Q and A on Long Term Care Insurance

 

Client: I apologize for the tardiness in responding to your latest email. I have other questions. I did get a quote from the broker at ABC Mutual Long Term Care Insurance mentioned to you earlier  and a long explanation as to how good they are.

Your quote from ABC Mutual Long Term Care Insurance in line with what he presented and was outside the premium limits I had asked for. I would like to share his thoughts just to get your opinion. BTW, I am not playing one broker against the other…I likely will go with XYZ Mutual Long Term Care Insurance with you writing it.

It was interesting that his father (they are partners) would only present ABC Mutual Long Term Care Insurance and no other but he apparently can sell other carrier’s products.  It was only when I mentioned that I was shopping the coverage and, after looking at a number of plans, I have pretty well settled on a plan that was under $4000 in annual premium which has ratings similar to ABC Mutual , that he said that there were less costly alternatives. My feeling is that they are not representing Jane or my best interests.

I am not asking for a point by point rebuttal, but your overall POV. Please feel free to rebut or comment on any item you feel compelled to do so.

BTW: his father asked me two questions: if the 90 day period was service or calendar days and the carriers I was looking at. I answered the first and only mentioned that after looking at numerous carriers, I had ferreted out all but one with ratings similar or same as ABC Mutual Long Term Care Insurance- so I did not mention XYZ Mutual by name.  Here’s another solid company to get Long Term Care Insurance quotes from:  https://www.ltctree.com/long-term-care-insurance/

Here is what he wrote to me:

As you noted we do not have a 5 year Long Term Care Insurance…so I matched the pool amount:

Model 1:                                                                                           Model 2:

Monthly benefit: 3300/mo                                                3800/mo

Elimination period: 12 weeks                                                   12 weeks

Benefit period: 6 years                                                               6 years

Benefit pool: 237,600                                                                  273,600

Inflation: 3% compounded                                                       3% compounded

Contingent non-forfeiture                                                        yes

Spousal discount                                                                           yes

Tax qualified                                                                                   yes

Total annual premium for both of you: $5247/yr        Total premium: $6043/yr

Points to consider:

1)      You may be able to use your existing ABC Mutual life policies to pay for your ABC Mutual Long Term Care Insurance with pre-tax dollars.  You will not be able to take advantage of this section 1035 of the tax code if you purchase Long Term Care Insurance with another carrier.   This not only lowers the effective cost of the policy by using pre-tax dollars but it may be nice in retirement to eliminate the LTC payment at some point. [ed. note: not sure how this works — I assume they use dividends to pay the premium rather than to increase paid up amounts]

2)      Financial strength ratings: ABC Mutual  has the highest awarded ratings from all 4 ratings agencies.  The two next carriers with quality ratings in the Long Term Care Insurance space are LIFE and XYZ Mutual.  Both quality companies worth considering.  However, Life has raised rates on existing policyholders.  XYZ Mutual has never paid dividends.  Both companies have old blocks of business that were significantly underpriced they will need to continue to deal with.

3)      Company structure: ABC Mutual  is mutual company and based on the number of carriers you are investigating many are stock company.  This is relevant in a number of areas:

  1.       Dividends:  When there are profits in a stock company, the dividends go to the owners (stock holders) vs a mutual company, ABC Mutual , the dividends go the owners (policy holders)…there are no stock holders. ABC Mutual  has paid millions of dollars back to Long Term Care Insurance policy holders over the last 5 years.  While dividends are not guaranteed this could more than offset the cost difference above over time….in other words you should be analyzing long term net cost not just initial premium.  If interest rates rise or there is a cure for Alzheimer’s ABC Mutual  will pay a larger dividend to its policy holders…stock companies will pay the dividend to the shareholders.  This will lower your net cost over time significantly.
  2.      Claims: when you call ABC Mutual Long Term Care Insurance claims you are calling as an owner of the company, not just as a customer. [ed. note: this has little relevancy to me as long as the carrier is solvent and stays that way]

4)      Rate increase history: ABC Mutual  has never raised rates on an existing Long Term Care Insurance policy holder.  Everyone else with the exception of XYZ Mutual has raised rates on existing policy holders multiple times…I have some clients who received 90% increases in their premiums in the last 3 years.  This is the link to the California insurance commissioners website showing rate increase history in all states: http://www.insurance.ca.gov/01-consumers/105-type/95-guides/05-health/01-ltc/rate-history-active.cfm

5)      Inflation rider:   some carriers use CPI compound and talk about it as if it is 3% and ABC Mutual  is a fixed 3% compound…..

  1.       While CPI is often quoted as averaging 3%…for the last 10 years, 20 years, and 30 years, it has averaged less than 3%.  So ABC Mutual  will provide more benefit than a CPI compound over the long run with fixed compounding.
  2.      As an example I took the last 10 years of inflation and compared the 2 inflation riders on a $4000/mo benefit.  A policy bought 10 years ago with CPI would have grown to $5183/mo of benefit.  The ABC Mutual  over that same time period will have grown to $5375/mo of benefit.  A difference of 192/mo or $6912 of additional benefit with the ABC Mutual  policy.  This difference will become greater over longer periods.

6)      Elimination period:  90 individual service days vs ABC Mutual with 12 weeks.  Best illustrated with an example.  If you have a stroke and need/pay for care every day…the 90 day will being reimbursing you on day 91 vs the ABC Mutual will begin reimbursing you on day 85.  However, if you only need care 5 days a week b/c family is caring for you on the weekend….the 90 day will begin reimbursing you after 126 calendar days because that is how long it will take to have 90 days of service…vs the ABC Mutual will still begin on day 85.  This is even more dramatic if you only need care for 2 or 3 days a week…it could take 6 months to satisfy the 90 days of service. [ed. note: this is an interesting comparison – the shorter wait period (or way of calculating) resonates with me — but I can likely handle the additional OOP – your thoughts — other options?]

7)      Waiver of premium definitions: At ABC Mutual  the premium is waived as soon as you demonstrate a need for Long Term Care Insurance.  At every other carrier premiums are waived when benefits begin.  At a minimum this is 3 extra months of premium you must pay at every other carrier per person.  Based on the elimination period mentioned in item 6  above…it could be even more months of premium out of pocket than 3 if it take longer to satisfy the elimination period.

8)      Entire pool is available for medical equipment or home modification at ABC Mutual  vs limited to a dollar amount at most other carriers [ed. note: Is this the case with XYZ Mutual?]

9)      Retroactivity: When ABC Mutual  makes an improvement to their policies, they offer the improvement for free or at a minimum with no underwriting to existing policy holders.  No other carrier has ever done this for their existing policyholders.

10)   XYZ Mutual is still offering gender neutral pricing…and my XYZ Mutual contacts have told me to get all my XYZ Mutual  applications in soon…apparently XYZ Mutual is making the same switch ABC Mutual  and every other carrier has made over the last few years.

11)   Moving the elimination period out would lower the premium closer to your $4,000 target.

12)   Many carriers have super preferred rates (discounts off of standard for the very best health class…that are very hard to qualify for)…so one must be careful when comparing carriers to see if the illustrations are representing the same rate class.

In closing, this particular product is extremely volatile and is in its adolescence.  It is most important to pick a carrier that 1) has high ratings with all 4 ratings agencies(not just AM Best) 2) pays dividends showing it is priced properly (and so it can respond to pricing pressures or improvements without resorting to a price increase) and 3) has never raised rates on existing policy holders.  With a  30-40 year promise, the policy with the most flexibility and with the lowest net cost over times is the best policy to choose.

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