Shopping For Security: Buying Long Term Care Insurance at Work

Shopping for Security: Buying long term care insurance at Work? This Could Be the Most Important Issue to Consider

The Wall Street Journal, June 26, 2005

GROWING NUMBERS of workers today are able to buy long term insurance through their employers. That's the good news.

The not-so-good news: A majority of these workers are ending up with a type of coverage that could leave them vulnerable to huge increases in premiums, just at the moment when they need benefits the most.

The potential for trouble is tied to inflation protection, "perhaps the most important feature [in long term care insurance] that consumers need to understand," says Joyce Ruddock, vice president for long-term care at New York-based insurer MetLife Inc. Some type of inflation protection is essential to a good policy. If health-care costs continue to rise about 5% a year, a bed in a nursing home that currently costs $180 a day would run almost $400 a day 20 years from now.

In general, insurers offer two types of protection: an "automatic benefit increase" (sometimes called automatic inflation protection) or a "future purchase option." The former, as the name implies, guarantees that a person's benefits will grow automatically each year; buying the feature, at a policy's outset, is a one-time decision. The latter gives policyholders an option to buy extra coverage at selected intervals, usually every two or three years.

So far, so good.

The twist comes down the road. Policies with an automatic benefit increase cost more to start with, but the monthly premiums typically remain fixed. Policies with a future purchase option start with much lower premiums, but those premiums can rise sharply if policyholders periodically buy additional protection. The reason: Premiums for the added coverage are based on a policyholder's age at the time the increase takes effect.

Here's an example: In the first year of coverage, using an illustration from the federal government's long-term care plan, a 55-year-old man might pay $140 a month for a policy with an automatic benefit increase, and only $50 for a policy with a future purchase option. Both policies, at the outset, would provide $150 a day for extended care.

Now, jump to age 75. The first policy still costs $140 a month. But the second has increased to about $300 a month, assuming the policyholder has added coverage every two years. At age 79, the premiums will exceed $500 a month. Worse, the big jumps come at a time when policyholders, in all likelihood, can least afford them: during retirement, when many people are on a fixed income.

Of course, policyholders with future purchase options can decline to buy additional protection; in the above example, the premium would remain fixed at $50 a month. But then, the daily benefit of $150 would remain fixed, as well.

Today, about 70% to 80% of consumers with a choice between an automatic benefit increase and a future purchase option are choosing the latter, says Jeremy Pincus, a principal at Forbes Consulting Group in Lexington, Mass., who specializes in long term insurance. The number alone, he says, doesn't mean that employees are making a "bad" decision; for some people, a future purchase option might be an appropriate choice. (More about that in a moment.)

The problem, according to some insurance experts, is that consumers -- because of the way policies are sold in the workplace -- often aren't getting enough information about future purchase options and just how large premiums can grow. As a result, many consumers simply opt for the policy that's cheaper out of the box: the one with a future purchase option.

In a group setting, insurers "are trying to keep the presentation [to employees] simple, and keeping the presentation simple means you don't get into some of these complex issues," says Dawn Helwig, a principal in the Chicago office of Milliman Inc., a consulting and actuarial firm. "And therefore it's not surprising that people don't really understand what they've got."

If you're thinking about purchasing long care insurance at work, here's what to look for and ask about:

WHAT'S AVAILABLE

Group coverage is a relatively new, but increasingly important, part of the long term care insurance business. The first policies appeared in the late 1980s; today, about 6,600 employers in the U.S. offer such benefits, or more than double the number of just five years earlier, according to Limra International, a research and consulting firm in Windsor, CT.

Inflation protection, too, has been changing. As recently as 2003, less than 10% of employers sponsoring a long-term care package offered an automatic benefit increase, says Dr. Pincus at Forbes Consulting. Benefits managers and insurers alike believed that employees would balk at the feature's high initial costs. But that thinking went out the window with the introduction in 2002 of long care insurance for federal employees. In the wake of an aggressive campaign by the plan's developers to illustrate the importance of inflation protection, almost 70% of workers and family members who purchased coverage opted for automatic benefit increases over future purchase options.

"The conventional wisdom used to be, `Offer the most affordable product,' " says Frank Titus, assistant director for insurance services programs at the Office of Personnel Management in Washington. "But we wanted to promote the product that provides the best protection."

