New products could deepen the pool of potential residents, but better public policies and more consumer education are needed.
By Jane Adler
Long-term care insurance is in the midst of a massive shift that might eventually expand the number of individuals covered by the policies. That could be good news for seniors housing and care operators seeking more residents with enough funds to pay the bills.
Once sold as a simple pay-as-you-go policy, something like auto insurance that kicks in when needed, long-term care insurance is now available with a variety of options to help more people.
New hybrid products combine long-term care insurance with an annuity or life insurance policy. Consumers can purchase short-term care insurance to cover less than 365 days of help.
Another option allows for annuities to be purchased when the insurance is needed most — when the senior is ready to move into an assisted living facility instead of years in advance.
The market could also get a boost from the sale of long-term care insurance as an employee benefit at work that is packaged in a group plan to reduce costs.
While product innovations could help more individuals afford assisted living, the insurance industry and policymakers are looking ahead to find solutions to the problem of how to finance long-term care, especially for those who cannot afford insurance or who don’t have enough resources to pay for their own care.
The financing problem was further highlighted during the recent healthcare debate in the U.S. Congress. Several of the unsuccessful healthcare proposals included sharp cuts to the Medicaid program, which pays for the care of 64 percent of all nursing home residents.
“The market is going through a transformation,” says Debapriya Mitra, vice president of business strategy at Genworth Life Insurance, a large provider of long-term care insurance based in Richmond, Virginia. “But there is no one silver bullet or one-size-fits-all [approach] to provide long-term care.”
There’s wide agreement that the growing senior population will need more help to pay for long-term care (see sidebar, page 51). The median price nationwide in 2016 for assisted living was $3,600 a month, according to the Genworth Cost of Care Survey. The median cost for a private room in a skilled nursing facility was $7,700 a month.
Insurers take their lumps
Long-term care insurance was introduced in the 1970s to help seniors pay for their care. But insurance companies made some faulty assumptions that eventually forced many of them to leave the market over the last five years, say industry observers.
About 10 major insurance companies continue to market traditional long-term care policies.
Insurers got into trouble because they underpriced policies and failed to correctly project the cost of care. They underestimated how long people would live and overestimated how many people would let their policies lapse.
Low interest rates were another factor, making it difficult for the insurers to build the reserves needed to pay claims, according to Marc Cohen, senior advisor at LifePlans, a risk management research company based in Waltham, Massachusetts.
The downward spiral continued as companies raised rates to make up for losses, thereby further suppressing sales. “A lot of factors have made the traditional product harder to sell,” says Cohen. “But the need for the product has not gone away.”
Long-term care insurance is expensive. A 2015 LifePlans study showed that the average annual premium for a traditional policy was about $2,700, an increase of 42 percent from 2005, and a 19 percent rise from 2010. Some 82 percent of the buyers had liquid assets of more than $100,000, or enough money to afford the insurance.
Policy pricing depends on a number of factors, such as length of coverage and the amount of the daily benefit.
It’s important to note that about 40 percent of those who apply for traditional long-term care insurance are declined, often based on pre-existing health conditions. Also, people must generally apply before age 75 in order to qualify for a policy.
Unpaid claims can be a concern for assisted living and skilled nursing operators, but more than 90 percent of policyholders who file for benefits receive payments, according to a study by LifePlans.
Many of the cases of unpaid claims are caused when a claim is made too early, in other words before the person qualifies to receive the benefit. Most policies require the person to be unable to perform at least two activities of daily living. If they are only unable to perform one activity, they won’t qualify until they need more help.
Also, there is a waiting period of usually 90 days before benefits are paid. This is to make sure the disability is not a short-term situation.
“There’s very little evidence to suggest that claims are not being paid,” says Cohen.
Home care claims mount
About 8 million people currently have some type of long-term care policy, according to the American Association for Long-Term Care Insurance (AALTCI) based in Los Angeles.
In 2016, long-term care insurance companies paid $8.65 billion in claim benefits to about 280,000 individuals. The number of individuals who received benefits from traditional long-term care policies in 2016 increased by roughly 20,000, a 7.7 percent jump from the previous year.
Most of the long-term care insurance claims currently being paid are for home care, according to the AALTCI.
Among those who hold traditional-type policies, 52 percent of new claims opened in 2015-16 were used for home care, 20 percent for assisted living, and 28 percent for nursing care. Women represented 68 percent of the claimants.
Policies were originally sold only to cover nursing home costs. That started to change in the mid-1990s when home care was included in coverage.
Insurance provider Genworth says about one-third of its claims are for payments to assisted living facilities. “Home care is cheaper,” says Mitra, explaining that many people start with home care, and then eventually move to an assisted living facility and use the benefits to pay for care. “It’s an important source of private payment to these facilities,” he adds.
