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Is Long-Term Care Insurance Just a Ripoff?

This article was updated on Dec. 28, 2015.

For years, long-term care insurance seemed like the ideal solution to one of the biggest concerns of an aging population. But premiums on existing policies have risen dramatically in recent years, and as a result, long-term care insurance is rapidly turning into a nightmare for millions of policyholders.

In 2013, 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 this year. 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.

Since then, premiums have risen at a slightly more modest rate, with the American Association for Long-Term Care Insurance finding that premiums increased 8.6% as of early 2015 compared to the previous year. Nevertheless, with past increases already in the books, further rises only exacerbate the problem of affordability for many policyholders.

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 healthcare skyrocketing, having the safety net of an insurance policy designed to cover the costs of nursing homes and home healthcare has grown increasingly necessary.

But the same trends of rising healthcare 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 healthcare that long-term care policies offer, insurance companies have struggled to price their policies correctly. Moreover, low investment returns have hampered insurance companies' efforts to reap enough income from early premium payments to cover costs when insured policyholders start claiming benefits. Rising rates from the Federal Reserve might ameliorate that lack of income, but most expect future increases to be slow in coming.

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 in 2013 to temporarily suspend sales of certain long-term care products in California pending approval of a replacement product that would offer reduced benefits at higher costs. Even though the company continues to offer long-term care insurance, it has remained a financial struggle. 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 late 2015, American Financial Group added itself to the list of companies getting out of the long-term care business, selling off its long-term care subsidiaries for just $15 million in order to narrow its focus on the annuity market.

In addition to CalPERS, many private insurance companies have sought 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 in 2012, while CNA Financial (NYSE: CNA  ) made a request to the California Insurance Department for a 45% increase. Since then, other long-term insurers have looked for ways to make long-term care more profitable with only mixed success.

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 longtime 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 wasting all the money they've spent on premiums for years.

What should you do?
Policyholders who have to deal with premium increases 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.

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