As the 80 million baby boomers approach retirement, many are concerned they will not have sufficient savings to sustain their standard of living throughout retirement. Few, however, have focused on another risk to their retirement security—the potential cost of financing often expensive long-term care services. The cost of long-term services and supports (LTSS) for the majority of older Americans may far exceed their financial resources in the future. Private long-term care insurance (LTCI) is available to provide some financial protection for persons against the risk of the potentially high cost of LTSS. To date, however, only about 1 in 10 individuals aged 55 and older own a LTCI policy. This report discusses the role of LTCI in financing LTSS and current trends in the LTCI industry; factors affecting the demand for LTCI, including cost and complexity of the product and adequacy of consumer protections; and legislative options available to improve affordability, strengthen consumer protections, and expand consumer education. Services provided by a LTCI policy may include a broad range of services and supports to help people with a limited capacity for self-care due to a physical, cognitive (such as Alzheimer's disease), or mental disability or condition. Health care and LTSS are different. Health care services typically treat specific acute and chronic medical conditions in a medical setting by a medical professional. LTSS, on the other hand, include a wide range of health and health-related support services provided on an informal or formal basis to people who have functional disabilities or cognitive impairments over an extended period of time with the goal of maximizing their independence. Unlike medical treatments, LTSS primarily assist individuals in their day-to-day activities. These "activities of daily living" (ADLs) include bathing, dressing, eating, toileting, and transferring (from a bed to a chair or vice-versa). Generally, LTCI policyholders are eligible to begin to receive benefits if they have at least two of the ADL limitations. LTCI policies may be sold to an individual directly or to a group as part of an employer-sponsored policy. The premiums charged for LTCI vary by age of purchase, with higher premiums charged to those purchasing at older ages. This age differential reflects the higher risk of needing LTSS at advanced ages. One study has estimated that over two-thirds of individuals who turn 65 years old will require LTSS at some point before they die. Although private LTCI is available to finance LTSS costs, only about 6% of LTSS spending was paid by LTCI in 2010. Nearly half of LTSS spending (nearly 43%) was financed by the Medicaid program, which is funded jointly by the federal government and states. Medicaid is intended to provide a safety net and is not available to everyone. To be eligible, individuals must meet certain functional criteria as well as state-specified income and asset thresholds. Medicare (which currently provides health care to older Americans and certain disabled individuals) financed about 22% of LTSS, but these funds were predominantly for post-acute care for short-stays in a skilled nursing home following hospitalization or for skilled home health care. Individuals who seek paid LTSS but do not qualify for public funding or do not have private LTCI must pay for these services directly out-of-pocket. In 2010, about 16% of LTSS spending was paid out-of-pocket. The magnitude of out-of-pocket costs will depend on the setting, intensity (including the skill level of the provider), and the duration of LTSS. For example, the setting of care can include care provided in one's own home, in a community-residential care setting such as an assisted living facility, or in an institutional setting such as a nursing home. For those receiving care at home, in 2012, the average cost of personal unskilled care (such as bathing, dressing, and transferring) was $19 an hour. Studies have found that individuals use on average about 18.4 hours a week of informal care, which would result in an annual cost of about $18,179 a year in 2012. The annual cost of care will also vary by intensity and duration of care, with individuals receiving care in an institutional setting paying more than those staying at home. For example, assisted living facilities that provide hands-on personal care for those who are not able to live by themselves (but do not yet require constant care provided by a nursing home) cost on average $39,600 annually in 2012. Nursing home care, on the other hand, generally costs more in that it provides LTSS assistance 24 hours a day. In 2012, the annual cost of a nursing home stay was $73,000 for a semi-private room and $81,030 for a private room. These estimates are national figures and can vary widely by geographic region. The private LTCI market has undergone significant changes in the past three decades. The employer-sponsored