Today, about 80% of new group plans, according to Dr. Pincus, are offering automatic benefit increases. Thus, one of the first questions an employee should ask when considering buying long term care insurance is: What type of inflation protection is available? Automatic benefit increase? Future purchase option? Both?

Ideally, both options will be on the table.

DIFFERING PHILOSOPHIES

Is one type of protection better than the other? The insurance crowd has two schools of thought, says Malcolm A. Cheung, vice president for long term care at Prudential Financial Inc., Newark, NJ.

The first: If you can't buy or afford an automatic benefit increase, you shouldn't bother buying long term care insurance. That's because an automatic increase is the best way to guard against rising health-care costs while keeping premiums relatively affordable.

The second viewpoint, says Mr. Cheung, is a bit simpler: "Some insurance is better than no insurance at all." In other words, the potential cost of long term care is so large that almost any form of insurance, regardless of the inflation protection, can help cushion the blow.

Claude Thau, who runs his own insurance consulting service in Overland Park, KS, can see both sides of the argument. He thinks the industry is moving in the right direction by adding automatic benefit increases as a feature in more long term care plans. But future purchase options, he says, have their place as well.

"Young people don't have a lot of purchasing power," Mr. Thau says. "They can't afford the high premiums" associated with automatic benefit increases. "For them, it makes sense to buy the future purchase option at first. Then, at some point, if they can afford it -- and their plan allows it -- they can switch over to the automatic benefit increase and avoid a real problem."

The "real problem," in this case, is the potential in later life for significant increases in premiums with a future purchase option. And that's where prospective buyers in group plans can run into trouble.

GET THE NUMBERS

Earlier this year, when Jack Burke, director of benefits at Boston College in Chestnut Hill, Mass., introduced a long term care plan for the school's employees, he asked Boston-based John Hancock Life Insurance Co., the plan's carrier, for some extra help.

He asked if it was possible to provide a comparison of monthly premiums for a policy with automatic benefit increases and a policy with future purchase option -- one that would show how the numbers might change year after year, and how much employees could end up spending in total. Several days later, John Hancock came back with a spreadsheet, which employees could access online.

"It was an eye-opener," Mr. Burke recalls.

A hypothetical example showed that a 55-year-old man who chose a policy with future purchase options and who bought additional coverage every three years would start with a monthly premium of $72.80 -- and would end up paying more than $1,000 a month at age 79.

Such numbers and insights, according to insurance consultants, can be hard to find in the workplace. Indeed, in an Encore survey of a dozen group plans, information about future premiums proved to be more general than specific. Enrollment packages, for instance, note that the cost of a policy with a future purchase option can increase over time, and some plans provide bar charts that show premiums climbing.

Typically, though, neither the text nor the diagrams include such specifics as year-by-year comparisons of premiums under different inflation plans; the total cost of premiums over time; or "crossover" points -- the points in the future when monthly premiums for a policy with a future purchase option could equal, and eventually exceed, those in a policy with automatic benefit increases.

"Yes, I think most people recognize that with [a future purchase option], premiums will rise if you add coverage," says Mr. Burke at Boston College. But "do they recognize how much they can rise? Without a comparison, without being able to go in and look at [the numbers] over time, I don't see how anybody would have a concept as to what those premiums could become."

He adds that employers and insurers should consider the future when deciding how much information to share with workers. "The last thing we wanted, and want, is a plan where someone joins it, and then down the road, comes back to us and says, `Hey, you never told me this was going to happen,' " says Mr. Burke. "Once you see the dramatic effect that one option can have compared to the other over a long time -- just for full-disclosure purposes -- I think that should be part of what the insurance company provides to groups."

Insurers, for their part, say they are trying to give more information to consumers. Prudential, for example, is in the process of developing inflation illustrations for customers, Mr. Cheung says. But the very nature of selling a product in the workplace, he adds, with large groups of people and competing demands for employees' time, limits what any vendor can accomplish. There's "just not the opportunity to go through all the options, and explain them all, before someone makes a decision."

Thus, the lesson: If you're considering buying long term insurance at work, ask for -- indeed, demand -- specific numbers about inflation protection, including annual premium comparisons over 30 or 40 years, the total cost of premiums under competing inflation plans, and the points at which one type of inflation protection becomes more expensive than another.

"You've got to see the lifetime numbers," says Brad Winnekins, president of Legacy Services Inc. in Colgate, WI, which specializes in implementing long care insurance programs for large employers. "The devil is in the details."