This year, we’re inviting a handful of our most trusted colleagues to share their ideas and expertise on topics of interest to our clients. As my grandmother used to say, “Growing old isn’t for the faint of heart!” This sage observation was usually in the context of the aches and pains of declining physical (or cognitive) health and she could have easily added “Or, for the skinny of pocketbook!” because healthcare costs—especially long term care costs—continue to grow much faster than most our other expenses. Historically, long-term care insurance was one way to help offset those costs but traditional long-term care insurance providers are dwindling and those that remain are increasing their rates dramatically. Bijan Noori, our guest writer, is an expert in the life and health insurance industry and in this article, he shares an innovative development in solutions to address long-term care insurance needs.
Skilled nursing and in-home care demand and costs are steadily increasing and along with them, the cost of long-term care insurance (LTCi). Insurance premiums have increased so much that much of the traditional LTCi market has become all but obsolete. However, the demand for LTCi remains strong so innovations in insurance coverage have pushed a whole new generation of solutions to the front of the line in the LTCi space. I will discuss some of these new products and how they might change in the future.
No-Loss Products This is my term for Hybrid Long Term Care Insurance products. Unlike Traditional LTCi, hybrid products combine life insurance policies with long-term care insurance. The long-term care insurance coverage portion of the hybrid products is very similar to that of a traditional LTCi policy. If the insured cannot perform 2 Activities of Daily Living or is Cognitively Impaired, then the LTCi payout is triggered and will cover up to the monthly benefit amount for the specified benefit period.
The main differences between traditional and hybrid products are how their premiums are paid (spoiler alert: traditional LTCi policies have lower annual premiums; I’ll explain why below) and guaranteed (or not), their underwriting, and their no-loss features.
Premium payments and guarantees: Most hybrid LTCi products are paid by a single premium or various 5 to 20-year payment options (most common premium modes are Single Premium or 10-Pay Premium). I like to compare this to paying off a mortgage. The total cost to purchase a home with cash versus a 30-year mortgage is significant, but for many it is much easier to make the mortgage payments than come up with a lump sum of money. The longer you stretch out LTCi premium payments the lower the annual premium will be, but the overall amount of funding will be higher (Example: Single Premium = $10 and a 10 Pay Premium = 10 x $1.20).
The most significant difference is that at the end of the scheduled premium payments the policy is paid in full and is in-force for the insured’s lifetime. Hybrid products also have guaranteed premiums, meaning the insurance carrier cannot increase premiums during the lifetime of the plan.
Traditional LTC policies are lifetime pay products. Premiums must be paid every year until claim, policy cancellation, or death. Traditional LTCi carriers also have the right to increase premiums and often do. These must be approved state by state, but over the last 20+ years we have seen significant premium increases, benefit reductions, or both from almost all Traditional LTCi carriers and products.
Underwriting: Another under-rated difference between the products is Hybrid LTCi has created a new age of underwriting. Carriers are finding that they can thoroughly underwrite most individuals with cognitive tests, phone interviews, and medical history reviews. No more taking blood and urinating into a cup!. This cuts down the time and costs for a lot of insurers to place new business. Underwriting is now somewhat user-friendly—terms that are rarely in the same sentence!
No-loss features: The most significant feature of Hybrid products is their no- or low-loss options. There are many product options that provide both a return of premium and death benefit. It is not a “use-it or lose-it” product, like Traditional LTCi. At some point funds will be paid back out from the policy, whether it is to the insured in the form of a return of premium, long-term care claim, or death benefit to beneficiaries.
A word of caution! With all the great options that a Hybrid LTCi policy provides, I am not advocating for owners to get rid of their existing Traditional LTCi policies. Many of the grandfathered plans still offer incredible benefits with low premiums. The new Traditional LTCi plans being offered today are not as competitive, but I still encourage an analysis of all available options before making any changes.
Looking to the future: In my 13 years in the profession, I have seen many new players enter this space. While that brings healthy competition, it also brings negative trends. This last year we saw several large carriers increase their insurance rates. Once one carrier moves forward with a rate increase for new policyholders, the rest tend to follow. As with Traditional LTCi industry, Hybrid products were more robust at a lower consumer cost in the early days and while Hybrid policies will not be able to increase premiums on current policyholders, it is likely that new policyholders will pay higher premiums for less coverage in the future.
As with most decisions in life, “should I?” can only be answered after a clear understanding of your goals and a careful analysis of your situation.
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