Long-Term Challenge

Long-term care insurance is an intuitive product for clients who want to protect assets and control their care in retirement. But independent agents often find that LTCi proves a very challenging sale.

The reasons vary from cost to misconceptions about how the product works. Recently, substantial class premium increases have disillusioned many comsumers.

In fairness to the carriers, the prolonged, abnormally low interest rates have made it difficult to generate adequate investment returns to meet the long-term tail of claims. In turn, a number of carriers exited the market while others increase their rates: five out of 10 of the largest LTCi carriers in 2010 are no longer writing LTCi. Going back a decade, almost 100 carriers were active in the LTCi marketplace—but now only about a dozen major carriers are still writing policies.

A major factor has involved the assumed “lapse” rate, which has been lower than some carriers expected. Many insurers predicted that 5–7% of people who bought LTCi would cancel their policies each year without tapping their benefits. Instead, actuaries report the annual cancellation rate has been less than 2%. PricewaterhouseCoopers estimates initial premiums would have been about 35% higher if insurers had assumed such a low cancellation rate.

It’s difficult to explain to a client that the carrier assumed more people would drop their coverage prior to incurring a claim. That message essentially contradicts the premise of the needing the coverage—that in the future, clients will be able to rely on their LTCi policy to meet a financial need. And many people have accepted rate increases or modified their policy, lowering the payout but keeping the premium increase within their budget.

In response to marketplace increases, carriers have introduced more hybrid policies that combine life insurance and annuities with LTC riders, allowing the policyholder to tap the policy in a tax-efficient way. Sales of these products are expected to increase, and agents should stay tuned to monitor the evolution for their clients.

Dave Evans is a certified financial planner and an IA contributor.

Nationally, premiums for policies for single women will rise 12% in 2014, while rates for single men will decline more than 14%, according to a recent price index from the American Association for Long Term Care Insurance (AALTCI). This year, a 55-year-old single woman will pay an average of $1,225 annually for the same level of benefits available to a single man at just $925.

The AALTCI also reports, however, that 70–80% of LTCi policies are bought by couples, whose rates will only increase 3%. —D.E.