New strategies for covering long-term care costs

Many policy experts view long-term care as one of the most important unsolved pieces of the nation’s health-care puzzle. In 2013, a politically divided Congressional Commission on Long-Term Care offered up two visions for solutions reflecting the commissioners’ ideological differences: Left-leaning members proposed expansion of Medicare to cover long-term care; right-leaning members advocated tax incentives and regulatory reforms aimed at stimulating wider use of private LTC insurance policies.

Some have advocated a middle-ground approach mixing private insurance with our large government-sponsored social insurance system–for example, opening the door for insurance companies to offer LTC coverage through Medicare Advantage plans. Another idea is to streamline LTCI plan offerings into a short menu of understandable options, and offer them through a tightly regulated federal marketplace, similar to how Medigap plans are sold today.

The Society of Actuaries recently published a series of papers examining ways managing the impact of long‐term care needs and expense on retirement security. Researchers evaluated everything from traditional LTCI policies to the extent to which seniors can depend on family and friends for support, tap home equity, and even have greater flexibility in tapping 401(k) and IRA accounts to pay for LTC.

Financial planner Michael Kitces stirred the pot recently by proposing to reform LTCI to cover only high-impact, low-probability events. He proposed that the industry begin offering two- or three-year deductibles instead of the three-month that is typical now. That would bring premiums down dramatically, permitting policyholders to use the significant premium savings that result to cover their care during the elimination period (the amount of time you wait for benefits to begin after filing a claim). That would require changed thinking in the industry, Kitces acknowledges–and also by states, which regulate insurance. Most states require LTCI elimination periods of no more than 365 days by law.

“Everyone fears these ultralong nursing-home events, but they are not the norm and don’t happen as long as we think or thought they do,” Kitces told me in an interview. “The stays tend to be a shorter event or series of shorter events bouncing in and out of care–and once people go into a nursing home, they don’t stay there very long.”

Hybrid Plans

The only way you can get this type of coverage, he notes, is by using a hybrid life insurance/LTCI policy. These are universal life-insurance policies with an optional LTC benefit rider. “It’s structured to pay benefits first from your own cash value and then from the insurance policy–so they function as high-deductible policies.”

Sales for these policies rose 18% in 2013 (the most recent available annual sales), according to LIMRA, the industry research and consulting group. Meanwhile, sales of new traditional LTCI policies were down 30%.

These hybrid policies hold appeal because so many potential buyers of traditional LTCI dislike the idea of paying premiums on a policy they may never need. That view misses the point of an insurance policy, of course, which is to insure against a risk that may or may not transpire. But another appeal of hybrids is that they inoculate buyers from the risk of steep premium increases via a single upfront payment.

Kitces is skeptical about that argument. He notes that the underwriters control the cash value and are under no obligation to pay a going rate of return in a rising-rate environment–instead, they can simply underpay on rates for your cash value. “It’s an emotional response,” he says. “I don’t want to pay $3,000 a year in premiums for a traditional policy, but I’ll give an insurance company $100,000 for a universal policy and forfeit any growth for the rest of my life.”

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