How are we going to afford to age?

A problem and a potential solution.

8 min readMay 8, 2020

I have been hacking and testing ideas, speaking with regulators and senior care operators, and interviewing different players in the space as a “secret shopper” for the past five months. COVID has shone a national spotlight on the unmet needs of seniors. You can read what I’ve learned here. Today I want to talk about something I’ve been thinking about for months.

There is a Reckoning Coming

The senior population is doubling from 44M to 89M people over the next 25 years, and 70% of us will require long term care at some point in our lives. No products exist to prepare our system to cover the costs of long term care, which not covered by Medicaid, Medicare, or the Affordable Care Act. Less than 50% of boomers retire with less than $100K. That will barely pay for the cheapest form of long term care (Home Health) for even one year.

Consider that in 2031, the first baby boomers will turn 85, the age at which long term care becomes a probability instead of a possibility. The LTCi market will adapt to this reality. — Stephen Moses, President of the Center for Long Term Care Insurance

What is Long Term Care?

An insurance policy that is designed to cover expenses when you can’t perform activities of daily living. These are things like bathing, toileting, dressing, and moving around. It also covers cognitive impairment.

What it is NOT: Health Insurance or Disability Insurance

There are tax code qualified plans. With the Tax Free 1035 Exchanges, the IRS lets you reposition non-qualified and qualified plans (401ks, life insurance cash value, non-qualified annuities) into life or annuity products. This provides a huge tax savings, as benefits for LTC through qualified plans are federal income tax free.
Care covers non-medical custodial care, home health care, hospice, assisted living, adult day care, and skilled nursing care.
Premiums can be raised for a class of individuals.
Reimbursements differ from health insurance. You get a fixed dollar amount per day or you get reimbursed costs up to a maximum cap.
Buyer persona. LTCi is targeted to middle affluent people 55–64. Middle Income, Affluent, $132k+ who are likely to self insure.

Historical Context: The Mass Exit

In 2002, there were 102 carriers selling LTCi policies. Many companies left 90s/early 2000s after the financial crisis when the combination of increased claims and lower interest rates made it impossible for carriers to profit. By 2010, there were 12 insurance companies left. There are two primary reasons why.

First, inaccurate underwriting. Carriers didn’t pay attention to long-tail models projecting claims and loss risk exposures. The actuaries were not LTC actuaries, they were life insurance actuaries. They didn’t accurately predict claims. Lapse rates were not accurate. LTC morbidity was worse than expected.

Second, low interest rates. Today, carriers take premiums and invest in things like bonds and mortgages. With interest rates at an all-time, low, carriers were not able to grow the capital in order to cover the costs of paying for claims.

Here are a few more details:

High capital requirements.
Companies had to reallocate for more profitable products. Lower than anticipated returns on investment due to interest rates. Lapse rates were also miscalculated.
Regulators wouldn’t approve premium rate increases in a timely matter, which made it difficult to make these products profitable.
There were more than anticipated long-tail claims.
Training and finding LTCi actuaries and experienced agents was also difficult.

Market Players Today

As of Q4'16, there are 14 carriers in the market: Bankers Life & Casualty Company, John Hancock/Manulife, Knights of Columbus, Lincoln Financial Group, Massachusetts Mutual, Medamerica Insurance Company, Mutual of Omaha Insurance Company, Nationwide Life Insurance Company, National Guardian Life Insurance Company, New York Life Insurance Company, Northwestern, State Farm, Thrivent.

Indeed, consumer demand has waned in the past decade. They are expensive products, with premiums averaging $2,500/yr), and these increase as you get older. In order to address this, insurers have de-risked by reducing maximum benefits, less rich inflation protection options, sex distinct premiums, and making medical underwriting more rigorous.

Financial Products Available to Pay for Care

LTC Financial Product Solutions

Traditional: underwriting is challenging and expensive premiums.
Hybrid: tax-deferred annuity with LTC benefit. You must have enough money (usually a 50K policy) and knowledge of structuring these policies.
Life Insurance with LTC Rider aka an accelerated death benefit: good if you need care for less than 4 years (riders typically cover 4 years). It’s complicated to structure well, and you may end up with inadequate coverage.
Immediate Need Annuity: On the plus side, you get monthly income for a single premium that can be used in any setting/expenses for LTC. You can transfer money to a new annuity without paying capital gains tax. On the cons, it’s usually more expensive than other solutions. The annuity amount may not be enough to pay for LTC expenses.
Self Insurance: On the plus side, no insurance premiums to pay. This is for people who have enough assets to fund care out of pocket.
Short Term Care Insurance: If you only need care for a short period of time (1 year or less), these policies, unlike LTCi, pay in addition to medicare.

