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.”

The Need For Both Types

Neither type is likely to corner the market, however. “Both traditional and hybrid plans have an important place,” says Len Hayduchok, president of Hamilton, N.J.-based Dedicated Senior Advisors. “Traditional LTCI is better suited for individuals who have a good income, perhaps due to a generous pension, and don’t have a comfortable enough level of assets to take out an asset-based LTC policy. They can also qualify for the state partnership program and allow for more effective Medicaid planning,” he says, referring to joint federal-state policy initiatives to promote the purchase of private LTC insurance. Basically, every dollar spent for a qualified plan is exempt from asset consideration in calculating Medicaid eligibility. This does not apply to combo policies.

But for those with adequate assets, “hybrid policies address the two biggest objections relative to traditional LTC—increasing premiums and paying premiums for 25-plus years and ‘getting nothing in return,’” says Hayduchok.

Recognizing the viability of both types of products, some carriers are offering both. One example is Northwestern Mutual, the insurance and financial services provider headquartered in Milwaukee. “We have a stand-alone product as well as a new linked benefit,” says Kamilah Williams-Kemp, a vice president at Northwestern Mutual. You needn’t choose one or the other, either. “Clients may own both,” she says.

High Lapse Rates?

Some clients, however, can’t maintain LTC coverage of any kind. In a study released in October 2015, the Center for Retirement Research at Boston College found that a third of 65-year-olds with LTC insurance let their policies lapse, either to save money or because of declining cognitive functioning. This means they forfeit all benefits—even people in cognitive decline who are most likely to need future care.

But many dispute these findings. “The researchers have pulled old actuarial data that has little if any relevance to individuals who have recently purchased or are considering buying LTC insurance,” says Jesse Slome, executive director of the American Association for Long-Term Care Insurance, an industry group based in Westlake Village, Calif. “Insurance companies now see lapse rates of 1% and under.”

Steve Cain, a principal and national sales leader at LTCI Partners, a brokerage firm headquartered in Lake Forest, Ill., would agree. “LTC insurance lapse rates are the very lowest [among] any type of private insurance,” he says.

Furthermore, there are now safeguards in place to reduce accidental cancellations. “At the time of application, and every year thereafter, the policy owner is given the opportunity to name a third party who would be notified in the event that the policy owner fails to pay premiums in a timely manner,” says Craig Sargent, a manager of advisory services at CPI Planning in Voorhees, N.J. “This is intended to prevent a policy lapse due to the cognitive impairment of the policy owner.”

Improving Penetration

Still, could the LTC insurance industry do a better job of serving its constituents? “There’s certainly a need for all types of products, as our industry has yet to ‘crack the code’ in LTC planning,” says Cain. “The need is growing, and carriers will continue to develop products that serve all client segments.”

For example, many stand-alone LTC plans now allow policyholders certain options to reduce their rates, such as the ability to lower the amount of inflation protection from 5% a year to 3% or less, or increase the wait time (often called the “elimination period”) before benefits kick in.

Another new option that’s gaining traction is short-term care insurance, which provides benefits for up to one year. It’s less expensive than LTC insurance and requires less stringent health screening. In the first half of 2015, new policy sales jumped a whopping 71%, says Slome of the American Association for Long-Term Care Insurance.

There’s little doubt providers will keep innovating to reach what is still a largely untapped market. “The industry understands the ongoing need, so it continues to look for ways to create solutions,” says Williams-Kemp, of Northwestern Mutual. “Four in 10 adults say they have not planned for, and therefore are not covered, if they were to incur costs of care for an aging family member or friend. This is a concern, as it could potentially derail one’s retirement savings.”

Given rising LTC costs, the impact of “self-insuring” could be catastrophic. “The ongoing problem here is that the whole issue of LTC planning is not being adequately addressed,” stresses Jayne Alford, managing director of IFP Insurance Group, a subsidiary of Tampa, Fla.-based Independent Financial Partners, an RIA. “People need to be encouraged to face this now.”