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Is Long-Term Care Insurance Just a Ripoff?

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For years, long-term care insurance seemed like the ideal solution to one of the biggest concerns of an aging population. But after recent announcements that premiums on existing policies will rise dramatically in coming years, long-term care insurance is rapidly turning into a nightmare for millions of policyholders.

Last month, the California Public Employees' Retirement System said it would have to boost the premiums it charges its policyholders for long-term care insurance by 85% by 2015. The move caused an outcry among the 110,000 CalPERS policyholders who have long-term care coverage with lifetime benefits, most of whom have had the insurance for 10 to 20 years.

Why is long-term care insurance getting so expensive?
It's easy to understand why having long-term care insurance is important. With people living longer and the cost of health care skyrocketing, having the safety net of an insurance policy designed to cover the costs of nursing homes and home-health care has grown increasingly necessary.

But the same trends of rising health-care costs and an aging population that have made long-term care insurance so attractive to consumers has presented big challenges to the insurance industry. Having underestimated the true costs of the health care that long-term care policies offer, insurance companies have struggled to price their policies correctly. Moreover, low investment returns have hampered insurance companies in their efforts to reap enough income from early premium payments to cover costs when insured policyholders start claiming benefits.

In response, insurance companies have faced a dilemma: Should they try to get state insurance regulators to approve huge premium increases, or should they simply eat their losses and move on? A number of companies have chosen the latter approach, with Genworth Financial (NYSE: GNW  ) having decided earlier this month to suspend sales of certain long-term care products in California pending approval of a replacement product that will offer reduced benefits at higher costs. Prudential Financial (NYSE: PRU  ) and MetLife (NYSE: MET  ) have taken the more dramatic steps of discontinuing long-term care sales in recent years, largely because of the financial challenges involved in offering the policies.

In addition to CalPERS, many private insurance companies are seeking higher premiums to keep selling long-term care policies. A subsidiary of Manulife Financial (NYSE: MFC  ) serving California got approval from regulators to raise long-term care premiums by 40% late last year, while CNA Financial (NYSE: CNA  ) has a request for a 45% increase before the California Insurance Department.

Bait and switch?
For existing policyholders, the main problem is one of sunk costs. Insurance agents typically advise people to obtain long-term care insurance as early as possible to reduce costs, as premiums are much lower for younger policyholders who are less likely to need benefits in the immediate future. What that means, though, is that those who've held onto their policies a long time have already paid tens or even hundreds of thousands of dollars in policy premiums without having gotten a dime in benefits to show for it.

Now, to avoid losing their coverage, these long-time policyholders have to find hundreds of dollars to cover extra premium payments each month. For many retirees living on a fixed income and already facing substantial price increases for other basic living expenses, that will prove an impossible task, and they will have to accept lower benefits or even give up their policies entirely -- thereby having essentially wasted all the money they've spent on premiums for years.

What should you do?
Policyholders now face some tough decisions. Retaining full coverage will cost a lot more, so some insurance providers are offering less extensive benefits as a replacement. As painful as accepting reduced benefits might be, it could prove to be a better option than simply allowing coverage to lapse entirely.

Unfortunately, the economics of long-term care make it likely that price pressures on policies will continue. For those considering buying long-term care insurance now, it's essential to read long insurance-policy documents carefully so that you'll know in advance about provisions that could send your premiums skyrocketing in the future.

To save for the costs of long-term care, you need to invest for your retirement. The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.


Read/Post Comments (24) | Recommend This Article (18)

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 March 23, 2013, at 1:56 PM, hepette wrote:

    as a worker who paid into ltd from the state of mich for over 10 yrs i was totally screwed by them. i had to quit work because of severe degenerative arthritis..i was awarded soc sec disabilty. when i went to apply for my monthly check from ltd i was told i couldnt get it. THEIR DRS SAID I COULD WORK even though i could not. all that money they took out of each check for 10 yrs was theirs to keep. we tried to take them to court but you cant get them into court because of michigan tort laws. now i have to live on half of what i am supposed to get. its heinous. its fraud on a huge scale. they didnt just do it to me either ..they did it to other workers. dirty rotten scumbag insurance companies.

