Monday, August 26, 2019

No. 328: Long-Term Care Insurance, Universal Life Insurance, and the Hybrids

I have been writing for 31 years about problems associated with long-term-care (LTC) insurance policies, and for 38 years about problems associated with universal life (UL) insurance policies. Now some companies are offering "hybrid" policies that incorporate LTC insurance and UL insurance in a single policy. I first heard about these hybrid policies a year or two ago, and began wondering about the question of whether the problems of LTC insurance and UL insurance can be solved by combining both types of insurance in one policy. My answer is no.

Recently the National Association of Insurance Commissioners (NAIC) and the American Academy of Actuaries (Academy) began studying hybrid policies. Those developments prompted this blog post.

LTC Insurance
I have long taken the position that the problem of financing the LTC exposure cannot be solved through the mechanism of private insurance. The reason is that the LTC exposure violates important insurance principles. The most extensive explanation of my views is in the July 2008 issue of The Insurance Forum, the monthly newsletter I published from January 1974 until December 2013. The article is entitled "The Shortcomings of Private Insurance in Financing Long-Term Care." Here are two paragraphs from the article:
The cost of LTC is high, and can be financially devastating for individuals and their families. When an individual cannot care for himself or herself, the cost of care—in the individual's home, in a nursing home, or in some other facility—can wipe out a family's life savings.
The fact that the cost of LTC is high and potentially devastating does not necessarily mean the problem of financing it can be solved through private insurance. The LTC exposure fails to meet at least three important conditions that are viewed by students of insurance as necessary for the proper functioning of private insurance.
The article goes on to describe three important principles the LTC exposure violates, and several other characteristics of LTC insurance that create problems. The full article is in the complimentary package offered at the end of this post.

UL Insurance
UL insurance has long been touted as solving certain problems associated with traditional cash-value life insurance. However, I have taken the position that UL insurance, while it has characteristics that differ from those of traditional cash-value life insurance, introduces new problems into the life insurance market. My first article about UL insurance is in the November 1981 and December 1981 issues of the Forum. The article is entitled "The War Over Universal Life." Here is the opening paragraph:
In recent months, the life insurance industry and the general public have been subjected to a blitzkrieg by the proponents of so-called universal life insurance. In response, certain segments of the life insurance business have begun to fight back. I believe that some of the claims made for universal life are justified, but that some of the claims are exaggerated if not false. The purposes of this article are to describe universal life, comment on some of the claims made by its advocates, and discuss some of the implications of universal life for the life insurance industry and the public.
The full article is in the complimentary package offered at the end of this post. The most recent discussion of my views on UL insurance is in No. 294 (November 8, 2018). It is entitled "Universal Life Policies—a Disaster for Life Insurance Companies and Their Policyholders."

Because of the failure of Penn Treaty, a major LTC insurance company, and because of large operating losses and the need for substantial premium increases at other LTC insurance companies, the NAIC has long had a keen interest in LTC insurance. In April 2019 the NAIC created a task force to address LTC insurance. Virginia Commissioner Scott A. White chairs the task force. In May 2019 he held a public hearing in Richmond. I expressed my views on LTC insurance in No. 310 (April 22, 2019) and submitted them for the hearing record.

More recently the NAIC asked its Life Actuarial Work Group to study hybrid policies. E. Perry Kupferman, FSA, MAAA, chairs the NAIC work group. He is Chief Life Actuary in the California Department of Insurance. Prior to state service, he worked at various insurance companies.

The Academy
As noted above, the Academy has begun studying hybrid policies. In July 2019 it released an exposure draft of a "Long-Term Care Combination Product Valuation Practice Note." Here are the first three paragraphs of the introduction to the exposure draft:
The purpose of this practice note is to provide information to actuaries on current and emerging practices in which their peers are engaged with respect to the considerations in the statutory, Generally Accepted Accounting Principles and tax valuation of long-term care combination products.
This practice note was prepared by a work group organized by the Health Practice Council of the American Academy of Actuaries. The work group was charged with creating the first practice note on long-term care combination product valuation.
This practice note is not an interpretation of actuarial standards of practice and is not a promulgation of the Actuarial Standards Board, is not an actuarial standard of practice and it is not binding upon any actuary. It is not a definitive statement as to what constitutes generally accepted practice in the area under discussion. Events occurring subsequent to this publication of the practice note may make the practices described in this practice note irrelevant or obsolete.
The full exposure draft is in the complimentary package offered at the end of this post. Warren Jones, MAAA, FSA, chairs the Academy's work group. He is in the Dallas/Fort Worth office of PricewaterhouseCoopers LLP.

General Observations
In recent years, in response to my blog posts about LTC insurance premium increases and about UL insurance cost-of-insurance increases, I have received many comments from frustrated policyholders. It saddens me to have to tell such individuals that I am neither an attorney nor a consultant, and that I am not in a position to comment beyond what I have written. In other words, all I can do is sympathize with them and provide them with easy access to articles and posts I have written.

In the case of LTC insurance, I remain convinced that the LTC exposure cannot be dealt with through private insurance. In the case of UL insurance, I remain convinced that the problems cannot be solved without a massive improvement in the record-keeping systems used by the insurance companies. I believe that combining LTC insurance and UL insurance into a single policy of mind-boggling complexity will not solve the problems associated with those types of insurance.

Available Material
I am offering a complimentary 42-page PDF consisting of the July 2008 Forum article (5 pages), the November/December 1981 Forum article (8 pages). and the July 2019 exposure draft of the actuarial practice note (29 pages). Email and ask for the August 2019 package about LTC insurance and UL insurance.