Monday, March 26, 2018

A long-term care policy from the client’s point of view

In my many years in insurance company actuarial departments, I have had the opportunity to participate in product development.  Always the concern was how profitable the products were as well as how much premium (and commission) will be generated (along with the questions of whether the product features will work on the administrative system and proposal system).  There were also questions of what interest rate and other guarantees were doable, as these were important pieces in the sales process.  Never was any talk given to how well the product performed from the point of view of the policyholder.  Did the product make the policyholder more well–off?

I have developed a program that gives vital information as to whether the purchase of long-term care insurance (either a policy or in a rider form)  is helpful to the client.  Let me explain the measures I use and how the results generally look.

I use a combination of three separate measures.  First, will the purchase of the product increase the chances that the client will meet goals, including the all-important goal of not outliving assets?  To answer this question, probability distributions of future long-term care costs are computed, customized to the client’s longevity and health profiles.  These distributions are then combined with many other aspects of the client’s financial situation (asset portfolio, investment/reinvestment/disinvestment assumptions, liabilities, expenses, tax and estate situations and many others) to compute the goal probability.  Then the process is repeated with long-term care insurance incorporated into the long-term care probability distributions.  The probabilities are compared.

The second measure is more detailed.  The measure addresses the questions: What are the chances that the client will spend less on long-term care costs over the client’s lifetime if the prospective insurance policy is purchased, as compared to not purchasing the insurance?  How much less?  For the chances of spending more, how much more?  The answer is displayed in a chart with the appropriate probabilities. 

So how do these comparisons usually work out?  For the first, the chances of success usually go down if the insurance is purchased.  Although unfortunate, the reduction is usually mild; say from 90% success chances without insurance to 86%( with insurance.  The second measure usually shows that about 65-85% of the time, the prospective insurance purchaser will pay less with insurance than without.  But the amount that they will save is usually on the small side.  On the other hand, if they do not purchase the insurance, 15-35% of the time they will pay more.  That  "extra" amount that they will have to pay can be huge.  Of course, this is the function of insurance, to protect against large losses.  The chart presents unbiased information about the policy, customized to the client, available nowhere else.  Often the client will see the big benefit of the insurance.

A third measure I recently developed deals with a major aspect of long-term care - how does the purchase of long-term care protection affect the amount of unpaid help to be provided by a spouse, by family and  by friends.  There are many articles as well as studies that talk about the great burden on the people close to the one who needs care.  My system actually quantifies this burden.  It produces a probability distribution of the amount of care that potentially could be provided by them, both with and without insurance (it assumes that care that would otherwise be provided by those close to the one who needs care will instead  be provided by professional care paid for by the insurance).  This analysis is only available through my program.  And just how well does the insurance reduce the burden for unpaid caregivers?  Contact me and I'll give you some interesting results!!

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