MARCH 16, 2013 VOLUME 20 NUMBER 11
A colleague recently asked if we knew why long-term care insurance premiums might be climbing significantly in the next month or so. We didn’t, but it got us thinking about how the industry has changed over the past few years. Is it still a good idea to purchase insurance to cover possible costs of institutional or home care in the future? If so, who should be considering such policies, and what should they expect to pay?
First, the cost figures. The American Association for Long-Term Care Insurance, an industry trade group, conducts a survey of prices every year. The AALTCI’s 2013 figures were released, as it happens, this month. The short version: long-term care insurance costs have risen significantly in the past year. They calculate, for instance, that a 55-year old buying a typical policy might expect to pay $2,065 per year in premiums; the same policy last year would have cost $1,720. That’s about a 20% increase in cost, during a year where the general cost of living increased at something more like 2%.
Of course, your mileage may vary. If you are older or younger, married rather than single, or purchase a “richer” policy or one with less coverage, you might see a greater or lesser increase. But there’s no doubt that the cost of long-term care insurance has increased in the past year, continuing a trend of the past several years. Jane Bryant Quinn, a leading columnist for AARP Magazine, last year reported that premiums were up as much as 50% over the preceding five-year period.
More significant, perhaps, is the problem of a contracting market. Both buyers and insurance companies are leaving the long-term care insurance marketplace (though the number of new policies has rebounded somewhat since the economic downturn of five years ago).
So what’s happening to the marketplace? Historically low interest rates have the perverse effect of increasing insurance costs (since insurance companies are investing your premium dollars in order to generate income to pay future claims, costs of administration and profits). Life expectancies continue to increase, and uncertainty about the length of a policy-holder’s life makes actuaries a little twitchy — and conservative. Medical advances introduce the possibility of cures for some of the diseases that cut life expectancies short — and create the paradoxical possibility of extended nursing home stays. And, surprisingly, existing policyholders are not dropping their policies at the rate predicted years ago — meaning that more claims are being made on older policies than insurance companies anticipated. While most insurance products experience a “lapse” rate of about 5%, the figure for long-term care insurance is more like 1%. In short, the long-term care insurance industry is in trouble.
That might mean that long-term care insurance is more expensive, or harder to locate, but it doesn’t necessarily mean that consumers should avoid the product. The cost of long-term care can easily exceed $100,000 per year in a nursing home or in home care (in fact, home care is often more expensive than institutional placement).
It is, of course, impossible to predict which potential buyers will need long-term care insurance. But there are some generalizations about the purchasers of LTCI policies that might give some guidance — if only on the theory that the marketplace is wiser than individual buyers. Here are some observations about typical buyers and policies, drawn from the American Association for Long-Term Care Insurance reports and financial writers over the past few years:
- The average age of new LTCI policy purchasers is dropping. Twenty years ago it was almost 70. Today it is below 60 (it was 59 in 2010-2011, according to America’s Health Insurance Plans, an insurance industry trade group).
- Not too surprisingly, wealthier people buy more policies. The AHIP study reports that more than half of policies are purchased by people with incomes over $75,000 per year; more than three-quarters of all policies are owned by people with liquid assets of more than $100,000.
- There is a correlation between education levels and policy purchases. Nearly three-quarters of long-term care insurance buyers are college-educated. For comparison purposes: about a quarter of all those over age 50 have college degrees.
- Women and men buy long-term care insurance policies at rates almost exactly equal to their respective shares of the over-50 population. Married people buy policies at a slightly higher rate than their representation in the age group, and divorced, separated and widowed seniors are much less likely to purchase policies.
- One of the significant drivers of cost of a particular LTCI policy: inflation protection. About three-quarters of policies sold in recent years include a provision for automatic increases in coverage — most of those provide for about a 3%/year increase, down from the 5%/year that was more common twenty years ago.
- In 1990 nearly two-thirds of LTCI policies covered nursing home or institutional care only. Today almost all policies (95%) cover both nursing home and home care. But more than half of the more modern policies will still be exhausted if the buyer spends four years in a nursing home.
Does all this mean that you don’t have to worry about long-term care costs unless you are age 59, college-educated and earning an income of $75,000 or more? Of course not. In fact, it may be more important that you shop for insurance if you are younger and more solidly middle-class (as judged by your income and assets). You might have more to lose, and a harder time paying for nursing care you might end up needing. We urge you to talk with an insurance salesperson about long-term care coverage.