Insurers getting plenty of mileage out of long-term-care hybrids

Pearl Neier, 85, decided against long-term-care insurance after hearing about the policies from AARP, the group that lobbies for older Americans. “It was much too high for me,” said Ms. Neier, sitting in the sunny dining room at her retirement residence facility. She said that her room and board are covered by Medicaid and Social Security. The insurance industry, which has struggled to persuade skeptics such as Ms. Neier that they need the policies, has turned to selling combination products that blend LTC with traditional life insurance. The policies generally are built using universal life, which has an investment component, and can pay out the death benefit early to help pay for care. Sales of the hybrid policies, which can cost $100,000 for a maximum monthly benefit of $5,000 and come with sales commissions as high as 8%, more than doubled last year at Genworth Financial Inc. By contrast, sales of traditional individual LTC insurance industrywide dropped 23% during the five-year period ended Dec. 31. “The problem with long-term-care insurance is that the wealthy don't need it, because they can afford their own care, and the middle class can't afford it,” said Peter Katt, a fee-only life insurance adviser. “It's a small sliver of the population who should even consider it.”

USING YOUR MONEY

The contracts generally are designed so that payments for care come dollar-for-dollar out of the death benefit, meaning that a buyer who taps a policy for long-term care will pass a reduced death benefit on to heirs — or none at all. “If you give a company $100,000 today, then you'll basically be spending your own money for the first two years of claims,” said John Ryan, an insurance broker and founder of Ryan Insurance Strategy Consultants. The median stay in a nursing home among patients who die there is five months, according to research by Alex Smith, an assistant professor of medicine at the University of California, San Francisco, and Anne Kelly, a social worker who was a student at the University of California, Berkeley, at the time the research was conducted. The combination insurance may be an easier sell to consumers who are skeptical of paying for insurance that they may never use, said Brian Peterson, president of NextGen Advisor LLC, which works with financial advisers in evaluating policies. Some insurers, such as Lincoln National Corp., are guaranteeing that buyers can get their premiums back at any time before tapping the benefit. “Most people who buy hybrid insurance are not buying it because they want life insurance; they're buying it because they need long-term-care insurance, and the sales pitch that you can get your money back, no matter what, is pretty compelling,” Mr. Ryan said. Traditional LTC insurance generally reimburses certain expenses or pays a daily cash benefit for those who require assistance with day-to-day tasks such as dressing and bathing. About 69% of Americans turning 65 today will need long-term care at some point in their lives, according to LeadingAge, a lobbying group that represents nursing and retirement homes. The number of Americans 65 or older may more than double by 2040 to about 81 million, from an estimated 40 million last year, according to the Census Bureau.

