Long Term Care Insurance Analysis Failure |
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by Bill Comfort, CSA, CLTC, LTCCP
UPDATED June 8, 2020
UPDATED June 8, 2020
A new column (5/25/2020) at Advisor Perspectives provides a much more comprehensive look at projecting the "need" for LTC insurance. "New Estimates of the Need for Long-Term Care" provides what the author of the February column critiqued below did not: data analysis using actual LTC insurance industry actuarial and claims data that is clearly explained and without the personal biases against insurance. However, caution should still be used in applying even these more-appropriately modeled conclusions when seeking to compare premiums and benefits and the value of owning LTC insurance. The "PV of LTC claims" and the "Premium recovery" percentage assume only an actuarial "average" length of claims, not a longer than average claim which is what owning insurance is ultimately used to protect against. I'd also like to thank author Joe Tomlinson who personally and professionally answered all my questions clarifying his data, calculations and conclusions.
A recent on-line column at Advisors Perspectives attempts to provide an objective framework for conducting a long term care insurance analysis in a financial planning practice. It attempts to quantify the value of owning either hybrid or traditional LTC insurance plans, and it seeks to conclude if any type of LTC insurance is even worth the premium. The analysis fails on every level.
The article, “Evaluating Long-Term Care Insurance”, published February 24, 2020, and written by Allan Roth, is hardly a comprehensive view of the subject, and it needs to be viewed with limited applicability. As he states in his own footnote, “In researching this piece, both data and coverage were inconsistent. Use this piece as points to consider in your own analysis.” [Emphasis added]
I find it to be only partially researched, inconsistently analyzed, and overly opinionated. It is a long term care insurance analysis failure.
The article, “Evaluating Long-Term Care Insurance”, published February 24, 2020, and written by Allan Roth, is hardly a comprehensive view of the subject, and it needs to be viewed with limited applicability. As he states in his own footnote, “In researching this piece, both data and coverage were inconsistent. Use this piece as points to consider in your own analysis.” [Emphasis added]
I find it to be only partially researched, inconsistently analyzed, and overly opinionated. It is a long term care insurance analysis failure.
The Purpose of Insurance
Mr. Roth begins with a spot-on recitation of the fundamental use of and value of insurance coverage even if, “the odds are that buying LTC insurance will be the ‘wrong’ decision.” In other words, it is most likely a policyholder will lose money. But he also correctly summarizes:
“We buy insurance because the consequences of being wrong are significant. An example is a high-income earner needing term life insurance, which is likely to expire worthless, because the consequences of dying early and leaving the family exposed are just too high.” - Allan Roth
The rest of the article then completely violates this primary risk-management directive by trying to quantify what he calls in conclusion the “probability-adjusted benefits” which he does not find compelling. The “probability-adjusted benefits” of term insurance are even worse, but that is not the point when the consequences of an event (dying or needing LTC for more than a short-average duration) are devastating.
Too many financial advisors and their clients inappropriately seek to value insurance products using an investment analysis model. While there are certainly cash-flow and cost of money considerations, as noted above, insurance is purchased with an expectation of “losing” a little in exchange for potentially protecting a lot. And there are “soft”, subjective considerations that are also routinely ignored, but these personal consequences create the greatest value in having coverage when the risk event occurs.
Too many financial advisors and their clients inappropriately seek to value insurance products using an investment analysis model. While there are certainly cash-flow and cost of money considerations, as noted above, insurance is purchased with an expectation of “losing” a little in exchange for potentially protecting a lot. And there are “soft”, subjective considerations that are also routinely ignored, but these personal consequences create the greatest value in having coverage when the risk event occurs.
Data Problems
The main data set used by Mr. Roth from Rand’s 2017 study, while credible, is grossly misleading in what it excludes: home care, adult day care, assisted living, and specialized memory care. The Rand numbers only look at stays in a nursing home - the last place anyone wants to plan to get care. There is no consideration of the even longer durations driven by those other “home and community-based care” options that are used primarily by people with the means to avoid or dramatically delay entry into a nursing home.
