As sales of standalone LTC insurance policies stagnate, innovative combination products may be where the segment’s future.Due to a combination of factors ranging from sharp rate hikes to stricter underwriting standards, sales of standalone long-term care (LTC) insurance policies have plunged in recent years. Industry trade group LIMRA reported that only 91,000 LTC contracts were sold in 2016, a steep 60% drop from 2012.
This decline in LTC sales comes as the public becomes increasingly aware of the need to fund the complex healthcare costs that arise later in life. In fact, 45% of workers who participated in a 2017 study by the Employee Benefit Research Institute feared that they wouldn’t have enough money to cover their medical expenses in retirement. Those concerns aren’t unfounded, since the federal government estimates that a person aged 65 today stands a 70% chance of requiring some type of long-term care services.
The need for LTC services will only increase as the population ages. A report from Research and Markets projects that the number of people older than 65 in the U.S. will reach 88.5 million in 2050, more than twice the 40.2 million recorded in 2010. As the demographic continues to age, they will likely require increased care for chronic conditions such as heart disease, dementia, and respiratory ailments, pushing the long-term-care services market to $549.7 billion by 2024, the report estimates.
Although sales of standalone LTC insurance policies have declined, the industry has developed new hybrid products that will help people protect their assets and fund medical expenses in their golden years. The future of LTC insurance may lie with these innovative combination policies.
Combination Policies to the Rescue
Instead of purchasing a standalone LTC policy, insurance buyers now have a choice of buying a combination life insurance or annuity contract with an LTC benefit. This combination life/LTC policy enables policyholders to dip into the death benefit when they need long-term-care services. Alternatively, policyholders can attach a chronic illness rider to their life policy, which provides funds if they develop a serious illness.
Fortunately, the public has taken notice of these hybrid-type policies, with purchases of annuity/LTC insurance products rising an average of 23% each year since 2011, according to LIMRA. Combination life and LTC policies, meanwhile, accounted for 17% of all premium sales in 2016, reaching $3.6 billion in sales.
Many people hesitate to buy a standalone LTC insurance policy in part because of the possibility that they’ll pay premiums for many years while never enjoying the benefits. With a combination life/LTC policy, policyholders are assured that their payments will result in a payout at death.
Despite the attractiveness of combination LTC policies, these products can be expensive. Morningstar columnist Mark Miller points out that a 50-year-old woman will need to pay $75,000 over 15 years to be eligible for a monthly benefit of $7,830 at age 80.
Rates Hikes Moderate
As LTC insurers struggled to properly underwrite a relatively new product in the face of rising costs and shifting actuarial assumptions, LTC insurance rates surged, scaring away potential buyers and forcing policyholders to rethink their purchase. According to a study by the Society of Actuaries (SOA), the chance of an LTC insurance policy rate increase stood at 40% in 2000. By 2014, however, the likelihood of a premium hike dropped to 10% as the underlying data improved to the point where “the potential for future rate increases on new LTC products has fallen [to] the lowest it has ever been,” the SOA report concludes.Nevertheless, as longtime LTCI agent Margie Barrie writes in ThinkAdvisor.com, rates hikes will happen, and agents should clearly address that possibility with their clients. She suggests that agents explore options with their clients to reduce premiums such as shortening the benefit period or cutting the inflation benefit from 5% to 2.9%. Undertaking those steps can soften the blow of a rate hike for what everyone agrees is a worthwhile product.