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The New Face of Long-Term Care Insurance

Consolidation, rate increases and product changes are creating a new landscape.

By David Gregg, LTCP

In the late 1980s, the number of entrants into the long-term care insurance (LTCI) market was increasing quite rapidly. The product was considered the newest and maybe one of the last untapped insurance frontiers. Experts acknowledged the need for LTCI retirement planning, and insurers strived to design products with the right mix of benefit triggers and policy features. As a market in its infancy, LTCI coverage was somewhat limited. Because of this, carriers attracted their share of consumer critics.

The critics are comparatively quiet today and LTCI has become quite established. Claim payments have reached $6 billion, and thanks to tax regulations, policies have standardized benefit triggers (based on activities-of-daily-living criteria) and pay for tax-qualified care services. Today, daily benefits are available for up to $400 a day, and the cost of care continues to rise. Medicaid is no longer acknowledged as the primary source of LTCI financing.

This, most certainly, should be the coming of age for the LTCI market. So why have some of the biggest and best-known carriers exited the LTCI market over the last five years? Why did industry sales decline in 2003?

As an industry, our predictive ability regarding lapses, claim incidence/continuation and necessary reserving has improved. We know that lower-than-assumed lapse rates increase reserves and lower-than-anticipated interest rates reduce return on investment. We know that the frequency of claims for home health care can be quite large and the length (or continuance) of nursing home claims can be significant. We know the importance of cognitive underwriting screening and can better predict the results of a cognitive-related claim. We also better understand that experienced LTCI sales professionals are necessary to produce positive sales results.

Market trends
As a result of these and other factors, insurers are taking a step back to reevaluate their positions regarding LTCI. They realize the critical success factors are not as much sales related as they are financially driven. Pricing has become more conservative. In some cases, regulators have demanded this conservatism to protect consumers from large rate increases. Many state departments of insurance are hesitant to approve rate increases on existing blocks of business. Insurers have found it necessary to use more caution in product design, pricing and underwriting. Claim adjudication is the next great frontier. How do we effectively manage and administer a home health care claim?

Some LTCI carriers have been rather zealous in pricing and underwriting. Some have had surplus issues related to sizable increases in sales while some have found that the intensive nature of LTCI product management competes with other product lines for resources. Therefore, some carriers have dropped out, have been purchased or have temporarily withdrawn sales. This has resulted in a dip in sales for 2003.

Reshuffling and consolidation
It’s definitely a time of reshuffling and some consolidation in the LTCI industry. Reshuffling and consolidation are healthy because we need LTCI carriers that are strong, experienced and committed to the LTCI market. Financial advisors will begin to recognize those carriers that have unwavering commitment to the LTCI market and, acting in the best interest of their clients, will recommend products from those companies. This does not mean advisors should shy away from companies that have experienced rate increases.

The industry in general has experienced profitability issues from the factors previously discussed, and prudent carriers will adjust their rates to compensate for these factors to ensure they will keep their promise to pay claims several years into the future. In addition, these carriers will use the most current, credible and accurate pricing assumptions available to provide some assurance of rate stability. Regulators have assisted in this cause by requiring carriers to certify their rates on new business as accurate under moderately adverse circumstances.

Impact on clients
How does this impact existing insureds? Premium increases are a possibility under existing policies. When notified by a carrier of an impending increase, advisors need to be proactive, notify their clients personally and explain the situation. Where necessary, they can suggest longer elimination periods or other product modifications to ensure affordability of the coverage.

Your clients may question your confidence in the insurance carrier when faced with a premium increase. In frustration, they may want to change companies. To properly guide them in their decision making, you need to understand the nature of the rate increase and the reputation of the carrier. Drawbacks to changing companies include higher rates because rates are based on the attained age of the insured. In addition, the new carrier may be considering a rate increase—making the switch futile.

Impact on you
These market changes affect you as a financial advisor in several ways. First, expect higher premiums for new products. These rates are a more accurate reflection of our current environment and the result of a genuine concern on the part of the carrier to maintain rate stability. Expect some product changes as well. Preferred discounts may not be available under all plan features, and certain limited pay features may be withdrawn.

You are charged with selecting the right carrier for your clients. Carrier financial stability is paramount, and experience in the LTCI market is critical. Ratings and surplus levels are important. Commitment to LTCI as a core product is critical. Responsible underwriting is very important. Look for a carrier that balances underwriting, pricing and commissions in a package that is attractive but not necessarily the most liberal in the industry.

You should understand the industry and view yourself as a partner with insurance carriers. Don’t be lured by the cheapest price, the most liberal underwriting or the richest benefits. Don’t hesitate to make product suggestions to your carrier. Focus on future market potential. We’ve heard about the coming wave of Baby Boomers. This demographic reality is underscored by the continually declining average issue age of first-time purchases. Several years ago the average was age 72. Today, the average is age 62.

Tremendous market potential
The market potential, already tremendous, generates enthusiasm and passion for many of us involved in LTCI. Here is some food for thought.

  • Watch for greater tax incentives. LTCI buyers are sophisticated and will be more knowledgeable in the future. Greater tax incentives will motivate purchases. As Medicaid coffers shrink, the federal government will be under increased pressure to make private LTCI more attractive. I predict that Medicaid qualification loopholes will close. Individuals who try to shelter their assets to qualify for Medicaid will have a more difficult time doing so in the future. Those who have sheltered their assets in preparation for a future long-term care event may find that new laws will negate their efforts.
  • Relate to consumers by tapping into the greater awareness of the need for long-term care. Virtually everyone knows someone who has needed long-term care. No one wants to lose their independence. This heightened awareness will lead to increased demand for LTCI. Do a good job of evaluating needs and recommending financial solutions for payment of premiums.
  • Position yourself in the LTCI market. Network, hold seminars and collaborate with CPAs and attorneys. Know the products and be especially cognizant of health-underwriting guidelines. One of the greatest areas of concern for financial advisors is declined applications due to the applicant’s medical history.

Understanding is key
Americans’ need to plan and provide for their long-term care can only increase as aging Baby Boomers shift our country’s demographic makeup. An understanding of this market will position financial advisors to ride the curve of continued growth in the LTCI industry.

David Gregg, LTCP, is the product manager for Mutual of Omaha’s long-term care insurance product. He has 14 years of experience in the LTCI industry and five years of experience as a health underwriter. You may reach him at 402-351-4309 or at

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