It's November, and Long-Term Care Awareness Month is well underway. Thanks to the efforts of organizations such as the American Association of Long-Term Care Insurance (AALTCI) and the LIFE Foundation, not to mention long-term care (LTC) carriers, more advisors and consumers are aware of the need for LTC planning.
In fact, the U.S. Senate even convened an LTC Commission this summer to make recommendations on how to deal with long-term care (or the more awkwardly named "long-term services and supports") in the country. One critical part of that commission discussed how to finance long-term care. Not surprisingly, the answers split along ideological lines, with some of the commissioners supporting a new entitlement program and others promoting private financing.
The truth is, both are necessary in a country with a widening wealth gap. Although I would love everyone age 40-plus to own a private LTC policy, almost half the country does not have the means to afford premiums. Some type of government solution (currently Medicaid) is necessary.
We've seen needed changes to the Medicaid LTC program in recent years, including a growing ability for people to receive care at home in many states. Medicare, which pays for some short-term care, could also play a larger role, as the so-called "dual-eligibles" — those who qualify for both Medicare and Medicaid — have better care coordination.
However, for many Americans, and especially affluent retirees, simply relying on the government programs will be unacceptable. Even in countries with social LTC programs, such as Germany, there is a desire to pay privately to increase choice and quality of care.
Luckily, in the United States, we have many private LTC insurance solutions. Despite media perceptions, Americans have more opportunities than ever to plan for LTC through insurance. Will baby boomers heed the message and actually engage in planning? Financial professionals are the most likely group to influence them.
See also: 5 ways to sell LTCI to boomers
There are four key types of coverage: traditional health-based LTC insurance, linked life/LTC plans, life insurance with LTC or chronic care riders, and finally annuity LTC plans. Let's look at the future of these product categories.
1) Traditional health-based LTC: Traditional LTC plans continue to be the dominant LTC program sold. In 2012, according to LIMRA, there were more than 200,000 traditional LTC policies sold compared to well under 100,000 life/LTC policies. However, traditional policies have faced struggles in recent years because of lower than expected lapse rates and a low interest rate environment. Due to these challenges, there have been many unplanned in-force rate increases that have caused consumer and advisor consternation.
Fortunately, once those advisors and policyholders find out what a new policy costs today (which is much higher), they normally are willing to pay the increased premium.
From a plan design perspective, LTC policies no longer offer the popular "lifetime" benefit that was loved by consumers and feared by carriers. The most up-to-date products today allow a purchaser to select a total pool of money, say from $100,000 to $1 million. That pool can be used in the future for care, up to monthly withdrawal limits either expressed on a percentage of the pool basis or a monthly maximum.
Fewer advisors today are spreadsheeting policies and recommending simple solutions based on the lowest premium product. Instead, advisors are looking at how claims will be paid.
One key difference between these carrier policies is the benefits for home care. Some plans allow for a "cash alternative" that can be used in lieu of the reimbursement benefit. Other plans offer expanded definitions of what qualifies as a home health care agency in order to support the newer private-pay home health care franchises that are rapidly growing throughout the country.
Another difference in LTC plans is how they handle future inflation requirements. The past standard, 5 percent automatic inflation, is simply not affordable in today's economic environment. In addition, historical LTC inflation rates for home health care from 2000 to 2012 have averaged 1.01 percent, according to AALTCI. I personally have found that the 5 percent inflation I bought has greatly outpaced the cost of care increase in my area, and I decided to scale back my monthly benefit maximum to save premium dollars. If carriers weren't required by regulation to offer 5 percent compound interest, chances are they wouldn't.
Today, inflation options abound on products. Options include:
- Policies that increase automatically with the CPI
- "Dial-your-own inflation," from 1 percent to 5 percent in 0.25 percent increments
- Inflation that increases by 5 percent to age 61 and 3 percent from ages 61 to 75
- Step-rated increases that increase premiums and benefits each year
- A plan that increases benefits if the carrier's underlying investment portfolio performs well
With so many options, how does someone decide what is best? One growing way to design a plan is focus on a premium budget first and then back into an appropriate plan design. You could call it the name-your-price option.
