Tuesday, July 2, 2013

Update: Long Term Care Insurance

The latest news on the cost and availability of long term care insurance is pretty disturbing. The numbers come from a Wall Street Journal article, Long Term Care Insurance Leaves Customers Groping by Kelly Greene posted less than eleven hours ago.

A year ago, I covered this topic in less detail than it deserves.

Long Term Care Insurance

As I mentioned in this article long term care insurance really isn’t available anymore. Normally, we buy insurance to cover the risk of unlikely events that would wipe us out. We self insure for those events that we can cover with our own resources. I know a few people who own one of the old Cadillac policies that have no cap. Today long term care insurance is sold in blocks of $100,000. Insuring against 20 years in an Alzheimer’s ward is no longer possible. With or without the normally recommended $300,000 in long term care insurance, such an event would wipe out even a wealthy family.

Jonathan Pond observes that not everyone needs long term care insurance. Here are his categories by liquid net worth.

Are you worth over a million dollars, excluding your home?

In that case, you probably can afford to pay for home health care and nursing care out of your own pocket.

Have a limited income and less than $500,000 in investments, excluding your home?

You probably can't afford long-term care insurance.

Are you somewhere in between?

Have more than several hundred thousand dollars, but aren't quite a Rockefeller? Long-term care insurance could be worth the price, particularly if you're married or in a partnered relationship.

Given the growing cost of long term care, the rate you are paying today will certainly not be the rate you are paying when you might actually need the coverage. Greene begins the article with the story of a family hit with a 77% rate increase. That is 77% in one year! In order to keep the policy in force, the insurer lowered the rate increase and the coverage. A number of facts presented in the article would seem to indicate that currently most insurance companies are looking to increase their premiums somewhere in the 50% range.

Given the option of losing all your money that you have been paying into a policy for a decade or more or settling for something less than originally planned and paid for is not a good solution. Attempting to budget for this expense in retirement is now close to impossible given the threat of catastrophic rate increases.

Greene notes, “The long-term-insurance industry now is shrinking, premiums are soaring and there is no fix in sight. At the same time, government safety-net programs, already under cost-cutting pressure, are bracing for demand from more of the 77 million aging baby boomers.”

Many insurance companies are simply getting out of the business. Greene reports that a decade ago about 100 companies sold long term care insurance. Today that number is about 12 companies. Many of the largest insurance companies including Met Life and Prudential are out of the business.

Part of this problem was caused by insurance companies going after market share. They intentionally low balled the premiums in the early years of the policy knowing full well they intended to raise them significantly once the policy was in force. Part of the problem was caused by bad assumptions. The insurers expected that 5% to 7% of their policy holders would drop their insurance without ever tapping any benefits. In fact, the annual cancelation rates are running at about 2%. Price Waterhouse Coopers estimates that if the insurance companies knew this was going to happen their initial premiums would have been 35% higher.

Insurance companies also underestimated how long their policy holders would live and how long they would collect benefits. Price Waterhouse Coopers principal Larry Rubin estimates this caused a 14% shortfall in premiums.

Historically states have allowed insurance companies to raise the rates on long term care policies without much review. Now some states have passed rate stabilization laws to protect the policy holders. Since insurance companies are already finding they underestimated their costs, expect these laws to drive more companies out of the business. Don’t expect the Government to come to the rescue. During the studies leading up to Obamacare, an overhaul of long term care was deemed too expensive. The subject was dropped from the law.

The insurance industry is attempting to replace long term care insurance with a hybrid product that packages long term care as a rider on a conventional life insurance policy. Expect the medical screening requirements to become more stringent. Expect the benefits to decline. Expect these products to be expensive.

According to recent statistics, only 37% of all 65-year-olds will need long-term care in a nursing home or assisted living facility. Most will stay less than two years.

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