TAKING TURBULENCE OUT OF THE LONG-TERM CARE INSURANCE ISSUE
When Prudential Financial announced on March 7, 2012 that the company would stop taking applications for individual long-term care insurance on March 30, the news meant that 10 of the top 20 long-term care insurance companies by sales had left the market in the past five years, according to a March 10, 2012 Wall Street Journal article. The insurance companies will continue to pay long-term care claims on policies currently in-force, but many of these policyholders may encounter premium increases in the future.

These exits from the long-term care insurance market might seem curious, considering that long-term care is becoming an increasingly important financial issue in retirement. If anything, the demand for long-term care has increased. But based on a range of comments from insurance industry observers, insurance companies are rethinking how to package and price long-term care coverage.

Long-term care is a relatively new insurance product (the first widely-marketed policies were issued in the 1980s), and a combination of economic, medical and consumer behavior assumptions have diverged from companies’ initial actuarial projections.

In order to maintain adequate reserves to pay claims, insurance companies are required to invest a significant portion of their assets in conservative, safe investments. In the current economy, these safe investments have been delivering historically low yields.

According to a March 7, 2012, Bloomberg News article, the low returns exacerbate another issue: The costs and circumstances of long-term care are different than the projections of 20 years ago:

Not only did insurers not predict that Americans would be living longer when they began writing long-term care policies in the 1980s, they also failed to project the cost and scale of care around disabling maladies such as dementia. That in turn led to policies being severely underpriced for years, insurance advisers say.

Most long-term care insurance policies include a provision that premiums may be increased to meet future long-term care claims. Typically, this provision applies only to policies that have been in force for a specified number of years, usually 5 to 10 years. In the recent past, some of the premium increases have been substantial (around 20 percent).

One of the possible responses to increased premiums that actuaries factor into their pricing models is that some policyholders will drop the coverage. But a high percentage of long-term care policyholders have maintained coverage in spite of premium increases. Why? As Malcolm Cheung, vice president of long-term care for Prudential told Bloomberg, “People value the coverage and protection.” Cheung’s comments reinforce the conclusion that long-term care is a significant financial challenge and the insurance is valuable; having made the investment to obtain coverage, most policyholders do not want to forfeit it.

For some insurance companies, these invalid assumptions about the economy, medical history and customer behavior have prompted them to step away, and take a breather, and reassess the way they want to do business. And it may be awhile before some clarity emerges about the most effective way for both customers and policyholders to deal with long-term care. But for many Americans, waiting for “clarity” about long-term care is not a reasonable approach; they need to address long-term care now. So, despite the current turmoil, what actions can be taken today to provide financial certainty in the face of what could be a serious shock to one’s standard of living and well-being?

Apply for coverage now. It may seem counter-intuitive, but in the midst of this uncertainty, there can be advantages to buying coverage now. As one brokerage company noted in its March 7, 2012, blog:

When a large life insurance and long-term care insurance company decides to stop selling individual long-term care insurance because it does not view the sales as profitable, the message is that the consumer is receiving significantly the best end of the bargain.

Most industry analysts expect the underwriting criteria for LTC will eventually get stricter, making it harder to obtain coverage. The reality: Younger, healthier applicants who apply under more generous guidelines have a much better chance of obtaining coverage on favorable terms.

Use a paid-up plan. Some insurers offer the option of paying higher premiums for a specified period of time, typically ten years. Once the paid-up period is fulfilled, no more premiums are required, and the coverage remains in force for the life of the contract. This feature eliminates the possibility of premium increases and locks in the benefits, making long-term care costs a known quantity in your financial plans.
Make long-term care part of your life insurance policy. Many life insurance policies now offer an accelerated benefit rider, which permits a percentage of the death benefit to be paid in the event of certain long-term care events. While this coverage is typically not as comprehensive as a true long-term care insurance policy, it does have one advantage: If you don’t need long-term care, the premiums will be “recaptured” by your beneficiaries when the death benefit is paid.

HOW ARE YOU GOING TO ADDRESS LONG-TERM CARE RIGHT NOW?