By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
I caught the tail end of a radio program recently as the hosts were talking about the need for long-term care (LTC) insurance for every new retiree. They both praised LTC and continually promoted the statistic that 70% of Americans will spend at least part of their lives in a care situation.
I considered that statistic as I reviewed the state of the LTC business in the U.S. Here are some facts:
- Reportedly, 10,000+/- baby boomers are retiring every day. That is 3.65 million per year.
- According to an article in the December 5 issue of The Wall Street Journal, “Insurers’ Collapse Reflects Woes of Long-Term Care,” approximately 105,000 LTC insurance policies were written in 2015. That is approximately 2.9% of the number of annual retirees.
- To compare, in 2002 nearly 800,000 LTC policies were written and there are roughly 7.2 million LTC policies in force today. According to the Social Security Department, over 43 million U.S. residents age 65 or older received benefits last month. This means that under 17% of Social Security recipients have LTC insurance.
- Current LTC owners face the prospect of large increases in premiums or reduced benefits as insurance companies can’t figure out how to price and manage their LTC portfolios in order to generate attractive profits.
The Wall Street Journal article also talked about the current status of LTC insurance carriers. Some more facts:
- Penn Treaty American Corp has two insurance units that focus on LTC. These units have about $600 million in assets and project liabilities that exceed $4 billion. They are going bankrupt and are being liquidated. Other insurance carriers will take over most of the liabilities of these companies, but as many as 10% of the 79,000 Penn Treaty policy owners could lose some benefits.
- John Hancock, a large and financially stable insurance carrier, announced last month that it will stop selling LTC. Prudential stopped writing new LTC policies in 2012. That leaves a limited number of financially sound insurance carriers left selling LTC.
Why is offering LTC unprofitable for insurance carriers?
It turns out that almost every major assumption that their actuaries made for pricing their LTC policies was wrong.
- The actuaries underestimated the percentage of policies that would be cancelled every year without a claim. They guessed that 5% of policies would be cancelled. The average amount is under 1%.
- The interest rate that the LTC insurer could earn on the LTC premiums was wrong. In the 1990s and early 2000s the insurance companies guessed that their earnings on premiums would be around 7% per year. The average return for an insurance carrier is about 3% per year.
- The percentage of LTC holders that actually use the benefits was under estimated. The people who have purchased an LTC policy have been better predictors of their future health than the actuaries.
So now we have more people than ever before in the U.S. who need LTC, but the premiums
are rising or their benefits are being cut.
What will happen to LTC in the future?
A few scenarios seem most likely to me:
- The number of insurance companies offering LTC will further be reduced to just a few. Premiums could skyrocket because lack of competition reduces pricing and underwriting pressure on the surviving LTC providers. Most new retirees won’t be able to afford to buy LTC so they go without and the number of new LTC policies sold in the U.S. drops to just a fraction of the 2015 numbers.
- Millions of retirees use their last savings in nursing homes or other facilities and Medicaid takes over paying for their LTC costs. Billions are spent on this program and the deficits of state budgets grow.
- Some years from now Congress realizes that the current market-based LTC system cannot be sustained. LTC providers, state insurance carriers and the federal government get together to try to create a simpler, more cost-effective product. Will they succeed?
Whatever happens to the LTC market, the challenges of buying and keeping a long-term care policy will only continue to grow.
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