The Insurance No One Wants to Buy, and No One Wants to Sell

Adequate insurance coverage is essential to good financial planning. This typically will include our property, health and life. Insurance for these risks is generally straightforward, standardized and accessible. However, when it comes to long-term care insurance, it’s hard to know if we even need it in the first place. If we do … Will we be approved for coverage? Will it be worth the years of premiums? Will the insurance company be around in the future? Will the coverage be relevant when the time comes that we need to use it?

For insurance to be effective in managing risk, the event should be both low likelihood and high-impact, such as the unlikely but devastating occurrence of a home fire or an early death. Decades ago, when long-term care insurance was first introduced, it was designed to cover this type of risk. However, advances in medicine have increased life expectancy and therefore the likelihood of some type of needed long-term care support. In fact, it is expected that the overwhelming majority of elderly Americans will require long-term care at some point in their lives. The U.S. Department of Health and Human Services estimates that someone turning 65 today will have almost a 70% chance of needing these services in their remaining years. As it turns out, long-term care needs have become a relatively high probability event.

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New data also shows that as care delivery has changed over the years, lower cost claims are increasing. Apparently most long-term care needs are not as long as we might think. According to a 2017 article by Morningstar, only about 25% of people need long-term care for more than two years, and the probability of needing it for more than five years is only 2% for men and 7% for women. Perhaps long-term care isn’t commonly the high-impact event that we once thought. High probability and low impact means that traditional long-term care insurance may be less like typical insurance. It may be more like simply prepaying most of the anticipated expenses of care over time (in addition to the costs of insurance overhead) and then just claiming them back later.

This has culminated into a classic market failure. The faulty forecasts in claims, the assumption that people would drop their policies as they got older, along with a long period of low interest rates have resulted in the product's troubled history of massive premium spikes and insurer losses. Consequently, insurance companies have been dropping out of the market at a rapid pace. While over a hundred insurers sold policies in the 1990s, now only about a dozen do. Sales are declining at a stunning trend as well. At the market’s peak in 2002, consumers bought 750,000 traditional policies. There were only about 89,000 policies purchased in 2016.

People understandably still want protection against long-term care costs. Currently state laws have impeded major reforms, but insurance companies are responding in other ways. They are more commonly using existing insurance products to fund long-term care in new ways. Also, alternative care solutions such as hybrid policies that combine life insurance and long-term care are increasing. Given the strain on social programming, it’s also likely that there will be public policy changes around Medicare and Medigap sometime in the future.

To properly assess our long-term care risk, we must first determine the type of risk we're trying to cover and how much we can tolerate on our own. Considerations include our health, hereditary conditions, family longevity, availability of family caregivers, and personal preferences. Needless to say, the right answer is very individual specific. Determining if long-term care insurance makes sense will also depend on our wealth, location, desire to leave a bequest and need for peace of mind.

All current choices for funding long-term care … self-funding, family care, private insurance or Medicare come with advantages and drawbacks that need to be carefully considered. We might determine that we don’t need insurance, but we do need a plan.