Why long-term care insurance may become extinct

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(MoneyWatch) A recent article in Investment News, a publication for investment advisors, examines the possibility that long-term care (LTC) insurance may go the way of the dinosaur. The article notes the recent mass exodus of insurance companies offering the product.

Over the last three years, Unum Group, Guardian, MetLife (MET), and Allianz have all exited the business. And Prudential (PRU) said in March it would stop issuing individual LTC insurance.

The problem for insurance companies is that they had little idea of what they would actually need to pay out since they had so little experience. Insurance companies collect premiums for years before the vast majority of the insured will become old enough to need the care. That problem is compounded by the low fixed-income returns insurance companies are making on the premiums.

"I've been saying for 15 years that long-term care insurance is not viable," University of Indiana professor emeritus of insurance Joseph Belth told Investment News.

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Insurance companies that have stayed in the LTC business have had large rate increases. That naturally drives healthier plan members to drop coverage, making those who remain in pool more likely to need care. This happens year after year (the healthier leave and the sick stay) leading to an insurance phenomenon known as the "death spiral." Eventually, the product or insurance company collapses under its own weight.

Is LTC insurance right for you?

For years, I've been somewhat agnostic on LTC insurance because of the uncertainty over premium increases. My first advice is that, if you can self-insure, don't buy it. Yes, assisted living is expensive, but don't forget the costs you will save by not traveling, needing a car, etc. On the other hand, I also think you don't need such coverage even if you have little money set aside. Save the premiums and live a nicer lifestyle. If you ever need assisted living, just understand that Medicaid may not provide the most luxurious care.

If you do buy LTC insurance, buy a plan that allows fixed premiums over, say, 10 years that then fully pays all premiums. That way, the insurance company can't raise your rates later. Consider partial self-insurance by buying longer wait periods and even skipping the inflation rider. Make sure it's from a highly rated insurance company (although my confidence in ratings agencies such as S&P and Moody's (MCO) is shaken).

Years ago, I decided to self-insure. Now the recent exits of insurance companies from the business and large premium increases make me feel pretty good about the decision.

[Matt_in_Memphis]

Allan:
My mind is blown. You are advising readers/households to "live a little better lifestyle now" as opposed to stashing away 2-4% of their income into an asset protecting product that will provide for them when devastation strikes. Furthermore, you are advising that they take advantage of Medicaid after all their years of hard work are liquidized to nothing.

Imagine this....you have to explain to your dear old Gam Gam that after 2 years of living in her chosen retirement home she has to be removed and taken into a lesser quality governmental facility on the other side of the city. I'm sorry Gam Gam but you don't have anymore money. Your assets are depleted and the government has to send you to a cheaper facility because you're worth it! I can't afford to send you here anymore either Gam Gam because I'm trying to put my kids through college, pay my bills, etc...etc... Wish you had something else to cover all these expenses, like Long-Term Care.

GamGam: But, but, Allan told me it was okay...that I didn't need it...to live a little better life-style 25 years ago....to not worry about care expenses when I'm old...that the almighty gov't would take care of me.

Sorry Gam Gam, your Adviser didn't like the price increases of LTC and told you to spend now and be miserable later. But he was right, the goverment will take care of you, just on the other side of town in that place you said smelled like mold. You got what you paid for Gam Gam.


What happened to being financially responsible in this country?

FEEONLYTOM suggests along with Allan "Yes, you cannot get Medicaid unless your assets are basically depleted, but I think that Allan made a point that instead of spending a lot of money for LTC insurance, why not live a little better while you're healthy (spend more) and then let the federal government take care of you once you run out of money."

I about fell out of my chair for a second time when I read that. Why would anyone WANT the federal government to take care of them when they can't even balance their own budget. My greatest fear is that I run out of money before my last breath. Next greatest fear is that I have to rely on the government to take care of me.

Reader's should do themselves justice and research the idea of Long-Term Care insurance and figure out what that means to them. Do they want to have the option to choose their assisted living facility or receive care in their own home...or do they want to spend their last dollar before they leave this world and let the gov't decide their fate.

Find a trusted financial advisor in your community and let them explain pricing and options for coverage. The thing with LTC is that you can get as much coverage as you want or can afford. Better yet, find someone that has experience with drawing LTC claims and ask them how it has affected their life and those that are closest to them. Then see if they approve of the spend your money now, regret it later technique.

Allan, you got me pretty good. I was laughing and fuming at the same time. It's not that you are inaccurate with your information, it's that your advice is horribly misguided.

