We are living in a world where health care costs are high and rising while an increasing population of aging adults is living far longer than prior generations. This situation naturally leads to more conversations about long-term care needs for individuals and/or for their aging relatives. Long-term care insurance is designed to offer financial support for medical and non-medical services for people who cannot complete the routine “activities of daily living” (ADLs). ADLs include using the bathroom, bathing, transferring and feeding, dressing, and personal grooming. Qualifications may vary by insurance company and policies, but generally needing assistance for two or more ADLs is the definition used for qualifying for long-term care that might be covered by insurance.
The cost of these services to help a person with their ADLs can create a financial problem for families that may have otherwise thought they were prepared for retirement. For some families facing this potential future financial burden, some form of long-term care insurance may be an effective strategy. Due to the higher likelihood of needing long-term care and the evolving insurance coverage options, it is more important now than ever to review legacy coverage and analyze potential new coverage options.
For years, separate traditional long-term care insurance policies were the industry norm. These policies offered a daily or monthly benefit maximum for a period of years (up to an unlimited amount over a lifetime) with an inflation protection option to cover the rising costs of care. Similarly to health insurance deductibles, such policies would typically have an elimination period (i.e. a waiting period of time before insurance coverage kicks in).
Given the rise in claims linked to people living longer, these policies and the industry landscape have evolved in recent years. The major change affecting legacy policies are large premium increases. Some policies have increased in cost by greater than 50% in one year even though increases typically must be approved by state regulators. Legacy policy holders may either accept the increased annual premium or choose a reduction in benefits to combat the higher premium expenses. The reality of the claims cost situation has led new traditional long-term care policies to become much less affordable for new insurance shoppers while putting a major strain on many existing policies and legacy insurers.
In response to the unaffordable costs of the traditional separate policies, insurance companies have pivoted to hybrid policies that add a layer of long-term care insurance to life insurance products. These policies essentially offer the option for policy owners to choose to use some of their life insurance benefit for long-term care needs instead of a death benefit. As with all insurance, the options and coverages can vary and require careful analysis to determine if they make sense for your family.
As insurance companies react to increasing life spans, rising costs of health care, and a sustained low interest rate environment making it harder for them to grow their balance sheets, we expect to see a rise in hybrid offerings and updates to the second generation of long term care insurance. We encourage families to understand all of their options, including simply building a financial plan to have higher reserves for these costs, before automatically assuming that a long-term care insurance policy is the right way to address their future concerns.