Nearly all of the recent news about funding options for long-term care tells a story of an industry on its heels. This is particularly true for traditional long-term care insurance (LTCI) products that are, essentially, health insurance policies that can be used to pay for costly end-of-life care in nursing homes or one's own home.
The vast majority of major insurance carriers offering these policies have had to request rate increases. Pressure points driving the increases include low interest rates, underestimation of policy lapses and the rising costs of long-term care. It was recently announced that one carrier is seeking to raise premium rates on some of its policies by an average of 58 percent. Another just announced it will stop selling LTCI products in California, following many of its peers in pulling such products from the marketplace.
According to LIMRA, 10 out of the top 20 individual writers of long-term care insurance have exited the market over the last five years. Prudential — the fifth-largest writer of LTCI in 2011 — stopped accepting new applications in the first quarter of 2012.
Meanwhile, Americans are dramatically underprepared to pay for long-term care. According to the National Clearinghouse for Long-Term Care Information, 70 percent of people over age 65 will require some type of long-term care services during their lifetime. On average, care will be required for three years. While only one-third of today's 65-year-olds may never need long-term care services, 20 percent will need care for longer than five years.
But despite the proven need for coverage, LIMRA estimates that only about 7 million Americans have long-term care insurance. The U.S. Census Bureau estimates that, in 2010, there were more than 40 million Americans age 65 and older.
A tremendous gap in coverage exists within a population that perhaps wrongly believes Medicare covers long-term care. It doesn't. If long-term care is needed, an uninsured individual is forced to use up a significant portion of his or her personal assets or estate value before qualifying for Medicaid benefits.
The 2011 John Hancock Long-Term Care Survey found that "although most respondents said they thought LTC insurance would be the best way to cover long-term care needs (61 percent), only 11 percent reported having purchasedit."
Viable solutions
Unattractive product design, the potential for significant rate increases and consumer apathy have led us to where we are today. But while some companies and financial professionals are walking away from long-term care insurance, others are finding that newer, even better options for their clients are already available — in fact, they are thriving.
These products are known as asset-based long-term care. They are built either on the chassis of whole life insurance or an annuity. You may have also heard them referred to as hybrid or combo products. With these products in place, when long-term care is needed, the life insurance death benefit or annuity value is accessed to pay for qualifying expenses, and the funds are available free of federal income tax.
Consumers and their financial professionals are attracted to asset-based long-term care products because of two major advantages over health-based insurance products: 1) a life insurance or annuity payout is made to beneficiaries at the time of death if the policy has not been exhausted for long-term care expenses; and 2) premiums are usually guaranteed, meaning older clients will never be exposed to an increase in the cost, especially at a time when they can least afford it.
Consumers are becoming more demanding about guarantees in the financial services industry and more appreciative and aware of these alternatives. As such, asset-based long-term care strategies are coming to the forefront as the pay-as-you-go, hope-you-never-need-it health-based LTC approaches fizzle.
