Executive Summary As the long-term care insurance industry continues its efforts to restore stability and regain profitability, the latest shoe is about to drop: a new gender-based pricing structure that will mean men and women pay different premiums based on their gender. The first company to venture down the path is the market leader Genworth, which is anticipated to begin receiving approvals to issue new policies with gender-distinct costs as soon as April; once the changes take effect, it’s likely that most other major LTC insurance companies will follow suit as well, and the new cost structure may be an industry standard by the end of the year. The primary impact of the cost change will be women who apply for a policy as an individual; premiums are anticipated to be as much as 20% to 40% higher than for men when purchasing a comparable policy at a comparable age. In the near term, this provides a unique opportunity for those considering a new LTC policy to buy one before the rate increase takes effect. Once the new pricing is in place, though, the only options may be to adjust the selected benefits to try to get premiums down to an affordable point, consider a hybrid LTC policy as an alternative (although such policies have challenges of their own!), or wait to see if the latest commission on LTC (required as a part of the fiscal cliff legislation) can come up with a new national solution to the country’s LTC woes. The upshot of the new gender-based pricing changes is that it may ultimately make LTC premiums more stable; accurate pricing reduces the risk of future premium increases for in-force policies. On the other hand, this also means the pressure is on to buy coverage sooner rather than later, as the cost for new policies continues to rise even faster than the increases for existing ones!

The soon-to-be-implemented changes mark another step in the ongoing challenges for the LTC insurance marketplace, which is struggling to find a balance between benefits and profitability in light of ultra-low interest rates and lapse rates; in fact, these proposed changes come on the tail end of a previous round of LTC adjustments that took effect last year to pricing, underwriting, and available features when selecting a policy, which included the end of lifetime benefits and limited pay policies.

Gender-Based Differences In Claims

The underlying driver for establishing a gender-based difference in LTC premiums is the simple fact that there is a significant gender-based different in LTC claims: Genworth estimates that approximately 2/3rds of all benefits payments go to insureds who are female.

The primary reason for this difference is simply the fact that women live longer than men. While this reality allows women to have more favorable claims for life insurance – it takes longer for them to pass away – the outcome is not so favorable in the case of long-term care insurance claims. With a difference in life expectancy of about 5 years, women have both an increased risk that they will be alive long enough to experience a health decline that necessitates care, and a high likelihood that by the time a claim occurs the woman will be living alone, as 7 in 10 women are living single by the age of 75 (either by being widowed, divorced, or never married). The distinction is important, as people who are single are more likely to go on claim quickly after a health event (as they often lack anyone to help provide care), and are more likely to need to move full-time to a nursing care or assisted-living facility (more expensive than receiving a small amount of assisted care in the home). By contrast, the claims experience reveals that men are more likely to still have a living spouse who can help provide care, which often both delays the onset of claims and reduces the extent of claims.

In reality, this distinction in the behavior of couples who tend to support each other compared to single individuals is one of the primary reasons why the LTC industry has historically offered significant discounts to married couples who apply for coverage. However, in today’s low interest rate environment, it’s not enough to merely eliminate the couples discount for those who apply individually for care; instead, the carriers have applied to state insurance regulators for permission to establish gender-distinct pricing.

Gender-Based Differences In Pricing

The coming price changes are anticipated to result in a premium difference as high as 40% between the cost of long-term care insurance for women versus men. The first carrier to change premium structure is Genworth, the dominant leader in the LTC insurance marketplace; other insurers are likely to follow suit quickly thereafter, in part because the other insurers otherwise risk an onslaught of applications from females that may distort the companies’ own claims risk exposure. The pricing changes that Genworth applied for is en route for approval in nearly all states (except for Montana and Colorado, which require unisex rates by law).

Notably, the pricing changes are only intended to apply – at least initially – to women who apply for coverage individually. Married couples will still enjoy a blended rate as a couple, including any potential couple’s discounts >(a higher rate for women and a lower rate for men equates to two people buying a unisex policy anyway). However, married rates and discounts will require both members of the couple to apply for coverage; if a female applies for coverage alone, even if married, the new gender-based individual rate will apply. It remains unclear how pricing will be handled if a couple applies for benefits and the husband is declined, although at least one Genworth interview last fall suggested a limited couple’s discount would still be available. On the other hand, it’s also worth noting that what constitutes a “couple” for the purposes of avoiding the new individual rates for women has expanded in recent years as well; many carriers will now allow couple’s rates and discounts for same-sex couples, unmarried domestic partners, and in some cases even siblings, as long as they co-habitate. On the other hand, if two women applied jointly for a couple’s policy, it still appears that the higher rates would apply to both of them (albeit with a couple’s discount).

