It is no secret that fewer consumers are buying long-term care insurance—annual sales are only about one-third of what they were a decade ago. But it turns out that those who are still buying are purchasing less coverage than ever, even though long-term care costs are rising.
When industry leader Genworth Financial Inc., which sold about one-third all traditional LTC insurance in 2013, released its quarterly financial statement last week, Wall Street focused its attention on the extra reserves the firm had to set aside to cover higher-than expected future claims. But deep in its presentation to analysts, Genworth also described an important trend: Remaining buyers are scaling back the protection they do purchase.
Buyers of Genworth’s newest policies (called PC Flex III) are purchasing insurance that averages $137 per day for 3.4 years. That’s about $170,000 in maximum coverage–a lot less than some older policies that typically provided almost $200 per day for four years (more than $283,000).
The calculation excludes the decline in lifetime coverage. While more than one-third of buyers of older policies bought lifetime insurance, the firm does not even offer such protection in its new products.
Genworth consumers closely track overall industry patterns. An industry-wide survey published last July by the magazine Broker World reported that sales of 3-year policies increased from 23.6 percent in 2007 to 35.3 percent in 2013. By contrast, sales of five-year policies plunged from 18.9 percent to 13.5 percent. Sales of lifetime policies fell from 5.7 percent to just 3.6 percent.
At the same time, consumers opted for lower daily benefit amounts. Broker World calculates monthly rather than daily benefits but the trend is the same. In 2007, about 10.6 percent of all buyers purchased less than $3,000 (or about $100-per-day) in coverage. By 2013, the percentage purchasing low-end policies grew to about 14 percent. Some of those may have been buying low-cost, very low-benefit policies, sometimes called short-term care insurance.
At the same time, those buying coverage of $3,000 to $6,000 per month fell from 69 percent to about 54 percent. Some may have bought up, since the percentage of those buying very high-end daily benefits also rose somewhat. But others clearly bought less.
The biggest change, however, may be in what’s happened to inflation protection. In 2007, nearly half of all LTC insurance buyers purchased 5 percent compound inflation riders. By 2013, only about 22 percent did so. At the same time, about 30 percent bought more modest 3 percent compound inflation protection up from about 9 percent in 2010 (the first year Broker World surveyed that product).
Inflation protection is extremely important since a consumer who buys insurance at age 55 likely won’t be eligible for benefits for 25 or 30 years and the cost of care is likely to rise significantly over that time.
What’s causing this change in consumer behavior? Price.
Premiums are rising rapidly. The average annual price of the latest Genworth product is nearly $2,800 for a $170,000 maximum benefit policy. For an older product that covered up to $283,000, premiums are only about $2,125.
The price difference in inflation protection is especially striking. According to Broker World, a typical 60-year old male could buy a $200,000 policy with no inflation protection for about $1,300, depending on the carrier. The same policy with 5 percent inflation protection would cost almost three times as much, nearly $3,700.
Rate hikes on existing premiums may also be driving benefit changes. Few policyholders drop coverage entirely in the face of those rate hikes, but industry insiders report that holders of existing policies instead elect to scale back their future benefits (especially inflation protection) to soften those steep rate increases. Genworth reported that in 2012 it raised premiums on some of its older policies by as much as 50 percent.
Some industry analysts argue that many consumers are over-insured and that buying less generous coverage makes good financial sense. Marc Cohen of the consulting firm LifePlans Inc. has calculated that claimants use only about half of their available benefits and only about one in seven will max out on their coverage.
Marc may be right. But whether they are making a rational financial choice or not, it’s increasingly clear that consumers are responding to rising premiums by buying less protection.