Long-term care insurance seemed like the perfect solution to a difficult problem when it first became available to an aging American population. By promising to make the huge potential costs of nursing homes and home-healthcare manageable, long-term care insurance attracted millions of customers. Yet as insurance companies and various employers providing long-term care coverage gained a broader appreciation for the loss experience they'd have to suffer, they've responded by raising premiums substantially. That has left many policyholders with an untenable choice: pay more than they can now afford or lose the coverage that they've spent years paying for.
Over the past couple of years, many people have learned that their premiums for their long-term care coverage would climb precipitously. One of the most egregious instances involves more than 110,000 workers covered under the California Public Employees' Retirement System, who will have to pay 85% more this year to continue their coverage. Some employees have seen their premiums jump by more than 400% since buying the policies almost two decades ago. Moreover, private insurers have sought substantial rate increases for long-term care coverage as well. Let's take a closer look at what's behind this troubling trend and whether it means you shouldn't seek out long-term care insurance.
How long-term care insurance got so expensive
It's valuable for aging Americans to have protection from the expenses of long-term care. Yet the same general increases in healthcare costs that make insurance necessary have also posed problems for the companies that provide long-term care policies. For years, lower-than-expected investment returns put insurance companies in a financial bind, while underwriters initially didn't charge nearly enough to cover the gradually rising costs of long-term care.
As a result, insurance companies have had two unappetizing alternatives. Because insurance is a regulated industry, companies have to seek approval from state regulators for any proposed rate increases, and major players like Genworth Financial (NYSE:GNW) have looked for increases ranging from 10%-50% or more in some markets in recent years. Those that receive permission to charge higher rates hope that they'll be sufficient to stem the flow of losses from these policies.
Several insurance companies have chosen instead simply to stop selling new long-term care policies. Among them are major carriers MetLife (NYSE:MET) and Prudential Financial (NYSE:PRU), with analysts citing tough economic conditions in the aftermath of the financial crisis that led to their reassessing whether generating more long-term care business made sense.
Understanding the risks
It's important to understand that these factors don't affect all long-term care insurance policies equally. For those shopping for new coverage now, insurance companies have already included in their premium calculations the same factors that made older policies economically unsustainable. Yet even when you look at the industry overall, the cost of long-term care insurance rose by an average of 8.6% in 2014, according to the American Association for Long-Term Care Insurance.
In addition, insurers have become more careful about issuing insurance in the first place. Tougher underwriting standards now often involve not only applicants themselves but also the family medical histories of their parents. Currently, health problems result in 30%-40% denial rates for new applications, and the trend could well rise in the coming years.
Tougher standards make it smarter to sign up for insurance earlier in life. But that leaves you more vulnerable to potential premium hikes, as it increases the amount of sunk costs you pay before you have a substantial likelihood of needing long-term care. For longtime policyholders who've paid premiums for years, rate hikes leave them either having to find hundreds of extra dollars per month to pay premiums or cutting back on coverage -- or letting their policies lapse entirely, essentially leaving them in a situation in which they wasted their money.
Given the need for protection against long-term care costs, giving up on long-term care insurance entirely isn't the best option for many people. Yet it's crucial to look closely at policies to understand insurance companies' rights to raise your rates in the future -- and to know how you'll be able to respond if you have to pay more down the road.