Eighty-percent (80%) of people receiving LTC services are at home as cited here by a 2013 report from the Congressional Budget Office. Any attempt at long term care insurance analysis must start with and focus on the costs and consequences of home care. By ignoring home care, Mr. Roth sets up the entire article as a complete long term care insurance analysis failure.
The other source, obliquely referenced by Mr. Roth, from a 2015 Department of Health and Human Services study is also flawed in that it projects an estimate of care needs from Medicaid and Medicare data which is heavily skewed toward nursing home care and short-term durations respectively.
Mr. Roth failed to consider actual LTC insurance claims data which would be much more informative for the type of LTC insurance analysis he attempted.
The Rand and HHS data do correspond to the overall average duration of actual claims from LTCI carriers: The average claim for men is just under three years, and for women it is just under four years. But a better number for LTC insurance planning with any eye to the “catastrophic” need is this: The average duration of claims AFTER lasting one-year is five years! The average duration of a cognitive claim (e.g., Alzheimer’s or other dementia) is at least two-years longer.
According to Genworth, the company with the largest and oldest in-force block of business - two-times larger than number two - reports that only 25% of claimants end their claims (die) in a nursing home. Basing planning or policy analysis exclusively on care in a nursing home is improper and misleading. With that said, let us examine the numbers as presented.
Mr. Roth failed to consider actual LTC insurance claims data which would be much more informative for the type of LTC insurance analysis he attempted.
The Rand and HHS data do correspond to the overall average duration of actual claims from LTCI carriers: The average claim for men is just under three years, and for women it is just under four years. But a better number for LTC insurance planning with any eye to the “catastrophic” need is this: The average duration of claims AFTER lasting one-year is five years! The average duration of a cognitive claim (e.g., Alzheimer’s or other dementia) is at least two-years longer.
According to Genworth, the company with the largest and oldest in-force block of business - two-times larger than number two - reports that only 25% of claimants end their claims (die) in a nursing home. Basing planning or policy analysis exclusively on care in a nursing home is improper and misleading. With that said, let us examine the numbers as presented.
The Cost of LTC Coverage Without A Claim
As some of the fundamental variables are not disclosed, I cannot argue with Mr. Roth's math that analyzes the net present cost of both traditional and hybrid LTC insurance policy premiums if care is never needed. But his conclusion that the hybrid plan “is a bit more expensive than the traditional LTC policy,” is a fanciful conclusion.
He calculates that the net cost in today’s dollars for the traditional plan - without a claim - is: $116,262 (assuming no rate increase). He then shows that the net cost of the hybrid - again without a LTC claim AND including the death benefit - as: $187,642.
More than $71,000 in net present cost is more than “a bit more expensive”; in fact it is 61% more expensive! Again, that is AFTER accounting for the hybrid’s death benefit!
He calculates that the net cost in today’s dollars for the traditional plan - without a claim - is: $116,262 (assuming no rate increase). He then shows that the net cost of the hybrid - again without a LTC claim AND including the death benefit - as: $187,642.
More than $71,000 in net present cost is more than “a bit more expensive”; in fact it is 61% more expensive! Again, that is AFTER accounting for the hybrid’s death benefit!
Comparing Policy Values with a LTC Claim
As to the value of benefits for a projected four-year claim for only one spouse, Mr. Roth calculates that traditional LTCI would provide - in today’s dollars - a net benefit after premiums paid for both spouses of $276,083.
But after all the mind-numbing calculations and scattered numbers he concludes about the hybrid plan that, “It’s difficult to evaluate the net benefit after the cost of the premium, since there would be a death benefit for the person not needing long-term care.” That is a glaring cop-out in the middle of an article attempting to objectively analyze the value of LTC insurance. He either did not try, or did not like the answer.
I am no math wiz, and someone please correct me if I am wrong here, but using Mr. Roth’s own hybrid numbers, here is what I get:
But after all the mind-numbing calculations and scattered numbers he concludes about the hybrid plan that, “It’s difficult to evaluate the net benefit after the cost of the premium, since there would be a death benefit for the person not needing long-term care.” That is a glaring cop-out in the middle of an article attempting to objectively analyze the value of LTC insurance. He either did not try, or did not like the answer.