[David Shulman, CLTC]

FeeonlyTom:
What happens if you recover? How is the "well" spouse left if you follow your theory? Relying on the governmnt in those situations is called "Welfare"

[victoriaengland]

I got into the LTCI business because of taking care of a mom and a grandmother with Alzheimers at the same time as raising my children. We paid over half a million dollars in care for just the grandmother after we finally had no choice but to place her in a safe facility. (she no longer recognized what even food was) Experiencing the emotional, physical and financial toll it took on me and our family, who by the way we were financially well off, I wondered how many people could afford to pay today about average $5k a month in care? And how long could they pay for that care at that rate? This made me start a non profit organization educating people like this writer of this article, and physicians, gerontologist, aging experts, state and other entities that we need to plan way ahead for our care as the MEDICAID SYSTEM IS BROKE. If the writer spent one day in a Medicaid facility as a Medicaid recipient, he would never want to tell anyone to let the government take care of you. MEDICAID is for the very poor, and believe me you have to be poor when you are on this system. I would tell the writer of this article like I tell Medicaid planning attorneys, financial planners, accountants and others who discourage people from buying long term care insurance, or life with LTCI or annuities with LTCI...that you should sign something that every time you advise someone to not consider long term care insurance, you will then pay for their care or should be held responsible for it. I have experienced cases where an 'expert' told someone they did not need long term care insurance, and then that person suffered a stroke 5 years later wiping out their 401k. They would have paid in about $20k in premiums for what is now at least $200k worth of care for just over 3 years of care. LTCI would have paid for the whole $200k leaving their money intact. One of my most recent clients, who on the day I was to deliver her policy suffered a stroke. She had paid one premium and the carrier is paying for her care. This is why I would rather take my chances with a company who has been in the long term care insurance business for many years then be stupid to think the government at all in the future can take care of me. If the carrier has to raise rates I would gladly pay for that increase. (although now there are options if you can't continue to pay) Compared to the cost of monthly care, less than one month of care equals an annual premium, that would still be to my advantage. Our government tried to offer long term care protection to businesses and employees across the country. They failed. They discovered what all insurance carriers have known from the beginning of insurance, that only people who already have a pre-existing condition would buy it. So last November the Obama administration had to drop the Class Act program. Remember the 70's movie Soylent Green? The old and those who are disabled, sick, young or old, but especially the old, are encouraged to end their lives with dignity by choosing a day to die. Why? The air and water is horribly polluted, the world is severely overcrowded, and the old are taking life resources; water, food, and air from the young. We are following part of what this movie warned us about. We already have assisted suicide in Oregon....encouragement and guidance is there if you want it. We need to plan ahead for our world, our children, our care, and our aging and or disabling lives. We must work together to solve this issue, and insurance no matter what product it is, is there as a pool system...not enough going in, cannot bring enough coming out. We have to have the healthy to pay for those unhealthy. This is also the problem with health insurance...if I paid you $200 a month for health insurance but my care is $500+ a month, how long would you be in business? How do you solve it? We have to start young, by encouraging us all to be responsible, and understand if you want care when you need it, then buy it now when you don't. This will not only save the ltci world but also the health issue. I am proud of those I have helped and will continue to do so.

[cbsbiz]

Can you please provide your website for LTC?

[heyeveryonehi]

The thing about long term care insurance is that it really isn't necessary for people to purchase until they are well into their 60s. This is because as a country, we are living longer and healthier lives. Long term care is a great option to think about when it comes to financing nursing home facilities for yourself or loved ones. As an employee at AccuQuote Life Insurance, I have seen adults take out a long term care rider/insurance on their aging parents. It's always better to err on the side of caution than to be stuck paying out of pocket for your long term care needs.

[JEngdahlJ]

"One in two Americans are likely to need long-term-care services sometime in their lives." http://www.healthcaretownhall.com/?p=4761

[Breadwinner_Brian]

As it is presently marketed, Long Term Care Insurance is a serious problem. While, theoretically, LTCI can make sense, the devil is in the details. Essentially, LTCI is a contingent deferred annuity, yet one where: 1) insurers retain an option to increase the premiums entire "classes of insureds," and yet 2) consumers must confront such post-purchase price risks without knowing the information necessary to conduct a due diligence assessment of alternative policies (for instance, they are told nothing about the investment activities and assumptions inherent in the pricing of the LTCI policies, or product lapse assumptions which almost all insurers originally misestimated and thereby drastically underpriced their LTCI policies' initial years' premiums). Furthermore, 3) consumers cannot transfer their coverage to a new insurer without forfeiting the value they've previously paid. A simple example can demonstrate the extraordinary problems with almost all currently marketed LTCI policies. Consumers can face premium increases because the insurer realizes it has or will have inadequate reserves. The cause of the inadequate reserves, however, can be anything from unacceptably high but undisclosed agent compensation, poor investment performance, or any other material factors in building the product about which the consumer was not at all informed. Defective LTCI policies have let consumers be shot like fish in a barrel; their inherent unfairness makes loan sharks envious. In contrast, appropriate disclosure of LTCI will bring consumer drastically superior value and understanding.

The above comments are from my December 2012 Statement to the Federal Insurance Office. Much more information is available on my website, www.BreadwinnersInsurance.com under the list of Current Popular articles.

There is a tremendous need for America's financial journalists to provide real investigative coverage of the extraordinary problems in the life insurance industry's marketplaces. There will be a Pulitzer Prize for the reporter that effectively, really effectively addresses the profound problems in the life insurance industry.

