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The government's bait-and-switch bailout antics might make you feel like the victim of a con game. But that's nothing compared to how angry the folks are who took the right steps to protect their finances -- only to get penalized for it.

Long-term care insurance can help you prepare for the huge costs of health care that many retirees eventually have to pay. Yet, insurers who wrote long-term care policies in recent years are discovering that they aren't as profitable as they had hoped.

In order to bail themselves out and recoup some of their losses, companies including MetLife (NYSE: MET  ) , Manulife Financial's (NYSE: MFC  ) John Hancock division, and Genworth Financial (NYSE: GNW  ) have increased long-term care premiums -- increases that many policyholders never expected to see.

The trials of a new product
Many large insurance companies have struggled recently. Although Wall Street investment banks and brokerage houses have gotten the lion's share of attention, revenues at many insurance companies are on the skids. Take a look at these recent numbers:


Revenue Growth

1-Year Return




Prudential (NYSE: PRU  )









AXA Group (NYSE: AXA  )



Source: Yahoo! Finance. Revenue growth is for most recent quarter compared with same quarter in previous year. Returns as of Dec. 4.

Yet, long-term care insurance faces its own unique challenges. Policies have been available since the 1970s, but much of the industry's growth has occurred much more recently. According to a study from the insurance trade organization AHIP, the number of policies in force has risen from 1.2 million in 1990 to over 5 million in 2005. Over that time, the average age of policyholders has fallen dramatically as well, as marketers targeted a younger audience for new policies.

Unfortunately, in creating new products, insurers didn't always make correct assumptions in estimating the number and amount of future claims. That led to losses over time, and now, current policyholders may be left to pay the price.

In addition to increasing premiums, some insurers are taking other steps to shield themselves from liability. Conseco (NYSE: CNO  ) recently transferred over 100,000 long-term policies into an independent trust in order to limit the amount of additional capital necessary to sustain the policies. Policyholders fear higher premiums or more limited coverage will soon result from the move.

More suffering for prudent people
Unfortunately, this is just one more example of how you can get punished even when you do the right thing financially. One primary reason why people buy long-term care policies early is to save on premiums. According to the American Association for Long-Term Care Insurance (AALTCI), a policy that costs $709 per year for a 55-year-old applicant costs almost twice as much -- $1,342 -- for someone who waited until age 65 to apply.

That's a powerful incentive to buy early -- and many policyholders have jumped on. An AALTCI study earlier this year showed that a third of all long-term care policyholders are 55 or younger. But if you assumed those premiums would stay low forever, you may feel like your insurer pulled a bait-and-switch on you.

Protecting yourself
Despite the troubling trends in premium hikes and potential coverage reductions, long-term care insurance remains a valuable protection against huge medical expenses that can cripple an otherwise healthy retirement nest egg. With nursing-home expenses topping $10,000 per month in some areas, it doesn't take long for a major health problem to wipe out your savings.

Nevertheless, before you buy insurance, make sure you understand what you're paying for -- and what changes are possible. Don't assume the best will happen -- find out what rights your insurer has to limit coverage, increase premiums, or make other changes to your policy. The worst thing to do is to buy a policy based on a misunderstanding, then only later learn that it doesn't cover what you expected.

If you already own long-term care insurance, talk to your broker or insurer, even if they haven't announced any changes or price hikes yet. Even if you feel like you got conned, it may still make sense to keep an existing policy rather than change to a new one that could be even more expensive.

For more on troubling trends for those approaching retirement, read about:

Handling health-care costs is just one aspect of a secure retirement. To put together a complete plan for your retirement success, check out our Rule Your Retirement newsletter. You'll find the tools you need to succeed -- and it's all free with a 30-day trial.

Fool contributor Dan Caplinger isn't worried about long-term care yet, but he knows he's getting older. He doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy covers you.

Read/Post Comments (8) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 05, 2008, at 5:43 PM, gr8optimist wrote:

    Mr Caplinger,

    I'm really starting to worry about your bias against insurance companies that have been around for over a hundred years. You make it sound like all insurance is bad. In that light, you better buy lots of puts for protection. (Wait, that's a form of insurance - you better go blast the market makers who make the spread, they're screwing you).

    You have no business advising the general public about insurance products. You have no education in them, do work with the companies that develop them, nor do you take the time to really understand them.

