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Insurance is designed to protect you from unexpected tragedies that would otherwise wreak devastation to your finances. Unfortunately, with one type of insurance that older investors have increasingly relied on for financial security, the insurance companies that offer it are the ones suffering financial devastation -- and they're doing their best to pass the costs on to you.
For many, long-term-care insurance is must-have protection for their retirement nest eggs. But just as increasing medical costs have forced health insurance premium increases and put programs like Medicare under the threat of long-term insolvency, the insurance companies that offer long-term-care coverage also have to deal with changing conditions in the industry that are crushing their profits.
Why you need it
Many people assume that once they retire, Medicare will pick up the tab for all of their medical expenses. But even with a good Medicare supplemental insurance policy, many needs that seniors have aren't covered in full. With those services that aren't deemed medically necessary, including assistance in taking care of basic personal needs, you can't expect Medicare to cover the tab.
That's where long-term-care insurance comes in. Long-term-care policies often provide benefits to pay not just for traditional facilities like nursing homes but also for relatively new innovations like home health care and assisted living facilities. Given that care can cost hundreds of dollars per day in some areas, paying relatively modest premiums can save you a fortune later on.
A big mistake by insurers
The problem that long-term-care insurance is facing now is that insurance companies underestimated the amount of money they'd have to pay out on long-term-care policies. Several factors combined to create the shortfall, including higher medical costs and an increasing number of claims, as well as low interest rates that have reduced investment income for insurance companies.
As a result, Manulife Financial's (NYSE: MFC ) John Hancock division is asking for rate increases of 40%, while Genworth Financial (NYSE: GNW ) wants an 18% increase for some of its long-term policies. MetLife (NYSE: MET ) has taken the even more dramatic step of no longer marketing new long-term-care policies.
Other companies are taking different steps. Prudential Financial (NYSE: PRU ) and Lincoln National (NYSE: LNC ) are looking to combine long-term care with traditional life insurance, allowing insurers to cover two risks at the same time and use benefits from one type of insurance to help pay for the other. But given that limits can be lower, you need to be careful in evaluating these hybrid products to make sure they'll actually protect you if you need long-term care.
Another alternative is allowing policyholders to draw down cash from traditional life insurance policies. Hartford Financial (NYSE: HIG ) offers a rider to its permanent life policies that let people take cash against their death benefit that they can use to pay for health care expenses in certain circumstances.
Still, not every insurer is giving up on long-term care. AIG's (NYSE: AIG ) American General unit gives couples enhanced coverage beyond their own individual policy limits.
What to do
As you consider whether you need protection against potentially huge long-term-care expenses down the road, the key thing that you need to be aware of is the changing nature of the business. Before you lock yourself into one particular type of policy, you should consider not just what your alternatives are currently but also what innovations may become available in the years to come. Given how much medical care for seniors has changed in the past 20 to 30 years, you have to be careful that a policy that would work well today will still get the job done when you actually need it.
Medical costs associated with long-term care are big enough that simply ignoring them could be the biggest mistake you ever make. Even as long-term-care insurance costs rise, it's more important than ever to get a handle on whether you need the protection that they provide -- regardless of the cost involved.
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