Pitfalls of Long-Term Care Insurance Products

This previously published article is part of 12 Days of Wealth Management: The Year in Review.

When Nancy Nasief was diagnosed with ovarian cancer in 2007, her husband Edmund G. Nasief Jr., a UBS advisor, wasn't thinking about long-term care insurance. It was about the last thing on his mind. In fact, when one of the members of his advisory team, the Nasief Meyer Wealth Management Group in Louisville, Ky., suggested in 2011 that he sell the product, he scoffed at the idea.

Then Nancy took a turn for the worse in 2012, and Nasief hired a caretaker to assist his wife 12 hours a day. "I began to live this problem, emotionally," he says. "Nobody thinks about it; then it's too late."

When she died three months later, the first thing Nasief, 63, did with the proceeds of her life insurance policy was put down a large, one-time payment on a long-term care contract for himself. He bought it with his daughter in mind. "I don't want you to have to go through with me what I went through with mom," he told her.

Fear: It's the primary reason most people buy LTCI. It assuages the fear of going broke paying for elder care, the fear of depleting wealth intended for the next generation, and the fear of saddling family members with the costs and logistics of providing care if assets run out. One look at the stats, and fear, or at least serious concern, seems a legitimate response.

Almost 70% of people aged 65 can expect to eventually require some level of services and support to meet personal care needs over an extended period of time, according to the Centers for Medicare and Medicaid Services. The median cost for a private nursing home is over $80,000 per year, according to a survey from Genworth Financial, one of the oldest and biggest providers of long-term care insurance. That number has risen over 4% annually for the past five years and is expected to go higher with increased demand from baby boomers, says Bonnie Burns, a policy specialist with California Health Advocates, a health care watchdog group.

That's why the cost of providing long-term care is one of the top two concerns among investors with over $250,000 in assets, according to a recent UBS survey. "It's the number one thing that people do not want to talk about and also the number one thing that can blow up their retirement if it's not addressed on the front end," says Kimberly Maez, an Ameriprise private wealth advisor based in Colorado Springs, Colo.

But individual long-term care insurance has not evolved into the security blanket that many advisors and their clients initially hoped it would be. Individual long-term care insurance, and by association, those who recommend it, face some serious challenges, chief among them the financial instability of its providers, which has led to exploding premiums, changing policy terms, increasing qualification standards and the requirement that purchasers predict, decades in advance, how much long-term care they are likely to need.

Highly publicized class-action lawsuits have sprung up around the country as a result of insurers' attempts to stay profitable in the face of economic challenges. Most of these cases seek to block rate increases that often top 80%, others dispute denials of benefits. These issues and the complex nature of the product have caused a sales plateau for individual LTCI in the past two years, as reported by the American Association for Long-Term Care Insurance. Genworth Financial reported that second quarter sales of individual (or traditional, premium-based) LTCI dropped from $53 million in the year-ago quarter to $38 million last quarter.

Despite the drop, about seven million individuals, including about 12% of Americans over 65, currently have long-term care coverage, according to a 2012 annual report from the Life Insurance and Market Research Association. Overall, AALTCI reports, providers paid $6.6 billion in benefits in 2012 to a record 264,000 consumers. That money went to disabled policy holders to purchase home care services, assisted living and nursing home care.

But consider this: Two-thirds of those over 65 require less than two years of formal paid long-term care services, according to the SCAN Foundation, a non-profit charity that addresses health care issues for seniors. "This particular service represents [coverage for] a potentially catastrophic risk for a small number of people," the report said.

Today, some are questioning whether traditional individual LTCI is the right answer to the challenges of paying for long-term care. As new, more user-friendly LTCI products enter the marketplace, the answer is increasingly "no."

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