Understanding Long Term Care Insurance
Why Attaching a Long Term Care to your Permanent Life Insurance Makes Sense
In an aging society, planning for long-term care has become increasingly critical. Yet many Americans remain unprepared for the potential costs and challenges of extended care needs. As we observe Long Term Care Month, let's explore this vital but often overlooked aspect of financial planning.
Long-term care insurance helps you pay for the cost of long-term care services, without depleting your savings quickly, impacting retirement plans and inheritance. Long Term Care (LTC) refers to a range of services that support people who can no longer perform everyday activities independently. These activities, known as Activities of Daily Living (ADLs), include bathing, dressing, eating, transferring (moving from bed to chair), toileting, and maintaining continence. However, the LTC market has changed significantly since inception, as the market was severely mispriced with people living way longer than anticipated, causing the premiums for long term care insurance to increase. More than 1 in 4 (27%) consumers say that a standalone long-term care insurance policy is too expensive.
Many people are turning to more multi purpose solutions like Life Insurance with LTC riders, or "Hybrids", versus the traditional "use it or lose it" modeled products. A Long Term Care Rider is an add-on feature to a life insurance policy that allows policyholders to access their death benefit early should they require long-term care. If you never need long-term care, your beneficiaries still receive the death benefit. It is generally less expensive than standalone LTC insurance and the premiums are guaranteed to not increase. The underwriting process compared to standalone LTC policies tends to be simpler. Many major life insurance carriers offer LTC riders as part of their permanent life insurance products, including Lincoln Financial Group, John Hancock, Pacific Life, and Nationwide.
Why the LTC shifted from traditional LTC standalone to more hybrid offerings
Several large insurance companies have left the LTC market over the past few decades. Companies—like Prudential, MetLife, and Genworth—either discontinued offering new LTC policies or sold their LTC businesses. There are several reasons companies like these left the market:
1. Rising Costs and Unpredictability
Long-term care insurance is expensive to provide and hard to price accurately. It’s difficult to predict how long policyholders will live and the associated costs of what they will need. A helpful rule of thumb to consider in terms of costs is that 2x HIPPA covers approximately $840 a day in costs. An increasing number of high-cost claims deters some companies from offering this product. With people living longer due to medical advancements, insurers often underestimated the number of claims, leading to financial losses.
2. High Premiums and Affordability
LTC insurance premiums have increased substantially over the years, making it less affordable for many consumers. Insurers have raised premiums in response to rising healthcare costs, longer lifespans, and underestimations of the number of policyholders making claims. This affordability issue has led many potential buyers to forgo purchasing LTC insurance, further shrinking the customer base.
3. Regulatory and Legal Issues
There has been a significant increase in regulatory scrutiny and legal challenges in the LTC insurance market. For example, insurers have been criticized for raising premiums on existing policyholders and for unclear policy terms. In response, some states have implemented stricter regulations, which can make it harder for insurers to balance risk and profitability.
The Best Time To Prepare Is Today
Many clients overlook the need for LTC until it’s too late, putting stress on families who may be unprepared to bear these costs. According to the U.S. Department of Health and Human Services, approximately 70% of individuals aged 65 or older will require some form of LTC in their lifetimes. The average duration of LTC is around three years, with 20% needing it for more than five years. Long term care costs can vary significantly. In the United States, the median annual cost of a private room in a nursing home was around $108,000 in 2023; in-home care services averaged about $60,000 annually for 44 hours of care per week. It’s important to consider getting LTC early, while still in good health, to get the most favorable terms.