I’m Not Sold On Long-Term Care Insurance (Yet).
Thursday, September 3rd, 2009
Have you purchased long-term care insurance yet? I haven’t. And it’s not because I’m not old enough to consider it (I’m 50) or don’t understand the product (I’ve been in the business for 20+ years). But I still have some questions about the efficacy of the coverage. By way of explanation, here are two recent articles from insurance trade publications in reference to long-term care caught my eye:
The first, from the May 18, 2009 National Underwriter announced that long-term care costs were rising again. The average annual cost of a private nursing home room in the United States rose 4.7 percent, to $74,208.
The second, reported in the August 2009 Insurance Sales Journal, declared the largest open long term insurance claim has now surpassed $1.2 million in paid benefits. The claim, which began 12 years ago, is for a woman who started receiving benefits at age 46.
What’s my take on this information?
Long-term care is expensive, whether administered in a care facility or at home. And those expenses have the potential to greatly exceed current projections. This combination makes long-term economic projections problematic, which makes insurance (of any kind) more difficult to implement.
Long-term care is essentially long-term health insurance. You are paying premiums to offset possible medical expenses, which if they occur, will most likely be incurred well into the future.
There are several factors that skew the marketplace for medical insurance. Government, through entitlement programs and tax breaks, essentially subsidizes health care. Government subsidies have a long history of inflating prices, whether in housing or medical care.
In addition, the majority of medical expenses are paid not by the patient, but insurance companies, which creates a price disconnect between the provider and the consumer. Providers charge more, and insurers pass on the cost to their policyholders, often employers. When providers and consumers do not interact directly, there is a greater chance that market pressures will not compel providers to deliver the best products at the lowest prices.
Third, there is substantial evidence that people with insurance are more likely to use it – the “want to get their money’s worth.” It is easy to see where those with long-term care insurance would have incentives to qualify for a claim, while those without would be more likely to pursue alternatives, including those more cost-effective.
In the past, these three factors result in cost increases for health insurance at a rate consistently greater than either the rate of inflation or the rest of the economy. Since long-term care insurance is a form of health insurance, it seems reasonable to expect similar increases in both costs and premiums.
A critical question for actuaries is “How much will these costs go up in the future?” While the factors mentioned above are persistent factors in cost increases, any long-term assessment of what those costs might be are difficult to assess. Which is why most long-term care policies come with a provision for premium increases at a future date (typically after 10 years).
Consider the implications of a premium increase: First, benefits stay the same, but coverage costs more. Second, because of inflation, any increase in premium without a concurrent increase in benefits means an additional loss of financial value. Third, some people will not be able to afford the increase; losing coverage is compounding by the lost opportunity costs.
One of the ways for insurers to adjust for unexpected cost increases is to deny or limit claims based on the terms of the contract. A long-term care claim is dependent on the definitions contained in the policy, such as whether one can perform activities of daily living (ADLs).
But the nature of long-term care is still developing. Initially, policies primarily covered nursing home expenses, yet recently have expanded to home care services. Considering the demographics of the baby boomers and possible advances in medical technology, who knows what long-term care will look like 10 or 20 years from now?
As an example, recall the life expectancy calculations for those diagnosed with AIDS and HIV two decades ago; most estimates were based on the disease quickly ravaging the body. Since then, new treatment protocols have greatly lengthened both lifespan and quality of life for those who contract AIDS or HIV.
These factors inevitably lead to uncertainties in pricing, no matter what insurers may say about their ability to forecast claims. When the premiums are steep and potentially open-ended, and the possibility exists that all premiums paid will not yield benefits (either because long-term care is never needed, or claims are denied because the future forms of medical care don’t match the definitions of today’s contract), there is substantial economic incentive to resist long-term care insurance.
150 years ago, the “modern” format of life insurance was a new concept. Read the histories of some of the first insurance companies operating before and after the American Civil War; many insurance companies went broke, or consolidated to stave off insolvency. It took awhile, probably 20-30 years, for actuaries and policy designers to come up with contracts and pricing that worked – i.e., workable products (like term and whole life), affordable premiums, and financial stability to deliver on promises.
The general idea of all insurance is to spread risk among a large group of people in order to manage it. Given this definition, it’s also worth considering whether everything labeled “insurance” really qualifies.
There are alternatives. If someone can afford the premiums for long-term care, using those dollars to buy the maximum amount of permanent life insurance might be a better option. Most life insurance policies include riders that authorize early disbursement of a portion of the life insurance proceeds in the event of terminal and chronic illness, and/or other afflictions that might precipitate the need for long-term care. If the policy is not needed for long-term care, so much the better; the proceeds simply add to one’s estate. And life insurance is very stable insurance product – even people with coverage have limited incentive to use it any sooner than necessary.
In the right circumstances, current long-term care policies may deliver the promised benefits. But in light of the factors mentioned above, long-term care is still a work in progress. The key factors for determining risk are still changing, as are the policy terms, and the pricing. The unsettled terms could translate to uncertain insurance benefits.