Just when America was warming up to the idea of purchasing long term care insurance to protect family assets from the devastating costs of custodial care, the three largest insurance companies have shaken up the market by raising prices on
policies, not just on policies to be sold in the future. How will this affect your planning?
Long term care insurance policies are sold with the "assumption" of level premiums that won't increase much over the years. That's the incentive to buy when you are young and healthy and prices are lower. Insurers do have the right, however, to go to state insurance commissioners and ask them to approve price increases for specific policies if the claims significantly exceed their original expectations.
When insurers first created long term care policies, it was hard to predict their costs. But insurers gained valuable experience offering benefits and pricing policies on long term care insurance in the past 10 years, and that created the expectation that the risk of price increases on the more recently issued policies would be slim, and that any premium increases would be minimal.
The recent price increases raise questions about these expectations. Those who bought early to lock in lower prices are now being surprised by significant premium increases.
In the past year,
requested increases ranging from 8% to 12% on some policies already owned by its customers. John Hancock announced a 14% increase in some existing policies in May 2008. Nearly all of these policies were issued before 2000. But this week,
announced it will raise annual premiums an average of 18% for policy holders who were younger than age 70 when they purchased policies in the years from 1998 through 2005.
In effect, the insurers are admitting they made pricing mistakes. The only other explanation for these price increases is that they priced policies artificially low to compete for business.
In a statement, David Acselrod, MetLife vice president, Long-Term Care & Critical Illness Insurance, said:
"Quite simply, we expect to pay out substantially more in claims than we originally anticipated. Some of the assumptions that drive LTCi pricing include policy lapses, interest rates, the number of people requiring care and the duration of care, to name a few. Following a review of our experience, we concluded that we had to make changes to ensure that we are pricing the products appropriately on behalf of all of our policyholders."
Isn't it the job of the insurance company to assess those trends that impact pricing before they go to market -- whether they be the rising cost of providing benefits or the cost of hedging against low interest rates that impact the investment of their reserves?
The Ultimate Cost
In 2007, according to the American Association for Long Term Care Insurance, 180,000 Americans received benefit payments as a result of having long term care insurance protection. Jesse Slome, the association's executive director says: "The total value of claims paid in 2007 was $3.5 billion - money that families didn't have to pay, and money that taxpayers didn't have to pay for impoverished seniors."
The population of Americans over age 65 is expected to more than double in the next 15 years. Few of the soon-to-be-elderly have saved enough to cover the costs of home health care, assisted living, or nursing-home care, which is currently approaching $100,000 per year in major cities.
Steve Moses, president of the Center for Long Term Care reform, a national policy think tank, defends private insurers, saying: "The government has not set aside
money for the future to back up its promises that Medicaid will care for frail seniors. At least, the private insurance industry has bitten the bullet and is increasing prices so they will have adequate reserves to pay the claims when they start coming in."
Moses suggests that the market for private LTC insurance will never expand, as long as the government is "giving away" the same service that insurers are trying to sell. He points out that middle-class and even affluent Americans have learned the tricks of qualifying for Medicaid nursing-home coverage.
They'll be surprised when they learn that Medicaid provides care primarily in nursing homes that will only become more underfunded and understaffed. Moses believes that the burden of long term care needs will crush the system, wiping out the possibility of such government-provided benefits in the future.
It's quite likely that state insurance commissioners will approve the requested price increases from the insurers. Unfortunately, a side effect is likely to be that fewer people will buy long term care insurance. Then, when the real burden of caring for aging baby boomers hits in the next 10 or 15 years, the states will have to shoulder the cost through their Medicaid programs as boomers run out of their own money.
Still A Good Deal
Don't give up on the concept of buying long term care insurance. Claude Thau, an industry expert, points out that even if you purchased a MetLife policy five years ago, and thus now expect a premium increase notice, you're still ahead. For example, if you purchased a policy costing $1,080 a year at age 50, even with the projected annual increase to $1,274 you're better off than if you waited until now to buy a policy. That's because a new policy with comparable coverage at age 55 (your current age) costs $1,814 a year!
For older insurance purchasers, the numbers are even more dramatic. If you were 60 five years ago and purchased a policy then, the original premium of $1,648 would increase to $1,944. But that's still a bargain compared to the $3,047 annual cost of the same policy if you buy it when you are 65.
If locking in rates is a concern, consider a 10-pay policy where your coverage is fully paid up in ten years. Janice Axelrod, an independent long term care insurance broker in Chicago, says this is particularly attractive for some businesses (C-corporations) which are allowed to deduct the full annual payment.
In other words, don't bury your head in the sand about the very real possibility that in old age you'll need help getting dressed or bathing or getting out of bed. Can you count on your children to be there for you? Would you even
your children to do that? Or will you run out of money trying to pay for care on your own? Those are questions to ask yourself as you consider the value of long term care insurance. And that's the Savage Truth.
Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated. She was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. Savage currently serves as a director of the Chicago Mercantile Exchange Corp.