I am no math wiz, and someone please correct me if I am wrong here, but using Mr. Roth’s own hybrid numbers, here is what I get:
- Total cost for hybrid LTC policies on husband & wife without LTC claim including the death benefits = $187,643.
- Estimated hybrid LTC benefits in today’s dollars of 4-years of LTC benefits for one spouse = $409,309.
- Since the first two years of paid LTC benefits simply accelerate the death benefit that means it has essentially been paid back in LTC claim dollars, which would be the same present-value cost analysis as the no-claim scenario.
- Therefore, the net benefit of the hybrid LTCI after premiums in today’s dollars = $221,666
For one spouse on claim, the hybrid strategy returns 20% LESS to the family than a traditional plan!
Traditional LTCI Rate Increase Risk
But what about the premium increase risk on a traditional policy? This is another place that when attempting an independent, “analytical” LTC insurance analysis financial advisors continue to violate one of the most sacrosanct admonitions from their own industry: “Past performance [rate increases] is no guarantee of future returns [rate increases].”
Of course history can and should be a guide, but what if the fundamentals have changed?
After a backwards-look at in-force rate increases of “50 to 100% or more,” Mr. Roth quotes a source he deems reliable enough to guide him on the cost and structure of traditional LTC plans, who provides actual pricing variables that have profoundly changed over time (lapse rates, interest rates, claim durations), and states clearly, “there will be few if any future rate increases.” Yet without any further research or analysis Mr. Roth opines, “I’m not so confident.”
Mr. Roth’s lack of confidence is not supported by any research into or analysis of the actual fundamental changes in new-business pricing. He , but rather on his own subjective opinion that “competition is lessening”, when in fact it has increased since his referenced 2012 column (also deeply flawed) with a new carrier entering and another re-entering the traditional LTCI market.
He also wants to improperly suggest that a reduction of carriers in the market from 80 to a dozen means the product is failing. It does not. I cut my teeth on disability insurance in the early to mid 1990’s when there were close to 50 carriers writing. Today there are 10. Is disability insurance dead? Hardly. It is prospering in the hands of a few companies willing to specialize in the difficult dynamics of the risk. Long-term care insurance is the same.
And neither of these factors have anything to do with pricing anyway.
Of course history can and should be a guide, but what if the fundamentals have changed?
After a backwards-look at in-force rate increases of “50 to 100% or more,” Mr. Roth quotes a source he deems reliable enough to guide him on the cost and structure of traditional LTC plans, who provides actual pricing variables that have profoundly changed over time (lapse rates, interest rates, claim durations), and states clearly, “there will be few if any future rate increases.” Yet without any further research or analysis Mr. Roth opines, “I’m not so confident.”
Mr. Roth’s lack of confidence is not supported by any research into or analysis of the actual fundamental changes in new-business pricing. He , but rather on his own subjective opinion that “competition is lessening”, when in fact it has increased since his referenced 2012 column (also deeply flawed) with a new carrier entering and another re-entering the traditional LTCI market.
He also wants to improperly suggest that a reduction of carriers in the market from 80 to a dozen means the product is failing. It does not. I cut my teeth on disability insurance in the early to mid 1990’s when there were close to 50 carriers writing. Today there are 10. Is disability insurance dead? Hardly. It is prospering in the hands of a few companies willing to specialize in the difficult dynamics of the risk. Long-term care insurance is the same.
And neither of these factors have anything to do with pricing anyway.
So what are the fundamentals that have changed? Mr. Roth’s source had it correct: low lapse rates, low reserve interest rates, and longer expected claims durations.
Here’s the bottom line:
All of the past pricing mistakes (some of which are still being corrected for in new rate increase filings on older contracts) are now corrected for and baked-into new business premiums.
New traditional LTCI pricing assumes a 1% or less voluntary lapse rate that cannot effectively go any lower, so that “mistake” can never come back. New pricing also assumes historically low interest rates on reserve investments forever in the range of only 3-4%. And claim duration assumptions are now based on actual claims data that is 70-times greater than in 2000 and approaching statistical credibility.
In fact, the Society of Actuaries produced a study in November 2016 that projects that traditional LTC insurance priced in 2014 and later has only a 10% chance of a future rate increase and if needed would only be on average a 10% increase.