  • Report this Comment On March 23, 2013, at 1:57 PM, hepette wrote:

    i have metal in my neck and low back holding my spine together

  • Report this Comment On March 23, 2013, at 3:04 PM, luckyagain wrote:

    I dropped mine several years ago because the benefits were so small compared to my payments. Most people who end up in a nursing home will use up all of their so-called benefits plus any retirement income and still be short of money to pay the bill. This will probably the biggest problem that retirees will face and there is no solution that I have seen. Many people consider Medicaid to be only for poor people but the truth is that almost every middle class person will probably be on it before they die if they go into a nursing home.

  • Report this Comment On March 23, 2013, at 3:06 PM, kkrimmer wrote:

    Last month, the California Public Employees' Retirement System said it would have to boost the premiums it charges its policyholders for long-term care insurance by 85% by 2015. The move caused an outcry among the 110,000 CalPERS policyholders who have long-term care coverage with lifetime benefits, most of whom have had the insurance for 10 to 20 years.

    WHAT THE AUTHOR FAILED TO MENTION:

    CalPERS is NOT an insurance company and DOES NOT have to have any rate increases approved by the CA Dept of Insurance.

    ALSO it seems this is simply an ad to sell motley fools services...

  • Report this Comment On March 23, 2013, at 3:16 PM, ALthinker wrote:

    Can we buy insurance to insure us against the money grubbing thieves that are allowed to call themselves insurance companies? There are too many overpaid people on their company rosters to give people fair treatment. Anyone remotely connected to health care insurance is feeding at the trough. These overpaid CEOs, CFOs, etc, foolishly spent "reserves" years ago because they didn't predict the way the Medical costs have skyrocketed past the inflation rate many times over. And as always, the consumer takes the financial loss.

  • Report this Comment On March 23, 2013, at 3:36 PM, miker4564 wrote:

    It is absolutely a ripoff... they can deny your claim and the cost far outweighes the benifit. Invest the premium yourself and you will come out ahead.

  • Report this Comment On March 23, 2013, at 3:39 PM, Freddbe wrote:

    Insurance is a rip off at ever level. It needs to be abolished.

  • Report this Comment On March 23, 2013, at 4:57 PM, David01111 wrote:

    I had LTC insurance for me and my wife. I had the inflation protection option. And after 7 years I found out that the "protection" meant " for 7 years only. Rates up, benefits down. My wife dies, and LTC wiggled out of its so called benefits. In reality, most nursing stays are less than 90 days, and LTC at reasonable rates only pays off after 90 days. So, for the $30,000 I paid in premiums, I got didley back. Save your money, invest it, and use that to pay for nursing needs.

  • Report this Comment On March 23, 2013, at 5:35 PM, Doctorrobertweed wrote:

    The California Public Employees' Retirement long term care program is not really insurance. No underwriting, no DOI regulation. They had no clue how to run the program. Meanwhile California partnership policies have NEVER had a premium increase.

    Tax qualified long term care insurance is affordable and has an outstanding record of paying claims. Premiums much more stable now as the nods try understands lapse rates. Almost nobody lapses these plans. They were, at one time, priced expecting a 15% lapse rate.

    So many of s will require extended long term health care due to health, accident or the impact of aging. Health insurance does not cover custodial care at all and skilled care for only a short period of time. Same for Medicare. This means WE need to plan for the high costs and the emotional and physical burdens this type of care places on a family.

    I bought a plan, it s affordable and never had an increase. It has inflation protect and addresses these real concerns to my savings.

    I learned from a number of good sites. www.completelongtermcare.com, www.aaltci.org and www.infoLTC.org.

  • Report this Comment On March 23, 2013, at 5:46 PM, Doctorrobertweed wrote:

    By the way, triggers to obtain benefits are hard for a company to get out of. With most contracts it is the policyholder's health care professional who certifies you need assistance with at least 2 of 6 activities of daily living or you need to be supervised due to a memory issue. The care must be expected to last at least 90 days.

