Long-Term Care

Long-Term Care and Premium Risk

By Lester Himel | August 25, 2023

Seven out of ten people over age 65 will need some form of long-term care. That's not a projection — it's actuarial reality. Yet the way most people plan for this risk leaves them exposed in ways they don't fully understand until it's too late.

The History of LTC Pricing Problems

Long-term care insurance emerged in 1974, but it was poorly priced from the start. Insurers had no direct experience data to work from, so they borrowed assumptions from life, auto, and health insurance. Two critical miscalculations undermined the entire product class:

Healthcare cost escalation was dramatically underestimated
"Lapse" rates — how many policyholders would cancel their policies — were far too optimistic

When premium increases were announced, far fewer policies were dropped than insurers expected. That meant greater claims exposure than the pricing models anticipated, and the problem compounded over time.

What Traditional Stand-Alone Policies Cover

Traditional stand-alone LTC policies (TSAP) cover care when an individual can no longer perform two of the six activities of daily living:

Bathing
Dressing
Toileting
Transferring
Continence
Feeding

Dementia automatically triggers coverage. The coverage itself is valuable — the problem is the premium structure and the risk that premiums keep rising over your lifetime.

Medicare vs. Medicaid: A Critical Distinction

There is a widespread and dangerous misunderstanding here: Medicare will not cover long-term care. Medicare covers acute care — temporary conditions that are expected to resolve. Medicaid addresses chronic care, but to access Medicaid for LTC, you must demonstrate financial need. For most people with assets, this means spending down savings until you qualify. An entire legal specialty called "Eldercare" law has grown up around Medicaid qualification strategies.

The Alternative: LTC Riders on Permanent Life Insurance

The insurance industry developed a better solution: attaching LTC or Chronic Care riders to permanent life insurance policies. This approach uses the same "2 of 6 activities" qualification test but offers several structural advantages:

Accessing part of the death benefit for care costs reduces the insurer's risk (death claims are more predictable than LTC claims)
Costs significantly less than standalone TSAP policies
Premium is recovered through cash value accumulation or death benefit if care is never needed
No "wasted" premium problem — the policy has living value regardless

Why Whole Life Is the Right Foundation

I strongly prefer participating whole life insurance as the base policy for LTC riders. Unlike Universal Life, which carries lapse risk as internal costs rise, whole life offers growth guarantees and policy permanence. If a Universal Life policy lapses due to expense erosion — precisely when coverage becomes most valuable — the attached LTC rider disappears with it. That's an unacceptable risk.