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Questions raised about why some people let their long term care insurance lapse?

by | Oct 19, 2015

Questions are being raised about the “new study” done by the Center for Retirement Research (CRR) on why some seniors let their long term care insurance lapse.

Carolyn and I have thousands of long term care insurance clients all over the country. The CRR’s conclusions in their latest brief are the complete opposite of our experience over the last 20 years. For example, each year about 1 out of every 500 of our clients will decide to not renew their long term care insurance and they will let their long term care insurance lapse. The CRR believes that 10 times that many seniors will let their long term care insurance lapse every year.

In an effort to reconcile CRR’s findings with our own experience, we spent some time studying CRR’s data. Here are some answers to the questions we had.  Read each question below and then click on it to open up the answer.  

Sincerely,  

Scott & Carolyn Olson

 

1) How old is the data and where did the Center for Retirement Research get the data from?

Although the CRR states that this is a “new study”, they used data that was collected between 2002 and 2006 from the “Health and Retirement Study” (HRS).

The HRS is a biennial survey of over 20,000 people. The CRR gleaned from this survey 892 people, age 65 and over, who said that they owned long-term care insurance in 2002.  Of those 892 people approximately 124 of them gave some evidence that lead CRR to believe that they let their long term care insurance lapse some time between 2003 and 2006.

2) The CRR based their conclusions on approximately 124 people who may have lapsed their long-term care insurance about 10 years ago?

CRR’s brief states that they studied 892 people, age 65 or over, who said they owned long-term care insurance in 2002.  CRR does not state how many of the 892 people they studied let their long term care insurance lapse.  But we know what the industry-wide lapse rates were between 2003 and 2006.

Using those lapse rates, it’s easy to determine that of the 892 people studied by the CRR approximately 124 of them may have lapsed their LTC policies.

3) Did CRR’s brief discuss the federal law that helps protect seniors from losing their long term care insurance, even if their policy lapses?

CRR did not mention this federal law in their brief.

4) Were the policies studied by the CRR protected by this federal law?

The federal law designed to protect seniors from losing their LTC insurance does NOT apply to policies purchased before January 1st, 1997.  The federal law only applies to policies purchased on or after January 1st, 1997.

Since the study by the CRR only included people who owned long-term care insurance in 2002, and were age 65 or older in 2002, many, if not all, of these policies were purchased before 1997.

Therefore, many, if not all, of the policies included by CRR in this study would not have been protected by this federal law.

5) How does this federal law protect seniors from losing their long-term care insurance?

Two ways:

First, this law requires all insurance companies to contact every long-term care policyholder, at least every 2 years, asking every policyholder to designate which family members, friends, attorneys and financial advisers they want the insurance company to contact if their policy is in danger of lapsing.  (Section 7, Paragraph A(1))

Second, this law requires all insurance companies to reinstate a long-term care policy within 5 months after it has lapsed if the policyholder was either cognitively-impaired OR functionally-impaired when the policy lapsed.   (Section 7, Paragraph B)

Again, this federal law does NOT apply to policies purchased before 1997. We do not fault the CRR for not mentioning this law since the policies that lapsed in their study were probably not protected by this law.

6) Is there any evidence the federal law is helping protect seniors from lapsing their long-term care policies? Is the percentage of seniors lapsing their long-term care policies going down?

Yes, the percentage of seniors lapsing their long-term care policies has gone down significantly. This past July, the Society of Actuaries released a study analyzing data from 20 different insurance companies, looking at millions of LTC policies over a 12-year period, from 2000-2011.  (Click here to download the report.) The percentage of seniors lapsing their LTC policies has gone down by 68% during that 12-year period.  (Click here to download the Society of Actuaries’ Excel spreadsheet containing the voluntary lapse rates.)

7) Are 124 survey responses from over 10 years ago a big enough sample size to estimate how many of the 7.2 million* people who currently own a policy will let their long term care insurance lapse?

A group of 124 people, who may have lapsed their LTC policies over 10 years ago, is probably too small a sample size to predict how many people today will let their long term care insurance lapse.  If a presidential poll interviewed only 124 people most voterse would not take that poll seriously.  The fact that the data used by the CRR is over 10 years old raises additional doubts.

*Source:  NAIC Long Term Care Insurance Experience Reports for 2014 (published 2015) see page 7 

8) Since their research was focused on why people let their long term care insurance lapse, how many of these 892 people who said they owned long term care insurance answered “yes” to the question, “Have you ever been covered by any long term care insurance that you cancelled or let lapse?”

Zero. None of the 892 survey respondents studied by the CRR were asked that question. That question was asked in surveys conducted between 1995 and 2002 but the CRR chose not use any of that data in this study.

9) How many of these 892 people answered the question: “Did your coverage lapse because the premiums were too high, because you didn't think you needed to carry it any longer, or what?”

Zero. None of the 892 survey respondents studied by the CRR were asked that question. That question was asked in surveys conducted between 1995 and 2002 but the CRR chose not use any of that data in this study.

10) Are you saying that CRR’s study on why people lapse their long-term care insurance used data from a survey that did NOT ask the survey respondents why they lapsed their long-term care insurance?

That’s correct. The survey data used by the CRR to find out why some people let their long term care insurance lapse, did NOT ask any of the survey respondents why they let their long term care insurance lapse. The survey did not even ask them if they had ever let their long term care insurance lapse.

11) If the survey data used by the CRR did NOT ask the survey participants if they had lapsed their LTC insurance, how did the CRR determine if someone lapsed their LTC insurance?

To determine if someone lapsed their LTC insurance policy, the CRR relied on one question in the survey.  Question number:  N071.  

Keep in mind, the HRS survey is very long–it’s about 1,000 questions.  Section “N” of the survey has roughly 50 questions about medical insurance.  For people age 65 and over, these questions focused on Medicare, Medicare supplements, Medicare HMO’s, and even dental insurance. Near the middle of Section “N” is question N071.  It reads:

N071:  Not including government programs, do you now have any long term care insurance which specifically covers nursing home care for a year or more or any part of personal or medical care in your home?”

The methodology the CRR used to determine if someone lapsed their LTC insurance is sketchy.  According to their brief a lapse equals:  

someone who answered “Yes” to question N071 in 2002

AND

that same person answered “No” to question N071 in 2004 or 2006

12) What is wrong with this methodology? Why is relying on this one question a bad way to determine who has LTC insurance and who lapsed their LTC insurance?

The first half of this question is fine.  The problem with the question is the last phrase:

“… or any part of personal or medical care in your home?

Medicare HMO’s were very popular in 2002.  Medicare HMO’s advertised themselves as offering “better benefits” than Medicare, especially for care at home.  If someone taking this survey in 2002 thought that their Medicare HMO paid for “any part of medical care in your home” they might answer “Yes” to question N071 even though they did not own long-term care insurance.   

If someone like that answered “Yes” to this question, CRR would count this person as owning long-term care insurance, even though they didn’t.  Because of the ambiguous language used in the question, CRR had no way of weeding out people who incorrectly reported themselves as having LTC insurance.  

If this person in 2004 or 2006 learned that they did NOT have LTC insurance, they would then answer “No” to question N071.  

In this scenario, CRR would count someone as having lapsed their LTC insurance, even though they never owned LTC insurance.

This mistake would have been avoided if the survey had asked the two most obvious questions:  Have you ever lapsed your long-term care insurance and, if so, why?  But since the survey did not ask these questions we have no way of knowing how many errors like this were included in CRR’s data.

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