market has grown as a share of total LTCI sales and the overall market has become more concentrated in terms of the number of companies selling the product. Further, a number of newer product lines have been introduced that combine LTCI with other retirement and life-insurance products. The following discussion provides greater details on these trends. There are currently between 7 million to 9 million Americans with an active LTCI policy (often called "in-force"). The growth in the number of LTCI policies in both the individual and group markets increased at double-digit rates from 1995 to 2002 before slowing in more recent years (see Figure 1 ). The composition of the market has also changed as employer-sponsored LTCI has grown as a share of the total LTCI market. In 2011, employer-sponsored LTCI represented about one-third of all active policies, compared with less than 3% in the mid-1990s. Employer-sponsored LTCI is distinct from employer-sponsored health insurance in that employers typically do not contribute to LTCI premiums. Rather employer-sponsored LTCI provides the advantage of a larger risk pool and generally lower premiums than if LTCI is purchased in the individual market. Among employers offering LTCI, the federal government is the largest employer offering group LTCI. Over the past decade, the number of companies selling LTCI has declined significantly. Between 1987 and 2002, more than 100 companies were selling LTCI. A downturn in sales beginning in 2003 prompted many insurers to exit the market or merge with other firms. As a result, the LTCI market has become much more concentrated, with the top 10 LTCI companies producing 88% of new sales in 2010. This number has fallen further in recent years. Since 2010, a number of well-known companies have exited the LTCI market. MetLife has announced that it has discontinued new sales of LTCI effective December 30, 2010. MetLife assured existing policyholders that their coverage will continue without any interruptions or changes. In February of 2011, Unum Group announced it will no longer sell group policies. In March of 2011, Prudential announced it will no longer sell LTCI policies to individuals and will instead focus on the group market. The consolidation of the LTCI industry reflects several factors, including high administrative expenses for policies relative to premiums, lower than expected terminations (i.e., lapse rates) that increased the number of people likely to submit claims, low interest rates that reduced the expected return on investments, and new government regulations limiting direct marketing by telephone. A number of legislative changes have enabled insurers to begin to develop hybrid products that combine LTCI with either an annuity or a life insurance product. The Pension Protection Act of 2006 ( P.L. 109-280 ) simplified tax rules regarding combination products (effective in 2010) and added a tax provision specifying that proceeds from an annuity can be used tax-free to purchase an LTCI policy. LTCI policies can also be combined with a life insurance policy through an accelerated death benefit rider. Circumstances that trigger these accelerated benefits include diagnosis of a terminal illness or a medical condition that would drastically shorten the policyholder's life span, the need for LTSS, or permanent confinement to a nursing home. Because these newer hybrid policies are just entering the market, it is too early to tell their impact on demand for LTCI in the future. In addition to the above-mentioned hybrid LTCI policies, there is also a LTCI product that is linked to Medicaid eligibility. The Deficit Reduction Act of 2005 (DRA; P.L. 109-171 ) established the Medicaid Partnership Long-Term Care Insurance Partnership Program (hereinafter referred to as the Partnership Program). Individuals who purchase certain LTCI policies may qualify for Medicaid without the same means-testing requirements that other applicants must meet. Generally, Partnership Program purchasers would seek Medicaid for extended coverage of LTSS after their LTCI benefits have been exhausted. For these individuals, Medicaid means-testing requirements are relaxed at (1) the time of application to Medicaid, and (2) the time of the beneficiary's death when Medicaid estate recovery is generally applied. , The original Partnership Program was established in four states: California, Connecticut, Indiana, and New York in the early 1990s. The Omnibus Budget Reconciliation Act of 1993 (OBRA 93, P.L. 103-66 ) prohibited other states from implementing the program. However, the Deficit Reduction Act of 2005 (DRA, P.L. 109-171 ) lifted this prohibition and allowed any state with a Secretary-approved Medicaid state plan amendment to operate a Partnership program. As of July 2011, 40 states, including the 4 original partnership states, elected to adopt a LTCI Partnership program. Ten states have yet to adopt a LTCI Partnership Program.