Potential Concerns and Risks for Traditional Long-Term Care Insurance

Since its introduction in the 1960s, long-term care (LTC) insurance has evolved significantly to address the changing needs and challenges of supporting aging populations. Initially focused on providing coverage for skilled nursing care following hospital stays, early LTC policies were often inadequate and left many policyholders without the necessary support. This led to a tainted reputation for the industry. However, by the 1990s, the scope of LTC insurance had expanded considerably, encompassing a broader range of services and care options. Today's typical policy covers nursing homes, assisted living, and home care. It may also cover other needs like homemaker services, hospice care, adult day care, international coverage, respite care, bed reservation, care coordination, caregiver training, and supportive equipment. The range of expenses covered by LTC insurance varies, and it is important to understand what exactly is covered by a contract under consideration.

The LTC insurance market expanded rapidly during the 1990s. However, many companies entering the market offered a level of benefits that could not be supported by premiums. The financial strains created by these underpriced insurance contracts have led to dramatic consolidation in recent years, with fewer insurers writing new policies today. Those still issuing new policies have had to raise premiums and reduce benefits. Most issuers have also worked with state insurance commissions to raise premiums on older policies in order to better fund their promised benefits.

The contracts usually guaranteed renewal or were defined as having "level premiums" rather than guaranteeing premiums would not increase. Level premiums do not mean premiums remain at the same level; only the company must charge the same premium to everyone who bought policies within the same age and group. If the insurance company convinces the state insurance commission that higher premiums are needed to support the promised benefits, all policyholders within a group may experience the same rate increase.

Research by Finefrock, Gradisher, and Nitz (2015) found that among 58 companies that had written long-term care insurance policies, only 4 never initiated a rate increase. They also found that, for instance, only 12 carriers were actively selling new long-term care insurance policies in California. Meanwhile, an additional 46 companies with existing policies had stopped issuing new policies.

For many retirees on a fixed budget, premium increases became unaffordable, and a number of policies lapsed. These premium increases left many Americans nervous about purchasing traditional long-term care insurance. It is important to shop around between different providers as the ability to qualify and the health classification for premiums may differ between companies. Buying based on who offers the cheapest price is risky since the company may be seeking upfront sales with the intention of increasing premiums later.

Public hesitation about LTC insurance stems from a number of concerns. Like many other insurance options, people struggle to place appropriate value on something they may not use. Consumers fear future rate increases could affect their ability to pay for the policy. They have concerns about underwriting and the lack of standardization among contracts, which make it difficult to know what is and is not covered. They also have concerns about the finite coverage provided by contracts, which may still leave them on the hook for expenses extending beyond coverage limits.

Another important concern for traditional long-term care insurance is the possibility of inadvertent lapsing. The Center for Retirement Research at Boston College released a troubling study in 2015, which found that about 25% of policyholders who entered a nursing home had let their policy lapse during the preceding four years, resulting in the loss of benefits they had supported with premiums earlier in their lives.

The troubling implication of this research is that two of the top hardships experienced in the years leading to entering a nursing home – financial strain and cognitive decline – led to a lapse in coverage when it was most needed. By following households over time, they learned that lower scores on cognitive tests increased the likelihood of needing long-term care and increased the odds of lapsing their existing long-term care insurance policies.

Another study conducted by The Center for Retirement Research at Boston College in 2022 found that about one-fifth of retirees will not need any long-term care support and that about one-quarter will have severe needs. As research indicates varying degrees of care needs among retirees, it becomes crucial for individuals to assess their options and ensure they have a robust support system in place, whether through family, friends, or professional services. Understanding the intricacies of LTC insurance and staying informed about potential changes can help individuals make more confident and informed decisions regarding their long-term care planning.