Add together prolonged low interest rates to advances in both health care and life expectancy, sprinkle in spiraling costs of healthcare and you have a recipe for major change in the long-term care (LTC) insurance industry. These industry dynamics, as well as a few others, have many LTC insurance carriers rethinking how to balance consumer needs with achieving long-term profitability. Many carriers are beginning to make significant adjustments to their product offerings, increasing premiums, changing pricing strategies and reducing product benefits. Even more dramatic, some are exiting the long-term insurance business entirely.
While long-term care insurance (LTCi) isn’t for every client, preparing for long-term senior care is prudent and oftentimes pays off. As we progress through life and age into retirement, it is common to expect new health concerns to greet us. As such, clients may want to consider long-term care planning early because once certain health issues set in, LTC planning gets much trickier and much more costly. LTC insurance can pay for extended care needs that often result from normal aging, and help pay for quality long-term care services that are not covered by health insurance or Medicare.
LTCi is a relatively young industry with a shorter history when compared to other coverage such as life insurance. Although the first traditional LTCi policy was issued close to 40 years ago, actuarially speaking the application of mathematical and statistical evidence to assess risk in this industry is in its infancy. Actuaries across the board have admitted to missing the mark when initially pricing this new form of insurance. Short medical histories as related to activities of daily living, low interest rates and increasing payouts for claims means today’s LTC insurance products are not priced appropriately (i.e., not generating acceptable profit margins for insurance carriers).
Major insurance carriers have begun announcing significant changes to their LTC products and requirements. Just recently, Genworth instituted a new pricing strategy and underwriting practice to reduce risk and improve the sustainability of their LTC insurance portfolio.
While there have been several changes announced recently across the industry (reduced advisor commissions, suspension of new sales), two significant developments on the horizon and already with one major carrier are:
- Gender-based pricing with premiums for females increasing across the spectrum, substantially in some cases
- Expanded underwriting requirements for applicants such as paramed exams, and blood/urine samples
Though long-term care is a concern for both men and women, there is greater risk for women. Industry studies show up to two-thirds of new claims are for female policyholders. New policies in gender-based pricing translates into increased cost for future female policyholders anywhere from 15 to 50 percent, while for men it may decrease 15 to 20 percent.
In the U.S., women live longer than men (81 years on average versus 76 for men), according to data released in 2013 by the Institute for Health Metrics and Evaluation.¹ This longevity translates to potentially more unhealthy years on average for women — 11 years compared to 9.7 for men, according to MarketWatch.com.² Women are also more likely to live alone in older age or to be a caregiver for their spouse. Women who need care themselves in old age are less likely to have a family caregiver, which may further increase their potential expense to an insurance company.
Rethinking LTC Insurance
Though clients and advisors alike may be worried that this is the end for LTC insurance, it’s really an opportunity.
As advisors I believe it is our fiduciary role and responsibility to help our clients understand what LTC is and more importantly what it means to their assets and family members should a LTC event affect them. I believe clients must also be reassured that not one time has a claim been denied because a carrier was not able to pay the stated daily benefit. The recent wave of changes does not mean LTC insurance carriers will deny claims due to lack of funds or that they will cancel blocks of LTCi contracts. Policyholders may indeed face premium increases (like auto, home and health) but as long as they are able to pay their premium they should not fear their benefit will be taken away from these outside forces shaping the LTCi industry today. As advisors, we need to reassure our clients that insurance carriers will honor and maintain LTC products already purchased. In fact, congratulate your client’s decision to insure the risk of LTC by purchasing a policy well below market value.
LTCi is a viable option for your clients to purchase. The more policies a carrier or the industry is able to sell the more they are able to spread the risk and provide opportunities for growth. Larger insurance carriers will continue to focus on providing smart, sustainable LTCi strategies and products to their clients. They will continue to create, develop and offer new LTC products that are built on conservative underwriting principles, a deep understanding of market trends and a disciplined approach to overall pricing. By making subtle changes such as reducing the number of products offered, pricing products accordingly with today’s aging population and communicating the long-term pay off for LTCi for individuals, the LTC insurance market should be less volatile going forward.
LTC has only made a small penetration in the overall insurance market, which means it has great potential for growth, if it is nurtured. If advisors rethink LTC insurance, talk more about it to their clients and peers and drive demand among clients, the market will grow and offer an opportunity for better pricing across the industry. Advisors must think and talk about LTC in a manner they may not have in the past and communicate these changes clearly to their clients. There is not a greater risk that we face in retirement than a LTC event. LTCi could certainly be a viable solution for you and your client.
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Jason Allen is an annuity and insurance planning consultant at 1st Global, a research and consulting partner for high-achieving CPA firms offering wealth management. 1st Global provides CPA, tax and estate planning firms the education, technology, business-building framework and client solutions that make these firms leaders in their professions through dedicated professional client relationships built around wealth management.
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Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
¹ “Global Health Metrics & Evaluation (GHME) 2013,” Institute for Health Metrics and Evaluation.
² “Women face a new long-term care dilemma,” Marketwatch.com, March 7, 2013.