Cognitive impairment, lower income drive higher LTC insurance lapses: Study

Advisers should take these factors into account when incorporating long-term-care insurance into a client's financial plan

Oct 7, 2015 @ 12:59 pm

By Greg Iacurci

Cognitively impaired individuals are more likely to allow a long-term-care insurance policy to lapse even though they're more likely to need long-term care in the future, according to a new study conducted by the Center of Retirement Research at Boston College.

Further, less wealthy households allow their LTC policies to lapse more frequently, due in part to inability to continue paying insurance premiums.

The study, “Why Do People Lapse Their Long-Term Care Insurance?” found that individuals in the 75th percentile of cognitive impairment are 3.4 percentage points more likely to lapse their policy — meaning they fail to pay their premiums and forfeit benefits — than those in the 25th percentile. At the same time, the risk of care use jumps 4.7 percentage points for those in the 75th percentile.

“The people lapsing are exactly the ones who ought to be holding onto their policy,” said Anthony Webb, senior research economist at CRR and co-author of the report.

The authors used data from the most recent health and retirement study conducted every two years by the University of Michigan's Institute for Social Research for their analysis. Data cover the period from 2002 to 2012, and long-term care includes both nursing home and home health care. It's limited to individuals age 65 or over in 2002 who held LTC insurance at that time.

Gregory L. Olsen, a partner at Lenox Advisors, said advisers who failed to prevent a policy from lapsing simply aren't doing their job, especially because there are protections in place so that situation doesn't arise for the cognitively impaired.

Chance of lapsing LTC insurance
Source: Center for Retirement Research. Assumes lapse rates remain at the same levels observed for someone who turned 65 in 2005.

Those safeguards against so-called “unintentional” lapsing of an LTC contract typically include overdue billing notices sent to the insured as well as another individual such as a relative. Mr. Olsen usually receives an overdue notice from the insurance company, and his firm's client management system indicates if the client has a history of missing payments.

From a liability standpoint, not to mention a moral one, advisers should be vigilant in protecting against unintentional lapsing, Mr. Olsen said. Advisers can be on the hook if they allow a client's LTC contract to lapse and that client subsequently needs long-term care.

There were 4.8 million individual LTC policies in force representing $10 billion in premiums, as of the end of 2014, according to Limra's LTC insurance survey. The survey represents about 90% of the LTCI market.

CRR's report also indicates household wealth and income as a determinant of lapsing an LTC contract. Households in the 75th percentile in terms of income are 4.2 percentage points more likely to lapse than those in the 25th percentile; it's 2.7 points when comparing household wealth, respectively.

“If you're making a recommendation to your clients about whether to purchase LTC insurance, you have to think very seriously about whether the client will stay the course,” Mr. Webb said.

If circumstances are such that a client can no longer afford premium payments, the last thing an adviser should do is allow the client to do away with the contract, especially if clients have been paying premiums for more than five years, Mr. Olsen said. Restructuring benefits to get a lower premium is often a better alternative, he said.

Policies Mr. Olsen sold 10 years ago were often more competitive than contracts that can be purchased today — they had flourishes such as lifetime benefits, or the allowance to pay off premiums in 10 years — so trying to reinstate coverage after a lapse would likely be more expensive or come with a loss of benefits, according to Mr. Olsen.

“We are vigilant with these because we know policies that are offered today simply do not have the cost benefit,” Mr. Olsen said.

However, LTC policies as a group lapse the least out of the insurance products Lenox Advisors sells, Mr. Olsen added. According to the American Association for Long-Term Care Insurance, lapse rates flat-line at around 1% per year for those over age 60, although they're around 5% for 50-year-olds.

“If you make it to 65, 70, this is the last coverage you drop,” said Jesse Slome, AALTCI's executive director.

Interestingly, CRR's research seems to run contrary to this, because it shows fairly high levels of lapsing from age 65 onward — approximately one-third will lapse prior to death, Mr. Webb said.

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