Updated: May 3, 2013 12:14PM
Just when America was warming up to the idea of purchasing long-term care insurance to protect family assets from the devastating costs of custodial care, the three largest insurance companies have shaken up the market by raising prices on existing policies, not just on policies to be sold in the future. How should that impact your planning?
Long-term care insurance policies are sold with the "assumption" of level premiums that won't increase much over the years. That's the incentive to buy when you are young, healthy, and prices are lower. Insurers have the right to go to state insurance commissioners to seek approval of a price increase on everyone who bought a certain policy, if claims significantly exceed expectations.
When insurers first created long-term care policies, it was hard to predict how their costs would turn out. But as insurers gained more experience in the last 10 years, it has been expected that the risk of price increases on the more recently issued policies would be slim and that any premium increases would be minimal.
Those who bought early to "lock in" lower prices are now being surprised by significant premium increases.
In the last year, Genworth requested increases ranging from 8 percent to 12 percent on some policies already owned by its customers. John Hancock announced a 14 percent increase in some policies in May. Nearly all of these policies were issued before 2000. But last week, MetLife announced it will raise annual premiums an average of 18 percent for policyholders who were younger than 70 when they purchased their policies from 1998 through 2005.
In effect, the insurers are admitting they made a pricing mistake. The only other explanation is that they priced policies artificially low to compete for business.
David Acselrod, MetLife vice president, long-term care and critical illness insurance, said: "Quite simply, we expect to pay out substantially more in claims than we originally anticipated. Some of the assumptions that drive LTCi pricing include policy lapses, interest rates, the number of people requiring care and the duration of care, to name a few. Following a review of our experience, we concluded that we had to make changes to ensure that we are pricing the products appropriately on behalf of all of our policyholders."
Isn't it the job of the insurance company to assess trends that impact pricing before they go to market?
The ultimate cost
In 2007, according to the American Association for Long Term Care Insurance, 180,000 Americans received benefit payments through long-term care insurance. Executive director Jesse Slome says: "The total value of claims paid in 2007 was $3.5 billion -- money that families didn't have to pay, and money that taxpayers didn't have to pay for impoverished seniors."
The population of Americans over age 65 is expected to more than double in the next 15 years. Few of the soon-to-be elderly have saved enough to cover home health care, assisted living, or nursing home care -- approaching $100,000 a year in major cities.
Steve Moses, president of the Center for Long Term Care reform, a national policy think tank, defends private insurers, saying: "The government has not set aside any money for the future to back up its promises that Medicaid will care for frail seniors. At least, the private insurance industry has bitten the bullet and is increasing prices so they will have adequate reserves to pay the claims when they start coming in."
Moses suggests the market for private LTC insurance will never expand, as long as the government is "giving away" the same service insurers are trying to sell. He points out that the middle class and even the affluent have learned the tricks of qualifying for Medicaid nursing home coverage.
They'll be surprised when they learn that Medicaid provides care primarily in nursing homes that will only become more underfunded and understaffed. Moses says the burden of long-term care needs will crush the system, wiping out the possibility of such government-provided benefits in the future.
It's quite likely that state insurance commissioners will approve the requested increases. Unfortunately, a side effect is likely to be that fewer people will buy long-term care insurance. Then, when the real burden of caring for aging baby boomers hits in the next 10 or 15 years, the states will have to shoulder the cost through their Medicaid programs as boomers run out of their own money.
Still good deal
Buying long-term care insurance still makes sense. (See examples in accompanying box.) If locking in rates is a concern, consider a 10-pay policy where your coverage is fully paid up in 10 years. Janice Axelrod, an independent long-term care insurance broker in Chicago, says this is particularly attractive for some businesses (C-corporations) that are allowed to deduct the annual payment.
Don't bury your head in the sand about the very real possibility that in your old age you'll need help dressing or bathing or getting out of bed. Can you count on your children to be there for you? Would you even want them to do that? Or will you run out of money trying to pay for care on your own? Those are questions to ask yourself as you consider the value of long-term care insurance. And that's the Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate. Copyright Terry Savage Productions Ltd.