LTC Bullet: The Myth of Unaffordability, Redux

Friday, April 29, 2022

Seattle--

LTC Comment: Nothing is affordable if you don’t think you need it. We revisit long-term care insurance affordability after the ***news.*** 

 *** LTC CLIPPINGS are news items we send to Center Premium Members daily with news, data, studies, and information they need to know to stay at the professional forefront. Steve Moses scans the popular and scholarly media, condenses vital information, and forwards to you a message with the title, author, a link, a representative quote and his “LTC Comment” analyzing the significance. To subscribe to LTC Clippings, contact Damon at 206-283-7036 or damon@centerltc.com. Here are some examples of LTC clippings sent this week:

4/26/2022, “WA Cares Act Update: Federal Court Dismisses Lawsuit, Holding Premiums Are State Taxes and Case Must Be Litigated in State Court—Court Notes State Constitutional Challenge Likely,” by Davis Wright Tremaine, Lexology
Quote: “On April 25, 2022, Judge Thomas Zilly of the U.S. District Court for the Western District of Washington dismissed a class action lawsuit that had been filed in federal court by DWT on behalf of employers and employees challenging the Washington Cares Act (WA Cares) premium assessed at the rate of .58 percent of wages. The lawsuit contended that the Act violated ERISA and other federal laws. … Judge Zilly dismissed the plaintiffs' federal case holding that the premium charged against an employee's wages was a tax and not an insurance premium.”
LTC Comment: Voters twice rejected WA Cares at the ballot box. So they sued, but now federal court has slapped them down too. When will the powers-that-be take “no” for an answer? When the current batch is thrown out of office. Is the cavalry coming? 

4/27/2022, “Older adults’ home equity exceeds record $10.6 trillion: report,” by Kathleen Steele Galvin, McKnight’s Senior Living
Quote: “Homeowners aged 62 and older increased their home equity by 3.98% in the fourth quarter of 2021 to a record $10.6 trillion from the previous quarter, according to the National Reverse Mortgage Lenders Association. That’s a difference of $405 billion. … Reverse mortgages aren’t just for homeowners short on cash anymore, the New York Times reported earlier this month.”
LTC Comment: Home equity could pay for a lot of long-term care if Medicaid didn’t exempt nearly all of it. How exactly does that policy help the poor who have no home equity? ***
 

LTC BULLET: THE MYTH OF UNAFFORDABILITY, REDUX

LTC Comment: In 1999, when the Center for Long-Term Care Reform was only one year old, we published a report titled The Myth of Unaffordability. Read it here. Even back then, in the good old days of long-term care insurance marketability, the product was not an easy sell. People didn’t believe the politicians who urged them to buy it (to relieve Medicaid), much less the AMGs (altruistic, masochistic, geniuses) trying to make a living selling it. Then, as now, the real problem with long-term care insurance sales was not affordability, but the misperception of need.

Why don’t people perceive the need for long-term care insurance? They’ve been regaled for decades with the threat that if they don’t buy it, they could lose their life’s savings to catastrophic long-term care costs. That seems like a pretty powerful motivation. It would be, if it were true. But it wasn’t true back then and it isn’t true now. Once you understand who pays for expensive long-term care and why people don’t worry about that risk and cost when they’re still young, healthy and affluent enough to plan for it, it’s pretty easy to see what needs to be done to fix the problem. Explaining that is what we did in The Myth of Unaffordability.

In the meantime, much has changed. Fruitless appeals are more common than ever for government to take over long-term care financing with a new federal or state-based compulsory payroll-funded program. Long-term care insurance is more expensive than before and fewer companies sell it. But what is more important for the LTCI market has not changed. Medicaid still pays for most expensive long-term care after the care is needed. So people don’t see the need in time to prepare for it. Instead of dealing with that cause, however, most analysts focus on the symptom of “unaffordability,” and write off private insurance because of it. Let’s reconsider.

