More than 400,000 long-term-care insurance policies were sold in 1992, according to figures published by The Wall Street Journal. These are the policies that help seniors cover the costs of nursing home stays at the end of life. At least 400,000 additional policies were purchased each year in the subsequent ten years, peaking at about 750,000 in 2002.
Then sales collapsed, and never again reached the 400,000 level. Last year, reportedly only 105,000 such policies were sold. What’s more, two Pennsylvania providers of long-term care insurance were on the verge of being liquidated in December.
The need for long-term-care insurance never has been greater. What happened to the market?
A series of actuarial errors were made when long-term-care insurance was first introduced. The most important of these was the “lapse rate,” the number of policies that will be terminated without ever paying a benefit. This occurs either because the insured stops paying premiums or the insured dies without making a claim. The actuaries chose a fairly conservative lapse rate of 5%. At that rate, if 1,000 policies were sold in year one, only 400 would be in force 20 years later. As it turned out, the buyers of long-term-care insurance thought of their purchase primarily as an investment, not as insurance, and so the lapse experience was closer to 1%, which implies that 800 of every 1,000 policies still will be in force after 20 years. That led to far higher payouts than projected.
When the unanticipated expenses started to pour in, insurance companies had to raise their rates. However, in many cases, state insurance regulators would not approve the full amounts requested for existing policyholders.
Two more errors compounded the damage. The first is that medical advances have lengthened life expectancies, which, in turn, increases the likelihood of making a claim on a long-term-care insurance policy. The second is that the actuaries generally assumed a 7% rate of return on the invested premiums on these policies. That assumption was fine in the 1990s, but interest rates have been at historic lows since 2008. When long-term-care policies are priced today, the projected rate of return on premiums is likely to be 2% to 3%, which drives premium costs still higher.
If you already have a long-term-care policy, you probably want to hang on to it. For the most part, those who have purchased these policies have profited from them.
New long-term-care policies still are available, although they are more expensive than in the past, and the terms may be less favorable than older policies. Insurance companies are now using much more conservative actuarial assumptions.
Hybrid policies that combine life insurance with long-term-care coverage have emerged, and they have proved popular as well.
The poorest seniors may have the costs of their long-term care picked up by the government through Medicaid. The wealthiest may be able to cover the costs without insurance—even though a year’s stay in a nursing home can easily run to $100,000 or more.
For everyone in the middle, planning is necessary. Despite the price increases, long-term-care insurance will prove an important part of that plan for many affluent families.
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