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)












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:

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.