History
▪ Staff
▪
News
▪
Affiliations
Big Changes in the Long Term Care Insurance Industry!
What You Need to Know
By Murray Gordon
From NAPFA Advisor, October 2003
Is Long Term Care Insurance (LTCI) part of
your professional financial planning strategy? If so, be aware: the LTCI
industry is rapidly transforming. What was true one year ago may not be
true today, and the years ahead will bring additional changes.
LTCI carriers are currently
reevaluating the way they do business. The industry is in the midst of a
philosophical shift, evidenced by new, next-generation policies and
tighter underwriting requirements that will affect future
policyholders—including your clients.
Here’s what you need to know to protect
their interests.
Key Factors Affecting the LTCI Industry
In order to understand the
changes in progress, you first need a bit of industry background.
At any given time, 100-125 carriers are
actively selling LTCI. Yet the top 10 carriers consistently represent
70% of market share, and these heavy-hitters set the trends.
LTCI sales have skyrocketed in the last
few years. Over eight million Americans now have coverage, compared to
815,000 in 1987. This boom is due in part to substantial growth in the
group sector.
In 2002, the federal government added
voluntary LTCI to its benefit program. As the nation’s largest employer,
the government serves as model for many U.S. employers. Now, companies
large and small are adding voluntary programs.
But remember the adage “Be careful what
you wish for!” As LTCI sales increased, so has benefit utilization.
According to the Health Insurance Association of America (HIAA), in
2002, annual claims surpassed the $1 billion mark for the first time.
There are numerous contributing
factors. People are living longer; the cost of health care is rising.
(Nursing facility care now averages $61,000 annually and will nearly
double in the next 10 years.) Roughly half of all Americans will require
long term care at some point over age 50.
And this need for care will accelerate
in the not-too-distant future, as 70 million baby boomers (1946-1964)
come of age. As a result, carriers are managing their exposure more
aggressively. Pair that with the fact that they—like most of us—have
experienced poor investment earnings over the last few years, and it’s
easy to see why the industry is pulling back.
A Time for Reassessment…And Change
Carriers are reexamining their
products and practices. Some have already filed for rate increases,
adopted more stringent underwriting guidelines, and tightened benefits.
Some are even downsizing. Here are the major changes we are seeing:
Unlimited Lifetime Benefits Are
Disappearing
Many LTCI policies still feature unlimited lifetime benefits, but
perhaps not for long. In March 2003, CNA—an undisputed industry
leader—introduced a new policy with a $2,000,000 lifetime benefit cap,
which will be offered in 22 states. CNA is the first to eliminate
unlimited benefits, but won’t be the last. Other carriers are already
taking this change into account when designing their new generation of
policies.
Tightening Up the Age Limit
A few years ago, many carriers would offer coverage to individuals
up to age 99. Now, you have to look hard to find such an offer. Carriers
have learned the hard way that exposure increases sharply after age 80.
More Health Conditions Excluded
Although each company evaluates health conditions individually,
eligibility overall is becoming more restrictive. Most carriers will not
insure insulin-dependent diabetics. Most now require an in-person
assessment of applicants over age 70, specifically to weed out those in
the early stages of dementia. Despite these tighter underwriting
requirements, it still remains much easier to qualify for LTCI than for
life or health insurance.
On the Positive Side…
Not all of the changes are
negative. Here are some of the industry’s bright spots:
Home Care Is Now Widely Covered
Some people used to call LTCI “nursing home insurance.” Today, a
more accurate name would be “anti-nursing home insurance,” because most
policies include benefits for home care. That’s good news, since home is
where most people prefer to remain. Some companies will even allow
family members to qualify as caregivers as long as they obtain a
caregiver’s certification.
Limited Pay Plans Growing in
Popularity
Under traditional premium payment plans, premiums are collected on a
monthly, quarterly, semi annual or annual basis. These days, more
policyholders are considering electing limited pay plans—such as “single
pay” (i.e., paying premiums in one lump sum) and “10 pay” (i.e., making
10 accelerated payments) and “paid up at age 65.” In some situations,
you may find this option beneficial. When choosing a plan, however, be
sure the carrier has very strong ratings and billions of dollars in
assets and reserves.
Inflation Protection—A Terrific
Option
Most carriers offer an inflation protection option, which
automatically increases benefits on each policy anniversary. This option
is becoming increasingly popular, and with good reason.
Consider this: in 1975, nursing
facility care cost roughly $20 per day. Now, that same care costs $167
per day. By 2015, costs are expected to top $290 per day.
With inflation protection,
policyholders can increase benefits annually by 5% on either a simple or
compound basis. Here’s how inflation protection stacks up against rising
costs, based on a first-year daily benefit of $200:
|
Year |
No Inflation
Protection |
5% Simple
Benefit |
5% Compound
Benefit |
|
2003 |
$200 |
$200 |
$200 |
|
2015 |
$200 |
$320 |
$360 |
|
2030 |
$200 |
$500 |
$866 |
Yes, the option results in higher
premiums, depending on age. However, premiums remain level year after
year, so the cost is spread over the life of the policy. As carriers
continue to find ways to limit benefits, inflation protection becomes
even more valuable.
Implications for Financial Planners
When LTCI was first made
available, the average buyer was in their mid 70s. Today, the average
buyer is 63 (in the employer/employee group market, the average age is
43).
The savvy financial planner will urge
his or her clients to purchase LTCI at a younger age, when benefits are
larger and premiums are smaller. Since carriers are tightening their
underwriting requirements, it makes sense to obtain coverage while
younger and in good health.
Some of the best LTCI deals are fast
disappearing. If your clients’ financial plan includes purchasing LTCI
coverage in the future, consider accelerating the timetable. There will
never be a better time to buy Long Term Care Insurance.
Biography:
Murray Gordon is President of MAGA, LTD., a nationally recognized Long
Term Care Insurance (LTCI) specialist and NAPFA Resource Partner. He
founded MAGA in 1975.
Over the years, Mr. Gordon has
played a vital role in the evolution of LTCI, working with industry
pioneers to develop features and benefits that are now standard policy
offerings. He has been quoted in many publications, including The Wall
Street Journal and the Chicago Tribune. A sought-after speaker, he
recently presented to members at NAPFA’s annual 2003 conference. Mr.
Gordon may be reached at 800-533-MAGA, www.magaltc.com.
