Insurers are changing long-term care insurance policies to reduce confusion and overcome the objections of many potential buyers. The government also is getting on board with some new rules that favor policy purchases.
Two major factors keep many people from purchasing long-term care policies. One factor is that the policies are complicated, with many optional provisions. The other factor is that a person can pay the fairly high premiums for many years, never need coverage, and receive no equity or other tangible benefit from the policy. Here is how insurers are responding to these obstacles.
Some insurers are simplifying their policies. Optional riders that confused people or were purchased by few are being dropped on some policies. Others that are more popular are included as basic features. The result should be lower premiums and a streamlined, easier purchase process. The process also might take much less time than it does now. ManuLife’s Leading Edge is an example of a streamlined policy.
Another way of reducing complications is to offer policies through employers. The employer does most of the work in negotiating the options and prices. Employees generally are offered a basic policy with few riders and options. Premiums are paid through payroll deductions. As a general rule, medical exams are not conducted but some written details of the medical history might be required. The group policies should cost less than individual policies for many people, though they do not have the flexibility of individual policies. Some employers will pay part of the premiums, effectively offering employees a discount, as an employee benefit.
The larger obstacle for many potential buyers probably is the idea that they might never receive benefits from a policy after years of paying premiums. For some reason, this does not bother people with auto and homeowner’s insurance but does with long-term care. To counter the problem, insurers are offering long-term care combined with other policies, usually either life insurance or annuities.
The advantage of the combination policies is that if long-term care is not needed, the insured or the beneficiary has the life insurance or annuity benefits. In addition, the combination policies usually avoid the steep premium increases that plague some long-term care policies.
Most of the combination policies are single premium policies. The insured pays one lump sum premium and has both the long-term care and the other benefits locked in.
For example, a policy might offer $100,000 of life insurance. If the insured needs long-term care, the policy will pay for it and subtract those payments from the life insurance benefit. Usually there is a monthly limit on the amount that can be withdrawn for the long-term care and a lifetime ceiling amount on the long-term care benefits. A typical combination policy would allow up to half of the life insurance benefits to be used during life for long-term care.
Under some policies, the insured buys a certain amount of life insurance, and then buys a long-term care rider. If the life insurance benefits are $100,000, the long-term care benefit is the same amount, providing up to a $200,000 potential total benefit. Often this type of policy has a single premium to pay for the life insurance and annual premiums to pay for the long-term care rider.
Another potential advantage of the life insurance/long-term care combination is that claim denials are less of an issue. Some long-term care policy holders complain that the insurers will not pay for care that should be covered. With a combination policy, the insurer eventually will have to pay the benefits as either long-term care or life insurance. That changes the insurer’s incentives and makes claims denial less of an issue for both the insured and the insurer according to some analysts.
An annuity/long-term care combination should be considered by someone with health issues that might make it difficult to buy stand-alone life insurance or long-term care insurance. Annuities do not have medical prescreening or underwriting. Life insurance usually provides more coverage per premium dollar, especially the younger a person is. But if life insurance is difficult to get or expensive, the annuity combination should be considered.
The combination policies are harder to evaluate and compare with stand-alone policies, because it is difficult to determine how much the different elements cost. In addition, while the insured will receive some benefit from the premiums for a combination policy, the lump sum premium reduces the amount of money the insured has to invest. The loss of lifetime income is a cost.
If a combination policy is considered, the traditional long-term care provisions need to be reviewed just as under a stand-alone policy. These provisions include inflation protection, whether all types of long-term care are covered, and whether care in another state is covered.
The government also is trying to make long-term care policies more appealing.
Beginning in 2010, individuals will be able to make a tax-free transaction by taking money out of an annuity they already own and using it to buy long-term care coverage. Currently, individuals can buy life insurance with an annuity in a tax-free transaction. But if long-term care is purchased with an annuity, that will be treated as a distribution from the annuity, taxed as ordinary income. In 2010, an individual also will be able to exchange an annuity for long-term care insurance tax free.
The federal government also is expanding a pilot program that allows people who have purchased long-term care insurance to qualify for Medicaid before giving up as many assets as required of those without the insurance. The program is available in California, Connecticut, Indiana, and New York, with others getting ready to apply.
Another problem for potential long-term care insurance buyers is the history of premium increases. A number of insurers under-priced their initial policies and had to implement steep premium increases in the following years. Some policyholders found that after years of paying premiums they had to let the policies lapse because the premiums were too high. They were letting the policies lapse just as they were nearing the age when they were likely to need the coverage.
To counter this problem, some insurers are guaranteeing premiums will not increase. The combination policies also can overcome this problem, because premium increases are less likely with those policies.