The Transformation of Long-Term Care Insurance
Since its inception in the 1970s, the long-term care insurance (LTCI) market has undergone significant evolution. Initially designed to safeguard against the financial burden of skilled nursing facilities, early LTCI policies typically provided benefits limited to such facilities, often requiring a prior 3-day hospital stay. However, today’s LTCI policies have adapted to encompass a broader spectrum of long-term care services, including home health care, respite care, hospice care, and personal assistance in various settings, such as the home, assisted living facilities, adult day care centers, and other community facilities. The LTCI market has grown from covering less than three million lives to now covering seven and a half million. As our population ages and lives longer than ever before, the demand for these services will only continue to grow, necessitating innovative solutions.
Factors Driving New LTCI Product Development
Two primary factors are propelling product development in the LTCI space: morbidity risk and longevity risk. Particularly in recent years, there has been a shift in focus towards addressing the risk of longevity as the Baby Boomer generation enters retirement. Advances in medical diagnostics and treatment have extended the average lifespan, but this longevity also means an increased need for long-term care services in later years.
In response to concerns about rate increases and the “use it or lose it” nature of traditional LTCI policies, asset-based LTCI (also known as hybrid LTCI) policies have emerged as a popular alternative. These asset-based policies combine life insurance or annuities with long-term care coverage, offering policyholders the assurance of rate stability and often providing a death benefit if benefits are not utilized.
Understanding Rate Increases on Traditional LTCI
Rate increases on traditional LTCI policies have been driven by various factors, including inaccurate longevity and persistency assumptions made by insurers. Early policies underestimated both the duration of policyholders’ lives and the likelihood of policy lapses, resulting in more claims than anticipated. Additionally, unforeseen factors like the prevalence and impact of cognitive memory disorders, such as Alzheimer’s disease, have contributed to increased claims. These inaccurate assumptions have led to rate increases from most major insurance carriers at least once.
The low interest rate environment of the 1990s and early 2000s further compounded these challenges, as insurers’ investments did not yield the expected returns. In fact, most families were affected by this low interest rate environment, be it in the stock market, their retirement portfolios, or other investment products. Fortunately, with hindsight and more conservative investment strategies, carriers have adjusted their approach to pricing LTCI policies, resulting in more stable premiums today.
Addressing LTCI Rate Concerns and Moving Forward
While rate increases may initially seem concerning, it’s essential to educate clients about the realities of traditional LTCI and the potential for premium adjustments. By leveraging historical data and improved projections, carriers can offer more stable premiums aligned with actual risk factors.
Like any other insurance policy, rate increases on traditional long-term care insurance can happen, which clients should understand when purchasing a policy. In fact, the personal worksheet (due diligence) included with every state application indicates that clients should prepare for a rate increase of about 20%.
Despite these considerations, LTCI remains one of the most cost-effective ways to safeguard retirement savings against the high costs of long-term care. It’s crucial to engage with clients, dispel any misconceptions, and explore the available options tailored to their needs. For more information on LTCI policies available in your state, please contact our team at (800) 255-1932.
