Military long term care insurance

Did you know that active-duty and retired military are eligible to buy a policy from the Federal Long Term Care Insurance Program?

I never used to care about long-term care insurance. That was for “old people” (hey, I’m not old!!), and I’d have plenty of years for the industry to come up with a great product before my spouse and I needed to worry about it.

But it’s not about me or my spouse. Last month we got “the call” from the hospital about my elderly father. He’s doing fine now but he’s no longer capable of living independently, and he may reside for another decade in a full-care facility. He’s a long-time widower, so back in 1992 he was persuaded to buy a long-term care insurance policy. For a small extra fee he added a 20-year inflation rider. He’s going to be making a claim on that policy soon, and today he has nearly $250K of coverage for only the ~$11K in premiums paid over the last 19 years.  Financially, he won the long-term care lottery.  His coverage just can’t be bought at this price today.  Even if it was, the insurance company would go bankrupt trying to pay out the claims.

Did I mention that the immediate family of active-duty military & active Selected Reservists, including your parents, parents-in-law, and stepparents, may also be eligible to buy a FLTCIP policy?

I’ve had my attention forced to the long-term care issue, so I’m going to occupational therapy learn more and write about it. I thought this was a quickie subject for a short post but my research has dredged up enough material for two posts (and maybe an entire book chapter in the next edition!). Today we’ll talk about the problems with the industry, and in another post we’ll talk about the actual decision.

One of the challenges of the long-term care decision is determining whether we (or our elders) will actually need it. Today’s oft-quoted statistics give the impression that it’s almost a certainty: we (and our parents) will all spend years in a care facility before passing away. The reality is that the statistics are designed to evoke fear… and the sale of long-term care insurance.

I’m not going to cite those numbers– they’re all misleading.  Like the Consumer Price Index, they’re applicable to large groups but not very applicable to each one of us. It’s easy for actuaries and insurance companies to predict that you’ll spend time in a care facility, and to claim that the likelihood will rise every year. They make long-term care sound as inevitable as death & taxes. However it’s based on the same logic flaw as the prediction that the older your home becomes, the more likely it will burn down. The reality is that newer homes have stricter codes and better fire-prevention technology, so the homes that burn tend to be older. The cause of the fire is not age– that’s just a side effect. Of course the difference is that fire insurance is cheaper than long-term care insurance, so it’s a lot easier to decide to buy it without having to become an expert in statistical correlation.

Another prediction from the insurance and medical industries is that more people are living longer and that [insert scary percentage here] will be afflicted with dementia and Alzheimer’s. The issue with these numbers is another problem of cause and effect. Human longevity hasn’t risen much over the last century,  but a lot more of us are getting better at avoiding other causes of death. This distinction may seem like the nasty semantics games inflicted on us by our high-school English teachers, but it’s a critical one. Our individual genetic risk of dying of Alzheimer’s is the same as it ever was, but our lifestyle risk of dying from just about everything else has gone down. Our medical risk of dying of many lethal diseases has also dropped,  so these reductions make the rate of Alzheimer’s look like it’s rising.

The media is doing a great job of adding to the fear and uncertainty. People buy newspapers and magazines to read frightening facts of the perils of Alzheimer’s, or the struggles of families coping to raise their children while caring for their parents. Editors and journalists are keenly aware of what sells their media, so they dig up even more alarming facts and figures. But the statistics have not changed– we’re just forced to become more aware of them.

Those last four paragraphs might make my old statistics teachers happy, but they’re not very reassuring to the rest of us. You may have realized by now that all the lifestyle and medical advances have accomplished is to make it easier for us to stick around long enough to be killed by Alzheimer’s.  Gosh, maybe we really should all go buy long-term care insurance!

Not so fast. Here’s a problem that the insurance industry is just beginning to figure out with more data and more computing power. It turns out that for decades, death rates have been dropping. (See this chart from a 2004 United Nations report.) People who would have died of smoking or alcohol or from drunk drivers or from not wearing seat belts are now avoiding these deaths to stick around long enough for their cohort to develop Alzheimer’s. Meanwhile the insurance industry has been selling these people long-term care policies with the assumption that a certain percentage of them are going to die from other causes so that the insurance company won’t have to pay out. Unfortunately their customers are avoiding most of those other causes, and more survivors means that there are more claims on long-term care policies.

Good ol’ competition has amplified this problem.  For example, John Hancock’s actuaries will (eventually) carefully calculate the statistics and the probabilities to determine the rates they need to charge to make an acceptable profit. However these statistics and probabilities are evolving and subject to interpretation and data-mining. Met Life’s actuaries will do the same analysis, but they’ll probably arrive at different numbers. If Met Life’s numbers result in lower premiums than John Hancock, then Met Life will probably sell more policies. John Hancock’s unhappy sales agents will ask their actuaries to take another look at their numbers and squeeze a few more pennies out of the premiums. The companies might even decide to reduce their commissions and profit margins to get more sales, knowing that they’ll earn less on each policy but hoping to make it up on higher volume.

These insurance decisions have what are known as “long tails”– the results of today’s pricing decisions may not become apparent for years, even decades. If the company uses outdated data in its decisions, or if only their healthiest customers buy their policies, or if they’re wrong about the cost projections, then they’ll lose money. If the policy permits, they’ll raise the premiums. If the company loses money, then it might not be able to pay out on its promise. Unfortunately many insurance companies have been losing money on each policy… and getting punished even more for trying to make it up on volume.

All of these developments have two effects on the customers. First, their media-enhanced perception of the hazards of dementia and Alzheimer’s makes them much more likely to lock themselves into a long-term care policy. If the company raises the premiums on their policy then they’ll feel obligated to keep paying. (Economists and investor psychologists call this the “sunk cost fallacy“. ) Second, when their worst fears are realized and they need to make a claim, the insurance company may not be able to pay out. It might go out of business, and the state/federal regulators might not have the funds to insure the insurance company.

How do we handle these problems? We’ll deal with them in the next post.

Related articles:
Federal Long Term Care Insurance Program
FLTCIP open enrollment season through 24 June 2011

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7 Comments
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  5. Reply Doug Nordman April 21, 2011 at 6:35 AM

    Thanks, Scott, good to know.

    I’m calling John Hancock this week to start my Dad’s claim.

  6. Reply Scott A. Olson April 21, 2011 at 6:14 AM

    The federal government recently did an audit of the claims practices of 7 of the leading long-term care insurers.

    You can read about it at:

    http://bit.ly/Federal-Audit-of-LTCi-Claims-Practices

    Scott

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