In fact, the Society of Actuaries produced a study in November 2016 that projects that traditional LTC insurance priced in 2014 and later has only a 10% chance of a future rate increase and if needed would only be on average a 10% increase.
Other Factual Omissions & Errors
Mr. Roth also ignores - or is ignorant of - the LTC “Rate Stability Regulations” (RSR) that are now in effect in 41 states which dramatically limit the ability of companies to increase premiums on new policies looking forward. Evidence already suggests that RSR has had a stabilizing impact on premiums for policies issued after a state’s implementation.
Finally, in regards to factual assumptions, he wrongly suggests that any coverage is unlikely to be much value in the future because, “Health care inflation currently far exceeds the CPIU.” But long-term care costs over the past 15 years have closely tracked the CPIU, and when higher, LTC costs have only been about two-points above the CPIU vs. “health care inflation” which runs double or more to CPIU. This is, again, an improper fact reference leading to a questionable conclusion.
Finally, in regards to factual assumptions, he wrongly suggests that any coverage is unlikely to be much value in the future because, “Health care inflation currently far exceeds the CPIU.” But long-term care costs over the past 15 years have closely tracked the CPIU, and when higher, LTC costs have only been about two-points above the CPIU vs. “health care inflation” which runs double or more to CPIU. This is, again, an improper fact reference leading to a questionable conclusion.
The Subjective Value of LTCI Coverage
Mr. Roth begins his article with an argument for insurance as a hedge against the consequences of a catastrophic risk, and yet after his lengthy long term care insurance analysis failure he concludes that he will simply self-insure. No wonder; he failed to take his own advice and then let his biases create a deeply-flawed analysis.
Let us be clear, you can never out-invest the return on actual benefits paid from an insurance policy. “Self-insuring” only wins if you never need care, or need it for less than a year, which is not what insurance is designed for, by Mr. Roth’s own admission.
Let us be clear, you can never out-invest the return on actual benefits paid from an insurance policy. “Self-insuring” only wins if you never need care, or need it for less than a year, which is not what insurance is designed for, by Mr. Roth’s own admission.
“Self-insuring” for LTC is simply betting that the event will never occur, or that it will not be catastrophic. Good luck, because that is an “all-in” bet. CLICK HERE to read our report, "The Myth of Self-Insuring for LTC."
Finally, Mr. Roth totally dismisses the protective value of insurance beyond just the numbers to preserve the life, health and lifestyle of the non-disabled spouse:
"I did not consider whether one would prefer to be at home and how much of a burden would it be for one spouse to have to care for the other." - Allan Roth
That is the primary reason to have LTCI coverage!
To explicitly dismiss this is the greatest analytical and advisory failure of the entire article. Most people not only want to stay at home if at all possible, for as long as possible, the spouse and other family members will work to provide care at home from their own desire not to “institutionalize” a loved one even if means great personal and financial sacrifice.
I have worked with several wealthy families who did not have LTC insurance and who could have easily paid for thousands of dollars of home care every month, yet they choose not to because it was seen as “too expensive”, and the caregiving spouse literally destroys his or her lifestyle and health in the process.
I have to wonder, if they could have asked the insurance company for the money to pay for care would that have made it easier to buy mom a good night’s sleep, a trip to the grocery without the fear of coming home to her spouse having fallen and broken ribs lying in a pool of blood from a head laceration? After that had happened three times, one of my clients told me she, “felt like a prisoner in her own home.”
Mr. Roth is also wrong to assume, “there would be substantial cost savings from not travelling, eating out, shopping, not needing a care or potentially even a house.”
While this would be true for a single claimant moving into any type of care facility, it is a fallacy for couples where a substantial amount of lifestyle costs do continue, especially for home care. If you must be in a nursing home, you likely won’t travel, but home care for stand-by or light hands-on assistance with ADLs doesn’t mean you cannot travel. Just take a look at the pre-boarding group flying from Chicago to south Florida in January or the folks with walkers in the cruise ship buffet line.
Which highlights another mindset that too many clients and advisors mistakenly operate in, and that is that LTC means “flat on your back in a hospital bed unable to do anything” - whether the hospital bed is in a nursing home or your dining room. Long-term care and its consequences start well before that.
