Page 32 - Bulletin Vol 26 No 3 - Sept. - Dec. 2021 - FINAL 3 version (1)

Finance Article | Long Term Care Policies

By Rob Brinkman
In the 1980s General Motors launched a campaign for one of its car lines “This isn’t your Father‘s
Cadillac.” They recognized the pressure that European luxury sedans were putting on the iconic brand
that for decades led the General Motors stable. Just 40 years ago, nearly one-third of all luxury cars sold
in the US were Cadillacs. Now less than 7%.

Over time the distinguishing tail fins and “bigger is better” dimensions morphed into a boxy Chevy with a
Cadillac badge slapped on it. GM made a bet with a smaller version called the Cimarron. It sold so
poorly that it was axed from their lineup by 1988, just six years after its launch. But that is not the point of
my analogy.

Nursing homes started to spring up in the 1960’s to provide long term care outside the family. Not
everyone could afford it, and as some people faced selling their homes or depleting their savings to pay
for Mom or Dad’s care, the Insurance Industry began addressing the need.

in the 1980s and 90s you could have purchased a “Cadillac” long-term care policy (LTC). It was the
equivalent of the iconic car brand everyone wanted to drive. Those long-term care policies were a bit
pricey, but the payout coverage was extensive and comprehensive. At least a dozen major Insurance
Carriers provided LTC policies. However, there was a major flaw and like Cadillac, the Insurance
Companies took too long to figure it out. Now LTC policies, if you can find one of the 3 or 4 available,
are expensive and limiting in coverage.

In 2004 Genworth, consistently at the top of LTC underwriting, flew me to Virginia to meet with some of
their Leadership Team to discuss the bind they were in. I had just recently exited as an executive for a
major Investment/Insurance Company that was purchased by Prudential. I had some experience with
price structuring, branding and distribution, and Genworth was hoping to gain some insight.

In a nutshell, the initial mistake insurance companies made is they built the LTC policy on the equivalent
of a Homeowner insurance platform. One of the unusual dynamics of a Homeowner’s policy is a
significant portion of the policies terminate (meaning people sell their home) without the owner filing any
claims, so there were years of premiums collected without any payout. This is why you see so many
State Farm and Allstate commercials.

Regarding LTC: Assuming the client starts the policy in his/her 50’s, there are three premium/payout
scenarios that are possible.

• They fund the policy for a period of time and at some point, often in their 60’s, they stop paying
premiums and cancel the policy.
• They fund the policy and at some point die, without any benefit paid out.
• They fund the policy and generally in their late 70’s or 80’s require assistance and the insurance
company distributes benefits until death.

So, as you can see, only 1 of the 3 scenarios actually require the insurance company to pay out. That,
to be rather pointed, is what is called a cash cow. Now you know why the early policies could afford to
be priced as “Cadillacs.” Then something changed.

The incidence of dementia increased by 117% between 1990 and 2016, with the number of prevalent
dementia cases increasing from 20.2 million in 1990 to 43.8 million in 2016. Within a matter of 10 years
the LTC pricing model blew up. Medical science was diagnosing dementia earlier in a person's life and
through recognition and better treatment, helping the patient live longer. Therefore, insurance compa-
nies not only started paying out sooner, but also longer.

32 | Nassau County Dental Society ⬧ www.nassaudental.org