The premiums for a long-term care (LTC) insurance policy are not the most important consideration when you are evaluating a policy.
It does not matter whether premiums are higher on the policy you have analyzed and realized has better policy benefits than another policy with lower premiums. Policy benefits should be the determining factor when comparing different policies. Just because a policy costs more, however, does not guarantee that it will pay claims easier. Selling a policy that will pay for claims is the most important factor to consider.
Compare a premium of $1,600 a year to another premium of $2,300 a year, and you'll realize that in 20 or 30 years, the $700 annual difference really is not important. [This example of premium difference is not typical because most LTC insurance company policy premiums are more competitive in price than this example -- also, you should be on alert when a comparable policy is $700 cheaper because it might not have actuarial integrity.]
In this example, policy premiums are based on a $100 daily benefit, zero day elimination period, lifetime benefit period, 5% compound inflation option, age 55, with a spouse discount.
If you buy a policy for $1,600 and pay premiums for 20 years, you will pay $32,000 in total premiums. If you pay these premiums for 30 years, you will pay a total of $48,000. In 20 years, the $100 a day benefit will inflate to $263 a day, or $96,000 a year. In 30 years, the daily benefit will inflate to $432 a day, or $157,000 a year. If you start using the policy benefits in 20 years, you will recover all premiums paid in 122 days. If you start using the policy in 30 years, you will recover all premiums paid in 112 days.
If you buy a policy with a premium of $2,300 annually, you will pay $46,000 in 20 years and $69,000 in 30 years. Again, the $100 daily benefit will inflate to $263 a day, and $96,000 a year in 20 years, and $432 a day, or $157,000 a year, in 30 years. If you start using the policy in 20 years, you will recover all your premiums in 175 days. If you start using your policy in 30 years, you will recover all premiums paid in 160 days.
The difference in 20 years of 122 days compared to 175 days represents 53 days. The difference in 30 years is 48 days [160-112=48 days], $20,736, or $1.90 a day.
Many experts use the statistic of 2.5 years in the nursing home as the average time of an LTC insurance claim. Two and one half years does not reflect the reality that people stay at home and in the community as long as possible.
If someone paid the $1,600 premium and used the policy in the first year, the gain would be $34,900 or 4.5% of premium paid to benefits received.
If someone had the policy with the $2,300 premium, he or she would receive $34,300 more than the initial cost of protection the first year. The percentage of premium compared to the benefits received would be 6.5%. The important consideration is that the $36,500 is paid.
Most people prefer to stay in their homes, and they will do anything to avoid a nursing home. This requires them to use their policy longer. LTC agents should use a more realistic time frame of five total years as an example of LTC expense exposure. Five years represents just 2.5 years of home and community care and the usual 2.5 years of nursing home care.
The real value of long-term care insurance is clear when you realize that 20 years from the issue date of an LTC insurance policy, whether you pay $32,000 or $46,000, the LTC insurance policy will provide protection of $251,000 for a 2.5-year claim and $535,000 for a five-year claim. In 30 years, if you pay premiums of $48,000 or $69,000, the policy will protect $410,000 for a 2.5-year claim and $870,000 for a five-year claim. The most important concern should be that both policies pay claims.
At 40 years after issue date of an LTC insurance policy with 5% compound inflation option, the policy will pay $704 a day or $257,000 a year. For a 2.5-year claim, the total payment will be $668,000, or $1.4 million for five years.
These figures are not important. What agents should realize is that in 30 years, people will be exposed to a claim of $410,000 for 2.5 years or $870,000 for five years.
Everyone will agree that people are living longer. New prescription drugs and advanced medical knowledge are generating longer life spans. The longer the life span, the longer the frail period or dependency period will last.
Many men are in denial about ever needing assistance. They try to convince themselves and LTC insurance agents that they never will require assistance because they are healthy and active today. The reality is that the longer they live, the longer they probably will be dependent on someone else to take care of them. Many people do not accept the reality that if they do live longer, their spouse will be older and it will be more difficult for the spouse to care for them. Long-term care expenses will increase for every year that they live longer, and their asset base might not increase and actually might decrease.
Before the battle of Normandy during World War II, the military high command gave the advancing soldiers the opportunity to increase their life insurance tenfold. The commanding officers explained that the casualty rate was expected to be very high. One-third of the soldiers accepted the offer, and two-thirds of the soldiers denied the reality that they might be killed in action and refused to increase their life insurance for their families. Unfortunately, the high command underestimated the causality rate. The mind-set of the soldiers at Normandy demonstrates just how difficult it is to persuade some people that they are not invincible.
Many men consider it a weakness to "give in" and buy an LTC insurance policy. They pretend to be invincible and will not ever allow themselves to think of being dependent on anyone else. Many people have the "it will never happen to me" denial syndrome.
Agents should respect the reasons people resist buying LTC insurance but should have the courage and conviction to crash through the wall of denial.
The premium of a policy does not indicate the best buy and usually is simply another excuse many people use to aid in the denial process. LTC insurance agents should offer the most consumer-friendly policy regardless of its premium.
Richard G. Green is president of Senior Security LTC and Christian Memorial Association, a non-profit association for seniors. He has been marketing insurance to seniors for 35 years and has specialized in long-term care insurance for the past 16. Mr. Green also is president of Safety of Seniors, a national program that provides early need identification of cognitive and functional incapacity. He is a registered non-paid lobbyist for senior issues.
