Comparing the Various Solutions for Health Care Costs in Retirement

The best thing about retirement is people are living longer than ever.  The worst thing about retirement is people are living longer than ever.  I’ve attended umpteen retirement conferences with this infamous tagline.  The U.S. elder care market is expected to exceed $512 billion in 2020[1].  Similar to national debt, social security obligations, pension deficits, and other entitlement conundrums, here is yet another figure which has become so gargantuan that it’s best to ignore and casually overlook a 3% versus 7% cost increase.  This attitude invalidates the first thing any grammar school teacher will espouse about goals, they must be SMART (Specific, Measurable, Achievable, Relevant, and Timed).

While ignorance is bliss, it’s also irresponsible.  Therefore, a financial planning client must zone in on their individual obligations, for instance the cost of private nursing home room-  $8,121 or assisting living facility- $3,750[2].  Let’s explore the original answer to this expense, Long-Term Care Insurance (LTCI), and then proceed to the recent response of hybrid products.

LTCI was first offered in the late 1970’s and really caught on in the 1980’s.  This was in response to many elderly Americans following the trend of having to sell their house in order to get care.    Sales began to peak in the late 1990’s and early 2000’s; in 2002 over 754,000 policies were purchased by 125 different insurance carriers.  Then there was the collapse… in 2014 only 129,000 policies were purchased by a mere 15 carriers[3].

Customers of LTCI would pay a “non-guaranteed” premium for a set number of years, or more commonly lifetime, with the potential to receive a specific daily benefit for a set number of years, or lifetime benefit, after satisfying triggers such as the inability to perform two of six activities of daily living, chronically ill, terminally ill, or severe cognitive impairment.  Carriers swooped into this growing market, competing for market share on cost.  With little to no prior actuarial evidence and making guestimates on potential claims 20-30 years down the road, carriers made some mistakes.  They then leveraged those “non-guaranteed” rate clauses to make up the shortfall, asking clients to pay sometimes 40-50% more premium for the same plan, only to then increase rates year after year.  Insurers argue these rate hikes are justified due to faulty assumptions about cost of care, interest rates, policyholder lifespans, retention rates, and other factors.  Naturally, many of our nation’s grandparents balked at these elevated expenses on their fixed retiree income, still harboring the fear of paying so much money only to die suddenly of a heart attack, and chose to lapse their policies.

The quickly growing market of seniors combined with a fading product left a void for new solutions… enter Life Insurance.  Some permanent life insurance, typically Whole Life or Universal Life, now contain an “Accelerated Benefit Rider”.  Typically, these riders will allow the insured to advance a portion of their death benefit prematurely in the event of chronic or terminal illness.  The advancement is based on a percentage of the corridor between Cash Value and Death Benefit, determined by their age at that point.  This advancement is also a lien against the death benefit.

To piggyback on this method, some life insurance policies offer a “Long-Term Care Rider”.  This is similar in that it allows an advancement of death benefit, but without restrictions based on age and/or cash values.  It typically also does not create a lien against the policy.  Such riders do come at an additional cost, which like traditional LTC is not a guaranteed premium.  Clients can at least erase the “use it or lose it” debacle, knowing heirs will get a death benefit, caregivers will receive payments, and/or they personally will enjoy cash value.

Beyond traditional life insurance, the annuity market has also created their own benefits to address LTC.  Some products offer a rider that will double the annuity payout or add some other bonus feature in the event chronic or terminal illness triggers are satisfied.  These often come at an increased cost on top of that of a withdrawal rider.

It may have taken several decades to get it right, but the insurance industry is finally making strides to help consumers tackle one of the biggest threats to retirement.  In fairness when discussing life insurance and long-term care, people having been dying since the beginning of time.  People have only been going into assisted living facilities for a few decades.  Hopefully continued actuarial evidence will lead to even more innovation.

Market Insight Reports- 03/19/2018

Genworth 2017 Cost of Care Survey

NAIC Report- 2016

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