By Mark Miller
Tribune Media Services
Harry Margolis is an elder law attorney who regularly helps clients plan for possible risk that they'll need long-term care. He's helped many select a long-term care insurance policy, but these days he's ambivalent about how to counsel them.
Margolis has seen numerous cases where long-term care insurance has protected clients from financial devastation. But he's worried by the turmoil the industry is experiencing.
Metlife, one of the industry's biggest players, announced recently that it would stop writing new long-term care (LTC) policies, although it reaffirmed its commitment to stand by current policyholders. And another huge underwriter, John Hancock, recently suspended sales to employers who offer LTC insurance as an employee benefit, although it continues to sell policies to individuals.
The Metlife and Hancock developments come against a backdrop of other signs of problems in the LTC market. Sales fell 24 percent in 2009, but bounced back 11 percent from that level in the first 10 months of 2010, according to LIMRA, an industry research and consulting group. LIMRA reports that just seven million LTC policies are in force - less than five percent penetration of the total possible market.
Unpredictable premium hikes are a key problem facing the industry. LTC policies require that customers keep current on premium payments from the time of purchase up until the point when a claim is made, but there's no guarantee that rates won't rise. Insurance companies need the approval of state insurance commissions to put through rate hikes and several have sought double-digit hikes this year. For example, Hancock has asked state regulators for permission to boost rates on most of its existing customers by about 40 percent.
"I'd like there to be something I could comfortably recommend to my client," says Margolis. "This is what the premium is and this is what the benefit is and it's not going to change. But it's not there."
The rate hike requests are driven, in part, by the current ultra-low interest rate environment, which makes it difficult for insurance companies to earn an adequate return on the investment portfolios that help fund policy payouts. Insurers need a 10 to 15 percent increase in premiums for every one percent drop in interest rates, according to the American Association for Long-Term Care Insurance.
But some LTC insurance providers also under-priced their policies due to wrong bets on the way customers would manage their policies. For example, just 3.8 percent of policyholders allowed their coverage to lapse between 2005 and 2007, and the rate was just 1.5 percent on policies at least six years old, according to LIMRA. That's good news from a consumer perspective, since it's rarely a good idea to walk away from an in-force LTC policy, but the low lapse rates have squeezed industry profits.
Certainly, the need to insure against long-term care risk hasn't changed; the Center for Retirement Research at Boston College (CRR) says about one-third of Americans turning 65 this year will need at least three months of nursing home care sometime during their lives.
Medicare covers only a small portion of long-term care needs, and the cost of a semi-private room averages $79,000 per year. CRR calculates that the mean lifetime exposure to long-term care costs for a 65-year-old couple is $260,000, with a five percent risk of a $570,000 expense.
If you do have LTC coverage and find yourself facing a big rate hike, it probably won't make sense to drop your coverage-especially if you bought your policy many years ago. Your premium almost certainly is much lower than you'd get on a new policy today at an older age - even with a steep rate hike thrown in.
And the policy's benefit may have increased substantially since you bought it if it has an inflation rider; about 40 percent of LTC policies sold have this feature.
If you just can't afford the rate hike, cutting back the coverage always is an option - and it's better than canceling the policy altogether. Your options include reducing the daily benefit or the length of time that benefits would be paid.
If you haven't purchased LTC coverage but want to get coverage, this is a time to proceed with caution. Study the market with the assistance of unbiased expert, such as a fee-only financial planner or attorney.
The LTC market likely will be changing over the next couple of years as the insurance industry tries to come up with more attractive offerings. Some insurance companies already are introducing less expensive policies with more limited benefits; others are introducing hybrid life-and-LTC products aimed at the affluent end of the market.
For example, Hartford Financial Group now offers a universal life insurance product through financial advisors featuring a "life access accelerated rider" that gives policyholders an option to begin drawing death benefits early to fund a LTC need, with flexibility on how the payout is used. The rider adds no more than 15 percent to the policy's cost, says a spokesman, who adds that the vast majority of buyers are affluent boomers. "It's really been exceeding our expectations." Sales are up 66 percent in the past 12 months.
Mark Miller is the author of "The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and LIving" (John Wiley & Sons/Bloomberg Press, June 2010). He publishes RetirementRevised.com, featured recently in Money Magazine as one of the best retirement planning sites on the web. Contact him with questions and comments at email@example.com
This column was originally printed in the January 2 - January 15, 2011 edition.