When Maura Carley’s mother was offered guaranteed-issue, group long-term care insurance, she snapped it up. That proved to be a good decision, Carley says, when the policy paid for her mother’s care during the last seven weeks of her life.
Most people dread the day when they may be old or disabled enough to need care from a paid health professional or aide. Long-term care insurance gives them the peace of mind that comes from knowing that an insurance company will pay for at least some of their care.
It protects assets — whatever the family doesn’t have to pay can be passed along to heirs — and can reduce family stress during an illness or at the end of someone’s life.
“When I recommend long-term care insurance, I am looking to protect the well spouse, the couple’s assets, their lifestyle, and their family and heirs,” says Doreen Haller, a certified financial planner at Best Times Financial Planning in Rochester, N.Y.
As a group benefit option, long-term care insurance is less common than it was, though it’s still available. But it’s harder to qualify for and often much more expensive, a victim of changing demographics and low interest rates on the fixed-income investments where insurance companies invest premiums.
In the last five to 10 years, long-term care insurance premiums have substantially increased. “Those costs have skyrocketed,” Haller says. “Over the last few years, I know that Genworth has raised their premiums by 25 percent. MetLife raised theirs by about 20 percent, and TIAA-Cref has raised theirs about 35 percent over a two-year period. Seniors on a fixed income are stunned.”
Behind the steep price hike are a handful of reasons. One is that insurance issuers guessed that long-term care policies would have a lapse rate around 30 percent. That hasn’t happened.
“Insurance companies are losing money because they totally misjudged how many people would buy these policies and keep them,” says Andrea Graham, who is a brokerage manager for long-term care at Upstate Special Risk Services, Inc. in Rochester, N.Y. “They figured that it would be like term life insurance, where very little is paid out in benefits.”
Insurers figured wrong, Graham says. “It’s a careful, planning person who buys long-term care insurance. They go through a lot to get it and then they hang on to it. Ninety-five percent keep long-term care insurance once they have it.”
Insurance companies invest policy premiums, mostly in fixed-income investments such as Treasury bills. In the current low-interest rate environment, they haven’t made enough money on investments to keep premium increases lower or flat. Even a quarter of a percentage point makes a difference over 25 to 30 years, and rates have been down by much more than that over the past five years.
While interest rates have gone down, the cost of receiving long-term care has headed up, to the tune of 8 to 10 percent annually. “Long-term policies have riders to keep up with inflation, but the insurance companies couldn’t find the investments to keep up with that kind of inflation increase,” Haller says.
The care is more expensive, and people are living longer and using more of it.
“These companies underestimated how long people would live,” says Carley, president and CEO of Healthcare Navigation, LLC in Shelton, Conn. That’s particularly true for women, who tend to live longer than men.
“In the past, husband and wife policies were rated at the same premium, and in many situations, the wife is the caregiver and not even tapping the husband’s long-term care policy. The surviving wife is more likely to use long-term care insurance.”
People also use more benefits when they’re eligible for both home and institutional care, which many policies allow. Many years ago, Haller says, long-term care policies paid only for institutional care. Then the policies began to include home health care benefits.
“Figure two home health care days to one nursing-home day,” Haller says, “or a couple of years of home health care before nursing-home care.” Graham estimates that 70 percent of claim dollars are paid outside of a nursing home.
Last but probably not least, some carriers have left the long-term care business. “They got out because the money doesn’t work,” Haller says. Fewer carriers means less competition — and less downward pressure on premiums.
Group LTCI: Harder to find
Because of these factors, Graham says, “it’s tough to find guaranteed-issue group anymore. You can do that with other kinds of insurance, because most people don’t use them to their maximum while they’re employed. When they turn 65 and retire, their long-term care insurance is the only insurance benefit that continues.”
Group coverage has usually been guaranteed issue, no matter what health conditions the insured might have. That’s pushed a disproportionate number of disabled people to sign up for long-term care insurance through work, Graham says, “because they’re not medically eligible for long-term care insurance outside a guaranteed issue environment, and they’re a claim just waiting to happen.”
Graham recalls a 2006 group plan for federal employees, offered through John Hancock and MetLife to postal workers, members of the military, and other government staffers.
“They had guaranteed issue when you were active at work. The literature wasn’t clear that retirees aren’t eligible, so they had to write policies for the medically eligible retirees. When it came up for renewal, MetLife got out and Hancock raised the premiums and refused to do it guaranteed issue,” she says.
For those who do want to offer long-term care insurance as a group employment benefit, there are alternatives to guaranteed-issue group policies.
“Insurers are starting to offer individual long-term care policies, where the employer can participate in the premium, or not,” says Barry J. Fisher, long-term care insurance brokerage general agent at Barry J. Fisher Insurance Marketing, headquartered in Dallas. “Voluntary plans have very low adoption rates, so we suggest that the employer pay $10 a month to see adoption rates go up.” The policies aren’t guaranteed issue. “Individual underwriting is really important in long-term care insurance,” Fisher says.
Another option is an individual multi-life policy. This kind of policy isn’t guaranteed issued, but it doesn’t involve full underwriting, either, Fisher says. “They do simplified underwriting by asking gatekeeper questions about applicants’ health.”