Alternatives to Long Term Care Insurance

Family: 95% of family caregivers end up quitting their jobs
Medicare: Based on 3-day hospitalization, you get days 0–20 at 100%, Days 20–100 you are covered after spending $105/day, and after day 100 you get NOTHING.
Medicaid: spend down required to be eligible. You are able to access specific types of long term care, traditionally institutional.
Personal Savings: annuities, riders, immediate need annuity, non-insurance products, home care insurance.
People are starting to use reverse mortgages to finance LTC.

Is Long Term Care Insurance the Answer?

There is trouble ahead. If you combine the increasing costs of long term care (driven by labor costs as minimum wage increases), combined with the increasing likely hood of needing long term care (as our lifespans are now 1 in 4 live til 90), America has a big problem. We have a false assumption we will be covered by a government program, and that is not the case.

I believe that Long Term Care Insurance may come back in style for a few reasons:

New Products are Growing

Combination products are increasingly popular and growing rapidly, up 37%. In 2015, sales of LTCi/Life combination products totaled $3.1B in premiums, and more than 200,000 lives covered. In comparison, there were 104,000 new lives covered by standalone LTCi, generating $260M. Source.

Reduced Acquisition Costs

As Millenials and boomers start to help their parents age and the existing facilities and agencies ask them if their mom has long term care insurance, they will realize that they are not financially prepared to age and will buy these policies.
Private-Public Partnership. There will need to be a partnership between the government and the private sector. The Silver Tsunami in America is upon us, and if there is no action and no private market, Medicaid costs will explode. Regulators are starting to understand that, thanks to policy firms like Urban Institute and Milliman. Their recommendations included employer incentives to auto-enroll employees in LTCI, and to allow the affordable care act health exchanges to offer LTCI. With government partnerships, we can think about introducing LTC products just like the government pushed 401Ks and Roth IRAs through employers.

Better Underwriting

Similar to how Coverwallet makes it cheaper to service business insurance policyholders, technology can make it cheaper to underwrite these policies and serve policyholders. The current underwriting process is not digital, and takes multiple weeks to complete.
Well trained, salaried agents who don’t receive commissions selling pre-customized products structured to optimized for the policyholder based on common scenarios, not structured to maximize the commission for the agent or the risk for the carrier. I got my life insurance certification and was shocked that the online course was only 3 days long. These products are extremely complex, and I did not receive the knowledge I need in order to help clients structure policies optimally.
We can use AI and predictive analytics to better predict pricing models to project morbidity, mortality, claims and lapse rates ina more real-time, data-driven way.

Profitable Investing Allocation

We can invest the pooled capital in markets other than mortgages and bonds. Specifically, we should think about taking premiums and investing in building the very services our policyholders will need 20 years later: homecare services, assisted living facilities, nursing homes, and the underlying real estate that will appreciate in value at a rate closer to how much more expensive long term care is becoming.

LTC 2.0 — Not your parent’s policy. Build a policy that is:

Focused on homecare and other less expensive forms of care, vs nursing homes.
Incentivizes policyholders to adapt daily living activities that are shown to reduce the rate of Alzheimer's (the #1 cause of claims). Use a Fitbit (or a Whoop!) and an app, as well as access to a free nutritionist. Create community walking groups show to reduce rehospitalization rates by combatting loneliness.
Different marketing costs — don’t just think direct mailing. Meet consumers where they are at today.
Design policies for Millenials and Boomers that meet them where they are at. Here’s the screenshot of the 60 page Life Insurance policy I was offered (I had to meet an agent at a coffee shop to receive said policy, she would not send at first over email).
New LTC will be based on more conservative morbidity and mortality.
Products will be more complex, with more benefits than traditional policies.

America needs to find a way to cover the 89 million people over 65 over the next 25 years, who will need long term care assistance and can’t afford it on their own. I think that Long Term Care Insurance, Annuities, and Life Insurance products are the only thing that today can be structured to help people afford to care. Using technology, better underwriting, and a different approach to investing the capital, these products might be able to handle the silver tsunami coming our way. Or, maybe we should just have a universal basic income. Or, move to Canada. Either way!