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Mark Miller: Remaking Retirement

Fresh Approaches to Paying for Long-Term Care

Some call for a hybrid public-private solution to financing long-term care costs and insurers to create new products, writes contributor Mark Miller.

Long-term care is a wild card in the deck for any retirement plan. Half of all Americans develop a disability at age 65 or older that is serious enough to need long-term care, and one in six will spend at least $100,000 out of pocket for care, federal data shows.

The financial risk is real, but our current system of insuring that risk is a mess. Don't even call it a system--what we have is a patchwork of private insurance that hasn't penetrated the market widely, and an inadequate public social insurance safety net.

Only the most affluent households can afford to pay for long-term care out of pocket, and private long-term care insurance covers only about 7.4 million people, according to the National Association of Insurance Commissioners. Many others will be covered under Medicaid, which funds care only in cases where a patient's assets have been almost completely spent. Meanwhile, a great deal of care is provided by family members. That can lead to other problems, including job interruption, reduced Social Security benefits and retirement saving, and general financial instability for the provider of care.

Most experts worry that the current approach isn’t sustainable. Long-term care costs are rising at a much faster pace than overall inflation--nursing home care's five-year annual growth rate is 4%, according to Genworth data. An especially troubling sign on the cost side is the shortage of professional caregivers.

Medicare and Medicaid together cover 61% of long-term care costs--and both systems face financial stresses that will only accelerate as the country ages. Meanwhile, most households don't enter retirement with enough savings to cover a long-term care expense. Among workers 55 or older, just 30% have saved more than $250,000, according to the Employee Benefit Research Institute; 15% have between $100,000 and $249,000. But 33% have saved less than $25,000.

Congress hasn't addressed the problem, partly due to ideological divides. Conservatives advocate private-market insurance solutions, while liberals advocate for stronger public coverage, mainly through Medicare.

Clearly, fresh thinking is needed. And that is starting to happen.

Three in-depth reports were released recently calling for a hybrid public-private approach to financing long-term care costs. The reports, which were developed by a nonpartisan consortium of researchers, represents an ideological middle ground. It calls for streamlining and simplifying private long-term care insurance to make it work better, but also covering the most extreme risk through a publicly financed insurance program.

Meanwhile, while the big thinkers think their thoughts, some insurance companies are tinkering around the edges by rolling out new private insurance products aimed at getting around traditional consumer objections to long-term care insurance.

Research Recommendations
The three reports all are based on a single, detailed core analysis of the nation's long-term care needs, insurance markets, and financing mechanisms conducted by the Urban Institute and Milliman, an insurance industry actuarial consulting firm. Taken together, they reflect input from most of the nation's long-term care policy experts--and each was written with balanced representation across the ideological spectrum. A side-by-side comparison of the three sets of recommendations can be downloaded here.

The Bipartisan Policy Center offered a detailed set of recommendations on how to reshape commercial long-term care insurance. Its report calls for a new type of "retirement long-term care" that would provide limited benefits--two to four years after a cash deductible is met. Workers could use savings from their 401(k) plans to buy insurance, and early withdrawals for that purpose (before age 59 1/2) would be penalty-free. The policies also would be sold on federal and state health insurance exchanges. The Bipartisan Policy Center and another report (by the Long-Term Care Financing Collaborative) suggest selling policies attached to Medigap or Medicare Advantage plans.

Retirement long-term care would be offered only in three basic flavors, with the intention of keeping choices standardized and limited to avoid consumer choice paralysis.

The key choices would be daily benefit level, length of coverage, and length of waiting period before coverage begins.

The researchers believe these simplified policies would be priced at about half the cost of current private market insurance policies. Those costs now range from $2,035 annually for a single male buyer (age 55) to $2,580 for a single female buyer of the same age, says the American Association for Long-Term Care Insurance. A married couple age 60 can expect to pay an average of $3,560 per year.

All three reports propose a new federally-run "catastrophic" benefit that would shift coverage for patients with lifetime costs exceeding $250,000 to a public plan. This most likely would be housed in the Medicare program.

A catastrophic Medicare benefit would be costly. The Bipartisan Policy Center estimates that if 90% of Americans were covered, benefits paid in 2015 would have totaled $411 billion, or about half the cost of Medicare's Part A (hospitalization) program. Some of that cost would be offset by lower Medicaid spending, but a new revenue source would also be needed--either an increase in the payroll taxes paid by workers for Social Security and Medicare, or through a "general funding" source, such as changes to the income tax or a consumption tax.

Meanwhile, the reports recognize that Medicaid continues to be the safety net for millions of Americans. Two of the reports call for modernization of Medicaid that would make the program's long-term care coverage more flexible.

Commercial Market Innovations
In addition, insurance companies are trying some new twists on traditional long-term care insurance.

Genworth--the largest underwriter of standard long-term care insurance policies--recently rolled out a single premium income annuity product geared to provide a long-term care benefit. The IncomeAssurance Immediate Need Annuity is designed as just-in-time coverage for people with an immediate need to fund a long-term care need but who didn't plan ahead by purchasing a traditional long-term care insurance policy. It is modeled on an existing product category in the United Kingdom called Underwritten Care Annuities; Genworth ispartnering with a large U.K. underwriter of these policies.

