Gaming

Crumbling economy undermines long-term care offerings

After all, all publicity may not be good publicity, the long-term care (LTC) insurance industry discovered last month.

The industry named November “National Long-Term Care Insurance Month” in hopes of raising awareness of the “need” for the product. However, most of the press for the month highlighted the downsides of LTC, as it focused on the problems of two key insurers, MetLife and John Hancock.

In early November, MetLife announced that it will stop selling LTC insurance as of December 30. Although it will continue to provide coverage to current policyholders, it will no longer issue new policies. It will also suspend new enrollment in group policies and multiple life plans starting next year.

Meanwhile, John Hancock asked state regulators for an average rate increase of 40 percent on most of his existing policies. The insurer also plans to increase the price of new policies by 24 percent in 2011. John Hancock has stopped selling policies to employers who offer the coverage as an employee benefit but, unlike MetLife, will continue to sell individual policies, as long as you can find anyone who is willing to pay your new fees.

There was not a single event in November that brought down MetLife and John Hancock’s LTC business. These two announcements were just the latest signs of the slow decline in the LTC insurance industry as a whole. The problem is not the economy or any other environmental factor; is that selling LTC insurance is an unprofitable business.

The purpose of insurance is to spread the cost of a catastrophic and highly unlikely event (read costly) among a group of people. Instead of risking a potentially large loss, the insured assumes a small, known loss in the form of a premium. The key is that the event must be unlikely. If it’s too common, affordable premiums won’t be able to cover the cost of claims and still leave a profit for the insurer.

As any insurance salesperson would confirm, as we age, our likelihood of needing long-term care approaches certainty. Risk no longer falls into the “unlikely” category and insurance becomes an ineffective and inappropriate solution.

As claims increase, the insurer passes the cost on to policyholders in the form of higher premiums. However, the premium increase is only a temporary patch. Once premiums go up, those who are at lower risk drop out of their expensive policies. This leaves an even larger risk pool to share the costs, compounding financing problems.

Persistently low interest rates accelerated the current decline in the industry. Insurers have not been able to obtain sufficient rates on their investment portfolios to finance policy payments and have therefore had to rely even more on premiums. According to the American Association for Long-Term Care Insurance, insurers must increase premiums by 10 to 15 percent to make up for each 1 percent drop in interest rates. (1) Interest rates are unlikely to increase enough in the near future to lessen stress for insurers.

MetLife promises that its current long-term care policyholders will not be affected by the recent decision. They will still be covered as long as they pay their premiums and may even change their terms of coverage, depending on what their particular policies allow. However, it is unlikely that policyholders are currently completely unscathed. Without a younger, healthier pool of policyholders entering the pool, it will be difficult for MetLife to find the cash to cover their claims. As a result, the company will most likely need to increase the premiums on its remaining long-term care policies to cover its costs.

In its press release, MetLife recognized that LTC insurance in its current form cannot balance financial claims with your business objectives. (2) That is, the business is not profitable. However, MetLife suggests that you can get back on the market if a profitable product is ever developed.

That profitable product could take the form of a hybrid policy, one that combines an annuity or life insurance contract with a traditional LTC policy. Several insurers are already beginning to offer policies of this type. Hybrids are more likely to attract lower-risk customers because even if a policyholder never needs long-term care, they still get a guaranteed payment. This makes the business more profitable and sustainable.

While hybrid policies are more promising than traditional LTC insurance, I hesitate to recommend them. The healthcare industry is too dynamic to be easily predictable, and these are relatively new and untested products.

We all face a number of potential expenses that we may or may not incur in our old age. We may need to help support children or grandchildren; we may need to renovate a house that is also aging; Or we may not be able to resist buying a vacation home on the beach. We may live very long and healthy lives and need to provide our own support.

There is no reason to treat the possibility of needing long-term care differently than these other possible expenses. In all these cases, one must recognize the need for funds and save and invest appropriately throughout life. Relying on a faulty insurance product won’t help.

Sources:

(1) Reuters: Is the long-term care insurance market sick?

(2) MetLife: MetLife to Discontinue Sale of New Long-Term Care Insurance Coverage

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