Long-term care insurance in a changing landscape

Long-term care (LTC) insurance is just as important as life insurance, disability insurance, and saving for retirement. Even so, many people will insure their pets before insuring themselves. Businesses also seem to offer more insurance for an employee’s furry friend than the employee. According to the Mercer benchmarking survey, 45% of large employers offer pet insurance, 28% offer hybrid life insurance, and 22% offer a stand-alone LTC program.

What is long-term care insurance?

Long-term care insurance reimburses policyholders for services that assist in activities of daily living. Activities include eating, bathing, transferring, incontinence, or cognitive impairment. A policyholder receives reimbursement after losing the ability to perform two or more activities. Typically, the policyholder must suffer the loss of two daily living activities for at least 90 days for the plan to pay out a benefit. LTC plans cover benefits if the policyholder requires care in a facility, daycare, or with a qualified long-term care provider within the policyholder’s home. Most LTC plans offer coverage for relevant home modifications. 

These insurance policies can provide a benefit on the first day of use. Policyholders can make claims as soon as they become benefit-eligible.

What are the challenges of the long-term care market?

The difficulties of getting insurance, high costs, and government medical programs make it challenging for many Americans to pay for long-term care.

Obtaining long-term care insurance used to be easier, but in the last decade, many group carriers left the market due to high claims and incorrect pricing plans. Today, there are roughly three group carriers, which significantly limits the availability of these plans.

One of the primary challenges of long-term care insurance is the cost. Krystie Dascoli, practice leader, Voluntary Benefits at Marsh McLennan Agency, notes that care prices are high for many reasons, such as administrative expenses, rising drug costs, and global labor shortages. Additionally, premiums can be expensive, especially for individuals who are old or have pre-existing health conditions. Traditional long-term care insurance policies often include premium increases over time. These rises make it challenging for policyholders to budget for the growing insurance costs in their retirement years. According to a report by the American Action Forum, the cost of long-term care increased by 20.7% from 2012 to 2019. By 2027, these costs will increase by 83%.

Consumers and potential enrollees would do well to recognize the need for LTC insurance while keeping track of its costs. Considering long-term care insurance as a critical component of their financial planning is important. Many assume they can self-fund, but frequently, according to Krystie, long-term care is needed sooner than expected. In many situations, the insured must accumulate more to support themselves when LTC is needed.

Many Americans opt out of traditional insurance plans because they view them as “use-it-or-lose-it.” If they never need long-term care, the premiums paid into the policy do not result in any financial benefit. The idea of paying high costs for coverage they may never need often deters policyholders. Instead, many rely on government-provided medical programs, like Medicare or Medicaid. It’s a common misconception that these programs will protect an individual in case of an emergency. However, Medicare only partially covers the needs for long-term care and will not cover activities of daily living. Medicaid is typically unavailable to individuals with more than $2,000 in countable assets. Additionally, the choice of facilities and care providers is limited to those who accept Medicare or Medicaid.

What are the costs of long-term care insurance?

The total coverage a long-term care policy will cost depends on the benefit period and the amount the policyholder chooses. On average, Marsh McLennan Agency data shows that these policies cost around $1,200-$1,400 per year. However, rates will vary based on:

• Age
• Benefit amount
• Carrier
• Plan design
• State

Typically, the younger the holder is, the lower the rates. Most traditional long-term care policies do not offer a single premium payment, and many have premiums that increase over time.

What is hybrid life insurance?

Hybrid life insurance is a relatively new product on the insurance market. Hybrid life is an alternative to traditional long-term care insurance that includes:

• Cash value and loan provisions
• Easier qualification requirements
• Employer options
• Multi-purpose coverage
• Premium stability

Hybrid life insurance is more straightforward than traditional long-term care insurance, as it combines different types of coverage into a single policy. This feature can make it easier to understand and manage your insurance portfolio. Hybrid life insurance is a multi-use policy that uses a life insurance chassis and includes a long-term care benefit. As a result, the policy can provide benefits in multiple ways, including a death benefit to beneficiaries, coverage for long-term care expenses, and terminal illness. Hybrid policies can help preserve your assets in case you need long-term care.

With traditional long-term care insurance, you may not receive any benefits if you don't need care. In contrast, hybrid policies offer a death benefit, meaning individuals won't lose the money paid into the policy. This multi-purpose approach can make it more appealing to individuals who want to maximize the utility of their insurance policy.

Hybrid life insurance with long-term care products offers flexible premium payment options. Individuals can make payments in one lump sum or pay through premiums over time. As these policies are level premium, the rate remains throughout the contract. This predictability can make it easier to budget for insurance costs. Traditional long-term care insurance often has rising premiums, which can become expensive as you age. However, rates will still be lower if the holder is younger and healthy.

These types of policies also build cash value over time. Insureds can tap into this money to cover expenses beyond long-term care, such as covering long-term care costs, supplementing retirement income, or paying premiums. This flexibility can be appealing to policyholders. In addition, combination policies can be purchased directly through their employer without medical questions.

What is the Washington Cares Fund?

On July 1, 2023, Washington became the first state in the nation to develop and impose a long-term care payroll tax. The Washington Cares Fund rolls out a 0.58% payroll tax on all employee wages to help fund long-term care programs. There is no cap on wages to help subsidize long-term care needs. While employers do not have to contribute to the fund, they do have to remit employee-paid taxes.

An interesting outcome of this program is the number of individuals who opted out of the state tax. When the state offered a brief opt-out period, four times more people than expected opted out and purchased an individual plan so they didn’t have to pay into the state fund. These opt-outs signaled that people believed individual plans would have better coverage than the state. Some employers offer hybrid life insurance with long-term care benefits as part of their employee benefits packages, allowing you to secure coverage without undergoing medical underwriting.

The program benefits of the Washington Cares Fund will be available in 2026. However, the eligible benefits will only be paid up to $100 daily, with a lifetime limit of $36,500. The benefit isn’t robust enough to lower the exponential costs. Bringing on additional coverage like a hybrid life policy can help out this benefit and facilitate overall protection.

As Washington leads the way, several other states are considering legislation that would do something similar for their residents.

How can Marsh McLennan Agency help?

Powered by experience in long-term care insurance, Marsh McLennan Agency aims to help employers like you re-imagine and re-balance your benefits. We partner with you so you can uncover cost savings while meeting your employees' expectations.

Reach out to a Marsh McLennan Agency consutlant today to learn more about long-term care.