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Thursday, February 10, 2011

Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

Janemarie Mulvey
Specialist in Aging and Income Security

As the 80 million baby boomers approach retirement, many are concerned they will not have sufficient savings to sustain their standard of living in retirement. Few, however, may be focused on another risk to their retirement security—the potential cost of financing often expensive longterm care (LTC) services. LTC services include help with either functional or cognitive impairment and generally include assistance with activities such as bathing, eating, and dressing. For the majority of older Americans, the cost of obtaining paid help for these services may far exceed their financial resources in the future.

Private long-term care insurance (LTCI) is available to provide some financial protection for persons against the risk of the potentially high cost of LTC. Yet, less than 10% of LTC spending was paid by LTCI in 2009. This low rate of financing reflects relatively low demand for LTCI over the past few decades. Moreover, most policy owners have not yet reached the age where they may need services.

A number of factors have adversely affected the demand for LTCI. The cost and complexity of LTCI policies have been cited as major deterrents to purchasing LTCI. In addition, increased concerns have arisen about the adequacy of consumer protections for LTCI as a result of inconsistencies in LTCI laws and regulations across the states. More recently, adverse publicity about premium increases and heightened concerns about the future solvency of LTCI insurers in the current economic environment have further dampened demand.

The private LTCI market has undergone significant changes in the past three decades. For example, the employer-sponsored market has grown as a share of total LTCI sales and the overall market has become more concentrated in terms of the number of companies selling the product. Further, policies have become more comprehensive in terms of services covered and inflation protection, but this has also increased LTCI premiums. Finally, a number of newer product lines have been introduced that combine LTCI with other retirement and life-insurance products.

To address these concerns, the 112
th Congress may consider a number of legislative options to increase participation in the voluntary LTCI market. These may include proposals to 
  • increase tax incentives to lower the after-tax cost of policies; 
  • improve consumer protections to boost consumer confidence in the product; and 
  • expand consumer education. 
In addition, the recently enacted Patient Protection and Affordable Care Act (PPACA; P.L. 111- 148) establishes a publicly administered voluntary LTCI program entitled the Community Living Assistance Services and Supports (CLASS) program. But, in December of 2010, the bipartisan National Commission on Fiscal Responsibility and Reform included in its recommendations a provision to either reform or repeal the CLASS Act. Then, on January 19, 2011, the House passed H.R. 2, which would repeal PPACA (including the CLASS Act). This bill has now been referred to the Senate for consideration.

This report discusses the role of LTCI in financing LTC costs and current trends in the LTCI industry; factors affecting the demand for LTCI, including cost and complexity of the product and adequacy of consumer protections; legislative options available to address these issues; and possible reform or repeal of the CLASS Act.

Date of Report: February 3, 2011
Number of Pages: 25
Order Number: R40601
Price: $29.95

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