The executive carve-out
Executive carve-outs are an alternative to full group participation. In an executive carve-out, a firm offers long-term insurance to one or more key people, not to every employee. Premiums are a tax-deductible business expense and benefits are tax free. (The latter is true for every type of long-term care policy.)
“We’ve always done a great deal of corporate carve-out for key employees, where the employer pays 100 percent, the premiums are tax deductible, and the benefits are tax free,” Fisher says. “We just did policies for 16 employees of a venture capital firm. They had money and they wanted to find a tax-free way to benefit their employees.”
The possibility of paying for coverage with pre-tax dollars is an appealing one. It’s even more enticing when the firm can condense years of payments into a single decade.
“This allows an employer to pull funds out of the business and buy something for a few people: the partners who started and own the business, for example,” Graham says. “They can pay off the policy in 10 years, so if they know that they will sell the company in ten years, they could leave with a huge benefit.” (Some companies have discontinued this option.) An employer-paid policy could also be an incentive, used to sweeten and strengthen a 10-year contract with a valued worker.
Medicaid will pay for long-term care, but it requires that individuals and couples spend down their own assets first. “For Medicaid to get involved, a couple needs to be down to $78,500 in assets, the house, and their car,” Haller says. “A single individual gets $14,400, no house, and no car.”
Partnership policies offer an exception. These policies offer a stated benefit value: perhaps $100,000. If the insured couple or individual uses up that benefit value and must switch to Medicaid coverage, the government lets that person keep the equivalent amount in cash or other assets. An individual who buys a partnership policy worth $100,000, for example, would be permitted to keep $100,000 in assets when Medicaid begins paying for her care.
This option gives purchasers some peace of mind, because they know that they will receive care and still have money to spend and an inheritance to give. They’re also more affordable. Partnership policies are usually cheaper than regular policies, because they don’t typically offer enough benefit to pay for many years of luxurious care.
Firms that consider offering a group partnership plan should investigate how much care is likely to cost in their region. They should also find out how their state handles partnership policies. “In New York and Indiana, you could get unlimited assets protected. All the others protect a dollar amount, and all the states have reciprocal coverage,” Graham says.
Last but not least, companies should also decide whether they will pay for a plan’s inflation rider. “A younger person, perhaps in their forties, who doesn’t take the inflation rider is going to end up with something that’s of very little benefit,” Graham says. A company with many older workers may pay a smaller total for cost of living riders, because people who are older than 70 no longer pay for inflation protection.
Buy partial coverage
A partnership policy is effectively partial coverage, with a state guarantee backing it up. A firm could also purchase less insurance on the open market.
“I think that too few people have too much insurance,” Fisher says. “Most claims are closed within four to five years” because the insured person dies. A policy that pays for more may be a waste of funds.
“Agents need to sell it differently,” Fisher adds. “We’VE been selling it as a catastrophic care product.” But a great many people will need some kind of end-of-life nursing care, he says.
“At some point, providing someone with a couple hundred thousand dollars at the cost of a thousand dollars a month is a good idea.”
Consumers who want to leave behind an inheritance are often drawn to hybrid policies, which combine long-term care coverage with life insurance. If the insured doesn’t use the long-term care benefits, the policy pays a residual death benefit.
“These tend to make sense financially,” Haller says. “They’re about the same or a little less in premiums, because this is a life insurance contract with a longer anticipated contract and no cost of living adjustment.”
Fisher says his firm has been trying to sell the hybrid product for quite a while, and points out that the customer doesn’t get as much benefit per premium dollar as with a traditional long-term care policy. “I think they have their place, but I don’t think they’re a replacement for traditional policies. I think we’re still trying to find a niche for that product,” he says.
What about individuals and firms who already have group plans in place and are staggering under the weight of premium increases? They have a few choices.
“If they can afford it, I suggest they keep paying the premiums. If not, we look at increasing the waiting period,” Haller says.
A firm or policy owner could also increase the elimination period — the number of days before which the policy pays a benefit — reduce the number of years that the policy will pay, reduce the cost of living rider to 3 percent simple, or give up the cost of living rider entirely. Haller says that the last option should be just that: the last option. “To me, the cost of living is too important to give up. We know the cost of care is going up by 8-10 percent,” she says.
Instead, look at the elimination period. “A lot of policies have a 10- or 20-day waiting period. If you can increase that to 60 to 90 days, that usually brings the premium even with last year. Most families can afford to pay that 60 to 90 days, especially if they are deliberate about setting the money aside,” Haller says.
It’s no one’s favorite solution, but sometimes dropping coverage — or not buying it in the first place — is the right move.
Consider whether employees are likely to have substantial assets at retirement. Anyone with a long-term care policy needs at least $300,000 in other assets, Haller estimates, for covering basic expenses in retirement and paying the premium increases that inevitably will come.
“I had a client come that had not even $150,000, and both the husband and the wife had long-term care insurance. They couldn’t even cover a deductible period of 20 days, and they were struggling to pay for 5 percent increase. I swallowed hard and told them to drop the policy,” Haller says. “If you can’t afford a 5 percent increase, you will qualify for Medicaid.” In those situations, an employer is probably wise to offer a different benefit.