Life Insurance Versus Long-Term Care Insurance

We often are asked what the difference is between life insurance and long-term care insurance (LTCI). One answer is it’s the difference between mortality (death) and morbidity (illness). But both insurance products are designed to protect income, assets and standard of living.

Underwriting life and LTCI are both based on claims experience, life expectancy, health history, family longevity and other information like where you were born.

When you apply for a life insurance policy, your insurability, underwriting rating, product offerings and premium are to a significant degree determined by your projected mortality.

Actuaries and underwriters are shockingly accurate when it comes to estimating life expectancy based on the health history and lifestyle information you provide.

No wonder. The concept of life insurance has been around since ancient Rome. The first company to offer life insurance did so in 1706. For centuries data has been compiled and studied to accurately pinpoint our individual mortality.

Mortality versus morbidity

Ever heard the adage that health buys long-term care insurance and your wealth pays for it? It’s true. Your health determines insurability, carrier, product and ultimately the cost of coverage.

Underwriting long-term care insurance (LTCI) is different. It focuses on morbidity. Here, experts are evaluating the likelihood that a person will contract or develop a particular disease. It’s about predicting who will get sick.

What will the illness be? How serious will it be? Will it require medical care provided by doctors or nurses or non-medical care provided by health care aides? Are there complications or multiple medical conditions to consider? Will it last less than a year? More than a year? More than five years?

One of the variables that contributes to the challenge of underwriting morbidity is longevity. A decade ago the life expectancy of a 65 year old American male was 82.9 years. Today, it’s 84.3 years.

In 2007, the life expectancy for an American female was 85.7 years. Today, it’s 86.6 years.

The longer we live the more likely it is that we will develop a medical condition and require custodial care.

Compounding the difficulty is the amount of data available. LTCI has only been around since 1974 and the quantity of claims data is wanting compared to life insurance.

Today the average age that people buy LTCI is 56. The majority of claims are filed between ages 80 and 85. If you think about how this works, an insurer has a product in the market for decades before a claim is filed and actuarial information is gathered.

What have we learned?

What do we know from claims history? There are two major causes of long-term care insurance claims.

Cardiovascular disease including stroke accounts for 17% of claims. But dementia comprises 34% of claims. It is the number one cause for claims. And it’s growing.

One major insurer, no longer selling new policies, reported that over a three-year period two-thirds of its policyholders filing a claim for the first time for care in assisted living or nursing homes were cognitively impaired.

Genworth has reported that 50 cents of every claims dollar is tied to dementia, including Alzheimer’s.

We’ve seen underwriting requirements change as a result of claims history. In the early days of LTCI the focus of underwriting was on functional skills. Carriers evaluated medical history, employment history, range of activities and a face-to-face interview might be ordered for older applicants.

Today, the focus is on cognitive skills. The majority of LTCI carriers now use the Enhanced Memory Skills Test. The EMST evaluates all domains of cognitive function by evaluating recall and abstract reasoning.

It is comprised of two exercises, takes about 15 minutes and is 97% accurate! It can differentiate lapses in attention, depression, sleep deprivation, stress, even cheating!

The applicant must respond to simple, clear instructions. The first exercise requires the applicant to repeat and recall 10 words multiple times after a time delay. This evaluates attention, comprehension and language.

The second exercise is about abstract reasoning. Here the applicant chooses which of three animals is most dissimilar. Then the applicant is asked to recall the animals. This evaluates comprehension, working memory and executive function.

The prevalence of dementia is increasing. Mild cognitive impairment precedes dementia by many years and initial symptoms are subtle.

Life insurance and LTCI are both risk management strategies designed to protect income, assets, standard of living, etc. But the underwriting of each product focuses on different risk strategies. Mortality is the focus of life insurance. Morbidity is the focus of LTCI.