    And for anyone who is reading this, please look at his previous article about the Retirement Mistake on annuities that he wrote on November 29th. That was complete nonsense.

  • Report this Comment On December 06, 2008, at 7:22 AM, Darwinfish67 wrote:

    "insurers didn't always make correct assumptions in estimating the number and amount of future claims."

    You put the blame here at the insurance companies but I have to question the role of the healthcare industry itself in keeping costs under control, much of whichis outside of their control?

  • Report this Comment On December 06, 2008, at 2:09 PM, ScottAOlson wrote:

    Large rate increases are NOT common on long term care insurance policies. Most of the rate increases on long term care policies have been requested by insurers rated "B+" or lower. Insurers with an "A" rating or higher have had remarkably few requests for increases.

    Out of the top ten insurers selling long term care insurance, only 4 of them have had rate increases on their LTCi policyholders.

    The single largest long term care insurer has been offering long term care insurance since 1974. This insurer has about 1.5 million long term care policyholders, (about 20% of the market share), and has had only 1 rate increase in 34 years of selling LTCi. That rate increase was less than 13% and it affected less than half of their policyholders. A single rate increase over such a long period of time is remarkable. I wish my medical insurance premiums were that stable.

    Additionally, many states have passed regulations that significantly limit an insurer's ability to increase rates on long term care policies. In March of 2003, Florida passed some very strong consumer protection features severely limiting an insurer's ability to raise rates on long term care policies.

    As with any insurance purchase, it's important to know the financial ratings of the insurer you choose and their claims paying ability. That is especially true for long term care insurance.

    Scott A. Olson

  • Report this Comment On December 06, 2008, at 2:16 PM, ScottAOlson wrote:

    I believe that the Pennsylvania Insurance Commissioner concluded that it was in the best interest of the Conseco LTCi policyholders to set up this trust, with the goal of more effectively serving the current and future claimants.

    The PA Dept of Ins. is facing a very difficult situation with a different insurer that might go into conservatorship next month. I think the PA DOI's conclusion regarding the Conseco policies, is that a well-managed trust now is better than trying to mop up a big mess through conservatorship later.

    At least by putting the policies into a trust, the PA Ins. Commissioner can cut administrative costs and eliminate waste, including executive compensation. The roughly two hundred million dollars of annual premiums paid by the policyholders can go towards current and future claims.

    Insurance companies don't have the authority to "transfer policies into a trust". It was the PA DOI that had the authority to do this. They did it for the benefit of all the policyholders because Conseco Senior Health was on the road to insolvency.

    As with any insurance purchase, it's very important to check the financial ratings of the LTC insurers you are considering.

  • Report this Comment On December 06, 2008, at 5:11 PM, JesseSlome wrote:

    Two particular points I believe consumers and the author should consider.

    Last year, the nation's long-term care insurers paid out some $3.5 billion to some 180,000 claimants. The number will likely have increased in 2008.

    The need to raise rates has less to do with not correctly anticipating claim costs but with two factors. The first was declining interest rates (good for mortgage holders but not good for long-term care insurers). For every 1 percent decline in interest rates, an insurer would need a 10% premium increase from day 1.

    But the second point I want to raise regards the authors comments at the end. The most important factor when one applies for long-term care insurance is your health.

    Here is a very meaningful finding from the American Association for Long-Term Care Insurance. Some 14% of individuals who submitted applications between the ages of 50 and 59 were declined for health reasons.

    That number grows to 23% for those between 60 and 69 and 45% for those between 70 and 79. Waiting to at least get information on cost and ratings of companies could indeed be a very costly mistake.

    Jesse Slome

    Executive Director

    American Association for Long-Term Care Insurance

  • Report this Comment On December 07, 2008, at 11:56 AM, BlueLakeVentures wrote:

    I think we also need to bailout Starbucks and my country club. My full line of thinking at:

  • Report this Comment On December 07, 2008, at 4:39 PM, jimialvin wrote:

    My my , these bailouts ! The first bailout attempt came when Lindsay Lohan , Britney Spears , and Paris Hilton bailed out of their clothes and flashed everyone ..........

  • Report this Comment On December 07, 2008, at 4:45 PM, jimialvin wrote:

    My my , these bailouts ! The first bailout attempt came when Lindsay Lohan , Britney Spears , and Paris Hilton bailed out of their clothes and flashed everyone around them ......... Spare us , they cried !

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