Does Long-Term Care Insurance Have a Future?

The decision by Metropolitan Life to stop selling long-term care (LTC) insurance once again calls into question the viability of that product as a way to pay for nursing home, assisted living and home care needed by the growing number of elders. MetLife was a solid company big and reputable, with a knack for selling policies to workers whose employers offered the coverage as an extra benefit. It was a name that people trusted in an industry characterized by many small sellers, some of whom became insolvent.

So what happened with MetLife? In a nutshell, the policies proved unprofitable because the assumptions the company made when it set the premiums turned out to be wrong. Too many people kept the policies instead of dropping them, too many people lived longer and too many had more expensive claims than the company projected. That's a recipe for disaster for any company in the difficult business of making money on LTC policies.

For years, such incorrect assumptions have plagued LTC carriers, causing them to seek high rate increases to recoup their losses.  Industry leaders John Hancock and Genworth Financial have asked regulators for permission to charge higher premiums. Hancock wants a 40 percent average increase for its policies; Genworth has requested an increase of 18 percent on older policies held by one-quarter of its customers.

That policies were underpriced should come as no secret.  Insurers low-balled consumers to entice them into buying a product that by its very nature had to be costly.  Nursing home care doesn't come cheap. Over the years, I wrote three major stories on long-term care-insurance for Consumer Reports that included policy ratings.  Each time we expressed doubts about the coverage and one year featured a cover that screamed Gotcha: The Traps in Long-Term Care Insurance.''  In 1997, we reported that carriers told us that fewer people were dropping their policies than they had originally assumed and that based on what they told us, plus technical documents they supplied, some insurers will be forced into significant price increases.''  Those increases have indeed materialized.

All this is occurring even though there is strong regulation for long-term care policies at least stronger than for other types of insurance.  States require carriers to provide lots of details when they file rates and impose other restrictions.  'These rules were intended to prevent these types of large rate increases in the future, but they didn't and this now becoming apparent, says Bonnie Burns, a long-term care insurance expert with California Health Advocates.

I asked Burns what consumers should do.  Buying a policy is a tough decision right now, she says.  The advice we gave at Consumer Reports is still valid be sure you can afford rate increases of at least fifty percent.  To help you learn whether a carrier has had a history of rate increases, check out a database compiled by the California Department of Insurance.

If you can't afford a policy you have now because your budget has no room for a large rate increase, Burns suggests contacting your state insurance department to see what options might be available.  Policyholders might be able to reduce benefits in exchange for a lower premium, or possibly they can stop paying premiums but retain the benefits equal to the amount of premiums they paid in.

Long-term care insurance has never gained traction as a solution to paying for long-term care even though the product has been tightly regulated and Congress has  given policyholders certain tax breaks.  It probably never will.  You have to have everyone covered to pay for the very expensive care some people will need,' says Burns. 'We are a long way from that.