For the past few years, the sales trends for long-term-care insurance haven’t changed much. The most recent figures are no exception. In the first three quarters of 2015, U.S. sales of this insurance fell 19% from the same period the year before to an annualized $189 million, as measured by data tracker LIMRA. In all, more than 75,500 Americans purchased the insurance during that time, down 22% from the preceding year.
“Traditional LTC insurance seems to be continuing to decline,” observes Andrew Bucklee, a senior vice president and head of insurance solutions at Lincoln Financial Distributors, part of the Radnor, Pa.-based Lincoln Financial Group. He then adds an optimistic note: “Lincoln continues to see increasing interest in our hybrid products.”
Bucklee is referring to annuities and life-insurance products with linked LTC benefits—asset-based combos that, as a group, have made up the fastest-growing area of the market. In one study, sales of life insurance with LTC benefits jumped some 500% in the six years ended 2014.
In LIMRA’s last annual survey, the market for hybrid policies “had not exceeded that for stand-alone policies, but it was getting close,” says Catherine Ho, a LIMRA product actuary.
(Results for 2015 are not available as of this writing.)
Understanding The Trends
To get behind the numbers, it’s important to realize that the combo products haven’t been around as long as their stand-alone cousins. “When we started looking at them, they amounted to a very small market,” Ho says. “So an extra couple hundred policies sold represented huge growth. We’re still seeing double-digit growth, but it’s getting to a point where the market is now a good size and growth rates may slow.”
At the same time, stand-alone plans have endured a run of bad press. Some had double-digit rate increases—while the hybrids lock in premiums up front (often payable in 10 installments). But the worst of the rate increases may be behind us. Also, many carriers dropped out of the market, though none in the past 18 months.
“Going forward, my expectation is that the carriers who are still in the stand-alone LTC insurance market have a pretty firm grasp on what the pricing models should look like and are no longer harboring overly rosy, unrealistic views of their risks and liabilities,” says David Beck, a partner at Egan, Berger & Weiner in Vienna, Va. “The narrowing of the marketplace has left us with a core group of providers that understand the business in today’s environment.
That hopeful thought is echoed by others. “As the baby boomers get older and become more aware of the need to protect their assets from the expenses of an LTC event, I hope and expect sales will be impacted in a positive way,” says Karen Fisherkeller, a LIMRA research analyst.
A Bifurcated Market
Besides being priced differently, combo policies have gained popularity because they are usually easier to qualify for, a result of less stringent underwriting. Perhaps most important, they promise a guaranteed payout, unlike stand-alone LTC policies. “I’m a big fan of linked/hybrid benefits,” says Larry Rosenthal, president of Rosenthal Wealth Management Group in Manassas, Va. “If you purchase a traditional LTC policy and die before you use it, then what happens to all those premiums? Some policies may have a refund, although most don’t. By purchasing the life-LTC policy, you at least know your money will come back to your family through either the LTC benefit or the life proceeds.”
Yet critics contend that hybrid plans have drawbacks. “If you ask a policy to do too many things,” says Beck, “you run the risk of diluting each benefit. So if you’re looking for pure LTC protection, the hybrid policies typically won’t offer you as much of an LTC benefit.”
In fact, linked plans tend to pay benefits from a finite source—namely, the value of the underlying asset. Edward Horwitz, a professor at Creighton University’s Heider College of Business in Omaha, Neb., says the amount of their LTC benefits is “tied to the underlying death benefits”—in the case of life insurance—“or premium amount”—for annuities. The bigger the LTC payout, the less that’s left over for a death benefit. With stand-alone plans, on the other hand, the insurance companies assume more risk.
Another complaint about some hybrid plans is their lack of inflation protection. “You can buy a policy that has a $500,000 death benefit and a 4% per month LTC benefit giving you $20,000 a month. But with no inflation protection inherent in the policy, if the costs track like they did from 1995 to today, you will need $27,000 a month in 20 years, when you really need the coverage,” says Gary R. Smith of New England Retirement Advisors in Auburn, Maine. “A $7,000 monthly shortfall is not a small amount.”