Notably, it appears that the new gender-based pricing will not necessarily result in a decrease in the cost for men from current levels. Instead, the reality is that rates were anticipated to rise this year on new policies anyway, and the proposals are simply shifting a large portion of this year’s increase to the pricing for females individually. In other words, men will likely see individual premiums that were roughly similar to 2012, while women will see costs that may be 20% to 40% higher later this year.

Planning Tips For Gender-Based Pricing

So how should planners and their clients plan and prepare for gender-based LTC insurance pricing?

For any clients who may be applying as single women, the first opportunity is to go ahead and apply for coverage now, before the new premium rates take effect. The new pricing from Genworth will take effect through the spring in various states as the approval process is completed, so time is of the essence for clients to get through the application process in time; as long as the policy is in force before the change takes effect, the client can lock in current pricing (which also means the new gender-based rates will have no effect on any other existing LTC policyowners). Some clients will have more time than others to get an application done, because the approval of the rates will go state by state, so be certain to check the timeline for your own state and when the insurer requires a completed application to lock in current rates. In addition, remember that just because the new rates are in effect for clients in one state does not mean the window of opportunity is closed for clients in other states; similarly, it’s notable that even after Genworth’s new pricing is in place, other carriers may still offer unisex rates, so some time remains. Nonetheless, the reality is that the window won’t likely remain open for long with any carrier; by the end of the year, it’s likely that gender-distinct pricing will be in place for all companies offering LTC insurance.

For clients that may not be ready or able to apply before the deadline, the next option is to consider a couple’s policy if possible, whether because the client is married, or otherwise in a co-habitation living situation that would allow for such a policy, which at least helps to mitigate the impact. If the client has no alternative but to purchase the policy with the new, higher rate structure, it may be necessary to look carefully at exactly which features and benefits are selected – or rather, which can be minimized or avoided to manage the premium cost. For instance, most clients should focus on a “short-fat” policy design (where the benefit period is short but the daily benefit amount is “fat”), given that the average claim is still less than 3 years; a short-fat policy can also ensure that the policy benefits are really able to cover the true cost of care in the area (but be certain not to buy “too much” either!). In addition, many clients may want to carefully consider what kind of inflation protection is purchased, as more and more policies now offer more than just a 5% compound inflation option, including 3% compounding, CPI-based inflation, and even future purchase options for additional benefit amounts. Some planners have also begun to look at hybrid LTC policies as well, due in large part to their guaranteed costs, although some caution is necessary about whether clients may regret hybrid LTC policies if rates rise in the future.

In the meantime, there’s still the potential for some kind of Federal LTC program in the future, although it appears that’s still years down the road at best, after the American Taxpayer Relief Act of 2012 (the “fiscal cliff” legislation) repealed the CLASS Act and replaced it with a new commission on LTC that is charged with trying to come up with some new solutions.

The bottom line, though, is that the new gender-based pricing is here to stay, and having costs that are higher for women and men will be a permanent fixture of LTC insurance in the future, just as men have long had higher costs than women for life insurance. And in reality, the new separate pricing for men and women will just be part of a series of changes to LTC insurance in the coming months, including stricter underwriting, blood tests to check for nicotine or other drug use (and also for cardiovascular disease and/or stroke risk factors), and also home visits during the application process instead of just phone interviews (primarily to assess mental competence and any concerns about dementia or Alzheimer’s disease). The net result won’t necessarily mean more clients will be declined for coverage, but these tighter underwriting provisions will reduce the likelihood that clients can obtain preferred/discounted rates – an unfortunate challenge, given the new pricing coming into effect soon! On the plus side, more accurate pricing and better underwriting does help improve the stability of today’s policies, which means new LTC coverage purchased later this year is more likely than ever to avoid ever having a premium increase in the future.

(This article was included in the Carnival of Wealth on Control Your Cash.)