Fresh approaches to paying for long-term care

The minimum investable amount is $50,000. Households with limited investable assets would need to seriously consider the potential risk of reduced liquidity and flexibility by locking up a significant portion of  investable assets in an annuity.

Another worry is that Genworth is marketing its long-term care annuity to a customer base more likely than average to be experiencing cognitive decline. The company acknowledges this issue, noting that it has created several “suitability” review procedures that brokers must follow in determining when a policy can be sold.

“We are acutely aware of this,” says Debapriya Mitra, senior vice president of business strategy for Genworth’s U.S. Life Insurance Division. “You want to be absolutely sure that people understand what they are buying.”

And Mitra acknowledges that solutions like this are far from ideal.

“This is not the greatest thing since sliced bread — it’s not,” he says. “We’re trying to address a gap for people who haven’t planned ahead but are facing a long-term care need today.”

Another product that targets older buyers–but has been in the market for some time–is so-called short-term insurance, which is structured very much like long-term care insurance, but provides coverage for one year or less. While long-term care insurance sales have flagged, short-term care insurance sales held their own or grown. At Bankers Life, which has sold short-term care for more than 20 years alongside long-term care insurance, short-term car insurance accounts for roughly 65% of sales, up from 50% five years ago, says Brian Millsap, vice president, long-term care product management. Overall, short-term care sales rose 19.6% last year, according to industry data.

The average short-term care insurance buyer is 68–about 10 years older than typical long-term care insurance buyers, Millsap says. A married couple age 65 could purchase a policy from Bankers Life for $2,440 annually that would provide $150 in daily benefit for 360 days. That pricing doesn’t include inflation protection, and only 10% of short-term care insurance buyers select the 5% compound inflation option, Millsap says.

“We’ve designed it to be a simpler product, with fewer options–also, the time horizon for using this is shorter than it is with LTCI.”

Short-term care insurance certainly can save some money–a married couple age 60 can expect to pay an average of $3,560 annually for an long-term care insurance policy, according to the American Association for Long-Term Care Insurance. But at $2,440 a year, the premiums for short-term care insurance still add up to a hefty $24,440 investment over a 10-year period–and no one can predict whether a care need will be short or long, so the benefit could easily wind up being inadequate.

Like long-term care insurance, short-term care underwriters can apply to regulators for premium hikes after policies are sold, but Millsap says the Bankers Life product lines have enjoyed stable premiums over the 20 years they have been sold.

“We have had three generations of products over that time–one that we sold in the early 2000s has had a rate increase, but the ones we sold before that, and since, have not,” he says.

Meanwhile, New York Life is rolling out NYL Secure Care, a long-term care insurance product that leverages the company’s mutual insurance structure. Since policyholders are owners, Secure Care is structured to allow them to benefit from potential dividends in a rising interest rate environment. Rock-bottom interest rates have been a key problem for long-term care insurance underwriters, since it hurts their ability to earn adequate returns on their bond-heavy portfolios.

If interest rates rise, starting in the 11th year of the policy the dividends would offset premiums–potentially eliminating the premium entirely in 20 or 30 years.

John Hancock is trying something similar, rolling out a “Performance long-term care policy.” The idea here is to bring down the cost of long-term care insurance premiums by offering potential “flex credits” if investment and claims results are favorable. Unlike New York Life, Hancock doesn’t have a mutual structure and may well “face a fundamental conflict of interest in deciding how much to pay as a Flex Credit to policyowners, versus a dividend to shareholders,” as Michael Kitces, director of research for Maryland-based Pinnacle Advisory Group, puts it.

What’s next?

Product innovations like the ones described above–no matter how well intentioned–aren’t likely to be game-changers in the long-term care insurance market.

For that, look to the broader proposals laid out by the bipartisan research studies released this year. All would require Congressional action,  which won’t happen in an election year. But it’s encouraging to see the groundwork being laid now for a serious policy discussion on how we pay for long-term care in 2017, when we will have a new president and Congress.

Here’s hoping for progress soon. The baby boom generation isn’t getting any younger, and the country’s age wave is increasing pressure to develop solutions.

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