Like any single premium income annuity, Genworth's long-term care annuity provides lifetime monthly income payments. But since it targets an older buyer with health problems, the monthly payments can be considerably higher than a typical single premium income annuity would provide.

Genworth provides this example: an 89-year-old widower with dementia could invest $180,000 to receive $44,000 in first-year annualized income--20% to 50% more than a standard single premium income annuity would generate, according to the company. A sort of reverse medical underwriting is used--income rises with a poor health rating. There is an early-death benefit that returns a portion of the premium if the buyer dies within the first six months after purchase. Cost of living adjustment riders ranging from 1 to 8 percent can be added, as can an optional five-year death benefit feature.

The minimum investable amount is $50,000. Households with limited investable assets would need to seriously consider the potential risk of reduced liquidity and flexibility by locking up a significant portion of  investable assets in an annuity.

Another worry is that Genworth is marketing its long-term care annuity to a customer base more likely than average to be experiencing cognitive decline. The company acknowledges this issue, noting that it has created several "suitability" review procedures that brokers must follow in determining when a policy can be sold. 

"We are acutely aware of this," says Debapriya Mitra, senior vice president of business strategy for Genworth's U.S. Life Insurance Division. "You want to be absolutely sure that people understand what they are buying."

And Mitra acknowledges that solutions like this are far from ideal. 

"This is not the greatest thing since sliced bread -- it’s not," he says. "We’re trying to address a gap for people who haven’t planned ahead but are facing a long-term care need today."

Another product that targets older buyers--but has been in the market for some time--is so-called short-term insurance, which is structured very much like long-term care insurance, but provides coverage for one year or less. While long-term care insurance sales have flagged, short-term care insurance sales held their own or grown. At Bankers Life, which has sold short-term care for more than 20 years alongside long-term care insurance, short-term car insurance accounts for roughly 65% of sales, up from 50% five years ago, says Brian Millsap, vice president, long-term care product management. Overall, short-term care sales rose 19.6% last year, according to industry data.

The average short-term care insurance buyer is 68--about 10 years older than typical long-term care insurance buyers, Millsap says. A married couple age 65 could purchase a policy from Bankers Life for $2,440 annually that would provide $150 in daily benefit for 360 days. That pricing doesn’t include inflation protection, and only 10% of short-term care insurance buyers select the 5% compound inflation option, Millsap says. 

"We’ve designed it to be a simpler product, with fewer options--also, the time horizon for using this is shorter than it is with LTCI."

Short-term care insurance certainly can save some money--a married couple age 60 can expect to pay an average of $3,560 annually for an long-term care insurance policy, according to the American Association for Long-Term Care Insurance. But at $2,440 a year, the premiums for short-term care insurance still add up to a hefty $24,440 investment over a 10-year period--and no one can predict whether a care need will be short or long, so the benefit could easily wind up being inadequate.

Like long-term care insurance, short-term care underwriters can apply to regulators for premium hikes after policies are sold, but Millsap says the Bankers Life product lines have enjoyed stable premiums over the 20 years they have been sold. 

"We have had three generations of products over that time--one that we sold in the early 2000s has had a rate increase, but the ones we sold before that, and since, have not," he says.

Meanwhile, New York Life is rolling out NYL Secure Care, a long-term care insurance product that leverages the company's mutual insurance structure. Since policyholders are owners, Secure Care is structured to allow them to benefit from potential dividends in a rising interest rate environment. Rock-bottom interest rates have been a key problem for long-term care insurance underwriters, since it hurts their ability to earn adequate returns on their bond-heavy portfolios.

If interest rates rise, starting in the 11th year of the policy the dividends would offset premiums--potentially eliminating the premium entirely in 20 or 30 years.

John Hancock is trying something similar, rolling out a "Performance long-term care policy." The idea here is to bring down the cost of long-term care insurance premiums by offering potential "flex credits" if investment and claims results are favorable. Unlike New York Life, Hancock doesn't have a mutual structure and may well "face a fundamental conflict of interest in deciding how much to pay as a Flex Credit to policyowners, versus a dividend to shareholders," asMichael Kitces, director of research for Maryland-based Pinnacle Advisory Group, puts it.

What's next?
Product innovations like the ones described above--no matter how well intentioned--aren't likely to be game-changers in the long-term care insurance market.

For that, look to the broader proposals laid out by the bipartisan research studies released this year. All would require Congressional action,  which won't happen in an election year. But it's encouraging to see the groundwork being laid now for a serious policy discussion on how we pay for long-term care in 2017, when we will have a new president and Congress.

Here's hoping for progress soon. The baby boom generation isn't getting any younger, and the country's age wave is increasing pressure to develop solutions.

Mark Miller is a retirement columnist and author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living. The views expressed in this article do not necessarily reflect the views of