Paul Willging Says…

Let’s Stop Ignoring LTC Insurance

LTC insurance will not only ease the burden on public funding sources, but it will be of real benefit to caregivers, not just those they care for. Let’s look at just some of the advantages at all three levels, and how they add up to your advantage.

Start with the policyholder. Other than the obvious psychological benefit that comes from a feeling of increased independence and security (as well as the chance at a lengthier stay at home), the financial benefit of LTC insurance can be equally significant. According to a thoroughgoing analysis by the Health Insurance Association of America (HIAA), the policyholder’s chance of “spending down” assets is reduced by 66%, and the reduction in out-of-pocket expenses ranges from $60,000 to 75,000 for the complete episode. Interestingly enough, these savings are accompanied, on average, by 14 more hours of personal care per week than those received by similarly disabled but noninsured seniors.

Family caregivers experience their own psychological and financial benefits. Working-age family caregivers, for example, double their chances of remaining in the workforce if the disabled senior they are caring for has private LTC insurance.

As for government funders, the HIAA has estimated savings to Medicaid and Medicare at $6,600 for each current policyholder. That constitutes a potential aggregate savings of $30 billion-savings that can only grow as more people purchase policies and the average age of purchasers continues to decline.

LTC insurance continues to become more accessible-most of the major life and health insurers in the country now offer these policies, and many have done so for more than a decade. What’s more, estate planning attorneys and other professionals assisting Americans with retirement planning are citing these products increasingly. Most policies are purchased by individuals rather than groups, albeit at an age (62) higher than advisable in terms of risk exposure and resulting premium levels.

LTC insurance was initially designed to cover the costs of nursing home care. This is one reason that the product has had limited penetration in the marketplace (another is that people assume that this exclusivity persists). Indeed, while approximately 9 million policies have been sold (with 70% of them still in force), this constitutes only 5% of age-eligible purchasers. The truth is today’s policies cover most long-term care settings, including assisted living.

Affordability is another issue that, some have argued, makes LTC insurance appear less than desirable. Most purchases are made by individuals in their sixties, and the average annual premium can easily exceed $1,500. If, along with a basic policy, the purchase includes an annual adjustment for inflation and a partial return of premium if the policy is “forfeited,” the premiums can be even higher. Given that expense, it has been suggested by some students of long-term care financing that any LTC insurance premium that exceeds 5% of the average senior’s disposable income is beyond the “threshold of affordability.” Most purchases are made, in fact, by seniors with less income than is deemed “essential” by the academics.

This illustrates a common mistake made by LTC insurance skeptics (academic or otherwise): a failure to distinguish between “price” and “value.” Mathematic equations assuming arbitrary limits on the price a customer is willing to pay for a product or service ignore the fact that it is customers, not economists, who determine what those limits might be, i.e., determine value.

Let’s take a simple, but comparable, example. Using the 5%-of-disposable-income threshold, most seniors would not buy Medigap insurance, because costs of those policies can easily exceed the 5% limit. Yet an overwhelming majority of seniors purchase them. Why? Because they are deemed valuable at the price offered, regardless of an economist’s preconceived limits as to affordability.

So, why isn’t LTC insurance seen by seniors as being just as valuable as their Medigap policies? Even a five-cent apple on one side of the street is not thought to be of value if it’s being given away for free on the other. One contributing factor to the slow growth of the product is the competition with Medicaid, a program misunderstood by most Americans, but considered (usually under the rubric “Medicare”) to be a “free good” to which they are entitled if in need. Seniors think, if I already have an apple, why buy two? Some go further: In a survey reported by the AARP, an unlikely 31% of Americans over age 45 thought they had purchased long-term care insurance through work. Between that and Medicare, people might think they have access to maybe even two apples-in which case, why buy a third?

There is also a continued perception by many (the industry’s marketing efforts notwithstanding) that LTC insurance is, in some mystifying manner, a precursor to a nursing home stay. I know from personal experience that some people have shied away from the insurance because purchasing it would somehow make it more likely that they would someday need it!

Finally, there are those ostensibly expert in retirement planning who have themselves failed to grasp the importance of this product. Recently, I read with interest the comments of a so-called “financial planner” who suggests that considering “the risk of being in a nursing home long enough, the chances of using [the insurance] are pretty remote.” Aside from this expert’s failure to grasp that few policies these days are limited to nursing home coverage only, let’s look at the statement itself. Using that same “remote chance” logic, why would any of us purchase homeowner’s insurance? Isn’t it the whole point of insurance to protect against “catastrophic” risk, as opposed to the reasonably anticipated risk? That, in fact, is why LTC insurance is even more useful to seniors than their Medigap policies (which don’t, for example, cover pharmaceutical expenses).

Fortunately, LTC insurance accessibility and options continue to grow. Although the employer-sponsored market has historically been small, that appears to be changing. From almost no employment-based policies 15 years ago, more than 4,700 employers were offering a long-term care insurance benefit by the end of 2001. More than 1,500 employer-sponsored plans were introduced in 2000 and 2001 alone. Admittedly, most plans don’t include an employer contribution (as is also true of the recently implemented LTC benefit for federal employees).

Meanwhile, the insurance industry continues to restructure the product, including the development of combinations tying in LTC insurance with life and disability policies. Another area of growth is the so-called “viatical” market, offering life insurance policies that pay out a discounted death benefit to those who have been certified as terminally ill or are in facilities, such as nursing homes, without a likelihood of discharge. In this manner, a life insurance policy can also serve as LTC insurance.

So, ignore this emerging product if you will-but do so at your own financial risk. Medicare stopped being the road to profitability in 1997. Medicaid, chronically underfunded since its inception, appears these days to be very near a death spiral. We desperately need to harness the financial resources of the private sector if operators of long-term care facilities are to have any chance at survival.

Let’s stop ignoring a product that might someday prove to be our financial salvation. NH