The long term care insurance industry has been very slow to realize that most Americans are unwilling to pay the high premiums charged today for a policy with robust benefits…benefits which would cover a future long term care scenario of many years.

The cost of a policy has tripled over the last twenty years, but the average cost of a policy sold has only increased by one percent per year…from about $ 1,800 to about $ 2,400 over twenty-five years. That indicates severe price resistance!

The insurance carriers now realize that their products are not very saleable. They see the huge sales decreases in long term care insurance…a 70% decrease over ten years. Unbelievable considering the growing need, but true. So what are they doing about it?

We’re beginning to see several significant changes. First, the carriers are stuck with their current products. It takes many months to design a new product, file all its parts, receive department of insurance approvals, normally after several revisions, and bring the product to market. So what are they doing to stimulate sales of their current products?

They’re encouraging agents to promote smaller benefit structures. To Promote lower premiums. To promote partial coverage. To minimize the impact of inflation riders by assuming rates of inflation below five percent. To try to cover only the majority of scenarios, which will not take place in expensive nursing facilities. To sell limited pools of money rather than years of coverage. And to sell younger and healthier prospects.

These are all good ideas, but markets don’t change quickly. Many people still want to insure the catastrophic risk, and are not satisfied with a partial transfer of risk. People that are middle age or younger still have current, pressing obligations, such as paying off mortgages and paying for their children’s education. Denial and procrastination are still prevalent. These ideas will be of limited help to agents.

The second change is the design of limited benefit, pool of money products. Current examples are new products offered by Life Secure, Med America, and Transamerica. Their design is to provide short-term benefits but with traditional long term care insurance definitions, benefit qualifications, and claims administration. These products cost less, but the lower benefit limit structures have yet to be accepted by many of the older long term care insurance specialists.

Agents who sold long term care insurance ten and twenty years ago did not realize what a terrific discount they were giving their clients. In many cases, it was equivalent to selling a new $ 30,000 automobile for about $ 18,000…or less. Now, they have to essentially sell that $ 30,000 automobile for $ 30,000. The policy is still a fair value, but not the terrific discounted policy sold heretofore.

The third change is the entry of a relatively new group of carriers, most of them “B” rated by A. M. Best, and in a limited number of states, with products mainly offering home health care benefits. In general, benefits are limited, but the underwriting is liberal.   Brokers are especially reluctant to sell these products because their E & O insurance normally will not protect them if a “B” carrier becomes insolvent. However, some of these policies could gain traction over time, and their progress should be watched carefully.

The fourth change is the somewhat successful promotion of linked-life/LTC and linked annuity/LTC products. The intrinsic value of these products is not well understood, and I want to go into some detail explaining them as I see them. These products have a major advantage over traditional long term care insurance in that the policyholder will receive a benefit no matter what…a combination of a death benefit, a long term care benefit, or their money back if they cancel the policy. Their disadvantage is that you don’t get two benefits for the price of one, even though it appears that way. The life insurance or annuity value grows at a very low rate, a rate approaching CD rates. Therefore, they are poor life insurance or annuity vehicles. However, with an extension of benefits rider, one can create a robust long term care benefit, thus making these products a bona fide substitution for traditional long term care insurance.

Carriers like these products more than traditional long term care insurance. Why? Because more of the policyholder’s money is used to pay a claim.   I have not priced out what follows, but I believe this theoretical example demonstrates what I want to show, so here goes. If one purchased a traditional long term care insurance policy for an annual premium of $ 2,500, the investment would be $ 75,000 over thirty years. The return on that money less expenses would yield the carrier at least another $ 35,000, making the total of the policyholder’s portion of a claim at least $ 110,000. This would be the money that the carrier would use before paying any money of its own. The benefit limit of the policy with inflation could be around $ 500,000, so the carrier’s portion of the claim could be as much as $ 390,000.

Now, if one purchases a linked life/LTC insurance policy for $ 100,000 with a death benefit of $ 166,667 with a triple benefit for long term care expense, the benefit limit of the policy could be $ 500,000. At the same investment yield, the carrier’s return on the $ 100,000 less expenses would yield the carrier at least another $ 46,667, making the total of the policyholder’s portion of a claim at least $ 146,667. Thus the carrier would have $ 36,667 more of the policyholder’s money before paying any money of its own in a claim. Then assuming a long term care claim of less than $ 166,667, or no long term care claim at all, if the policyholder died after thirty years, the carrier would only have to pay $ 20,000 of its own money to pay the $ 166,667 death benefit in full.

These changes in product are already on the street, at least in most states. What is less clear is the new long term care solutions that the carriers are creating. We have some hints, plus we can speculate. I’ll do this in another blog.


Louis H. Brownstone is the Chairman of Northstar Network Insurance Agency, Inc. and a certified in Long Term Care specialist. Louis is recognized as an industry leader, with articles appearing frequently in California Broker Magazine and other industry publications and events. Read More…