LTC Bullet: Medically Underwritten Annuities for LTC
Friday, May 15, 2015
LTC Comment: The Brits are selling them. Should we? After the ***news.*** [omitted]
LTC BULLET: MEDICALLY UNDERWRITTEN ANNUITIES FOR LTC
LTC Comment: Vincent L. Bodnar, ASA, MAAA, is Chief Actuary at LTCG. In his former position as director of Towers Watson’s strategic long term care efforts and initiatives, he worked closely with insurance executives in the United Kingdom. One of his objectives was to learn whether US LTC insurance products might transplant well into the UK market and vice versa. We reported on one aspect of Mr. Bodnar’s research last fall in “LTC Bullet: Out of the LTC Frying Pan into the Fire.” Today we’ll look at a particularly interesting British LTC financing product that he thinks might fit well into the US market.
In a presentation to the “Long Term Care Discussion Group” on May 5, 2015, Vince spoke about the British “care annuity” product. What follows is our interpretation of what he said. It does not necessarily reflect his or his company’s views.
Care Annuity Product
The care annuity is a medically underwritten single-premium annuity. Unlike most LTC insurance products, this one is usually purchased by people as they begin a care episode. Like any annuity, it converts a lump sum of money into a lifetime income stream.
Vince explained that here in the US, we usually don’t underwrite annuities. Insurance carriers figure that if someone is willing to swap a bundle of money for an actuarially determined lifelong income stream, then he or she must be, or they think they are, in very good physical condition. In other words, the insured basically self-underwrites. The carriers “figure if you asked for it, you must be healthy.”
So, why underwrite an annuity? Someone entering long-term care can be expected to have a shorter life expectancy than the actuarial tables predict for healthy people. The average long-term nursing home stay is roughly two years and the average assisted living stay is four years. Underwriting for a new LTC patient means the annuity writer can give a higher payout than otherwise. In fact, “the more conditions you have, the shorter your life span and the more you’re going to get from your income stream.” Poor health becomes an advantage instead of a disadvantage as in traditional LTCI.
From the underwriter’s point of view, assuming the underwriting is accurate, a portion of the insureds will die before and another portion will die after the break-even point, taking into account administrative expenses and profits for the carrier. For the insureds, this has the effect of taking the longevity risk out of the LTC financing equation. A portion of them may die before and the other portion after they break even, but none are going to run out of money.
The British public financing system for long-term care is similar to ours in the respect that people are expected to spend their own money, up to a certain limit, before the government will contribute. One key difference, however, is that there is no home equity exemption in the UK. That means British home owners have a potentially substantial asset base that is vulnerable to LTC expenses and available to fund one of these care annuities.
“Care homes” in the UK do a routine health assessment at admission of each new resident. The care annuity writers use this assessment as the basis for underwriting the care annuity. which is usually purchased at this point of admission. They usually pay directly to the care provider.
Care homes are not as finely distinguished between nursing homes, assisted living, residential care, etc. in the UK as here. Nor is home care as prevalent in the UK as in the US, but this kind of annuity might work as well here as there.
Nursing homes are more expensive than assisted living facilities which are more expensive than home care, but the “money metric works out the same because of the longer life span at lower levels of care equates to a lower monthly payout for longer.” Besides, it would be possible to re-underwrite at each stage of an insured’s decline as higher levels of care become necessary, if the care recipient wants to “buy up” the income stream amount as their care costs increase.
As in the USA, British people don’t understand who pays for LTC or how. They are surprised when they learn they have to use their own assets first. Insurers need to catch them at that point of realization and show them how to ensure their ability to meet their LTC payments throughout their lifespans while retaining any balance for survivors and heirs. This product in the UK tends to be bought by the surviving spouse. The typical insured is 85 years of age and widowed.
In the UK, this is a difficult market to penetrate because of awareness issues. It is also critical to get the mortality risk right. To some, it feels like “selling home owners insurance when the house is on fire.” So insurance companies are reluctant to participate. According to a British participant in the Discussion Group, there are only three companies in the UK care annuity market now, compared to seven or eight at one time.
In the UK, there is almost always a home sale involved in funding the care annuities. But in the US, there is a “nice swath of middle class people who could finance such a product.” People here 80 years of age or older have an average net worth of $275,000 of which roughly half, $135,000 is home equity. The average nursing home costs $81,000 per year. The average elder could fund nearly four years in a nursing home with a care annuity, but the average nursing home stay is only two years.
This, however, is not what people in the US do. Instead, they go on Medicaid. And if they have too much money, they may engage in Medicaid planning. They move assets off the books. What happens is Medicaid takes the tail risk. This care annuity product pools that risk together.
The key question the care annuity answers is: How can you leverage assets that aren’t producing income and find a way to generate income from them to pay for your care? If this product were widely available in the US, Bodnar opined, not for people who were always going to be on Medicaid, but for middle income people, it would be all about avoiding Medicaid.
“Why avoid Medicaid?,” asked the British participant. “Didn’t you say the elders’ adult children quickly figure out ways to deplete funds?”
Here ensued a long list of reasons to avoid Medicaid provided by the speaker and members of the audience: stigma, poor care, low reimbursement, limited home care, lack of independence and choice, transfer of assets restrictions, estate recovery, etc.
But as one audience member mentioned, most people are not aware of those disadvantages. It’s also true that at the stage when care is needed someone other than the frail or infirm elder is usually making the financial and care giving decisions and may have a financial conflict of interest by taking advantage of Medicaid. The simple fact is that most expensive long-term care is paid by Medicaid, whatever the program’s disadvantages.
The program ended with one member of the audience observing that the care annuity is “kind of like anti-planning. If something happens, I have my house so I don’t need to plan.” But Vince observed that this product addresses a segment of the population that does not want to buy a product they may not use. And it has the advantage of starting where people actually are nowadays: in need of care and worried about their money running out. It would be nice if they would plan, but they don’t.
LTC Comment: Medically underwritten annuities are available in the United States already. Center for LTC Reform corporate member OneAmerica offers such a product, called “ImmediateCare.” Learn more about it here: http://www.assetbasedltc.com/long-term-care-solutions/immediatecare. Our opinion is that the medically underwritten annuity for financing long-term care could become an extremely popular product if Medicaid’s home equity exemption of up to $828,000 were eliminated as in the UK or severely reduced in combination with stronger enforcement of Medicaid’s mandatory estate recovery programs. Under those circumstances, of course, all forms of private LTC financing--including traditional and hybrid LTC insurance, various forms of home equity conversion, and real asset spend down—would surge in popularity and use. More private financing in the LTC delivery system would raise care access for everyone, private payers and the remaining genuinely needy Medicaid recipients.