Running for the Exits

With so much happening in the long-term care insurance marketplace, it’s tempting for agents to want to give up selling it. But while the market is in disarray, the need for the product is clear.

According to the Robert Wood Johnson Foundation, approximately 70% of adults will need long-term care services—and that percentage increases with age. The number of Americans who need long-term care is expected to increase from approximately 12 million today to 27 million in 2050. By 2030, when the last baby boomers turn 65, the number of Americans 65 and older is projected to be about 72 million, or 19% of the total U.S. population—up from more than 40 million, or 13% in 2010. Currently, 5.2 million Americans live with Alzheimer’s disease. By 2050, up to 16 million may have the disease. Long-term care expenditures are projected to increase to $346 billion in 2040. Medicaid accounts for 43% of all long-term care spending, and Medicare accounts for 18%. Meanwhile, federal and state governments are reducing overall spending, and states are cutting back on their Medicaid programs.

The data certainly suggests that LTC expenses are a significant risk to a couple’s standard of living and need to be considered in retirement planning (and earlier). It is a basic axiom of insurance that if an individual is facing a peril, especially one whose costs can be significant or even catastrophic, insurance is an efficient way to transfer the risk to a third party—and if it can be insured, to an insurance company. But what happens when the assumptions that the insurance company uses have changed? Who does the insurance company transfer their risk to?

Dropping Out
It has taken years for insurance companies to convince insurance agents to offer LTC to their customers. And it has taken many insurance agents years to convince their customers that LTC is a good avenue to transfer the risk of catastrophic long term care expenses. However, due to a variety of reasons, there has been a reversal in the LTC marketplace. Some of the largest and most well-known insurance companies have either dropped individual or group LTC policies. Or, they have dramatically raised the rates on existing and new policyholders.

Over the last several years, Unum Group, Guardian, MetLife, Prudential and Allianz have all exited the business. Also, carriers that will stay in the market have dramatically raised rates. Beginning on Aug. 1, Genworth, for example, began to raise premiums on pre-2003 policies by 50% over the next five years, and on newer policies by 25%. The company also tightened its underwriting for new products, and for the first time, required blood tests for applicants. Related actions include the ceasing of selling lifetime benefit policies, reducing spousal discounts from 40% to 20% and ending preferred health discounts and the sale of products that allow consumers to pay premiums up-front rather than over their lifetimes.

It’s not just insurance companies that have run into problems with premium increases for LTC. The California Public Employee Retirement System is preparing to impose a rate hike of up to 85% on most of its long-term care insurance policyholders. The rate hike would begin in 2015 and be phased in over two years. It would affect three-fourths of the 150,000 CalPERS members who have purchased long-term care. CalPERS hasn’t sold any new policies since 2008 and won’t resume selling until the program is on more solid financial ground. Also, they announced that they will offer a less expensive policy that provides 10 years of benefits. Currently, most of the members have lifetime coverage.

The federal government has also retreated from its foray in LTC. Part of the Patient Protection and Affordable Care Act included a provision to form the CLASS Act, which would have been a new government-run voluntary long-term care insurance program. However, the program was deemed actuarially unsound and unable to comply with the parameters spelled out in the law. The program was designed to pay out a minimum benefit of $50 per day and be funded only by premiums—meaning no taxpayer funding. However, its design made that impossible as the program would have become a study in adverse selection; employees could opt out of the program and the cost to healthy employees was significantly higher than what they could purchase in the marketplace.

Chicken or the Egg
So what is the catalyst behind the exit of a number of major LTC carriers? First, from an actuarial and asset/liability standpoint, forecasting medical inflation is extremely challenging. And, no doubt a number of insurance companies were underpricing the product, as evidenced by the significant range in premium rates among carriers. However, given the breadth of the carriers that have raised rates dramatically or left the market, the bigger culprit is the historically low interest rate environment. Since insurance companies invest premiums for long-tail risks like LTC in long duration bonds, the Federal Reserve’s near-zero interest rate policy has created an environment where the return on bonds cannot meet even the anticipated rate of medical inflation. According to a survey conducted by the American Association for Long-Term Care Insurance that looks at popular policies offered by 10 big insurers, prices for such policies have risen by as much as 17% from a year ago.

So where does this situation leave independent agents looking to help clients position themselves for LTC? One avenue is to consider looking at policy features and reduce the most costly items, such as the inflation rider, waiting period and daily maximum benefit level. While this approach will shift more exposure back to the insured, it will lower the cost and can help mitigate significant cost increases, especially if the inflation rider is not selected. This will be more budget-friendly and allow the policyholder to keep the policy in force for the long term. Agents should be aware that if their client has a partnership plan, they need to be cautious about their approach regarding any reduction in benefits.

The Robert Wood Johnson Foundation established a national program in 1987 to promote public and private partnerships that encouraged people to purchase affordable long-term care insurance, while protecting some of their assets should they ultimately require Medicaid services. The concept is to help control Medicaid costs and protect consumers who need long-term care. By purchasing a partnership plan (offered in 44 states), the policyholder gets to shield assets equal to the amount of benefits that are purchased. However, the rules vary by state—and a related consideration is whether the insured is moving to a state that has reciprocity.

Examine All Avenues
Hybrid insurance policies, which combine long-term care insurance with either a life insurance policy or an annuity, can also help pay for LTC expenses. While these policies have been around for a while, they got a boost from the Pension Protection Act’s favorable taxable treatment, which began on Jan. 1, 2010, and allowed distributions from life insurance and annuities to be tax-free when used to pay nursing home costs. The concept behind a hybrid life insurance policy is to allow a buyer to purchase a cash-value life insurance policy and to use a portion of that policy for long-term care benefits, while keeping the rest as a death benefit that will be paid to the purchaser’s beneficiary. If long-term care benefits are used, the death benefit may be reduced. For example, a purchaser could deposit $200,000 into an annuity. The annuity would provide approximately $6,000 of long-term care benefits each month, for 36 months. For an additional cost, the purchaser could get the $6,000 monthly benefit for life. However, policy provisions will vary and hybrid policies may not provide specific riders like home care coverage or inflation protection.

Hybrid policies have become more popular as LTC policies have increased in cost. But, hybrid policy rates are not immune to price increases either. The NAIC has issued a revised Actuarial Guideline 38 to address the issue of inadequate reserve levels among life insurance companies that issue universal life policies with secondary guarantees (typically the type of policy that combines universal life insurance with long-term care benefits). In many instances, the revised guidelines for calculating reserve levels will require life insurance companies to increase their reserves to ensure they are able to pay the benefits they have guaranteed. Revised AG 38 will apply retroactively to policies issued as early as July 1, 2005. It is estimated that premium increases will range from a minimum of 5% to 10%, to as high as 20% to 25%.

When it comes to long-term care insurance, there are no easy options for agents to recommend. Have a long conversation with clients and gather information to help manage the trade-offs. Allowing your customers to ignore this significant risk is a disservice to them and to your agency.