Fresh approaches to paying for long-term care

The Bipartisan Policy Center offered a detailed set of recommendations on how to reshape commercial long-term care insurance. Its report calls for a new type of “retirement long-term care” that would provide limited benefits–two to four years after a cash deductible is met. Workers could use savings from their 401(k) plans to buy insurance, and early withdrawals for that purpose (before age 59 1/2) would be penalty-free. The policies also would be sold on federal and state health insurance exchanges. The Bipartisan Policy Center and another report (by the Long-Term Care Financing Collaborative) suggest selling policies attached to Medigap or Medicare Advantage plans.

Retirement long-term care would be offered only in three basic flavors, with the intention of keeping choices standardized and limited to avoid consumer choice paralysis.

The key choices would be daily benefit level, length of coverage, and length of waiting period before coverage begins.

The researchers believe these simplified policies would be priced at about half the cost of current private market insurance policies. Those costs now range from $2,035 annually for a single male buyer (age 55) to $2,580 for a single female buyer of the same age, says the American Association for Long-Term Care Insurance. A married couple age 60 can expect to pay an average of $3,560 per year.

All three reports propose a new federally-run “catastrophic” benefit that would shift coverage for patients with lifetime costs exceeding $250,000 to a public plan. This most likely would be housed in the Medicare program.

A catastrophic Medicare benefit would be costly. The Bipartisan Policy Center estimates that if 90% of Americans were covered, benefits paid in 2015 would have totaled $411 billion, or about half the cost of Medicare’s Part A (hospitalization) program. Some of that cost would be offset by lower Medicaid spending, but a new revenue source would also be needed–either an increase in the payroll taxes paid by workers for Social Security and Medicare, or through a “general funding” source, such as changes to the income tax or a consumption tax.

Meanwhile, the reports recognize that Medicaid continues to be the safety net for millions of Americans. Two of the reports call for modernization of Medicaid that would make the program’s long-term care coverage more flexible.

Commercial Market Innovations

In addition, insurance companies are trying some new twists on traditional long-term care insurance.

Genworth–the largest underwriter of standard long-term care insurance policies–recently rolled out a single premium income annuity product geared to provide a long-term care benefit. The IncomeAssurance Immediate Need Annuity is designed as just-in-time coverage for people with an immediate need to fund a long-term care need but who didn’t plan ahead by purchasing a traditional long-term care insurance policy. It is modeled on an existing product category in the United Kingdom called Underwritten Care Annuities; Genworth is partnering with a large U.K. underwriter of these policies.

Like any single premium income annuity, Genworth’s long-term care annuity provides lifetime monthly income payments. But since it targets an older buyer with health problems, the monthly payments can be considerably higher than a typical single premium income annuity would provide.

Genworth provides this example: an 89-year-old widower with dementia could invest $180,000 to receive $44,000 in first-year annualized income–20% to 50% more than a standard single premium income annuity would generate, according to the company. A sort of reverse medical underwriting is used–income rises with a poor health rating. There is an early-death benefit that returns a portion of the premium if the buyer dies within the first six months after purchase. Cost of living adjustment riders ranging from 1 to 8 percent can be added, as can an optional five-year death benefit feature.

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