Tue, 19 Sep 2017
A rapidly shifting landscape has pushed lower- and middle-income buyers out of the marketplace.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The long-term care industry has been experiencing dramatic changes recently. I'm here with Christine Benz, our director of personal finance, to look at what the implications could be for investors who are looking to take on this kind of insurance.
Christine, thanks for joining me.
Christine Benz: Jeremy, great to be here.
Glaser: Christine, you've been doing a lot of work in this area recently, looking at some of these dramatic changes. What's some of the biggest that you've seen?
Benz: One of the biggies, and anyone who has been following this industry even in passing knows this, is that we've seen these huge premium increases come through and they have hit consumers really quite hard. A recent example--in 2016, the federal government, for the long-term care policies that it was offering to federal government employees, those policies pushed through an average increase, premium increase, of 83%. So huge, staggering hikes that consumers have had to reckon with.
And we've also seen a lot of insurers just getting out of this business altogether. Back in the year 2000, there were about 125 companies offering standalone long-term care insurance policies. More recently, just 15 companies or even fewer than 15 companies were offering standalone long-term care insurance policies. That doesn't include companies that were offering hybrid life/long-term care insurance policies. These are pure policies. We've seen a big drop-off in insurers who were in this business in the first place.
Glaser: Why is this happening? What are the biggest drivers?
Benz: A couple of big factors behind these premium increases as well as behind insurers getting out of the business. One is that lapse rates have been really low. When companies push through these premium increases, they expect to see some consumers shake off and drop the policies. What they are finding, what insurers have found, is that consumers who have purchased the policies, tend to stay on board even when the premiums skyrocket. So that has been an issue.
Another issue is that the claims experiences have been worse than expected. People who have these types of policies do tend to use them. And finally, the interest-rate environment that we've been in for a couple of decades now with interest rates going in lower and lower, well, that's bad news for insurers who have to try to earn a positive return from low-risk assets. All of those factors have been working against insurers over the past couple of decades really.
Glaser: What are the ramifications of fewer players, higher costs? Is this something that should concern anyone considering this type of insurance?
Benz: Absolutely. And one of the big ramifications is that when we look at the characteristics of the typical long-term care insurance buyer, they are changing over the past couple of decades. In 1995, the median income of someone buying a long-term care insurance policy was $30,000. In 2010, it was about $90,000. That goes well beyond what people have experienced in wage inflation. We've just seen higher-income buyers being the people who are willing to stand up and potentially contend with these big rate increases that a lot of these policies have pushed through. Median assets of long-term care insurance buyers were about $90,000 back in 1995. Now, they are about $325,000. You've got a lot of people stepping up for these policies with much higher asset levels than that. For lower- and middle-income buyers, they have essentially been pushed out of the marketplace because of premiums that are high to begin with as well as some of these premium increases.
Glaser: What are people replacing this with? Do you have a sense of what's filling in this gap?
Benz: Well, certainly, we have a lot of people who have just said, you know what, I'm going to roll the dice. When we do look at the numbers, about 50% of the population does not have to pay for long-term care costs during their lifetimes. Some people are simply saying, this is a risk that I'm going to have to shoulder rather than to shell out for these premiums.
The other big trend that we've seen coming on strong is the trend toward some of the hybrid products, which I mentioned earlier. These are hybrid long-term care/life insurance products as well as hybrid long-term care/annuity products. We've seen the purchases of these products really skyrocket over the past several years. In fact, between 2009 and 2013 new purchases actually quadrupled of those types of products. And one of the big advantages is that these products typically require a lump sum initial investment, and net effect of that is that purchasers don't have to contend with these premium increases. But they are not necessarily great products for everyone.
Glaser: What are some of the drawbacks?
Benz: One of the big ones is just that the transparency is really tricky. It's hard to do comparison shopping among these products because the features are all really different. And then the other big disadvantage, and it's kind of the flip side of the fact that you won't have to contend with premium increases, is that if you are having to put a lump sum into these products, it means that you will have an opportunity cost. Especially, if yields go higher in the future, you will have sunk a lot money into these products and you won't necessarily be compensated if higher yields come online. So that's a big disadvantage.
Glaser: You do have one piece of goods news here, which is that more plans trying to cover in-home care. What's been that trend?
Benz: That's absolutely right, Jeremy. More and more consumers are saying, well, I want to have at least the possibility of receiving care in my home. The vast majority of long-term care insurance policies on offer today do cover in-home care, and that's a big change from a couple of decades ago where just maybe a third of policies offered in-home care.
Glaser: Christine, thanks for talking about the shifting landscape of long-term care with us today.
Benz: Jeremy, great to be here.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.