In general, about 15 to 20 percent of residents at senior living communities have the insurance, according to industry sources, though some report as few as 5 percent of residents hold the coverage. Assisted living personnel often help residents and their families complete some of the paperwork needed to file a claim.
“We’re seeing less use of the insurance policies since a number of companies exited the market,” says Jay Hibbard, senior vice president of sales and marketing at Covenant Retirement Communities.
The nonprofit organization, which is based in Skokie, Illinois, owns and operates 15 retirement communities in 10 states. Hibbard figures about 15 percent of Covenant residents rely on the insurance to pay at least part of their fees.
Hybrid products catch on
The number of policies being purchased each year has held relatively steady, but the type of policies being bought by consumers has changed.
Approximately 400,000 policies are sold each year, according to the AALTCI. Traditional or so-called stand-alone policies that only cover long-term care accounted for about 91,000 of total sales last year.
About 300,000 policies sold last year were of the hybrid type, which are linked to life insurance or some kind of annuity.
Five years ago, the situation was reversed. About 75 percent of the policies sold then were the traditional type, and 25 percent were some kind of hybrid policy.
Since 2007, annual sales of hybrid policies have grown from $600 million to $3.6 billion in 2016, according to LIMRA, a research firm that serves the insurance industry.
Consumers have turned to hybrid policies because they get something in return, for example a death benefit, even if they don’t use the policy for long-term care.
Sales of short-term insurance for six months or a year of coverage are on the upswing too. These policies are an option for those who can’t afford traditional long-term care insurance, which typically provides coverage for several years.
The average annual cost of short-term insurance was $1,043 in 2015, a 20 percent increase over the prior year, according to the National Advisory Center for Short-Term Care Information, a sister group of the AALTCI. “Some protection is better than none,” says Jesse Slome, executive director of both groups.
Others agree. “It’s important to have a basket of products to cater to a wide array of consumers based on their needs, but everyone should have a plan,” says Mitra at Genworth
In 2016, Genworth introduced an immediate need policy. It is meant for those who can’t qualify for traditional long-term care insurance because they’re already in poor health but need help now. “A product like this guarantees a lifetime of income,” says Mitra.
The product has a single payment premium of anywhere from about $50,000 to $1 million. “This is not a product for the masses,” says Mitra. It is aimed at a consumer who is looking to convert an asset, such as the proceeds from the sale of a home, into a monthly income stream.
The wide variation in premiums is due to the fact that applicants are underwritten based on their particular age, gender and health status, along with the options they select, so the income generated is unique to that individual.
To qualify, a nurse conducts a medical review, but no additional medical tests are required.
The product is gaining traction, says Genworth’s Mitra, though he declines to share any specific sales data. “We see this as an unfulfilled part of the market. Any new market takes time to develop, and we have the patience to do that.”
The seniors housing industry and insurers share common ground, adds Mitra. “The provider and financing community should be working together,” he says.
A starting place is consumer education about how to pay for long-term care since many people mistakenly believe Medicare or private health insurance will pay the bills.
Policymakers seek a solution
Interest groups are working on new solutions to address the problem of the costs of long-term care, especially for the vast majority of middle-class Americans.
The Bipartisan Policy Center issued a 2016 report with a series of recommendations on long-term care financing. Some of the ideas included:
- giving employers incentives to offer affordable long-term care insurance as a benefit;
- allowing workers to withdraw from retirement funds without tax penalties if the money is used to buy long-term care insurance;
- allowing Medicare Advantage plans to sell long-term care coverage.
- and allowing the health insurance exchanges to sell the policies.
“We would like the federal government to incentivize people to save and plan for long-term care,” says Maribeth Bersani, COO, at Argentum, the assisted living industry association based in Alexandria, Va.
Another idea is to establish savings funds, similar to 529 college plans, earmarked for long-term care. “There is a need to incentivize people to take personal responsibility and save if they can for long-term care,” says Bersani.
Respondents to a recent study conducted by LifePlans indicated that they would be interested in buying a policy if their employer offered it, and if the premiums were tax deductible, says Cohen. But greater public support is needed for a lasting solution to the problem of high long-term care costs, he says.
Cohen foresees a public-private partnership structured something like Medicare with wraparound private insurance supplements. Under such an arrangement, the individual would be responsible for the financial liability associated with the first two years of care or some other predetermined length of time.
Ultimately, the cost of long-term care would be paid for by a combination of personal savings, family support and/or private long-term care insurance.
After two years, the government would pay benefits through the establishment of a new public insurance program covering long-term care. Individuals would pay a premium during their working years to establish this new program.
Something crafted along those lines for long-term care could work, says Cohen. “I fear the current long-term care insurance policies are becoming a niche product for wealthier Americans who frankly don’t have the biggest need for the product,” he says. “We need something for the middle market.”