As Long Term Care Insurers abandon the marketplace what other options will step forward?

Less than twenty years ago there were dozens of major insurance companies selling long term care insurance (LTCi).  Today there are less than thirty.  The paradox is why just as Baby Boomers started turning 65 at a pace of 10,000 per day, the LTCi market is shrinking instead of “Booming”? 

Market Disruption

The list of companies that have abandoned the LTCi market is a who’s-who of insurance industry giants: MetLife, Prudential, AIG (American General), Guardian, UNUM, Allianz, and CNA to name just a few.  When MetLife announced they would be exiting the market it was a shock as if General Motors announced that they would no longer be selling automobiles.   But why would the companies that pioneered LTCi from the beginning abandon the market just as the 72 million Baby Boomers started entering their retirement (and prime long term care planning) years?  The reasons given boil down to some simple economic and demographic facts that we were not accounted for in the early years of selling this product.

Among the challenges that LTCi insurers faced is the simple fact that they sold the product at too low a price in the hunt for market share.  Without sufficient premium payments coming in, they could not weather unexpected developments like longer life expectancies than had been predicted requiring the insurers to continue making benefit periods for extended timeframes.  Also, unlike life insurance which has a high abandonment (lapse) rate, owners of LTCi held onto their policies and kept making premium payments until they could collect their promised benefits.  LTCi companies bet wrong when they priced their products by assuming people would live for shorter periods, and that a great many more would abandon their policies before they started collecting benefits.

 

The impact of these challenges has driven major insurers out of the market and forced others wishing to continue offering LTCi to raise rates not only on future sales; but for existing policies as well.  According to the 2012 LTCi Index, policy premiums have been increasing at an annual rate of 17%.  Two of the largest remaining insurers selling LTCi recently announced rate increases that would raise premiums on policies already sold in some cases by almost double.  John Hancock will raise rates between 40%-80% and Genworth announced increases between 25%-50%.  In a statement released by Genworth about the increases, Martin Klein, Genworth's acting CEO said, "We must rebuild value for shareholders."

In an article written by Dave Lieber for the Fort Worth Star-Telegram, he interviewed Anna Emmons, 75 years of age, who has owned a John Hancock LTCi policy for ten years.  The rate increase means her monthly policy premiums would go up 64% from $151 to $247.  If she can’t afford that increase, her choices for the policy going forward include abandoning it after ten years of premium payments or reducing the benefits she originally bought to keep the premiums at a lower level.

Private Market Alternatives

Despite these market realities, LTCi can still be a viable option to help people pay for future long term care needs.  Sales of hybrid policies that offer a combination of life insurance protection that can later be converted to LTCi benefits are on the rise.  There are a number of options along these lines and consumers need to fully understand the costs involved, if rates are subject to future increases, and if the level of benefits would be sufficient to cover long term care expenses years down the road.  For people in their peak earning years (30-60) this is certainly an option to consider, and obviously the younger/healthier one is when purchasing the policy the more affordable it will be. 

But what about the millions of Baby Boomers and seniors who bought traditional life insurance policies over the last thirty years and require the financial means to pay for long term care services today?

One option that is growing across the long term care industry is the conversion of existing life insurance policies into a private long term care benefit plan.  Life insurance is legally recognized as personal property of the owner with guaranteed rights to use the policy as a “living benefit” and not just a death benefit.  The problem is that far too many life insurance policies owned by seniors will never pay a death benefit because they are allowed to either expire, lapse or are surrendered for cash value. The shame of this situation for the consumer is that the option to convert a life policy into a long term care (Assurance Benefit) plan while still alive is readily available.

Converting an existing life insurance policy into a long term care Assurance Benefit plan is not to be confused with a long term care insurance policy, accelerated death benefit (ADB) rider, annuity, or a hybrid life/LTCi product.  This conversion option allows for the private, secondary market exchange of a life insurance policy for a long term care benefit plan at the time that care is needed.  The benefit plan is a private market long term care funding option and is not issued by an insurance company or restricted to life policies that contain a conversion or accelerated death benefit rider. 

Once a policy is converted by the owner (usually 30 days), the monthly long term care benefit payments begin immediately and the enrollee is relieved of any responsibility to pay any more premiums.  Every benefit account provides a final expense benefit to help cover funeral expenses, and if the insured should pass away before the benefit amount is exhausted, then any remaining balance is paid to the family or named beneficiary as a final lump sum payment.

For Medicaid applicants, life insurance is an “unqualified asset” for eligibility and it has been standard practice for years to abandon a life insurance policy if it is within the legally required five year look back spend-down period.  But, converting a life insurance policy into a long term care benefit plan is a Medicaid qualified spend-down.  Instead of abandoning the policy and going immediately onto Medicaid, the time a person remains private pay is extended while the present day value of the life insurance asset is spent-down in a Medicaid compliant fashion—all while preserving a portion of the death benefit for the family during the extended time period. 

Any form of life insurance can qualify for conversion: universal life, whole life, term life, and group life.  The benefit plan will pay for all forms of long term care: home health, assisted living, and nursing home care.  For families with the need to pay for long term care, but are unable or unwilling to keep their life insurance policy in-force by maintaining premium payments, the life policy Assurance Benefit conversion option is a much better choice than abandoning a policy. 

Conclusion

Consumers lack preparation and awareness of how they are going to cover the costs of long term care.  It is a subject typically ignored until a loved one is in immediate need of care.  Families that need long term care are in a particularly difficult position if they have not planned with savings or LTCi.  Unfortunately, that is how you would describe the vast majority of people who require senior housing and long term care today.  We need to do all we can to educate people on how to plan for their long term care futures.  But what about the majority of unprepared people that need access to long term care today?

It all starts with education and awareness.  Millions of seniors are holding a potential solution in their hands if they own a life insurance policy.  Unfortunately they are unaware of their legal rights and available options such as a policy conversion to a long term care benefit plan.  As the word spreads across long term care providers, advisors and with the consumer; the growing use of policy conversions will begin to have a measurable, positive impact on the long term care funding crisis in Florida and across the United States.