Advances in medicine allow us to live longer, but have increased our need for care when we're old and worn out. Buying long-term care insurance is one way people have hedged against the rising costs of long-term health care. But in this prolonged low-interest-rate environment, many insurers have either increased policyholders' premiums or fled the industry altogether, leaving policyholders jilted. Where does this leave the industry? And, more important, is there hope for prospective policyholders and investors?
Long-term care insurance basics
According to the U.S. Department of Health and Human Services, 70% of people who reach age 65 will need long-term care services during some point in their lives. Long-term care is defined as needing assistance with at least two of six "activities of daily living" like bathing and dressing. Currently, the four options we have when facing a long-term care event include spending down our nest egg, relying on family and friends, going on Medicaid (not to be confused with Medicare), and buying long-term care insurance.
Health insurance and Medicare help pay for acute medical expenses, whereas long-term care insurance helps people cope with the cost of chronic illnesses. Typically, long-term care insurance covers out-of-pocket expenses that result from home care, assisted-living facilities, and nursing homes. The policies help pay for everything from basic to skilled care.
Like all health care, long-term care isn't cheap. The national average cost of care in an assisted living facility currently stands at $3,300 per month. A private room in a nursing home runs roughly $80,000 annually. Still worse, the cost of long-term care has increased as much as 6% annually for the past five years.
Ever-changing industry landscape
Decades ago, long-term care insurance was viewed as a promising growth opportunity for insurers. But some insurers eager to acquire market share purposefully underpriced premiums. With time, they couldn't meet their claims-paying obligations. As a result, they continually increased premiums and were eventually forced to sell their policies to other insurers. Recently, Prudential Financial (NYSE: PRU), MetLife (NYSE: MET), and Unum Group (NYSE: UNM) stopped selling new individual policies.
Due to rising health care costs and unpredictable claims patterns, the insurance has proven difficult to price appropriately. Policyholders are living longer and generating more in claims than insurers originally projected. Many insurers have sought approval from state insurance departments for price increases to offset unanticipated costs. Recent premium increases, including as much as a 17% jump in prices last year, have affected countless policyholders.
Most recently, low interest rates have reduced insurers' earnings, since rates play a key role in the profitability of the product. Insurers strive to make money on the premiums policyholders pay in the years before they file claims. Prolonged low interest rates have hurt the industry. But the surviving insurers have factored in the impact of low interest rates, and the majority of rate increases should be behind them.
Those insurers still standing have also tightened up the underwriting process, and rejection levels are higher than they were a few years ago. This is long overdue and will only benefit the industry, prospective policyholders, and investors. Leading long-term care insurers Genworth Financial (NYSE: GNW) and Manulife Financial (NYSE: MFC) are considered conservative underwriters in this business and are continually highly rated by consumers. Genworth, part of General Electric before 2004, pioneered the business in 1974 and is the company behind AARP's long-term care insurance offerings.
Foolish bottom line
Not all long-term care insurers are created equal. Some boast many decades of experience in the business and vast amounts of actuarial data to help predict and mitigate risks. Others underpriced premiums to gain market share, then exited the industry as conditions worsened. As an investor or prospective policyholder, do your homework. Look for insurers who boast solid financials, exhaustive actuarial data gathered from tenure in the business, and an untainted claims-paying history.
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