Thursday, July 14, 2016

Misguided LTCi "Reform"

Over at LifeHealthPro, FoIB Allison Bell has the story of a woman who doesn't understand the purpose of the product, who's never designed, priced, marketed or sold a plan, who may not even own one, yet is called upon to offer suggestions on how to "reform" Long Term Care insurance.

What could possibly go wrong?

Let's start with some basic facts:

First, the primary purpose of Long Term Care insurance (LTCi) is asset protection. That is, as homeowner's insurance protects one's home, LTCi protects one's retirement and other financial assets.

By definition, folks on Medicaid have no such assets to protect, hence no need for a plan. If one has no car or driver's license, why would one want (let alone need) to buy auto insurance?

Second, the primary reason that rates have continued to increase is that the industry made some (very) bad assumptions about retention. That is, they designed and priced the plans similar to disability insurance (close cousin), assuming a similar lapse rate. In hindsight, this turns out to have been a mistake, because insureds have been keeping their plans - even with rate increases - in droves. This drives up claims, and here we are.

Ms Burns offers 7 suggestions about how to "reform" Long Term Care insurance. There's a lot of bad advice (and assumptions) but we'll just look at three particularly egregious examples.

First, "(l)et Medicaid help low-income long-term care insurance policyholders hang on to their policies."

Why? If they're already on Medicaid, then they have no use for an LTCi plan (remember, it's primarily designed to protect assets). Now I could see where that might help Medicaid: after all, premiums are a lot less than benefits, and so the gummint would reap some major savings. But that's not the same thing as actually helping policyholders, who might have other uses for those dollars.

Second, "(l)et the government try to recover any long-term care insurance premium subsidies provided after the insured dies, from the insured's estate." There's a lot of stupid packed in here, but I'll try to help her out. To begin with, this is already the law as regards benefits. How's that turning out?  And comparing LTCi with reverse mortgages? Where's Fred Thompson when you need him?


Finally (at least for this post), "(b)uild in transportation and meal support benefits." Right, because adding even more benefits always drives down cost. If there was a market for such cover, rest assured that it would be offered as an option for those who wanted to spend the extra cash. It's called "the free market" and it works.

Next week, we interview an electrician about the best way to install a new toilet.
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