At less than 30 years old, long-term care insurance is still the baby of the insurance industry. Some might even call it the Rodney Dangerfield of the business. It just doesn’t get much respect.
Consider the unfounded charge that LTC insurance doesn’t cover Alzheimer’s and dementia. It’s false. “Alzheimer’s is the No. 1 cause of claims paid by LTC insurance,” says Jesse Slome, executive director of the American Association for Long-Term Care Insurance, an industry group headquartered in Westlake Village, Calif.
He may be a kind of cheerleader for the industry, but he’s far from alone. Murray Gordon, CEO and founder of Riverwoods, Ill.-based MAGA, an independent LTC insurance advisor, concurs. Alzheimer’s and dementia “represent 50% of all LTC insurance claims,” he says.
Limitations and Exclusions
That said, it doesn’t quite tell the whole story. Some experts note that many LTC policies these days fall short of covering all that’s required in Alzheimer’s and similar conditions. Typically they “do not pay for the higher cost of special facilities sometimes needed for people with Alzheimer’s,” says Beth Blecker, a certified financial planner in Pearl River, N.Y. “These facility costs are higher than those of normal assisted care or nursing home care facilities.”
Also, she says, many plans don’t provide “adequate coverage for a long, drawn-out condition like Alzheimer’s.” That’s because, in the face of rising premiums (some have risen as much as 50%) many clients have chosen to buy cheaper, stripped-down policies that only pay benefits for a limited time. “It’s now very, very expensive to get an unlimited policy, [so] many people are buying smaller policies with only three years of coverage,” says Blecker. For many LTC situations, that might be enough, but Alzheimer’s can be different. “Many people suffering with Alzheimer’s are physically healthy and may live many years,” she adds.
LTC insurance often contains other limitations, exclusions, restrictions and caps as well. For instance, a 5% compounded inflation rider used to be standard. But with costs soaring and interest rates near record lows, clients are lucky if you can find an affordable 4% inflation rider. “John Hancock has gone as low as a 2% compounded inflation rider,” says Gordon, “but 3% is most common now. The lower the inflation rider, the cheaper the premium.”
The Origin of Restrictions
These changes are attributed to updated actuarial data. Early on, carriers offered overly broad LTC policies. They were surprised to find that people were living longer than expected, and not letting their policies lapse, thus many carriers went out of business. The surviving ones had to raise rates and tighten their standards just to stay afloat. (That included charging women higher premiums than men, ostensibly because women tend to live longer and thus represent a bigger risk.)
“You’ve got the insurance companies on the one hand trying to figure out how to provide a service and still make a profit. Then you have the consumers on the other, who want all they can get. So there’s always a sort of tug-of-war,” explains John Ryan, principal at Ryan Insurance Strategy Consultants in Greenwood Village, Colo., which assists fee-only advisors with their clients’ insurance needs. “The carriers tried to be as generous as possible, until it started to hurt them. That’s when restrictions and limits were born. They might not completely exclude something, but they could put on some restrictions. They could limit certain situations somewhat, but not entirely.”
In today’s typical contract, benefits cannot be paid for conditions that arise from drug or alcohol abuse, self-inflicted injury, attempted suicide or an act of war. That’s about as far as they go in terms of out-and-out medical or diagnostic exclusions.
But there are other clear restrictions. “Policies may specify that coverage only applies where the diagnosis is made after the policy is purchased,” says Royal Oakes, a partner at the law firm Hinshaw & Culbertson in Los Angeles. “The main area of excluded coverage relates to pre-existing conditions. Policies might exclude conditions entirely, or [they] might require that a specified time period expire, following issuance of the policy, before coverage will begin.”
Benefit Disbursement Restrictions
There are also restrictions in the way caregivers are compensated. “Some companies are eliminating riders that provide not just reimbursement for caregivers’ wages but guaranteed fixed daily sums whenever any level of care is needed,” says Oakes.
Actually, caregiver wages are often a sticking point. “Many older policies allowed you to hire your own aides, [but] now many policies require you to hire aides through an agency, which can be considerably more expensive,” says Blecker. Agencies charge what are essentially finder’s fees that can double the cost of care.
Another, related complaint is that family caregivers are treated differently. “There are policies that exclude care provided by a family member,” cautions Ryan.