By Dan Schulte, Senior Vice President and Manager, Annuities and Insurance
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Over the next six weeks, leading up to the end of the year, we will be sharing our “Financial To-Dos” list with you. These reminders will highlight important strategies to consider before the year concludes. Our first topic is long-term care.
November happens to be Long-Term Care Awareness Month, a time to reflect on care options and steps that can be taken to ensure well-being and financial stability in the future. With this in mind, let’s look back on how long-term care has evolved through the years and information you may want to consider in the present day to have peace of mind tomorrow.
A Brief History of Long-Term Care Insurance:
Long-term care insurance has a relatively short history compared to other forms of insurance, but it has experienced significant changes over the past few decades. As time goes by, the long term-care insurance (LTCI) industry has been able improve their pricing and innovate the product offerings. This innovation is important because the need for long term- care solutions is more present than ever with our aging population.
Early Policies (1970s-1980s):
Long-term care insurance emerged in the US during the late 1970s and early 1980s in response to the growing need for financial protection against the high costs of long-term care (LTC) services. The first LTCI policies were often sold strictly as “nursing home insurance” and primarily covered care in skilled nursing facilities. These early policies were quite costly and offered limited benefits without coverage for assisted living or home care. These policies were typically purchased by individuals who had significant assets to protect.
Expansion (1990s-2000s):
In the 1990s and 2000s, more companies entered the LTC Insurance marketplace and policies began to offer a broader range of coverage options. Usually newly issued contracts in addition to nursing home coverage also began to offer more comprehensive coverage including care in assisted living facilities and home-based care. Also during this period, the industry began to offer inflation protection options to help policyholders keep up with rising LTC costs.
Challenges and Premium Increases:
Early in the 21st century, the LTC insurance industry faced significant challenges. Most of the problems in the LTC insurance market in large part can be traced to pricing errors made from its inception. Essentially LTC insurance plans across the country were initially offered at premium rates that were far lower than they should have been. Insurance pricing relies on assumptions about various factors, including policyholder behavior, the costs of future care, and future market conditions, including the interest rate environment.
When insurers began offering long term care, they did not have historical data to inform these assumptions. As a result, unexpectedly high claims costs and lower-than-anticipated interest rates led to premium increases for many policyholders. As a result of the poor initial pricing, insurers sustained significant losses, which resulted in significant increased premium rates on existing and new policyholders. Because of these pricing challenges many insurers exited the LTC insurance business altogether.
Evolving Market (Present):
Today, LTC insurance continues to evolve, with a variety of policy options available to consumers. A limited offering of traditional LTC is still available and can provide valuable tax-free benefits whether care is in a facility or at home. However, these policies are “use-it-or-lose-it” type contracts, which means, if long-term care is not needed prior to death, no death benefit is paid to the beneficiaries and the premiums paid are lost.
An alternative to the “use-it-or-lose-it” coverage, the industry has developed numerous hybrid life insurance and annuity policies that offer cash value and death benefits. These types of policies have become popular because they ensure that if no long-term care claim is made prior to death, a tax-free death benefit is paid to beneficiaries. Also, if the policyholder ever decides to surrender the policy, there is a cash surrender value that will be paid back to the policyholder.
Long-term care insurance remains a valuable tool for some individuals to plan for the potential costs of long-term care. Contact your financial advisor to help guide you through your options based for your unique situation.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.