As to dementia care, Mr. Roth is just plain uninformed regarding spousal caregiving when he says, “Potential dementia of one party could make it virtually impossible for the other spouse to be the caregiver.” Not sure where this observation comes from, but it is the exact type of care where spouses and other family members are burdened - and take on the burden - the most, especially in seeking to keep their loved one at home!
To explicitly dismiss this is the greatest analytical and advisory failure of the entire article. Most people not only want to stay at home if at all possible, for as long as possible, the spouse and other family members will work to provide care at home from their own desire not to “institutionalize” a loved one even if means great personal and financial sacrifice.
I have worked with several wealthy families who did not have LTC insurance and who could have easily paid for thousands of dollars of home care every month, yet they choose not to because it was seen as “too expensive”, and the caregiving spouse literally destroys his or her lifestyle and health in the process.
I have to wonder, if they could have asked the insurance company for the money to pay for care would that have made it easier to buy mom a good night’s sleep, a trip to the grocery without the fear of coming home to her spouse having fallen and broken ribs lying in a pool of blood from a head laceration? After that had happened three times, one of my clients told me she, “felt like a prisoner in her own home.”
Mr. Roth is also wrong to assume, “there would be substantial cost savings from not travelling, eating out, shopping, not needing a care or potentially even a house.”
While this would be true for a single claimant moving into any type of care facility, it is a fallacy for couples where a substantial amount of lifestyle costs do continue, especially for home care. If you must be in a nursing home, you likely won’t travel, but home care for stand-by or light hands-on assistance with ADLs doesn’t mean you cannot travel. Just take a look at the pre-boarding group flying from Chicago to south Florida in January or the folks with walkers in the cruise ship buffet line.
Which highlights another mindset that too many clients and advisors mistakenly operate in, and that is that LTC means “flat on your back in a hospital bed unable to do anything” - whether the hospital bed is in a nursing home or your dining room. Long-term care and its consequences start well before that.
As to dementia care, Mr. Roth is just plain uninformed regarding spousal caregiving when he says, “Potential dementia of one party could make it virtually impossible for the other spouse to be the caregiver.” Not sure where this observation comes from, but it is the exact type of care where spouses and other family members are burdened - and take on the burden - the most, especially in seeking to keep their loved one at home!
Conclusions
Long-term care insurance should first be used to protect couples from the first disability at home. This is where the personal, emotional, and health consequences hit hardest and any extra insurance benefit is invaluable as it covers the extra costs of home care that are over and above all of their ongoing lifestyle expenses.
Anyone can find a financial reason not to buy LTC insurance if they push the numbers around hard enough. When conducting a LTC insurance analysis for clients what financial advisors must get better at is looking at the "subjective" value of coverage along with the financial calculations. It is not an area that many advisors are comfortable with or skilled in, but it is critical in addressing extended planning. The value of the premium increases dramatically when the personal consequences are properly considered as part of the analysis and advice.
The best approach for fiduciary advisors: Partner with an experienced, independent LTC insurance specialist who understands the extended care planning process, how it integrates with other financial, investment, retirement and estate plans, and who brokers multiple companies representing all of the different types of policies from traditional to all of the many newer hybrid options.
For clients: Make sure your advisor or agent truly specializes in LTC planning and can give you an independent LTC insurance recommendation. CLICK HERE for a checklist of what to look for - and look out for.
Anyone can find a financial reason not to buy LTC insurance if they push the numbers around hard enough. When conducting a LTC insurance analysis for clients what financial advisors must get better at is looking at the "subjective" value of coverage along with the financial calculations. It is not an area that many advisors are comfortable with or skilled in, but it is critical in addressing extended planning. The value of the premium increases dramatically when the personal consequences are properly considered as part of the analysis and advice.
The best approach for fiduciary advisors: Partner with an experienced, independent LTC insurance specialist who understands the extended care planning process, how it integrates with other financial, investment, retirement and estate plans, and who brokers multiple companies representing all of the different types of policies from traditional to all of the many newer hybrid options.
For clients: Make sure your advisor or agent truly specializes in LTC planning and can give you an independent LTC insurance recommendation. CLICK HERE for a checklist of what to look for - and look out for.
