You have to wonder if you’ll be able to buy decent long-term care insurance in 10 years.
If you’re putting off a decision about buying long-term care insurance (LTC), be aware that buyers are facing higher costs and diminished choices as more insurers leave the market.
The market is changing fast because of concerns over profitability, says Mike Skiens, chairman of the National Long-Term Care Network trade group. It’s getting harder to find LTC policies that offer lifetime benefits, leaving policies that offer only several years of protection.
LTC policies are designed to help people who no longer are able to perform the day-to-day activities necessary to live independently. Their problems may be due to aging, illness or disabilities. LTC has strong appeal to people who are trying to protect their heirs and estate from the draining costs of a long and serious illness. Care covered by LTC policies generally isn’t covered by Medicare, which focuses on rehabilitation and short-term services. Medicaid doesn’t kick in until you’ve used most of your assets. Here’s more about long-term care insurance basics.
“You were really blessed to have one of those [lifetime duration] policies,” Skiens says. “Now the carriers are saying there is too much risk associated with them. When you look at the increasing incidents of dementia claims, you can see why [some] carriers are no longer offering those, but they are still offering two-year, three-year, five-year, seven-year plans.”
Rising health insurance costs have made it difficult to price LTC policies correctly to guarantee a profit for insurers. By offering policies of shorter duration, insurers limit payouts to policyholders who could live many years with an illness that requires expensive care.
Can you afford long-term care insurance?
Over time, LTC may become unaffordable to middle-wage earners, says Brian Gordon, president of MAGA, an LTC insurance agency in Illinois. Jesse Slome, executive director of the American Association for Long-Term Care Insurance (AALTC), compares having an LTC policy with benefits that last more than a few years to owning a high-performance luxury car.
Many people want them, he says, but they lack the income to make a purchase.
In its 2012 National Long-Term Care Insurance Price Index, the AALTC says prices for LTC policies today are between 6 and 17 percent higher than comparable coverage of only a year ago. Prices rose, in part, because of historically low interest rates and low yields on investments, says Slome. Investment returns provide between 40 and 60 percent of the money insurers accumulate to pay future claims.
A changing business environment
Over the last three years, Allianz, Guardian, MetLife and Unum Group have joined insurance companies that are leaving the LTC business, CBS News recently reported. After putting a halt to selling new individual LTC policies in March, Prudential announced in July that it would stop selling group LTC policies in all states except Indiana, Iowa, Kansas, Louisiana, and South Dakota, where it must continue offering policies for periods required by state law.
When Genworth Financial — a dominant LTC carrier — recently announced it was reducing LTC operations, the action sent a shock through the industry, says Gordon. “They are the big boys on the block. They have a really good track record. They have a good claims history. They are pulling back. Another company or two could get out of the business before the end of the year.”
None of the companies that leave the market will stop honoring the LTC policies they already have sold, Gordon notes.
Part of the reason for LTC’s lack of profitability is that insurers had comparatively little actuarial data to go on for establishing rates when the product began gaining in popularity in the 1990s. Insurers didn’t fully understand the risks they were taking on, says Gordon.
Coping with costs
“Most [insurance] products have over 100 years of actuarial data,” he says. “In long-term care you are looking at a 35- to 40-year product.”
In the early years, insurers were less concerned with potential losses. “There was a tremendous amount of unlimited benefits being purchased,” Gordon says. “I call that the open checkbook.”
LTC isn’t cheap. The average annual premium for a policy with four or five years of coverage sold in 2010 to someone age 55 to 64 is $2,261, according to AARP. The longer you live, the more likely you are to use your LTC policy, but not everyone should buy one. If you have to use money that otherwise would be spent on such necessities as food, shelter or medical care, it’s not a good tradeoff.
While the policies are relatively expensive, not having LTC coverage can be even more costly. The average annual private pay cost of nursing home care this year is about $88,000 and exceeds $100,000 in 10 states, according to AARP’s Long-Term Care Insurance: 2012 Update.
The base price for assisted living facilities averages $41,000 annually. Adult day services, which allow people to remain in their homes, average $66 per day. Companies that provide licensed home health aides not certified by Medicare charge an average of $20 hourly, according to the AARP report.
Eric Tyson, author of the book “Let’s Get Real About Money,” says LTC policies often provide the most peace of mind not to policyholders, but to their adult children. In the current tight economy, the costs of caring for an aging relative can seem overwhelming.
“If you are having your own health issues or tying to hold down a job, you may simply be incapable of meeting [your parents’] needs for personal care,” Tyson says.
The future of long-term care insurance
In the future, some insurers will continue offering LTC policies, but they won’t be as comprehensive as those that were sold in the recent past, says Gordon. Consumer will have to adjust to the new reality.
“I don’t think it is to the point where it is getting unaffordable, but people have to design realistic benefits,” he adds. “They have to find something in the two- to three-year benefit range that is affordable.”
With medical costs rising, buying limited LTC coverage may be better than having none at all.
Despite higher prices and less coverage, “People still are calling for new quotes,” Gordon says. “They are trying to wrap their arms around how to protect themselves.”