Funding Long Term Care without LTCi

With the recent failure of two long term care insurers in the state of Pennsylvania, the state and future of long term care insurance (LTCi) bears studying.  To that end, the National Association of Insurance Commissioners released a report last year titled “The State of Long Term Care Insurance : The Market, Challenges, and Future Innovations”.

Fun fact : did you know that Alzheimer’s is the most expensive disease in America ?  According to Alzheimer’s association, nearly 1 in 5 medicare dollars is spent on a person with Alzheimer’s.

In the absence of LTC insurance, the report sites an novel way of funding LTC using an immediate annuity :

Traditional immediate annuities are priced assuming the annuitant is anti-selecting; in other words, the person is very healthy and expects to live longer than others the same age. For example, let us assume the premium for healthy people buying an annuity at age 82 is 10 times the annual payment they will receive. So, a $120,000 single premium will purchase an annual income stream of $12,000. However, people beginning a stay at a nursing home typically have health conditions which will shorten their life expectancy to, let us assume, 20 months. This makes the purchase of a traditional immediate annuity to protect against longevity uneconomical.

Such a situation is ideal for an underwritten immediate annuity, particularly one aimed at people entering a nursing home. Here, underwriting is counter to what we think of in life and health insurance because the more health conditions people have shortening their life expectancy, the more leverage they have. For example, an underwriter could discern, based on health conditions, a particular person is expected to live approximately 20 months. Allowing for profit margin, the insurer might assume a two-year life expectancy for pricing purposes. In this case, the $120,000 could purchase an annual income stream of $60,000 for the life of the annuitant, which is enough to fill the average income gap during a nursing home stay while the annuitant lives. This could be purchased from just a portion of the average person’s net worth at over age 80—and it would eliminate the fear of outliving assets and the panic which leads to the initiation of Medicaid planning.

As of this writing, there is at least one such product available in the U.S. There are examples of proven success elsewhere. This is the predominant form of LTCI in the U.K., where the traditional product as we know it in the U.S. is not sold. The target market for such a product comprises people entering or currently in care episodes with income shortfalls, but who have enough net worth to fund the income shortfall for an average remaining impaired life expectancy. This is the case for about half of the U.S. population over age 80.

Other solutions :

Other point-of-need funding solutions have emerged for those who did not previously purchase LTCI. There is a budding financial advisory space focusing on these cases, and these advisors do not push a Medicaid solution. The approach of such financial advisors is to first determine whether there is an income shortage for persons who need LTC and, if so, to quantify it. Then they take steps to convert net worth into income streams help fill this gap. The most common ways of doing so are:

Home equity can create income via reverse mortgages.

A life insurance death benefit can be assigned in exchange for a lifetime income payment (life settlements).

A series of loans against a life insurance policy can be taken, but only while principal lasts.

At least one “financial concierge” company has emerged in this market, which receives referrals from nursing home and assisted living facility admissions offices. It acts as an advocate for new entrants in finding ways to finance care, and it can provide bridge loans as solutions are put into place, which can take months in many cases. The company also receives real estate brokerage or referral fees in cases where a home is sold, as well as referral fees for other transition services (such as moving and storage services).

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