There has been a lot of upheaval recently in the standalone long-term care (LTC) market. With some companies petitioning state regulators to allow rate hikes on stand alone LTC as much as 40 percent1, and other companies getting out of the long-term care insurance (LTCI) market altogether2, the already uncomfortable subject of long-term care has become an even more difficult discussion to have with clients.
The Crisis Facing Traditional Long-term Care Insurance
Companies participating in the standalone LTCI market face higher claims risk than ever before. When companies originally priced traditional LTC policies, they were counting on a certain number of policies to lapse - and a certain percentage of people to pass away without using any (or very little) of their LTC benefits. However, increased morbidity coupled with unexpectedly low lapse rates has produced a higher rate of claims than ever before.
Daily LTC payouts have doubled between 2006 and 20093, and it is only going to get worse as the Baby Boomers age and join their parents in the LTC claims pool.4 Lower interest rates are also adding to the problem, leaving LTCI companies with less income to pay claims with.4 While a company selling standalone LTCI must petition state regulators for rate increases, there is no limit as to how often this could happen, nor is there a ceiling on the cost of the product. In order to salvage a now unaffordable policy, some people have had to accept reduced benefits.
Traditional LTCI policies do have the most customization features of all LTC solutions, but many individuals worry they may be purchasing a product they may never need at all, or will receive little benefit from. These issues have resulted in sales declining nearly 23 percent, from $602 million in 2008 to $464 million in 2009 (2010 numbers not yet available).5
An Alternative Solution
Life insurance/LTC combo products offer a different story that more and more clients are gravitating to. With a life/LTC rider combo, the LTC benefit is paid - after LTC triggering events - by accelerating the death benefit. The linked combo products are usually one set plan, with little or no opportunity to customize features.
But consumers are embracing this solution more and more as a plan that guarantees payment to someone (based on the claims paying ability of the issuing company) regardless of what turn life takes, either as a claim for the insured's LTC needs, or as a death benefit claim paid to beneficiaries.
The final death benefit is reduced dollar for dollar by any LTC benefit collected, but because the LTC coverage is a rider on life insurance, the "use it or lose it" concern associated with standalone long-term care insurance is eliminated. Sales statistics of combo products show increased sales of approximately 28 percent -- from $633 million in 2008 to $813 million in 2009.5
There are a couple of ways a LTC rider may appear on a life insurance policy. One method includes the LTC rider as part of the base policy and does not charge an additional fee. However, this type of rider may be more difficult for the client to understand since the LTC benefit cannot be determined until actually going on claim. A life purchase should be based on the life policy, and not optional riders or features. The cost of a rider may exceed the actual benefit paid under the rider. Keep in mind that as an acceleration of the death benefit, the LTC rider payout will reduce both the death benefit and cash surrender values.
The other method allows an individual to add the LTC rider for an additional charge. One of the advantages of this method is that it is much easier for clients to understand. The amount available for LTC benefits is known at policy issue and is the same whether needed at a much younger age than expected or later in life. Some companies will even allow the contract owner to choose a smaller amount to accelerate for LTC purposes in order to save on policy charges and guarantee an amount of death benefit can be preserved.
Why is it that life/LTC combo products are not exposed to the same risk as traditional standalone LTCI policies? Pricing of these products is based on life insurance, which has a long history of pricing experience. While companies selling standalone LTCI policies expect only a certain percentage of policies to go on claim, companies who sell life/LTC combo products know they are going to pay a death benefit.
The life/LTC combo product only needs to price the LTC component of the policy to cover the risk of paying that death benefit earlier than life expectancy due to a qualifying LTC need. Make sure that clients are aware that all guarantees and benefits of the insurance policy are subject to the claims-paying ability of the issuing insurance company.
Costs of these riders also have ceilings that do not exist with standalone policies. Not only are life/LTC combo products built with guaranteed rate ceilings, there are also combo products available that can guarantee the premium can never go up. Combo products with this type of stability will generally be attached to life insurance products that offer some type of no-lapse guarantee or extended death benefit guarantee rider (another optional rider offered for an additional cost).
It's important for clients to understand that long term care riders may be known by different names in different states, may not be available in every state and have additional charges associated with them. A life purchase should be based on the life policy, and not optional riders or features. The cost of a rider may exceed the actual benefit paid under the rider.
There are multiple solutions available today to meet a client's desire for long-term care coverage. There will always be clients who prefer to customize a plan with traditional standalone LTC policies, but for those clients who don't want to risk price adjustments or the chance the product may never be used, linked solutions such as life insurance with a long-term care rider may provide an answer that covers LTC worries without compromising on other concerns.
Shawn Britt, CLU, is director of advanced sales with Nationwide Financial Services in Columbus, Ohio.
1 National Underwriter - "LTC Producers React to Hancock Rate Hike" Sept. 23, 2011
2 National Underwriter - "Guardian to Leave LTC Insurance Market" February 7, 20111FAX 614.737.0669
3 Financial Advisor - "Long-Term Headache" February 7, 2011
4 National Underwriter - "AALTCI: LTC Insurers Pay $11 Million a Day" January, 31, 2011
5 LIMRA 2010 Long-term Care Study