COST OF CARE

The cost of a private room in a nursing home is $213 a day, or about $6,500 a month, according to a survey this month by Genworth Financial Inc. Assisted-living facilities, which, unlike nursing homes, generally don't offer round-the-clock skilled nursing, charged an average of more than $3,000 a month, according to Genworth. “A lot of people become convinced, through scare tactics or statistics or whatever the case may be, that they need long-term-care insurance. Then they start looking at policies, which may be prohibitively expensive,” said Scott Witt, founder of Witt Actuarial Services, a fee-only insurance adviser. A traditional LTC policy from Massachusetts Mutual Life Insurance Co. that pays a maximum of $200 a day in benefits over 10 years, with an automatic 5% annual inflation adjustment, would cost a 55-year-old couple about $6,700 annually or about $590 per month, according to a quote obtained last month by Mr. Katt and confirmed by the company. Ms. Neier said that she hadn't thought about the prospect of paying for long-term care until her 70s, when she looked into the policies. She had been paying for her stay at VillageCare, where apartments start at $3,600 a month, including some meals, with the proceeds from the sale of her home until this year, when she qualified for Medicaid, she said. Companies that underwrite LTC policies have had to raise premiums or stop selling the insurance altogether in recent years. That is because they overestimated lapse rates, or the number of people who allow their policies to lapse, meaning the companies have had to pay out more in benefits than they anticipated, said Carl Friedrich, a principal and consulting actuary for Milliman Inc., a benefits consulting firm. MetLife Inc., the largest U.S. life insurer, stopped accepting applications for new LTC policies at the end of last year. In February, Guardian Life Insurance Co. of America said that it would stop writing new LTC insurance policies by the end of the year. Allianz SE has sold no new LTC insurance since 2009. Last year, John Hancock Financial Services Inc., a unit of Manulife Financial Corp., filed for permission with state regulators to raise premiums for some of its LTC policies by an average of 40%. So far, 15 states have approved increases. In 2007, Genworth said that it would raise premiums by 8% to 12% on many of its policies, and in October, it announced a further 18% premium increase for some of them “Sales have ramped up” for combination policies during the same period, Mr. Friedrich said. Sales of hybrid life and LTC policies by Genworth increased 124% last year, compared with 2009, according to spokesman Tom Topinka. Genworth estimates that industrywide sales figures for last year, which aren't yet available, will show an increase of more than 50%, he said. Last year, sales of life and LTC combination products at New York Life Insurance Co. jumped 92%, vice president Michael Lackey said. Lincoln sold $108.5 million of MoneyGuard, the top-selling hybrid LTC insurance in the United States last year, a 62% increase from 2009. Sales of life and LTC blended products have increased by 67% annually since 2008 at State Life Insurance Co. The policies offer a more cost-effective way of insuring against the possibility of a very long nursing home stay than other products on the market, Mr. Friedrich said. “We believe the combination policies are poised to take a leadership role in financing long-term care,” said Bruce Moon, vice president of marketing for State Life, a subsidiary of insurer and employee benefits provider OneAmerica Financial Partners Inc. Some policies offer an extension-of-benefits rider so that they will continue to pay, up to a certain amount, if a holder spends through their death benefit while receiving long-term care. Sales commissions generally are about 8% of the upfront premium, Mr. Ryan said. “It's a more "affordable' way for certain people to add long-term care onto their policies,” said David O'Leary, executive vice president and head of the financial protection division of Axa Equitable Life Insurance Co., a unit of Axa SA. For a 60-year-old New York man who doesn't smoke, putting $100,000 upfront into a Lincoln MoneyGuard Reserve policy would translate into maximum monthly benefits of about $5,000 a month for at least six years for a policy with an automatic 5% inflation adjustment after the first two years of benefits, according to a quote obtained by Mr. Ryan and confirmed by the company. The first $119,460 spent on long-term care would draw down the policy's guaranteed death benefit, after which the holder would have an extension of benefits of $238,920 or more to spend if he remained in long-term care, according to the quote. “You have to put up a pretty sizable amount of cash in order to get a long-term-care benefit that's meaningful,” said John Sherman, president of LTC Experts, an LTC insurance broker. The health care law that President Barack Obama signed in March 2010 created a program that will pay a daily cash benefit that averages $50 or more to those workers who enroll in and contribute to the program, and can no longer care for themselves. Details of the plan, called the Class Act, such as the cost of premiums for workers who enroll, haven't been released, said Lauren Shaham, a spokeswoman for LeadingAge.

PUSH TO KILL BILL

In April, Sen. Lindsey Graham, R-S.C., and Sen. John Thune, R-S.D., introduced a bill that would repeal the Class Act. “The Class Act is a Ponzi scheme that would make Bernie Madoff blush,” Mr. Graham said in a statement. “It's billed as an insurance program for long-term care, but really it's just a huge and very costly government accounting trick.” Medicaid is the largest single payer for long-term care and makes up 42% of total spending, according to LeadingAge. Medicare pays for stays of up to 100 days at skilled-nursing facilities when medically necessary, after a patient has had an in-patient hospital stay of three days or more, said Ellen Griffith, a spokeswoman for the Centers for Medicare and Medicaid Services. To qualify for Medicaid, an individual over 65 generally needs to have assets of less than $2,000, excluding home equity of up to $500,000, said Molly O'Malley Watts, principal consultant for Watts Health Policy Consulting. “You truly have to impoverish yourself to qualify,” she said. Medicaid officials also will look at any assets individuals have transferred out of their control in the five years prior to applying for Medicaid. “You can't transfer all your assets to a child and then qualify,” Ms. Watts said.