At the risk of sounding the alarm, one could make the argument that the stand-alone long term care insurance marketplace is in a state of upheaval.
Studies have shown that many people dramatically underestimate the cost of long term care, while overestimating how much such entitlement programs such as Medicare, Medicaid, and Social Security will help mitigate that future cost. Adding to this worry is the alarming statistic that seven out of every 10 people living to age 65 will need some sort of long term care in their lifetime.
The future rising cost of care has become so firmly planted in the sociopolitical landscape that The Department of Health and Human Services has a website dedicated specifically to helping individuals understand the potential costs of – and the best ways to plan for – long term care.
Why, then, if the need is so obvious, are insurers running as fast as they can away from stand-alone long term care insurance products?
The LTCI carrier belt-tightening can't possibly be underestimated: Virtually every major carrier of stand-alone LTCI has either recently raised premiums on all existing in-force business, or is in the process of doing so. When the policy was originally designed, carriers acknowledge that they mispriced their product, relying on the lapse rates characteristic of life insurance. Individuals, however, never lapsed their long term care insurance. In turn, carriers raised premiums to accommodate the actuarial misstep.
Anecdotally speaking, it has never been more difficult to underwrite long term care insurance. Cases that would have been routinely approved in the past now face much greater scrutiny. In a case I recently had issued, a carrier asked a proposed insured to undergo a memory test over the phone, even though the proposed insured had passed a full neuropsych evaluation mere months earlier as part of an annual executive checkup.
Given the difficulty agents now face in finding product to fit the demand for long term care coverage, where can we go to best serve our client's needs? We look to life insurance, in a variety of new – and old – forms.
Combination products
The first recent twist on life insurance as long term care coverage is the LTC rider, available from a variety of carriers featuring similar, but slightly different specs. LTCI benefits can be paid out at a certain percentage of a death benefit for a certain number of years until the entire benefit amount is exhausted. These benefit payouts will erode the life insurance benefit, but this allows the insured to have a benefit that is not "use it or lose it." In other words, if someone needs long term care, the money is there. If they don't need the care, then the benefit can be used for wealth transfer.
Seems like a pretty good deal – and it works for other reasons, as well.
Stand-alone LTCI advertises, in bold type on every application, the possibility that carriers reserve the right to raise premiums. This type of premium increase in a life insurance policy with a LTC rider is a much more remote possibility. This particular rider may become more difficult to issue as carriers tighten their LTC belts, but more and more carriers are entering the LTC market this way, without having to issue the stand-alone product.
Other hybrid solutions
If the traditional universal life or variable universal life policy with a LTC rider doesn't fit the need, the industry has also recently developed a string of hybrid products, often funded with a single pay, which can offer a great alternative on a number of fronts. Most importantly, they can offer both a long term care and a death benefit. As with LTC riders, various carriers offer products with slightly different features and benefits, but the products generally offer the same thing.
Most often found in a single-pay scenario and marketed by carriers as a great replacement for CDs, these are UL products that offer a leveraged death benefit, and which can even offer greater leverage for a long term care benefit, depending on the age of the proposed insured.
