As long-term care insurers abandon the marketplace what other options will step forward?
By Chris Orestis
Life Care Funding
As the word spreads across long-term care providers, advisors and consumers, the growing use of life insurance policy conversions will begin to have a measurable, positive impact on the long- term care funding crisis across the United States.
Less than 20 years ago, there were dozens of major insurance companies selling long-term care insurance (LTCI). Today, there are under 30. The paradox is, why, just as baby boomers started turning 65 at a pace of 10,000 per day, is the LTCI market shrinking instead of booming?
The list of companies that have abandoned the LTCI market is a who’s-who of insurance industry giants: MetLife, Prudential, AIG (American General), Guardian, UNUM, Allianz and CNA, to name just a few. When MetLife announced they would be exiting the market, it was as if General Motors announced that they would no longer be selling automobiles. But why would the companies that pioneered LTCI from the beginning abandon the market just as the 72 million baby boomers started entering their retirement (and prime long-term care planning) years?
The reasons given boil down to some simple economic and demographic facts that we were not accounted for in the early years of selling this product.
Among the challenges that LTCI insurers faced is the simple fact that they sold the product at too low a price in the hunt for market share. Without sufficient premium payments coming in, they could not weather unexpected developments like longer life expectancies than had been predicted, requiring the insurers to continue making benefit periods for extended timeframes.
Also, unlike the life insurance market, which experiences a high abandonment (lapse) rate, owners of LTCI held onto their policies and kept making premium payments until they could collect their promised benefits. LTCI companies bet wrong when they priced their products by assuming people would live for shorter periods, and that a great many more would abandon their policies before they started collecting benefits.
The impact of these challenges has driven major insurers out of the market and forced others wishing to continue offering LTCI to raise rates not only on future sales, but for existing policies as well. According to the 2012 LTCI Index, policy premiums have been increasing at an annual rate of 17 percent.
Two of the largest remaining insurers selling LTCI recently announced rate increases that would raise premiums on policies already sold — in some cases, by almost double. John Hancock will raise rates between 40 percent and 80 percent, and Genworth announced increases between 25 percent and 50 percent. In a statement released by Genworth about the increases, Martin Klein, Genworth's acting CEO, said, "We must rebuild value for shareholders." In an article written by Dave Lieber for the Fort Worth Star-Telegram, he interviewed Anna Emmons, 75 years of age, who has owned a John Hancock LTCI policy for 10 years. The rate increase means her monthly policy premiums would go up 64 percent, from $151 to $247. If she can’t afford that increase, her choices for the policy going forward include abandoning it after 10 years of premium payments, or reducing the benefits she originally bought to keep the premiums at a lower level.
Despite these market realities, LTCI can still be a viable option to help people pay for future long-term care needs. Sales of hybrid policies that offer a combination of life insurance protection that can later be converted to LTCI benefits are on the rise. There are a number of options along these lines, and consumers need to fully understand the costs involved, whether rates are subject to future increases, and if the level of benefits would be sufficient to cover long-term care expenses years down the road.
For people in their peak earning years (ages 30-60), this is certainly an option to consider, and obviously, the younger/healthier one is when purchasing the policy the more affordable it will be.
But what about the millions of baby boomers and seniors who bought traditional life insurance policies over the last 30 years and require the financial means to pay for long-term care services today?
Converting a life insurance policy into a long-term-care benefit plan is a Medicaid qualified spend-down of a life insurance policy, and it extends the time a person remains “private pay” before going onto Medicaid. Think of the process like a reverse mortgage on a life insurance policy. A policy conversion, sort of reverse life insurance, allows the owner of a life insurance policy to trade in the policy and convert the death benefit into a living benefit that is spent on long-term care services.
A private market long-term care benefit plan is not a long-term care insurance policy, annuity, any form of hybrid life/LTCI policy, or an accelerated death benefit — it is actually the exchange of a life insurance policy for a pre-funded and irrevocable benefit plan at the time that care needs to be paid.
This is a unique long-term care financial option for seniors because there are no wait periods, no care restrictions, no costs to apply, no requirement to be terminally ill, and there are no premium payments. Policy owners use their legal right to convert an in-force life insurance policy to enroll in the benefit plan and are able to immediately direct payments to cover their senior housing and long-term care costs. Providers of long-term care services such as nursing homes, assisted living communities and home health agencies have been quick to embrace the conversion of a life insurance policy into a long-term care benefit plan as an alternative form of payment. State governments, too, are realizing that there is tremendous value to be found by converting life insurance policies to help pay for the costs of long-term care. Any form of life insurance can qualify for conversion: universal life, whole life, term life and group life. Policy owners use their legal right to convert an in-force life insurance policy to enroll in the benefit plan and are able to immediately fund their care through a guaranteed monthly payment stream for the entire benefit period. The benefit plan will pay for all forms of long-term care: home health, assisted living and nursing home care. For families with the need to pay for long-term care, but who are unable or unwilling to keep their life insurance policy in-force by maintaining premium payments, the long-term care benefit conversion option is a much better choice than abandoning a policy.
Consumers lack preparation and awareness of how they are going to cover the costs of long-term care. It is a subject typically ignored until a loved one is in immediate need of care. Families that need long-term care are in a particularly difficult position if they have not planned with savings or LTCI. Unfortunately, that is how you would describe the vast majority of people who require senior housing and long-term care today. We need to do all we can to educate people on how to plan for their long-term care futures. But what about the majority of unprepared people that need access to long-term care today?
It all starts with education and awareness. Millions of seniors are holding a potential solution in their hands if they own a life insurance policy. Unfortunately, they are unaware of their legal rights and available options, such as a policy conversion to a long-term care benefit plan. As the word spreads across long-term care providers, advisors and consumers, the growing use of life insurance policy conversions will begin to have a measurable, positive impact on the long- term care funding crisis across the United States.