Why Long Term Care Insurance Was Created

Long term care insurance was developed within the past 25 to 30 years in an attempt to anticipate
the needs of the rapidly aging population. With families spread out across the country, it’s
difficult or impossible to take care of an elderly family member who becomes incapable of taking
care of himself or herself. Long term care insurance provides cash that enables people to help
the disabled person.

We wanted to know why was long term care insurance created and asked Bob Scott, a partner with
the Advocate Law Group to provide some insight. “There
is a social need and a definite value for long term care insurance. The issue has always been
whether or not the insurance company can price properly for that product. Insurance premiums are
usually based on experience and there was very little real experience in play when the product was
first developed. There was little actuarial data to show what the cost would be, what they would
be going forward and what the need for insurance would be in the future.

Most elderly people did not want to go into a nursing home. A nursing home was regarded as
death’s waiting room and people have long tried to avoid the need to go into nursing homes where
such care was traditionally provided. People wanted to have care provided in their home setting
if at all possible. Long term care insurance essentially migrated from being a nursing home
policy to a policy that paid benefits to people who could still stay at home, but needed some
assistance in that home to conduct their normal daily activities. Their premiums on the product
are also reasonably high.”

From an insurer’s perspective

Many insurance companies looked at long term care insurance as an additional product for their
agents to sell and a product that would carry very high commissions because high commissions
motivate agents to sell products. Life insurance typically is a product that involves high
commissions because there is a cash build up. The people who are buying the insurance are not
currently using it as they are with health insurance for example.

From an insurance company perspective, this was a product that would bring in, hopefully,
significant amounts of premium that could be invested by the insurance company and paid out
perhaps some time in the future. Insurance companies knew people didn’t want go into nursing
homes, so even if you had insurance that only paid for nursing home stays, people would still
fight to avoid going into nursing homes not withstanding that that would be paid for.

Long term care insurance is triggered by some future event – the inability to provide for one’s
activities of daily living and that may never occur or may occur some time in the future. That
enables the money that is paid as premium today to be invested by the insurance company and many
insurance companies make their principal living by that investment income. The fact that they
have to cover certain events such as a catastrophic illness, disability or the inability of a
person to engage in activities of daily living is just basis for them to justify receiving the
premiums.”

Changing behavioral patterns

Aside from premiums, Scott thinks that the concept of long term care insurance has the
potential to change behavioral patterns. “Instead of going into a nursing home, why not get an
aide to come into the house for several hours a day if the insurance company will pay for it? Why
not hire somebody to save the family member’s need for coming in and interfering with his or her
own life.

That was one of the major factors the insurance companies were concerned about when it came to
long term care insurance - that the availability of this insurance would change usage patterns.
So they – insurance companies - were enamored with the prospect of getting relatively high
premiums that they wouldn’t have to pay immediate claims on, but they were concerned about the
prospect of getting large claims down the road that they didn’t really price for or anticipate.”

Unfortunately, their concern for getting large claims became a reality and many insurers have
either sold their long term care book of business or have stopped paying claims. More information
is slowly coming to light and experts say that this issue may become litigious in the very near
future as Congress and consumer groups begin to investigate deeper.