Following are excerpts from The Myth of Unaffordability. Many of the numbers would need to be updated, but the fundamental analysis and recommendations remain sound. Take this walk down memory lane, but keep your focus on applying its principles to the future.

Executive Summary

The publisher of this report—the Center for Long-Term Care Financing [now Reform] in Seattle, Washington—is dedicated to ensuring high quality long-term care for all Americans.

The global aging crisis is a demographic vise closing rapidly and inexorably on America and the world.

In the United States, challenges to our pension (Social Security) and health care (Medicare) entitlement programs capture most of the public’s attention.

In the end, however, the paramount problem of aging demographics is long-term care and how to pay for it.

Unfortunately, long-term care service delivery and financing in America are already fragmented and dysfunctional. They continue to decline.

Medicaid and Medicare—the principal public financing sources for long-term care—pay too little for nursing home and home care to assure public access to quality care.

Private financing, including long-term care insurance, remains inadequate to support the home and community-based services and assisted living that most seniors prefer.

Nevertheless, America’s World-War-II generation is dying in nursing homes on public assistance while their baby-boomer children blithely ignore the risks of long-term care.

Why do most Americans evade the risk of long-term care and fail to plan, save and insure before the chronic illnesses of old age befall them?

The usual answer—“They’re in denial”—begs the question “How can they ignore a nine percent risk of spending five years or more in a nursing home after age 65 at $50,000 per year?”    

The other commonplace answer—“Most people cannot afford to buy private long-term care insurance”—is demonstrably untrue as this report substantiates.

The real reason Americans fail to prepare for the risk of long-term care is twofold:

First: since 1965, they have been able to ignore this risk, avoid the premiums for private insurance, wait until they need long-term care, and get Medicaid and Medicare to pay.

Second: the insurance industry has tried to sell asset protection (which the government is giving away) instead of emphasizing its unique benefit—access to quality care at the optimal level.

The solution to the long-term care financing problem is also twofold:

First: the government should redesign Medicaid to be a loan instead of a grant (for anyone with assets) and simultaneously educate the public about the real risk of long-term care.

Second: the long-term care insurance industry should market much more heavily the crucial benefit of access to quality care at the appropriate level in the private marketplace.

This report demonstrates and documents the fact that most Americans should, could and would purchase private long-term care insurance if the right public policy incentives obtained.

When most Americans do purchase long-term care insurance, the public financing programs will be better able to provide for those who are unable to pay privately for their care.

Once consumers recognize the real need for long-term care insurance, i.e. not just asset protection, but access to quality care at the appropriate level, they will have many strategies and techniques from which to choose that can enhance their ability to afford the protection. For example:

• Buy young when premiums are lower. The average policy referenced above costs $589 per year at age 40, but $5,592, at age 79. The immediate benefit of buying young is self-evident. What may be less obvious is that total premiums paid for a long-term care policy purchased at age 55 and held to age 85 will be less than one-third the total premiums paid for similar coverage purchased at age 75 and held for only ten years.[1] A good strategy is to buy what you can afford when you are young and “stack” on additional coverage if you still qualify later as your financial condition improves. “Learn about long-term care insurance in your forties and own it by 50” is very sound advice.
   

• Look to home equity for cash flow. Approximately, 77 percent of seniors own their homes and 82 percent of these own them free and clear.[2] More than $1.5 trillion lies untapped in seniors’ home equity that could be freed up by means of home equity conversion tools such as reverse annuity mortgages[3] to enhance the incomes of older people.[4] This extra income would empower many more people to buy long-term care insurance or to purchase home and community-based services. According to one expert: “Estimates reveal that 57% of all homeowners could pay the premium of the prototype LTC policy with their RM [reverse mortgage] disbursement.”[5] New, “premium-less” long-term care insurance policies could be developed funded entirely by home equity.
   

