe that hybrids also will cause insurance companies to exit the business?
I was wondering if Michael or others had an update on this topic – have their been any advancements in LTC products becoming available with multiple year elimination/waiting periods?
Alas, nothing yet from any issuers offering traditional LTC with longer (>1 year) elimination periods. There is still the implicitly longer elimination period associated with hybrid LTC policies, but they have their own issues, as discussed in https://www.kitces.com/blog/is-the-ltc-cost-guarantee-of-todays-hybrid-lifeltc-or-annuityltc-insurance-policies-just-a-mirage/
– Michael
Thanks for the quick reply. Would be great if you or others might update this post if anyone learns of a better option in the future. I hope that in the coming years as premiums rise this will become an option.
The OneAmerica/StateLife AnnuityCare product with the lifetime extension of benefits rider gets close, BUT you have to design it carefully. I always use the little-promoted “AnnuityCareCP” option which requires only 1/2 of the base annuity funding to generate the same “pure” LTC insurance rider benefit after the 3-year EP. With a guaranteed premium and the lifetime option, this is about as close as I can get to a long-EP, “stop-loss” type of LTCI design without tying up too much money in “unnecessary” linked benefits. And for couples it’s a “joint” or shared 3-year EP.
http://www.ComfortLTC.com