Long-term care insurance: From crisis to opportunity

By Dharam Khalsa

America is sleepwalking into a senior care crisis. The numbers don’t lie. Federal estimates state that 70% of people aged 65 and older will require some form of senior care in their later years. Yet, a recent study from LIMRA estimates that only 3% to 4% of over 50s have a long-term care insurance policy.

As someone who works within the assisted living and senior care industry, I see the enormous problems this is creating, as well as understand what the perspective is from the senior care industry.

How we got here

To appreciate the true scale of the current mess we’re in, we need to first understand how we got here. LTCi coverage was first offered in the 1970s, but its popularity began to take off in the 1990s and early 2000s. Consumers were becoming increasingly aware of the high cost of care they could face in later years, while policies were priced competitively with many carriers in the market. Supply, more or less, met demand.

But it was those early pricing models that planted the seeds of the current crisis. This was partly as a result of ill-fitting regulation, which bound carriers to minimum loss ratio requirements similar to health insurance. The problem being, LTCi books would have very low claims rates in the first decade or so, so would have to lower premiums accordingly. Then, when the claims started piling up as policyholders began reaching the age where long-term care was required, they were forced to rapidly increase premiums to fill black holes in their loss ratios.

Not all of this can be blamed on poor regulation. Actuarial models were also at fault by failing to accurately forecast increases in life expectancy and the additional long-term care requirements this would entail. The result of these insurer losses and aggressive premium hikes has been large numbers of carriers leaving the LTCi market, while those that remain offer premiums that are out of reach for many consumers.

The perspective from the senior care industry

One of the most pressing issues for seniors moving into assisted living and their families is the question of how they’ll pay for it. Once again, the data makes for stark reading. For example, average monthly prices for assisted living accommodation in popular Northeastern U.S. cities can range from $6,000 up to $12,500.

For most seniors, their income won’t come close to covering these costs. In Massachusetts, for example, the average annual retirement income is $35,113, yet annual assisted living costs in some Boston suburbs can average as much as $120,262.

What’s more, many mistakenly believe – or learn too late – that Medicare and the Affordable Care Act cover senior care costs; they do not. The only safety net is Medicaid, but most states require recipients to have spent all their assets down to their last $2,000 before they can claim it. What’s more, there are many exclusions when it comes to Medicaid and assisted living costs. It can also be difficult to find a facility that will accept Medicaid payment, while some states such as Alabama and Kentucky provide no Medicaid coverage for assisted living costs at all.

Where we go from here

One of the quickest wins is to address poor policy design. Too many LTCi products, especially legacy policies, are penny wise but pound foolish. A common exclusion is home care costs, as highlighted in a recent New York Times report. Although this may have the desired effect of reducing initial claims from policyholders, it can push people into assisted living facilities much earlier than they would otherwise have needed to if they had had access to appropriate home care support.

This has the dual effect of triggering large payouts from carriers to cover assisted living costs at the policyholder level, while also having an impact at the aggregate level of pushing up assisted living costs by increasing occupancy rates in a market with very constrained supply.

Moreover, the insurance industry, specifically agents and brokers, need to better educate consumers about coverage for long-term care costs. Waiting until you reach age 55 or 60 before taking out an LTCi policy will create a barrier to entry for too many people, as the premiums required at those ages will be unaffordable for many. Therefore, challenging the conventional wisdom of waiting until your mid-50s to consider LTCi coverage could open access to many more consumers.

But what of those who have planned too late and find they are locked out by unaffordable premiums? Innovative thinking can help to address this problem too. A number of carriers have begun offering LTCi policies with longer payment periods, which lowers premiums and further opens access.

Hybrid life/LTCi policies are becoming increasingly popular and can be a better value than taking out two separate policies. They also contain return of premium features (with some caveats), while traditional LTCi policies are often offered on a “use it or lose it” basis, which can act as a psychological barrier to some.

Americans are drastically underserved by LTCi coverage, and the industry must accept some blame for this. But intelligent policy design coupled with smart problem solving by diligent agents and brokers can begin to turn the tide.

Dharam Khalsa is cofounder of Mirador, an assisted living platform. Contact him at [email protected].

Dharam Khalsa is cofounder of Mirador, an assisted living platform. Contact him at [email protected].