long-term care insurance

Many people who live to old age eventually need help with everyday tasks — bathing, dressing, eating, moving around — or supervision because of dementia. This is not medical treatment so much as daily care, and it can cost a great deal: years of home aides or a nursing home can run far beyond what most savings can sustain. Long-term care insurance pays for this kind of ongoing personal care.

Typically a benefit triggers when you can no longer perform a set number of activities of daily living (commonly 2 of 6, like bathing and dressing) or have severe cognitive impairment. The policy then pays a daily or monthly amount (say 200 a day, or a pool like 300,000 of total benefit) toward care, often after an elimination period of weeks or months. Like disability income it is a morbidity-and-duration product: the actuary must estimate both how likely you are to need care and, crucially, how long that care will last — and LTC claims can run for many years.

Long-term care is famous among actuaries as one of the hardest products ever priced, and a cautionary tale. Early policies were dramatically underpriced because three assumptions all went the wrong way at once: people lapsed far less than expected (so more kept their cover to claim), they lived and needed care far longer than assumed (longevity and morbidity improvement), and the low-interest era cut the investment income that was supposed to fund the long deferral. Many insurers exited the market or sought large premium increases. It is the standout example of how long-tailed morbidity risk, compounded by interest and lapse assumptions, can overwhelm a product.