    LTC insurance is a huge value considering so many of us will need care. Care can cost hundreds of thousands of dollars in today's money. If you are 45 planning for your future the cost down the road for care could triple by the time you are 80. Yes 40% of people who need extended care are under the age of 65, according to the US HHS.

    Also keep in mind the ROI for insurance companies in any health related area is generally about 2%.

  • Report this Comment On March 23, 2013, at 5:49 PM, 22roberts wrote:

    We were cheated out 20000 dollars by a leading insurance company and the Nebraska Insurance Commission which raised rates 90% last after selling the long range policy based on their solid financial base. Is anyone doing a class action suit.

  • Report this Comment On March 23, 2013, at 6:37 PM, rugerz wrote:

    Perhaps someday Washington will finally get around to focusing on COST REDUCTION and CONTAINMENT instead of merely adding millions of people to an inefficient and egregious system where aspirin tablets cost $22. Lower costs and THEN add people; not the other way around...

  • Report this Comment On March 23, 2013, at 7:42 PM, LC5 wrote:

    It is not just the insurance companies. In fact, the top 3 are the hospitals, equipment makers, and drug companies. Read Time Mag article in March on the health crisis. The chargemaster (database of charges) for the health industry is fantasyland and extremely high. The insurance companies negotiate their discounts from this and it still is many times to high. Medicare pays an nth of those charges, and the hospitals still take them because even though they are so low, THEY STILL MAKE MONEY, and the sheer volume cannot be ignored. The whole system is corrupt, and there are 7 lobbyists for every member of congress. Corrupt, corrupt, corrupt!!! The system screams for real change, but the politicians don't address the real problem of over-inflated prices in the first place. They banter about the insurance, which is secondarily a problem, but not the real #1 problem.

  • Report this Comment On March 23, 2013, at 8:33 PM, greyhound44 wrote:

    Mine was deleted, but I would never pay for insurance in the feeble USA!

    ret expat MD

  • Report this Comment On March 23, 2013, at 11:09 PM, bugmenot wrote:

    Obama's health care bill is the root cause of massive insurance cost increases. The Democrats failed to read what their lackeys wrote. And now the US has a mess. If Democrats could read, we wouldn't have this problem.

  • Report this Comment On March 24, 2013, at 1:55 AM, MellowGuy1 wrote:

    When your money is gone your State will finance your nursing home stay, but that isn't a nice way to live.

    Insure yourself against running out of money by buying a lifetime annuity.

    Try to stay healthy through diet and exercise along with periodic visits to the doctor.

  • Report this Comment On March 24, 2013, at 3:13 AM, AKretired wrote:

    Having retired I did get a long-term care policy through my state. I was offered 3 different policies each with set term of length of services available and what costs I would incur on my part. Regardless of the pluses and minuses presented in this article have something for a rainy days especially as one ages is almost a necessity. Many people do not have a family that can provide a home for aging family members. Medical conditions required more than a warm home and family, it requires professional care too.

    80 years ago, SS started to provide some monthly income for retirees. 50 years ago Medicare started to help cover medical care for the elderly. Long-term care is an individual's safe guard for the limits of government health care.

  • Report this Comment On March 24, 2013, at 8:09 AM, kahunacfa wrote:

    Over the last forty years I have worked in the Investment Departments of three different Insurance Companies. One converted from a Mutual Company to a stock company.

    Our Underwriting Department always priced Long-term care policies to be one of the most profitable parts of the business. Long-term care insurance is only reasonably priced when it is purchased when you are very young -- certainly age forty or less.

    After the BIG four-zero, the price quickly starts to go up. Also, virtually every civilized State in the United States has State Supported "Old Folks" homes. Then, of course for Military Veterans, there is always the Veterans Administration -- that was badly under-funded starting with the undeclared Vietnam War that was NOT officially a War at all.

    Those wooden boxes, draped in a United States Flag was just a JFK and LBJ optical illusion. -- Many families found out all too tragically that there were of course all too real.

