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.”

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