September 20, 2016 • Christopher Robbins

Americans are shunning long-term-care insurance policies, even as the need for some form of health care planning in old age is growing.

As the population ages and Americans in general live longer, long-term health care costs are becoming an increasing concern — but sales of traditional LTC policies, which cover in-home and nursing home care, have decreased sharply over the past 15 years.

According to a report earlier this year from the American Association for Long Term Care Insurance, Americans purchased 105,000 new LTC policies in 2015, down from 750,000 policies purchased in 2000. The group credits rising costs for new products, in-force rate increases on existing policies, and increasing longevity and health as reasons for the decline.

Ash Toumayants, founder of State College, Penn.-based Strong Tower Associates, argues that many Americans don’t think they’ll ever need to use a long-term-care insurance policy, which he claims is a dangerous assumption.

According to a recent report from the U.S. Department of Health and Human Services, 70 percent of Americans turning 65 years old this year will eventually need some amount of long-term care.

“People are worried about the future of health care,” Toumayants says. “They don’t lnow what is going to happen to the cost. They realize that the quality of government-funded care is not as appealing to people with the assets to take care of themselves. They’re less willing to leave their potential long-term care for the future to take care of itself.”

According to LifeHappens, a not-for-profit marketing agency created by a consortium of insurers, the cost of eight hours of daily in-home care is now about $44,000 a year, while a year of skilled nursing home care costs about $91,000.

Yet Americans seem to underestimate the cost of long-term care. According to a recent Genworth Financial study, 30 percent of respondents believed that long-term care costs less than $417 a month. Another 28 percent thought it cost between $417 and $1,666 per month.

Most Americans also underestimate the cost of unplanned long-term care on families, says Deb Newman, founder of Minneapolis-based Newman Long Term Care and past chair of the LIFE Foundation.

“People need long-term-care insurance because without it people don’t really discover when care needs start,” Newman says. “What starts happening is that the family members start delivering care. It doesn’t matter which economic stratus the family is at, they start caring for the people they love the most.”

Joe Heider, founder of Cleveland, Ohio-based Cirrus Wealth Management, says that he has a pair of clients who found themselves in a long-term-care trap. The husband developed Parkinson’s Disease while he was still in his fifties and needed help, but the wife wanted to keep him at home as long as possible.

As the disease progressed, the wife became responsible for more and more of her husband’s daily needs, until she had to be rushed to the hospital from exhaustion.

“The flipside of assuming your family member is going to be a caregiver is that you’re going to have to watch them become physically and emotionally exhausted because of trying to provide round-the-clock care for you,” Heider says. “It’s a tough topic. Individually owned disability income is expensive, but there’s a high probability that you’re going to have to use it. It should be part of any long-term financial plan.”

Wealthy Americans may assume that they can simply cover the expenses themselves or self-insure, but Heider says that might put any planned wealth transfer at risk.

“LTC is great for people who have assets to protect, but they don’t have excess earnings opportunities,” Heider says. “We’re looking for people who could drop $200,000 to $300,000 on a policy without impacting their remaining spouse’s ability to live the kind of life that they want.  When clients have above $3 million to $4 million in liquid retirement assets, LTC is less critical because they have sufficient assets to pay and meet their needs without devastating their estate.”

But Newman counters that even within wealthy families, a spouse or a child may end up taking on more of the caregiving responsibilities instead of spending money on their loved one. Long-term-care insurance could also head-off arguments among heirs about whether to put a client into a long-term-care facility, Newman says.

Yet standalone coverage is not widely utilized today, even among those who need it most, perhaps because of the uncertain and expensive costs associated with coverage.

“The price structure is difficult for people to appreciate and understand,” says Toumayants. “They’re having to pay anywhere from $2,000 to $10,000 a year on coverage without knowing if they’re ever going to use it. Why should they spend that money? Now insurance companies have too few people as policyholders and that’s forced them to continue raising rates.”

Toumayants says that as future health-care costs increase and become difficult for actuaries to project, many companies are closing their LTC business because the risk is too high.

