Not surprisingly, LTCI sales -- while recovering from last year's dive -- still hang well below their 2000 peak. "When people have less discretionary income, they don't view it as a need," says insurance analyst Jeffrey Lane of A.M. Best, which studies the industry.
I'm a big believer in LTCI, especially for couples, who -- too affluent for Medicaid -- want to shield their mates from the potentially huge costs of care. My late husband couldn't qualify for coverage, due to a pre-existing condition. In the last year of his life, his bills for care at home exceeded $100,000. When I remarried, I barely glanced at my new husband's bank balance. What mattered was whether he could get LTCI. He could and did, which sealed the deal. Priorities change, as life rolls on.
Currently, the industry finds itself in an investment trap. "Between half and two-thirds of all claims are actually paid from a company's investment income," says Jesse Slome, executive director of the American Association for Long-Term Care Insurance. With stocks underperforming and interest rates low, the portfolio isn't carrying its share of the weight. So premiums have to rise. Slome estimates that for every 1 percentage point that rates decline, an insurer needs a 10 to 15 percent increase in premiums on its older policies.
The industry is also being buffeted by its own miscalculations. People are holding on to their LTCI policies longer than the companies expected (their plan was that more of you would decide that you couldn't afford the premiums, and quit). Periods of care are lasting longer, too, and insurers have added some bells and whistles that might have been underpriced.
Newly-issued policies carry higher premiums, to cover these costs. It's the older ones that are dragging the business down. Most of the LTC insurers have already raised their prices at least once. Those that haven't, such as New York Life and Northwestern Mutual, were expensive to begin with.
Nevertheless, this industry isn't going away. People with assets should get their heads out of the sand and protect themselves against these old-age costs. Here are seven rules for buying LTCI today:
1. Buy group insurance, if your employer offers it. The younger you are, the less it costs. Don't worry about the fact that the insurance company might not be in business 40 years from now. Someone will be servicing those policies -- a new insurance company or your state's insurance guaranty fund. Your coverage will be good.
2. Be prepared for your policy's premiums to rise. In theory, the premium you start with should be fixed for life. In practice, that rarely happens. Maybe today's new policies are properly priced for the next 40 years, but maybe not. When you're budgeting for retirement, prepare for the possibility that you'll have to pay more to keep your policy in force.
Most states provide a safety net for LTCI. If you can't afford a premium increase, the insurance company has to offer you an alternative -- say, a policy at the same price you're paying now, but with lower benefits.
3. For individual coverage, choose a large, well-diversified insurance company, rated no lower than A. Even if it quits selling policies, it will be strong enough to manage its existing business. Small and mid-size companies, and companies that specialize in LTCI, are another story. Many of them are finding it hard to maintain the surpluses necessary to back their current book of business, A.M Best reports. Best has dropped its credit ratings on many of these firms and calls the outlook "negative."
4. If a big insurer won't take you, go for the small insurer anyway. As long as you have a policy, consumer protections click in. For example, two companies that specialized in selling policies to poorer health risks -- Penn Treaty and American Network -- failed last year. The policies were transferred to the various state insurance guaranty funds. Depending on your state, you're protected for at least $100,000 in LTC payments and usually $300,000 or more. (Check the limits at the National Organization of Life & Health Insurance Guaranty Associations.)
5. Consider hybrid products. You can buy life insurance policies or annuities that let you divert part or all of the benefit to long-term care expenses. If you have an old annuity you won't use, exchange it tax-free for a hybrid annuity, says Judith Maurer of Low Load Insurance Services. You can double or triple the money available for care.
6. Cut the cost of a policy while still providing yourself with a reasonable safety net. You might cover yourself for only three years (the average nursing-home stay) instead of five years or a lifetime. Buy a lower daily benefit -- $100 a day instead of $150. That won't cover the whole bill but it lessens the burden on your savings. Pay premiums annually instead of monthly. Wait six months instead of three months before benefits begin. State LTC Partnerships give you access to Medicaid, as long as you have some private LTCI coverage, too.
If your doctors accept Medicare's reimbursement schedule, consider canceling your Medigap coverage and using that money to help fund LCTI. Coverage of small deductibles isn't nearly as important as coverage of long term care.
It's not only the insurance companies and investment markets that are messing with the future of long-term care. "Some states are playing games" by not approving needed rate increases on existing policies, says Steve Schoonveld, chief financial officer and actuary of LifePlans, a consultant to the industry. They're doing it in the name of consumer protection. But that adds to the need for even higher premiums later, Schoonveld says. Some states don't permit short-term policies or other money-saving designs that could reach a wider market.
For now, LTCI is a luxury product that not even the well-to-do are taking much interest in. That's too bad. A lot of your future assets are on the line.