[David Shulman, CLTC]

BB
You do make valid points. There is no perfect solution,m however there is a serious need to protect retiremnt porfolios from the potential expense with out some type of planning. Today's LTCi poroducts are price more appropriately. Although more expensive, they are more likely to be stable. At the recent ILTCI Conference last month the future will see more products designed to cover the catastrophe of extended care with a more calculated risk factor for the provider. As long as there is a need, there will be solutions. We are certainly witnessing the evolution of products. Dont be so glum.

[Breadwinner_Brian]

As it is presently marketed, Long Term Care Insurance is a serious problem. While, theoretically, LTCI can make sense, the devil is in the details. Essentially, LTCI is a contingent deferred annuity, yet one where: 1) insurers retain an option to increase the premiums entire "classes of insureds," and yet 2) consumers must confront such post-purchase price risks without knowing the information necessary to conduct a due diligence assessment of alternative policies (for instance, they are told nothing about the investment activities and assumptions inherent in the pricing of the LTCI policies, or product lapse assumptions which almost all insurers originally misestimated and thereby drastically underpriced their LTCI policies' initial years' premiums). Furthermore, 3) consumers cannot transfer their coverage to a new insurer without forfeiting the value they've previously paid. A simple example can demonstrate the extraordinary problems with almost all currently marketed LTCI policies. Consumers can face premium increases because the insurer realizes it has or will have inadequate reserves. The cause of the inadequate reserves, however, can be anything from unacceptably high but undisclosed agent compensation, poor investment performance, or any other material factors in building the product about which the consumer was not at all informed. Defective LTCI policies have let consumers be shot like fish in a barrel; their inherent unfairness makes loan sharks envious. In contrast, appropriate disclosure of LTCI will bring consumer drastically superior value and understanding.

The above comments are from my December 2012 Statement to the Federal Insurance Office. Much more information is available on my website, www.BreadwinnersInsurance.com under the list of Current Popular articles.

There is a tremendous need for America's financial journalists to provide real investigative coverage of the extraordinary problems in the life insurance industry's marketplaces. There will be a Pulitzer Prize for the reporter that effectively, really effectively addresses the profound problems in the life insurance industry.

[JEngdahlJ]

"One in two Americans are likely to need long-term-care services sometime in their lives." http://www.healthcaretownhall.com/?p=4761

[Allan_Roth]

JEngdahlj

Just curious why you left out the rest of the quote?

"...about a third will not meet the most common deductible period of 90 days because they will either die or recover before then."

[FeeOnlyTom]

Here's the full comment from the website that you provided a link for, JEngdahlJ:

"So how great is the need for such coverage? It depends on how you look at the data. "One in two Americans are likely to need long-term-care services sometime in their lives," says Amy Pahl, a consulting actuary for Milliman Inc, a leading actuarial and consulting company. However, Pahl adds, of those who might need long-term care, about a third will not meet the most common deductible period of 90 days because they will either die or recover before then."

[ERinSTL]

Allan:

I have recently been through this for me and my wife. I hope I can provide some perspective.

I learned at an Elder Law seminar that there are very strict spend-down rules for Medicaid eligibility. Not only does the disabled person have to spend down almost all assets to less than $1000, but his/her spouse -- the "community spouse" -- has to go pretty far down as well (something around $100,000 in my state, YMMV). That's pretty frightening!

One of the secondary reasons for getting LTCI is to protect some of those assets from the spend-down provisions. If you have a "qualifying" "partnership" policy, in most states (read "in my state ... I have no idea about others") your assets are sheltered from required spend-down dollar-for-dollar against your maximum lifetime LTCI benefit. BUT ... for the policy to be "qualifying", it has to include inflation protection. There are also state tax deductions available for "qualifying" policies.

I am by no means an expert in this complicated area of getting older, so if you see anything here that interests you or scares you, please confirm with your own research.

[Allan_Roth]

ERinSTL

The Medicaid laws are state specific (as you note) and very complex. As a rule of thumb, assume the state wants you to spend all of your money before you start spending theirs.

[David Shulman, CLTC]

Allan:
I agree that it is disconcerting that existing premiums are being raised. In almost all cases, the raises are less expensive than a replacement policy, even if calculated at the original age. Any raise that I have seen does include an alternative choice to maintain premiums or minimize the increase by adjusting the benefits. For example: removing inflation or decreasing benefit or benefit periods.
I do believe that the premiums for today's products are more realistic and they "should" remain stable.
It would seem evident that the plans work. Claims are being paid. Medicare and Medicaid funds are limited and the government has offered no alternative with the demise of "CLASS Act".
The reality is that there is a need for a "plan" for extended care especially if one believes they could live a long life. The consequence of not having a plan can be devistating to retirement portfolios and the "healthy" spouse. LTC Insurance is still very worthwhile to those who have something to protect. We are LTC specialists and I think that the key is really knowing the products and being creative with plan design.
David Shulman, CLTC
www.ssltc.com