“I can do great due diligence on existing standalone LTC plans, but when a company decides not to offer a policy anymore, it becomes a pool,” Toumayants says. “Those people inside the pool are getting older and need care, so the people still paying in have to come up with the money. If a company says that it is going to stop offering LTC within five years, that’s a clear sign that you can expect rate increases, and significant ones, for policy holders.”

Since health care now figures in many financial plans, advisors are less willing to plan around uncertain and unstable insurance costs, says Newman, who adds that advisors may also be reluctant to address LTC because of the movement away from product-driven practices towards financial planning.

“Advisors are trying to move away from talking about insurance in general; part of that is the regulatory pressure,” Newman says. “It’s easier for them to tell a client that if they want to evaluate this kind of coverage, then go ahead and do it. I don’t think they’re being callous, I think they’re being cautious.”

Clients, at the same time, may not be receptive to talking about insurance that they may never have to use. Even though Genworth’s study found that the amount of claim benefits paid by LTC insurers is increasing, advisors are still troubled by the assumption that up to 30 percent of the retirement-age population will never need the coverage.

Newman also says that the barriers to eligibility for long-term-care coverage are so high that many clients no longer qualify once they reach an age where discussing such coverage seems appropriate to advisors.

Steve Cordasco, founder and CEO of the Philadelphia-based Cordasco Financial Network, generally avoids standalone LTC insurance.

“We prefer for our clients, who tend to have a higher net worth, to self-insure,” Cordasco says. “The real issue I have with the standalone long-term-care policies is that there’s no guarantee for what happens to them in the future. Not only is there a chance that they’ll never file a claim, but there’s also a chance that these policies will cease to exist in the near future.”

Ultra-high-net-worth families always have the option to self-insure and to use trusts to protect any assets they wish to set aside for a legacy plan, says Toumayants, but for other, less wealthy clients, there are two alternatives available.

Whole life insurance plans with a long-term-care rider offer clients a death benefit, a tax-advantaged investment wrapper and the ability to use part of that death benefit early to cover their LTC needs.

“Long-term-care insurance is a very difficult business,” says David Wilken, president of individual life for Voya Insurance Solutions. “Because of the challenges in offering stand-alone LTC coverage, Voya doesn’t offer these policies, but we think we offer a better option in our chromic illness rider.”

Voya’s Chronic Illness rider can be added onto certain life insurance products for an additional cost to cover nursing home, hospice, assisted living, medical equipment and home health needs in case of illnesses like Alzheimer’s, arthritis, heart disease, malignant cancer and diabetes.

Voya also offers an accelerated benefit rider, which pays benefits if a life insurance policy holder contracts a terminal or critical illness or faces permanent confinement in a care facility.

“These are preferable to standalone LTC because policyholders keep the value of their policies as a death benefit if they don’t use the riders’ benefits,” says Wilken. “We would still argue that traditional LTC policies may be right for some clients, especially if they don’t need life insurance protection.”

Yet life insurance riders come with a few caveats, says Toumayants. For one, clients who access LTC through a life insurance product can’t take advantage of some states’ policies that exempt the value of a LTC policy from an individual’s Medicaid eligibility calculations. For another, life insurance riders often limit the amount a policyholder can use for their LTC needs, and if the client has an extended LTC need, they could exhaust their benefit altogether.

Toumayants also explores using accelerated benefit or chronic illness riders on annuity products to cover clients’ LTC needs.

“They have the potential to create an income stream that we can use for LTC expenses, especially because they increase the payout amount over time in most cases,” Toumayant says. “That’s appealing for people who want or need LTC but can’t purchase life insurance or an LTC policy because of health issues.”

Heider says that using an annuity can be cheaper than standalone LTC coverage or whole life, and because it pays a benefit overtime, an annuity avoids clients’ concerns over whether the coverage would be used.

Some clients will still not be able to afford to self insure or buy a whole life policy, or cover their entire need with an LTC policy, says Newman — yet some LTC coverage is better than none, and advisors shouldn’t avoid the conversation just because of a client’s net worth.

“Every person, every financial planning client, needs some sort of plan for long-term care,” Newman says. “Not everyone needs long-term-care insurance. They just need to know what they’re going to do if this happens to them.”