• Buy Chevrolet, not Cadillac coverage. Consumers can decrease the cost of long-term care insurance drastically by reducing the length, breadth, and depth of coverage. For example, why would someone purchase a two-year, inflation-less, facility-only policy with a 90-day elimination period? If that is all a 79-year-old can afford, such a policy at least assures the policyholder highly competitive access to a quality nursing home as a private payer and improves the chances of remaining there should conversion to Medicaid occur later. Instead of paying $5,592 per year for the “average” policy cited above, a 79-year old purchasing this shorter-term, facility-only plan (which includes assisted living coverage) could pay $1,704 per year.[6]
   

• Self-insure for some of the risk to reduce premiums. Long-term care insurance need not cover the entire cost of care. Over 90 percent of seniors receive Social Security benefits; approximately one-third have pension income; many receive interest or appreciation on their savings or investments. When someone enters an assisted living facility or a nursing home, his or her income, previously spent on food and lodging in the community, becomes available to offset the cost of facility care. Home equity conversion could also generate additional income to supplement the long-term care insurance benefits whether or not a surviving spouse remains in the home. Furthermore, many policies waive premium payments at some point after benefits begin.
   

• Invite heirs to contribute toward premiums.[7] After all, who should insure the heirs’ potential inheritance against the risk of depletion by long-term care expenses? Is it the responsibility of the generation that struggled through the Depression, fought World War II, and scrimped and saved to accumulate the estate? Or should their baby-boomer heirs—who are about to inherit a $10.4 trillion windfall from their parents and who are now in their peak earnings years—pay the price to protect the estate and their parents’ access to quality long-term care?[8] This is more than common sense; it is common decency. Nevertheless, a survey of “Who Buys Long-Term Care Insurance” found: “When asked if children help to pay for long-term care insurance premiums, 98 percent indicated that they paid for premiums without help from their children.”[9] Worse yet, adult children are the driving force behind the artificial impoverishment of the elderly by means of Medicaid estate planning.[10]
   

• Reconfigure assets to find premium dollars. Older people often have large sums of money tied up in low-yielding financial instruments such as bank accounts and certificates of deposit. Conversion of these assets into higher-yielding limited-risk instruments such as annuities or bonds can help to bridge the gap between available income and premium costs. Furthermore, by linking the income from a fixed-income asset to payment of a long-term care insurance premium, the policyholder reduces the risk of accidentally lapsing the policy for failure to pay the premium on time.
   

• Mine the Med-Sup Policy. A fundamental principle of insurance is that one should insure against catastrophic risk first. Nursing home costs account for over 80 percent of seniors’ out-of-pocket expenditures that exceed $2,000 per year.[11] Yet most of the elderly are unprotected against this risk while 70 percent or more have “Medi-Gap” policies that cover routine, first-dollar acute care. Many seniors still pay $1,500 to $2,500 annually for Medicare Supplemental or Medi-Gap insurance policies. While it could be unwise[12] to drop this traditional coverage in favor of the low-cost or “free” Medicare wraparound protection offered by many health maintenance organizations, it may make sense to reduce Medi-Gap premiums drastically. A true catastrophic-only Medi-Gap policy, available for $600 or $700 per year, could often free up $1,000 or more annually to apply toward long-term care insurance premiums.
   

• Look to life insurance for help. It is very important to match insurance coverage to your stage of life and to your financial goals. Many older people have significant assets frozen in whole life policies that could be freed up to finance long-term care insurance. Middle-aged people may find that by age 55 they need long-term care insurance more than they need their old term-life policy for which the premiums have increased over time to equal what a long-term care policy would cost now.[13] Single-premium and other equity-based life insurance policies that will also pay for long-term care are a good option for people with sufficient assets available to fund them. Finally, viatication, or sale of the rights to the benefits of an insurance policy is a viable care financing option for people with shortened life expectancies.

The truth is that if you recognize the need for long-term care insurance and if you give this kind of coverage a high enough priority in your financial plan, the probability is very high that you will find the product affordable at one stage of life or another. If it is out of reach when you are young, low paid and building a family, perhaps you will be able to afford protection when you are older, even if the premiums are higher, if you look creatively for optional financing sources such as heirs, home equity, and efficient asset management.