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Mark Miller: Remaking Retirement

The Long-Term Care Insurance Market Evolves

The commercial market shifts to policies combining care protections with life insurance, notes contributor Mark Miller.

It's a paradox: More Americans are worried about the risk that long-term care expenses can pose for their retirement plans, but few take action to protect themselves. The commercial long-term care insurance industry has never achieved mass market penetration levels, and sales have been falling steadily over the past five years.

Chalk it up, in part, to consumer resistance. People are reluctant to spend thousands of dollars annually on insurance premiums for a long-term care need that might come far down the road, or not at all. But the insurance industry hasn't helped itself, either. Insurance companies selling traditional long-term care insurance initially underpriced policies, leading to double-digit rate hikes on policies in force that scared off buyers.

While the traditional long-term care insurance business has been struggling, a newer option for insuring against long-term care risk is growing: life insurance policies that combine universal life insurance with long-term care protection. These life combination policies have been enjoying strong growth since the end of the recession, and they really took off after 2014, when more flexible payment options were introduced.

Traditional long-term care insurance policy sales have fallen 60% since 2012, according to LIMRA, an insurance industry research and consulting group. 

In 2016, 91,000 long-term care insurance policies were sold (the most recently available data), compared with 256,000 life-combination policies. That is up from just 86,000 life-combination policies as recently as 2012.

The worry among older Americans about long-term care risk is there: nearly half (45%) of retirees are not confident that they will be able to pay for long-term care, according to a survey by the Employee Benefit Research Institute; an even higher percentage of workers--57%--share that concern. And a poll by LIMRA in 2016 found that 44% of retirees are concerned about long-term care expenses, up from 31% in 2006.

How substantial is the risk? Federal government data shows that a 65-year-old person today runs a 35% chance of entering a nursing facility in their lifetime. Other reports have suggested the risk is higher or lower, depending on the methodology.

Recent research by Rand Corp. concludes that 56% of people ages 57 to 61 will spend at least one night in a nursing home during their lifetimes. People in this age group run a 10% risk of spending three years or more in a nursing home, and a 5% chance of spending more than four years in one.

The big financial risk lies with those longer stays. The median annual cost of a private nursing home room this year is a bit over $8,000 per month, according to Genworth's annual cost-of-care survey, and it is far higher in some states ($9,700 per month in California, for example).

But none of the commercial insurance options are making a significant difference in meeting the huge unfunded need for long-term care protection. Overall, just 12% of people in their late 50s and early 60s have purchased coverage, according to Rand.

Nationally, long-term care is funded through a patchwork system that includes Medicaid for low-income households, commercial policies for some, and crossed fingers among everyone else. Fixing that problem will require a major overhaul of our national long-term care policy, and that is nowhere on the horizon right now.

Traditional Long-Term Care Insurance
The traditional long-term care insurance market continues to decline. Insurance companies have had a tough time pricing risk accurately or profitably; that has led to repeated rate hikes on existing policies. Rate increases approved by regulators have averaged more than 20% annually in recent years, according to a study by the Society of Actuaries. Many carriers have simply stopped writing new policies.

"The companies in the market have determined that there is a lot of risk there," says Karen Terry, assistant managing director of insurance product research at LIMRA.

"With premiums going up, and the bad press over that, there definitely has been less interest in the product," adds Al Schmitz, a principal at Milliman, the actuarial consulting firm.

Some experts think traditional long-term care insurance could be entering a period of greater rate stability. The SOA study concludes that policies priced today are "significantly less likely to need future premium rate increase than any earlier product generation." Reduced industry competition has given remaining carriers more pricing power, and understanding of risk is greater. Currently, a 55-year-old man can buy a traditional long-term care insurance policy this year for $1,870, according to the American Association for Long-Term Care Insurance; a woman can buy the same policy for $2,965. A combined policy for a married couple would cost $3,000 annually.

Those annual premiums will get you three years of benefits with initial daily payments of $150 per day; the policy also is adjusted for inflation at 3% compounded annually.

Combination Policies
Combination life and long-term care insurance policies address one of the big stumbling blocks for traditional long-term care insurance: buyer concern that thousands of dollars of premium payments go down the drain if a need never arises. Combo policies pay a death benefit. Combo policies also lock in premium rates, taking the worry of big rate hikes off the table.

Combination life-long-term care products are available in three flavors:

  • A linked benefit product that accelerates the death benefit for a long-term care need and also provides the option to extend the amount payable, generally two to three times higher than the death benefit.
  • A life insurance policy with long-term care death benefit acceleration only.
  • Life insurance with a chronic illness rider. These policies typically don't charge upfront for the long-term care protection, but offer a rider that the policyholder can exercise when diagnosed with a chronic or terminal illness.

Changes in policy design have made it easier to buy combo policies without a very large upfront payment. Lincoln Financial Group, one of the largest players in this market, now offers options with payments spread out over a number of years. That has helped push down the average age of buyers, according to Bill Nash, vice president of distribution for the company's  MoneyGuard products.

"As recently as a few years ago, the average buyer age was north of 60," he says. "The big lump sum payment upfront made it difficult for someone with kids in college or other responsibilities to write a check that large. Now we can customize a solution anywhere from one to 10 years. So people in their forties and fifties are coming into the market."

Still, the coverage does not come cheap. For example, a 50-year-old woman could purchase a policy with annual payments of $5,000 over a 15 year period. At age 80, she would be eligible for a monthly benefit up to $7,830. That's a $75,000 cost over 15 years.

But if the same buyer waited until age 60 to buy the same policy, she would have to pay $10,000 in annual premiums for 10 years ($100,000 total). That's because buyers age 55-72 cannot stretch payments longer than 10 years; for buyers age 73-79, the payment period must be less than 10 years.

Congress hasn't addressed the problem, partly due to ideological divides. Conservatives advocate private-market insurance solutions, while liberals advocate for a stronger public social insurance approach, mainly through Medicare. A bipartisan path would combine both approaches, streamlining and simplifying private long-term care insurance to make it work better, but also covering the most extreme risk through a publicly financed insurance program.

This approach was proposed by several authoritative studies published in 2016. Don't expect anything big to change in our approach to financing long-term care until this kind of compromise can be enacted.

Morningstar columnist Mark Miller is a nationally recognized expert on trends in retirement and aging. He also contributes to Reuters,, and The New York Times. His book, Jolt: Stories of Trauma and Transformation, will be published in February by Post Hill Press. The views expressed in this article do not necessarily reflect the views of