    In the sixties there was a Chant, two chants actually. First: "We Shall Overcome, We shall Overcome, ...; Second Hey, Hey JBJ How many Boys Have you killed today.

    Take a Visit to the National Cemeteries or the Vietnam War Memorial in Washington, DC to see the names of actual, real, involuntary draftees and of course the Volunteers.

    Captain(Ret) USNR

  • Report this Comment On March 24, 2013, at 12:15 PM, lugmauler wrote:

    and you folks thought obanana care was a good thing. ( this being stated to the health insurance industry) for all others,,, you expected some thing different from congress and our government?

  • Report this Comment On March 24, 2013, at 7:55 PM, MRWheat1 wrote:

    If you don't need it, or never used it than it's a rip off, but if you do need it and you have it than it's a God Send. Same can be said for life insurance and health insurance. Must be a slow day and they can only come up with stupid stories.

  • Report this Comment On March 25, 2013, at 3:29 PM, StevenPelly wrote:

    I have been selling long term care insurance for more than 20 years. Some of the above comments pertain to health insurance, some pertain to disability insurance. Long term care insurance has its own set of rules for collecting benefits, which were "unified"

    when the federal government made the premiums tax deductible in January of 1997 for "qualified" policies.

    But part of that law also required that a licensed medical practitioner certify that the "disability" would be expected to last at least 90 days. So short-term stays for rehab no longer qualified for benefits, nor did hip or other replacements which were expected to result in mobility in less than 90 days after rehab began. These policies are now for "long term" care. Finally, many policyholders forget that they might have 5% inflation protection riders, so 10 years later their total dollar benefits have gone up 63%, and after 14 years their dollar benefits have doubled. These policies are for people who have assets to protect, don't want to raid their savings-and pay taxes as they liquidate those savings to pay for annual care-and who understand that being 100% self-insured is a very big risk. Also, it's a lot easier to tell your kids, "Just call the agent, we have insurance," than it is for your kids to have to decide which of your bank accounts they are going to raid to pay for your care. May I suggest that readers view Genworth's annual "Cost of Care Survey" and see what care really costs. All of a sudden insurance doesn't sound so expensive. Finally, if the state insurance departments had any guts, they would allow carriers to offer a guaranteed "no premium increases for the life of the policy," perhaps as a rider, which would force the carriers to price these riders accordingly.

  • Report this Comment On March 25, 2013, at 5:48 PM, ltcassociates wrote:

    Terms like "Rip Off" and "Bait and Switch" are about as close to libel as a personal finance columnist would dare. I'll leave it to others to form their own opinions of this cherry-picking editorial-- but it would serve the public better if The Motley Fool began reporting in context.

    Best regards,

    Stephen D. Forman,

    Senior Vice President, LTCA

    @ltcassociates

  • Report this Comment On April 19, 2013, at 2:11 PM, jacklenenberg wrote:

    Is health insurance a ripoff? My Blue Cross and Blue Shild of GA premium is increased by 25% every year. LTC premiums are guaranteed renewable just like health insurance. The only difference is LTCi premiums might increase once every 5-10 years. Or not at all. Mass Mutual and Northwestern Mutual have never requested rate increases.

    http://longtermcareinsurancepartner.com/

  • Report this Comment On November 19, 2013, at 7:23 PM, gert7to3 wrote:

    Think LTC policies will increase only every 5-10 years? Wonder how high the increase might be? Read the fine print. Take a guess, you will be low.

    My 10 year guaranteed LTC insurance from CNA was just increased by 50%. So there goes $8400 worth of 10 tears of purchased policy. The premium increase limitation was in place for 10 years. After that period it can increase whatever level my state insurance regulators will permit. There will be no further limitation on increases. Talk about bait and switch, this is that in spades. Apparently the regulators aren't serving the citizens of Illinois very well.

    The only comparable insurance screw over I had before this was when BCBS jacked me 30% because I turned 55. This occurred 7 months after I bought the policy.

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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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