In the United States’ contentious debate over the future of health insurance, policymakers rarely mention another form of coverage that is almost as important to an aging population. Private long-term care insurance — LTC for short — ought to be a go-to means for middle- and upper-middle-income Americans to finance a variety of costly services for the elderly and disabled that are not covered by the government. Yet fewer than one in ten consumers owns a policy. And despite rising premiums, carriers have struggled to find a way to make a profit on LTC insurance.  

About half of older adults will need long-term care at some point in their lives. According to a 2015 analysis by my Urban Institute colleague Melissa Favreault, the average lifetime cost of this care for someone turning 65 is $138,000. And about 15 percent of older Americans will require more than $250,000 in paid care.

To put it another way, if you are a typical middle-income American, there is a one in six chance that you’ll need care that is far beyond your ability to pay — one chance in six you’ll end your life (and perhaps that of your spouse) in penury.

What Are Your Options?

Medicare protects nearly all Americans over 65 against medical risks, though seniors still have significant cost-sharing obligations. But that social insurance program does not cover long-term care costs — a reality apparently unknown to most Americans. The United States is, in fact, one of only a handful of developed nations whose government does not provide at least some universal, long-term care benefits funded by taxes.

That leaves most of us with only three possible sources of funds to pay the hefty bill. There is private savings, including home equity; Medicaid, which will provide safety net support if you become impoverished; and private LTC insurance.

Given the limited options, one might imagine LTC insurance would be widely seen as a vital adjunct to Social Security, Medicare and retirement savings. In fact, it has become a case study in market failure: few consumers seem willing to pay for LTC insurance, and only a handful of carriers still want to sell it.  Only about seven million Americans currently own policies — and that number has barely budged since 2008.

The need for long-term care should be a textbook example of an insurable risk. Yet the market for LTC insurance has gone off the rails.

Why? Begin with consumers’ reluctance to plan for old age and insurance companies’ reluctance to manage poorly understood liabilities, and then add dementia and low interest rates to the brew. 

First the buyers – or, rather, the non-buyers. In general, Americans hate all insurance (and aren’t all that fond of the folks who sell it, either). More to the point, they hate paying insurance premiums. And, arguably, they hate LTC coverage most of all because it is so hard to imagine they’ll ever need this sort of care. Even those who have seen close relatives struggle with the costs of long-term care somehow convince themselves it won’t happen to them. “Denial is not just a river in Egypt,” is a favorite phrase of frustrated LTC brokers and actuaries. 

As a result, LTC insurance is subject with a vengeance to what economists call “selection bias.” Those who do buy have some good reason to believe they are more likely than average to need care, and for a longer period.

That’s where dementia comes in. Alzheimer’s and other forms of dementia tend to be maladies of very old age. And long-term care insurance buyers typically live longer than average because they have above-average incomes. (Income is closely correlated to life expectancy.)

Insurers tell me that fully half of their LTC claims are for dementia. And because the course of these brain diseases is so uncertain, insurers run the risk of paying claims for a very long time. In the business, they call this the “tail risk” — those relatively few (often very expensive) claims that go on for years and years. 

It gets worse. The business model of LTC insurance is simple: collect premiums for decades and make money by investing those premiums. But state regulators generally require carriers to invest premiums in super-safe bonds. And after the financial collapse in 2008, bond yields plummeted. A decade later, they have still not returned to historical norms.

Where Does That Leave Insurers…?

Insurance companies have responded as one would expect: they raised premiums, tightened underwriting standards and limited the length of coverage.

In 2005, a buyer aged 55-64 paid an average annual premium of about $1,900. By 2015, average premiums had grown to more than $2,600 in spite of the fact that consumers were settling for less coverage. In 2005, the average policy paid a maximum of about $270,000 in benefits. By 2015, it had declined to $235,000. At the same time, most insurers shortened the maximum duration of benefits. First, they stopped selling lifetime policies, and then they stopped selling 10-year policies. Today, few carriers will sell more than 5 years of coverage.  

Despite all this, claim losses have exceeded expectations since 2008. And there’s no reason to believe the trend will reverse. As premiums rose and benefits fell, consumers lost interest — adding to the selection bias problem. At the industry’s peak in 2002, about 750,000 individuals purchased LTC insurance. Last year, only about 100,000 bought traditional coverage. Another 100,000 or so bought so-called combination policies that linked long-term care benefits with annuities or whole life insurance — high-margin products that sweeten the deal for insurers.  

LTC carriers have traditionally been relatively small subsidiaries of large life insurers, many of them publicly traded. And shareholders are unwilling to take on the open-ended risk of catastrophic claims, especially coupled with low investment returns. The biggest LTC carrier, Genworth, is going private after taking $2 billion in charges to boost reserves against future claims and watching its stock price take a beating. A decade ago, consumers could select policies from 100 carriers; last year, perhaps a dozen companies were actively in the market.

…And the Rest of Us?

As the Baby Boomers age, the challenges of financing long-term care needs will inevitably balloon. In theory, long-term care insurance ought to be part of the solution. In reality, private insurance plays a small and ever-shrinking role. Somebody’s got to pick up the liability. If private insurers won’t and most consumers can’t, who will it be?