A lot has happened over the past few years in the long-term care industry. The pandemic has added additional challenges to providing care for the elderly in nursing homes.
Some large insurance companies have stopped selling new long-term care policies and some have been issuing rate increases for existing policies. Even so, long-term care (LTC) policies can be a real financial lifeline to a family to afford the support they need as they age without the worry of burdening family.
If you already own long-term care (LTC) insurance or are thinking of buying it, this article will provide you with information about this important topic.
In this blog, you’ll learn:
- Impact of the COVID-19 Pandemic on the Long-Term Care Industry
- What Does Long-Term Care Insurance Cover?
- State of the Long-Term Care Insurance Industry
- When is the Best Time to Buy Long-Term Care Insurance?
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Impact of the COVID-19 Pandemic on the Long-Term Care Industry
The past year has shown us that the impact of COVID-19 is much more severe on people who are older and those with weakened immune systems. Since this is the population in a nursing home, this makes them especially vulnerable to the spread of COVID-19 and of experiencing a more severe illness.
According to the New York Times, 4% of the cases in the US are linked to nursing homes, but this resulted in 33% of the deaths1. New Hampshire reported that 71% of the deaths in the state from COVID-19 were in nursing homes, which was the highest in the US.
Source: New York Times1
Nursing homes across the country responded by implementing very strict protocols for staff and residents. Visitors were banned for much of the past year. This resulted in isolation and we heard stories of loneliness by the residents. This has created the desire to provide care for elderly family members at home, outside of facilities, where they can continue to be around relatives.
Long-Term Care (LTC) Insurance can provide the financial resources to pay for care to enable the elderly to stay at home longer and avoid going to nursing homes. That is why we often call long-term care insurance “nursing home avoidance insurance”. Next, let’s discuss more about LTC insurance and the state of the industry.
Impact of the COVID-19 Pandemic on the Long-Term Care Industry
When many people think of LTC insurance, they think of it as insurance to pay for a person to stay in a nursing home. Most modern policies issued in the past 20 years cover much more.
LTC policies may include reimbursement for care including:
- A Nursing Home
- Residential Living or Assisting Living Facility
- Adult Day Care Facilities
- Skilled care by a licensed person at home
- Non-skilled care at home (for things like cooking and cleaning)
- Respite care (someone to replace a spouse for a few weeks a year to give them a break)
- Hospice care (for end-of-life care)
The state of California Department of Health Services has tracked where the dollars are spent by people who hold long-term care policies in the state. The chart below shows the breakdown of different types of care covered by Long-Term-Care policies.
Source: California Department of Health Services
With the largest amount of money going to providing care at home, and a relatively small amount being spent on care in a nursing home, this is why we often refer to LTC insurance as “nursing home avoidance insurance”.
State of the Long-Term Care Insurance Industry
Twenty years ago, many of the largest insurance companies were selling LTC insurance policies. Since then, many have made the business decision to discontinue selling new LTC insurance policies. This includes such large insurance companies as John Hancock, MetLife and CNA. It is important to note that polices sold by these companies in the past are still valid and are being supported by these companies.
The large insurance companies have studied the data for the number of claims by policy holders over the past 20 years. They found that they made some incorrect assumptions when determining the pricing for older LTC polices, relative to the cost of providing the features and benefits of the polices. This caused the insurance companies to underprice these older policies.
Here are a couple examples of the incorrect assumptions made by the insurance policies:
Bond Investment Requirement:
By law, the premiums paid by policy holders must be invested in bonds and cannot be invested in the stock market. The insurance companies did not expect that the Federal Reserve would lower short term interest rates to zero and keep them there for many years. The low interest rates by the Federal Reserve significantly reduced the returns from these bond investments.
Low Lapse Rate of Policy Holders:
Another error was assuming that about 5% of the LTC policy holders would lapse their policy (stop paying and terminate the policy). The actual lapse rate of policy holders has been much lower, among the lowest of any insurance products in the market2. When a person allows their policy to lapse, they stop paying and never claim any benefits. The very low lapse rate reduced the profitability for the insurance companies.
The Older the LTC Policies, the More Underpriced, and the Larger the Premium Increases
Since about 2000, the price for buying new policies has been steadily rising. The pricing of new policies today is much better aligned to the cost for the insurance companies to offer the long-term care benefits and services in the policies. But the earlier policies have been found to be underpriced.
For policies of the past 20 years, the older the polices are, the more they were underpriced. To be financially viable, the insurance companies raised the premiums on more recently sold policies and they have had to go back and increase premiums on existing (already sold) policies.
It is important to remember that a policy holder can always reduce the features and benefits of their policy, and thus reduce the future premiums. If FJP helped you purchase your policy, we can help you evaluate possible changes to your policy.
When is the Best Time to Buy Long-Term Care Insurance?
We believe that LTC insurance can be an effective way to reduce the financial risks for someone who needs care for a longer term. Remember this insurance only pays for incidents when care is needed for over 90 days. That is why they call it long-term care.
The cost of premiums starts to go up each year at a faster rate once you turn 60. The ideal time to buy this insurance is when you are younger, ideally in your 50’s. If you have passed 60, then we think you should consider buying it as soon as you can.
To qualify for LTC insurance, you must be in good enough health to pass all the health standards. That is another reason why we tell our clients that it is best to buy this insurance while you are still young and healthy enough to qualify for it. If you wait for a later age, you may no longer qualify to purchase it.
We have worked with our clients for over 20 years to help them understand whether LTC insurance is right for them. If you already have a LTC policy and have questions, give us a call. If you do not currently have a LTC policy, we can give you a quote for a policy and work with your Wealth Manager to see if this is an appropriate addition of your financial plan. Give FJP a call and Scott can work through your questions about LTC insurance and evaluate your specific situation.
Financial Journey Partners is Here to Help You
Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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References:
1 New York Times – Nearly One-Third of U.S. Coronavirus Deaths Are Linked to Nursing Homes