People buy insurance to insulate themselves from surprises. Many long-term care (LTC) policy owners, however, received uninsulated surprises recently-substantial rate increases from carriers including MetLife, John Hancock and TransAmerica.
"I've seen rate increases as high as 25%," says Mark Thompson, senior vice president of Thompson Wealth Management in Melbourne, Fla. "Double digits are standard." Last year a John Hancock study projected premium increases of 40%. MetLife and Berkshire decided to stop writing LTC policies in late 2010 and early 2011. Across the industry, experts say costs will push carriers either to raise rates or stop selling policies.
WHY COSTS ARE UP
Insurance companies base their premiums on the complicated mathematics of benefit costs, the percentage of policyholders who use the coverage and how much they use and the portion which let a policy lapse. Interest rates matter too. All these factors are pushing up expenses for insurers and their policyholders, driving both premium increases and market dropouts, says Jesse Sloane, executive director of the American Association for Long-Term Care Insurance in Westlake Village, Calif.
Competition pushed insurers to offer flexible policies that help pay for both in-home and institutional care. A policyholder who might once have used an LTC policy to pay for three years in a nursing home might now use the same policy to fund two years of in-home care, followed by the same three years of custodial care. That drove up costs.
At the same time, people are living longer and using more benefits. "It's not unusual to see people functioning well into their early nineties," says Steven Podnos, a former physician who is a principal at Wealth Care in Merritt Island, Fla. "Eventually they run out of health."
Every insurance cost equation includes a lapse rate, or the proportion of customers who purchase and then abandon a policy without ever tapping benefits. Sloane says, carriers assumed a lapse rate of around 4% for LTC policies. The real rate, he says, is closer to 1%. "That means a lot more policies on claim for big companies," Sloane says.
Insurers invest premiums in high-quality debt, which has offered low returns in recent years. As a result, carriers must raise premiums in order to pay claims and maintain financial cushions.
That expense means that fewer people can afford LTC insurance-another problem for carriers. "The market for LTC insurance is between 15 and 18 million people, but only about eight million have coverage now," Sloane says. Many buy coverage because their family history suggests they will need it, making them likely to use their policy benefits.
To be profitable, the LTC insurance industry needs more policyholders who use fewer benefits. "They need volume to make it work," says Allen Hamm, president of Superior LTC Planning Service in Pleasanton, Calif., which consults with planners and their clients about LTC insurance. "They need to sell about one million policies per year to stay viable, by my own math." According to the Long-Term Care Insurance Association, though, they're selling between 250,000 and 300,000 policies a year.
Psychology also plays into the size of premium increases. Most policyholders would like minimal rate increases, so insurers prefer to make hikes few in number but substantial in size.
The alternative is to set higher initial premiums, the strategy of Northwestern Mutual Life Insurance Co. in Milwaukee, which has not raised premiums and doesn't plan to do so, according to Steve Sperka, vice president of long-term care. "We set the premiums with the goal of stability over the long term," he says. In 2007, the average LTC premium was $2,207, according to LIMRA, although premiums vary by age.
For publicly traded companies, investor expectations for profitability also help determine pricing. Owned by its policyholders, Northwestern is more able to keep premiums steady because it isn't publicly traded, Sperka says.
Planners and clients aren't happy with premium increases or reduced carrier options, but not every aspect of the change is a shock. "We knew as long as 10 years ago that you had to be careful about carriers," Hamm says. Many were competing on price alone, with little thought for sustainability, he says.
Few clients are ready to drop their policies. "I've only had maybe two policies in my career lapse by choice," Thompson says. "Once clients have LTC policies, they keep them."
Even so, clients should consider their options carefully. The most obvious choice is to pay the increase. Some insurers also let policyholders choose a lower level of benefits in exchange for forgoing a premium increase. Self-insuring is an option for those who can afford it, and Medicaid will likely still be there for those with little or no savings, or who expect to spend down their savings before they need long-term care.
Clients who don't have the money to pay for extensive long-term care but still have assets to protect will need other ways to shield themselves. Government partnership programs, part of the Deficit Reduction Act of 2005, are one option.
Many states offer these programs, which offer individuals an incentive to buy LTC insurance. For each dollar policyholders receive in LTC policy benefits, the state allows them to shelter another dollar from Medicaid limits, says Norma Hand Brill, a principal at Southwest Florida Elder Law in Fort Myers, Fla.
A client who receives $300,000 in insurance payments, for instance, can keep $300,000 in assets if he or she later uses up insurance benefits and must let Medicaid pay for continuing care. Without the partnership, the client would have to spend down most of those assets in order to qualify for Medicaid.
Partnership programs can also put policyholders in a good position to find a Medicaid-funded spot at the facility they prefer. "If private care insurance has run out, they're usually first in line to get a Medicaid bed at that facility," Brill says.
It's important, though, to make sure that a partnership program applies in any state where a policyholder might decide to live. See current reciprocity information at www.dehpg.net/ltcpartnership/statereciprocity.aspx.
Some planners suggest hybrid policies, which combine life insurance or an annuity with an LTC rider. Nadine Wilkes, managing partner at Weinstein Wilkes Financial Group in Fort Myers, Fla., suggests buying universal life insurance policies with LTC coverage riders.
Hybrid policies require a lump-sum investment, perhaps between $100,000 and $250,000, which earns interest and can be withdrawn at any time. Depending on the terms of the LTC rider, a beneficiary may use that payment first to fund long-term care. Once that money is gone, the beneficiary can also use the death benefit to fund long-term care.
Wilkes likes these policies because payments typically stay the same. Clients also like them because they offer heirs a tax-free payout if beneficiaries don't use all the money for long-term care.
A hybrid policy "makes a dollar work in multiple ways," agrees Judith McGee, CEO of McGee Financial in Portland, Ore. McGee describes a client who wanted to leave her heirs a substantial sum of money. Most of her money was in her IRA. By purchasing a hybrid life insurance and LTC policy, she ensured that her children would receive a life insurance payout even if she spent down the rest of her assets on LTC costs.
Hybrids can be unaffordable for some, though. "It's expensive to buy a big enough policy," says Richard Schroeder, a principal at Schroeder, Braxton & Vogt in Amherst, N.Y. "It's better to have specific insurance for each need."
Hybrids typically require a lump sum, which many can't muster. "Plus, you lose the other options that the lump would have given you," Hamm notes. "The investment return on $100,000 could pay for both life and LTC coverage, and you'd get to keep the $100,000."
Hamm used to recommend LTC coverage to anyone in good health under 60, anticipating rate increases of 2%. Now increases are likely to be closer to 5% compounded annually-the difference between doubling every 50 years and doubling every 14 years.
Today, he recommends that clients get just enough LTC insurance to fill the gaps. Clients might buy a little insurance with a guaranteed purchase option for more, to cover the risk that they might not be healthy enough to get insurance once they actually need it. Another option is to buy a policy at 50 and drop it at 65. This would cover any needs before the beneficiary has time to build up assets to cover his or her own care.
New LTC policies have more accurate assumptions, Sloane says, and eventual higher interest rates could help shore up insurer finances. Medical breakthroughs could make a difference too. In the meantime, plan on more surprises.
Ingrid Case is a financial writer based in Minneapolis.