Posted 4/25/2011 12:00 am
Updated 11 months ago
With the aging of the baby boomer generation, long-term care insurance is experiencing a significant increase in popularity.
Those who cared for their elderly parents without assistance are seeing the value in what a policy can offer. But many questions surround the policies because so few people have first-hand experience with this evolving offering from the insurance industry.
Cost and coverage can be affected by everything from a person's age and gender to what kind of care he needs and what age he is when he purchases his policy. Several options are available for consumers looking to purchase long-term care, such as traditional long-term care policies or life insurance policies and annuities that offer long-term care benefits.
Dan Honey is the deputy commissioner of the life and health division of the Arkansas Insurance Department, and he has been following the surge of interest in long-term care policies.
"It's obvious with the aging of the population and baby boomers moving into senior citizenry that this is a product that has become more popular over the years," Honey said. "It is a relatively new product. It was really first developed in the '80s and '90s."
As with many new products, Honey said, at first, insurance companies were unsure how to package long-term care. "One thing that we have seen over the years and what has been a trend in long-term care is that, because it was a relatively new product back in the '90s, companies were not real sure how to price it. So we have had quite a few companies that underpriced their products, and they're starting to ask for a lot of rate increases."
Honey said that the trend of rate increases was related not only to actual market experience but also because people were living longer. "Companies have a better idea of what the lapse rates are and the mortality rates," he said. "People are living longer, and as people live longer, there are more people that are filing claims because they need the policy rather than people passing away."
More than 20 companies are certified to sell long-term care insurance in Arkansas, including State Farm Insurance, New York Life Insurance, John Hancock and Genworth Life Insurance, which have the largest market share.
Variables Complicate Pricing
Olin Wage, a senior vice president with Stephens Insurance of Little Rock, said that determining the cost of a policy could be difficult because so many variables are involved. "Some basic factors include the age, gender of the insured and their insurability," Wage said in an email to Arkansas Business. "Certain policy provisions and riders can influence premiums. There is not a 'One Size Fits All.'"
A study conducted by the American Association for Long-Term Care Insurance found that the cost of comparable coverage can vary by as much as 40 percent from company to company.
A traditional long-term care policy, Wage said, can be designed so that premiums are paid in 10 years or over a lifetime. Most policies also offer a consumer the ability to designate a specific benefit period, such as three years, six years, 10 years or a lifetime.
A traditional life insurance policy that includes long-term care benefits is designed a little differently, so that long-term care benefits are a percentage of the death benefit. "For example," Wage said, "if the death benefit is $100,000 and a percentage of 4 percent is paid, the monthly benefit generated would be approximately $4,000 ($131.50 daily) over 50 months, equaling $200,000 in benefits."
Annuities allow consumers to choose benefit periods of three, six and nine years and are usually available for those aged 40 to 80.
Policies can vary, too, in what services they cover. Most cover the cost of home care as well as that of nursing care facilities. "Coverage is broad," Wage said. "Benefits can be paid for skilled services, home health aides and personal care attendants, homemaker services, chore services, hospice care and adult day care. Other benefits are also available, such as respite care, caregiver training, equipment and home modification and alternate care. Facility care can include assisted-care facilities, nursing homes and bed reservation benefits."
Jesse Slome, executive director of the American Association for Long-Term Care Insurance, said that there was a basic formula for determining how to buy.
"You look at how many dollars you want per day in care times how many days you want it," he said. "That becomes the multiplier to figure out how much money your initial pool of benefits is. Then you add a growth option. Your pool of money today grows into the future." For example, a 55-year-old person who wanted $150 a day in care for three years and chose a provision for inflation growth at 3 percent annually would have an initial benefit pool of $169,000. At age 70, the value of that person's protection would be $263,000.
Slome said that planning for the future could be deeply personal and difficult to confront, but he said it was important to get a head start. "Here is the thing that consumers don't know and that they need to know: You must look at this while you're healthy and can qualify. People are not aware of that."
The sweet spot, Slome said, is between ages 55 and 62. "If you plan later than that, there's a very good chance that you will not have qualified," he said. "Seventy percent of 80-year-olds that submit an application are denied."
Experience as Caregivers
Emily Sneddon, a partner at the Little Rock law firm of Mitchell Blackstock Ivers & Sneddon, said her experience as a caregiver for her parents influenced her decision to purchase a long-term care policy. In that way, she is typical.
"When I spoke with my insurance agent about purchasing long-term care insurance, he told me the majority of his clients who inquired about this were middle-aged people who had been caregivers for their elderly parents," Sneddon said.
Sneddon began shopping for long-term care by acquiring information from the Arkansas Insurance Department. "I decided I wanted to go with a company that wrote a whole lot of other insurance business," she said. "A company with a lot of assets, because when all the baby boomers start making claims on this policy, it's going to be huge. I wanted a company that had the assets to be able to pay this."
Sneddon purchased her policy from State Farm, where she also has other kinds of insurance.
After exploring the different kinds of provisions, such as inflation protection or a steady rate, Sneddon purchased a policy that will hold some value even if she stops paying for it, but can only be used for long-term care. "My thinking on this was, I'll go ahead and get this policy and pay on it while I'm working. It accrues a maximum worth of benefits. If I quit working, my income goes down and I quit paying for it, I'll still have a certain amount of money solely for long-term care. If I never need long-term care, then the money is gone."
Long-term care policies have a reputation as somewhat of a luxury item, and Sneddon said she thought it would be difficult for most people to afford long-term care insurance. Honey, however, thinks that they're aimed at a middle-class individual.
"If you're a low-income individual with very few assets, you would probably qualify for Medicaid if you needed long-term care," he said. "If you're a very wealthy individual you should be in a situation where you would be able to self-fund a situation where you would need long-term care. I think these are kind of a midrange type of product."
Honey cited his mother, a retired teacher, who purchased a long-term care insurance policy in her early 60s. A few years later her financial situation improved to the point where she decided to let her policy lapse and cover any long-term care needs that she might have out of her personal finances.
Slome said that while a person with little or no savings would have to depend on Medicaid, those with more income can make a personal choice. "If you have some savings, $150,000 to $200,000 or more, then you really need to look at some modest coverage," he said. Millionaires, on the other hand, can choose whether they want to purchase a policy or pay out of personal finances if the need arises.
"The thing I tell people," he said, "is that some coverage is better than no coverage. You should approach the purchase of long-term care insurance the same way you approach other insurance protection."