Potential Concerns and Risks for Traditional Long-Term Care Insurance
Long-term care insurance has traveled a rocky road since its inception. When people entered a nursing home after a hospital stay, early long-term care insurance policies of the 1960s generally only supported stays in nursing home facilities that required skilled care rather than custodial care. This is exactly what Medicare covers, and since care is rarely needed for longer than Medicare provides, these types of policies rarely paid off and left a stain on the industry.
By the 1990s, new policies covered an increasingly general range of long-term care needs, including help with activities of daily living and/or cognitive decline. Coverage is generally for skilled care, intermediate care, and custodial care. The typical policy today covers nursing homes, assisted living, and home care. It may also cover other needs like homemaker services, hospice care, adult day care, international coverage, respite care, bed reservation, care coordination, caregiver training, and supportive equipment. The range of expenses covered by long-term care insurance varies, and it is important to understand what exactly is covered by a contract under consideration.
The long-term care insurance market expanded rapidly during the 1990s. However, many companies entering the market offered a level of benefits which could not be supported by premiums. Some companies overestimated lapse rates as more contracts were held longer than expected, and they underestimated the recent decline of interest rates. Some companies priced policies too low in order to generate more sales (in the ongoing battle between the marketing departments and actuaries).
The financial strains created by these underpriced insurance contracts have led to dramatic consolidation in recent years, with fewer insurers writing new policies today. Those still issuing new policies have had to raise premiums and reduce benefits. Most issuers have also worked with state insurance commissions to raise premiums on older policies in order to better fund their promised benefits.
The contracts usually guaranteed renewal or were defined as having level premiums rather than guaranteeing premiums would not increase. Level premiums do not mean premiums remain at the same level, only that the company must charge the same premium to everyone who bought policies within the same age and group. If the insurance company convinces the state insurance commission that higher premiums are needed to support the promised benefits, all policyholders within a group may experience the same increase in rates.
Research by Finefrock, Gradisher, and Nitz (2015) found that among 58 companies that had written long-term care insurance policies, only four never initiated a rate increase. They also found that, for instance, only 12 carriers were actively selling new long-term care insurance policies in California. Meanwhile, an additional 46 companies with existing policies had stopped issuing new policies.
For many retirees on a fixed budget, premium increases became unaffordable and a number of policies lapsed. These premium increases left many Americans nervous about purchasing traditional long-term care insurance. In the future, premium increases may be less common as companies have a better grasp on how to price their policies, and as interest rates are unlikely to fall dramatically lower than their current low levels.
It is important to shop around between different providers as the ability to qualify and the health classification for premiums may be different between companies. Buying based on who offers the cheapest price is risky, since the company may be seeking upfront sales with the intention of increasing premiums later.
Public hesitation about long-term care insurance stems from a number of concerns. As with many other insurance options, people struggle to place appropriate value in something they may not end up using. Consumers fear future rate increases could affect their ability to keep paying for the policy. They have concerns about underwriting and the lack of standardization among contracts making it difficult to know what is and is not covered, as well as the finite coverage provided by contracts which may still leave them on the hook for expenses extending beyond coverage limits.
Another important concern for traditional long-term care insurance is the possibility of inadvertent lapsing. The Center for Retirement Research at Boston College released a troubling study in 2015 which found that about 25% of policy holders who entered a nursing home had let their policy lapse during the preceding four years, resulting in loss of benefits they had supported with premiums earlier in their lives.
The troubling implication of this research is that two of the top hardships experienced in the years leading to entering a nursing home – financial strain and cognitive decline – led to a lapse in coverage when it was most needed. By following households over time, they learned that lower scores on cognitive tests increased the likelihood of needing long-term care and increased the odds for lapsing their existing long-term care insurance policies. The importance of having family, friends, or professional assistance during this time cannot be overstated.
Long-term care benefits are received tax-free. Premiums may be deductible as they are applied to medical expenses, which are deductible once they exceed 7.5% of adjusted gross income for those 65 and older. New partnership policies between states and insurers allow assets to be exempt from Medicaid rules.