History of Long Term Care Insurance Carriers
Does Health Insurance Pay for Long Term Care? (Part 6 of 6)
There's a lot that's being written about longterm care carriers by people that don't necessarily tell you the whole story. Let me put longterm care insurance, as it relates to life insurance, into an important context. Life insurance has been around for 200 years or more. Longterm care insurance has been around since 1974. If we believe that life insurance has been around 200 years, longterm care insurance has less than a fourth of the experience. When General Electric in 1974 began their foray into the longterm care insurance marketplace they had to make some assumptions that were unknowable.
One of the assumptions had to do with persistency. Many carriers felt that if a hundred policies were sold, that they would have a six and a half to 7% lapse rate. What they ended up getting was more like one and a half percent. This is an assumption that as I said earlier, was unknowable at the time in 1974.
Another assumption that carriers had to make was what percentage that they would get on interest on reserves that they were required to put away. If you think that you're getting a certain percentage on that, and you project that into your pricing and you get a different number that also can adversely affect the block of business. Finally, they made errors on claims assumptions.
Again, all of these assumptions were unknowable in 1974 when General Electric started this, one of the assumptions was how long a woman would be on claim should she need longterm care? If a carrier thought it would be three years and what you got was four that's not the outcome that they're looking for. They're off on that as well. If you're a man and they thought that if you went on claim it might be two years and what ended up happening was three, that also is equally bad.
However, you fast forward to the year 2000, the carrier marketplace had the advantage of understanding what GE (General Electric) and some of these other carriers experience with their pricing in the year 2000, the carriers made a decision to make sure that they price their products more closely to what the consistency actually was as opposed to what they projected. Most products now are priced with a one and a half to 2% lapse rate.
They've also gotten additional insight as to how to best price their products as it relates to interest rates, they have also done a much better job of pricing, their product related to claims. So like a good coach at halftime, they made these adjustments. The carriers now have done a much better job of pricing the products because they have that experience in the grand scheme. When you consider it against life insurance, they've still had a fraction of the experience that the life insurance industry has.
And it must also be said that the life insurance industry definitely understands their actuarial assumptions. They definitely understand that business. And they definitely understand those numbers because they've had the experience. So this leads us into another discussion. One of the things that is discussed out there is that the premiums can sometimes be changed if people have traditional health longterm care insurance. That certainly is the case. It is filed in the tax code as health insurance.
So while they cannot single anybody out, they do have to get permission from each state's insurance commissioner, to make sure that they're able to implement the rate, the action that is out there. So there are two sets of instruments essentially to solve the problem of longterm care. One is traditional longterm care as we've earlier referenced, and there's a newer set of instruments called asset based longterm care or combination or hybrid longterm care, you hear it called all three of those things.
Usually it means it's a combination product of life and longterm care or annuity and longterm care. Traditional longterm care premiums are not fixed. One of the other push backs sometimes we hear from clients is that if they pay these premiums in for a period of time and the client dies healthy without using the benefits that money is gone. That's a high class problem.
You don't want to pay into this insurance to end up using it. Similarly, you probably aren't laying awake at night, being mad because you didn't have to access your homeowners insurance because your home hasn't burned down. Asset based alternatives are also called combined products or hybrid products. Generally they are life and longterm care or annuity and longterm care related products. And the premium generally is fixed there. It also addresses the question of what if the client dies. The client dies healthy and uses little or, or no longterm care benefits.
There is a remainder that can be left for the beneficiary. So we know that there are different options and different instruments available to help with the longterm care issue. Please keep in mind that you also have to be clear on what your health is and you have to make sure that the carriers can take you. And whoever helps you has to make sure that they understand completely your ten year medical history, your ten year surgical history, and the medications that you take. Then your health can drive the direction and drive the instrument that is used to leverage and take the longterm care issue off the table for you.