The American Association for Long-Term Care Insurance reports that the industry's largest open claim has surpassed $1.2 million.
AALTCI's Executive Director Jesse Slome says the research will help advisers educate prospects, helping them to understand two crucial points. One, self-funding really isn't a plausible option for most consumers. And two, million-dollar claims can strike at any time.
"What's interesting is that people will look and say, 'How many years? They must have paid 50 years in order to get that,'" Slome says.
But that's not the case. The industry's top claim is for a woman who purchased her policy at age 43, paying $1,800 in annual premiums for three years when her claim started. She's been on claim for 12 years.
The second million-dollar claim, pegged at $1.02 million, is from a woman who purchased a policy at age 72. She paid an annual premium of $12,766 for three years before going on claim. She has received benefits for nine years.
Slome says the use of averages has contributed to the belief that self-funding is an option for LTC. AALTCI reports that 180,000 Americans received roughly $8.5 billion in benefits from their LTC insurance policy in 2008.
"So the industry pays 180,000 people a year. That's how many people are on claims. The average amount is actually pretty small," Slome says. "What that does is it tells the consumer, 'I could self-fund.'"
But with this research that shows claims can top a million dollars and begin almost immediately after entering into a policy, that position becomes more difficult to justify.
"Long-term care insurance is not the lottery," Slome says. This is not something you really want to win, but having protection in place can certainly pay off, and for thousands of people it increasingly is."
And while the new research does help advisers make the case for LTC with prospects, does it also underscore the problems carriers have had with the product, namely accurately forecasting their own risks and properly pricing policies?
Slome says the biggest concern carriers have right now is interest rates.
He says anywhere from 40% to 60% of the money that a carrier accumulates to pay claims comes from investment returns, not actual collected premiums.
The problem is that it takes two years to file a product and get it to market. Interest rate bets have to be made that far in advance, and as the recent economic turmoil shows, it only takes a couple of months for a market to turn on its head.
Some carriers that filed their products two years ago may have said 6% was the safe bet. Others may have sensed economic weakness and opted for a more conservative 4%.
"But you were competing against other people that were projecting 6%, so your product would've been priced too high. Interest rates drop and they sit there and go, 'Holy cow,'" Slome says.
So what's next?
"I haven't talked to any of the chief financial people. My guess is that they are kind of looking and saying, we'll ride this out for the short term because they probably think that inflation is going to hit and interest rates will go up dramatically and that will help them. But, yeah, it's the interest rates that are killing them," according to Slome.
Fast facts for the group market
Here's some of the top-line findings that can be found in the AALTCI's latest sourcebook.
36% of 2008 sales were to people between 45 and 54.
61% of policies sold have a five-year benefit period.
33% of policies carried daily benefit amount between $100 and $149.
85% of sales carried an elimination period of 90 days or more.
72% of policies sold in 2008 carried the future purchase option of inflation protection.
Source: American Association for Long-Term Care Insurance, 2009 LTCi Sourcebook.
