The Miserable State of Long-Term Care Insurance

Americans who recently turned age 65 face a 52% chance of needing long-term care, according to the May 2016 study, “The State of Long-Term Care Insurance: The Market, Challenges and Future Innovations” by the National Association of Insurance Commissioners and The Center for Insurance Policy and Research. Because they live longer, the percentage for women (58%) is higher than for men (47%). The average length of a nursing home stay is one year for men and 1.5 years for women. While 15% of those turning 65 between 2015 and 2019 will spend in excess of $250,000 on long-term care, 58% will spend less than $25,000. The 2017 national median annual cost of a private room in a nursing home is about $97,500, according to the Genworth Annual Cost of Care Survey. Costs vary immensely depending on the type of care (skilled, intermediate, or custodial) and the geographic region (a room in Manhattan will cost about triple that of Monroe, Louisiana).

A recent article in Financial Advisor magazine, “Some Doubt LTC Insurance Industry’s Future as Premiums Spiral Upward” showed just how much conditions have deteriorated in the LTC insurance market. All of the companies that entered the market in the prior century underpriced their policies due to overly optimistic actuarial assumptions, including claim frequency, interest earned on reserves, mortality, and lapsation rates. LTC can be considered the poster child for the concept of adverse selection—those who are more likely to utilize it are more likely to buy it.

The largest player in the industry, Genworth, just received approval for a 58% rate increase in 22 states for some of its policies. This is on top of 28% increases it received in each of the past two years. According to company spokesperson Julie Westermann, Genworth has lost $2.9 billion cumulatively in long-term care insurance and continues to lose money every year. Results like these have prompted about 90% of LTC issuers to exit the market over the last two decades, and the remaining companies are not picking up the slack. Standalone LTC insurance is a dying market.

In meeting long-term care needs, there are several alternatives to standalone LTC policies. First, people can simply self-insure by saving and investing what they would have spent on insurance. This option especially makes sense for high net worth investors. Second, some life insurance policies offer an accelerated death benefit that may be utilized for end-of-life care. Finally, an annuity with a long-term care rider may offer a payout for long-term care expenses after the account value has been fully exhausted. Regarding this vehicle, Scott Olson of LTCshop.com admonishes, “There are many drawbacks to buying an annuity with a long-term care rider. The opportunity cost is high because the return on the annuity is usually less than 1%, often 0%. With some of these annuities the return is negative every year. In addition, someone who puts $100,000 into one of these annuities is essentially buying a $100,000 deductible; the buyer has to use all the money that was paid in before the insurance company starts using its money.”

At Clarity Capital Advisors, we have been extremely reluctant to advise our clients to purchase long-term care policies, as they have proven to be unreliable. Those who do purchase LTC insurance should be careful to not over-insure themselves. A common mistake is paying for a shorter elimination and longer benefit period than needed. It is important to note that many who require long-term care do not have to commit to a nursing home, so a policy with a reasonable payout for home health care services is advisable. Given the high rate of inflation of health care expenses, inflation protection is a valuable benefit.

Although we do not sell insurance products, we are happy to discuss your insurance planning needs with you. Please call us at 800-345-4635 or email us at info@clarityca.com.