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Long Term Care Hybrid Policies: Energizing the Life Insurance Market

Filed under: Benefits

Sales of long term care insurance policies rose to popularity in the 1990s, right about the time studies began discovering that modern medicine was enabling people to live longer. Unfortunately, many of those product lines were badly underpriced. Insurers began to feel the pinch of having to pay out benefits for many more years than their actuaries expected. 

That led to many insurers increasing premiums substantially, year after year, to get premiums where they needed to be to cover benefits and remain viable. For example, in 2019 Blue Cross Blue Shield of Florida notified policyholders that their annual premiums for coverage would rise by an average of 94 percent through 2021.

Even with a long term care insurance (LTCi) policy, beneficiaries may not receive full coverage for their expenses. LTCi policies typically pay out a fixed amount per day for nursing home, assisted living facility, or home healthcare fees. The policy may require a wait period before coverage kicks in, such as 90 days, and there may even be a limit to how long coverage lasts – so seniors could outlive their policy limits. Most of the time an LTCi policy is purchased when the beneficiary is in his late 50s or early 60s, and premiums tend to increase as the policyowner gets older.

However, over the last decade LTCi sales have dropped significantly as premiums have increased and people have come to believe these policies do not offer good value. Sales of traditional LTCi policies have declined by more than 90 percent and there are currently less than a dozen carriers selling the product. Fortunately, other options to fund long term care have become available to help fill the LTCi void.

One of the drawbacks to LTCI is that it works like auto insurance: You pay for it whether you use it or not. Since fewer retirees today receive employer-sponsored pensions and are already inadequately prepared for retirement, many are reluctant to pay high prices for insurance they may never use.

Hybrid LTC

The insurance industry has developed hybrid insurance contracts that offer the flexibility to meet multiple needs, from retirement income, to death benefit for heirs, to long term care coverage – if needed. For LTC coverage, some life insurance contracts offer a rider that enables the policyholder to draw from the face value of the insurance policy to pay for long term care expenses.

 A hybrid life insurance policy essentially leverages a portion of current assets to provide a substantially higher death benefit for heirs, with the option to draw from the contract if needed for long term care. That way you don’t pay for coverage you don’t need, but it’s there if you do.

Certain types of life insurance policies have evolved to include long term care coverage options through a variety of hybrid plan models. For example:

  • Long term care rider – may be added to a whole or universal life insurance policy for an additional fee
  • Terminal illness benefits – pays out a portion of the policy’s death benefit if the policyowner is diagnosed with a terminal illness or cognitive impairment
  •  Accelerated benefits – pays out a portion of the policy’s death benefit for long term care

Note that when a rider offering accelerated benefits is added to a life insurance policy, this generally costs about five to 10 percent more in premium. In recent years, however, some insurers have begun to include this as a standard benefit for a stronger competitive edge. Compared to a traditional LTCi policy, a hybrid policy can be two to three times more expensive because it features multiple benefits.

Market Response

From an actuarial perspective, hybrid policies present less risk for insurers because they blend benefits. This means that some of the insurance pool will utilize more expensive benefits, such as long term care, while others won’t need a payout until the death benefit.

From a sales standpoint, today’s consumers are looking for better value. They understand how life insurance works, so combining the value of life insurance with coverage for LTC expenses helps address some of their biggest retirement concerns.

Perhaps that’s why hybrid policies have energized the insurance market in recent years. Sales of hybrid contracts with a long term care rider more than doubled between 2015 and 2018, rising from 228,000 to 461,000 policies sold. Today, more than 40 insurers sell combination products with a long-term care component, generating 14 percent average annual sales growth.

To illustrate just how much more popular hybrids are over traditional LTCi, note that hybrids now claim 85 percent of sales in this market, according to LIMRA. When compared to strict life insurance policy sales, hybrids that include long term care coverage represent more than a quarter (27 percent) of the overall US individual life insurance market.

Group Market

Among employer-sponsored benefits, standalone LTC Insurance policies continue to be offered. In recent years, however, some life insurance carriers in the group field have begun to beef up their offerings with an LTC component.

Distribution of hybrid life products within the group market offers two important benefits. For insurers, the workplace channel provides a more stable premium pool. For workers, hybrid carriers may offer guaranteed premiums so they don’t have to worry about rates creeping up as they get older, or being disqualified due to a health condition.

Group combination policies generally provide long term care coverage in the form of an accelerated death benefit. In some cases, the contract may offer both an accelerated LTC rider and extension of benefit LTC rider. For example, a policy with a face value of $100,000 may pay out a monthly acceleration of four percent of the death benefit ($4,000) for 25 months, if the worker needs to pay for long term care expenses. Once the death benefit is exhausted, the policy may pay an additional extension of benefit rider for up to a specified number of months. In this scenario, the combination of LTC benefits could double or triple the original face value of the life policy.

Because the overall LTCi market has shrunk over the last decade, fewer issuers offer coverage through the group model. However, many employers offer individual LTCi policies as a voluntary benefit. These contracts tend to provide more flexibility, newer product features, and are portable if the worker leaves the company.

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