The crumbling economy undermines long-term care offerings

All the hype may not be good publicity after all, the long-term care (LTC) insurance industry found out 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 month’s press highlighted the drawbacks of LTC, as it focused on the problems of two key insurers, MetLife and John Hancock.

In early November, MetLife announced that it would stop selling LTC insurance effective December 30. Although it will continue to provide coverage to current policyholders, it will no longer issue new policies. It will also discontinue new enrollments in group policies and multiple life plans beginning next year.

Meanwhile, John Hancock has asked state regulators for a 40 percent average rate increase 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 that offer the coverage as an employee benefit but, unlike MetLife, will continue to sell individual policies, as long as you can find someone 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 of the LTC insurance industry as a whole. The problem is not the economy, or any other environmental factor; is that the sale of LTC insurance is an unprofitable business.

The purpose of insurance is to spread the cost of a highly unlikely and catastrophic (read expensive) event among a group of people. Rather than risk a potentially large loss, the insured accepts 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 will confirm, as we age, our likelihood of needing long-term care approaches certainty. The risk no longer falls into the “unlikely” category, and insurance becomes an inefficient and inappropriate solution.

As claims increase, the insurer passes the cost on to policyholders in the form of higher premiums. However, the increase in premiums is only a temporary patch. Once premiums rise, those at less risk drop their expensive policies. This leaves an even larger risk pool to share the costs, exacerbating funding problems.

Persistently low interest rates hastened the current decline in the industry. Insurers have not been able to get enough rates on their investment portfolios to fund policy payouts and have therefore had to rely even more heavily on premiums. According to the American Long-Term Care Insurance Association, insurers must raise premiums 10 percent to 15 percent to offset every 1 percent drop in interest rates.(1) rates rise enough in the near future to ease the stress on insurers.

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

In its press release, MetLife acknowledged that LTC insurance in its current form cannot balance claims funding with its business goals.(2) That is, the business is not profitable. However, MetLife suggests that it may return to the market if a profitable product is ever developed.

That profitable product could take the form of a hybrid policy, which combines a life insurance or annuity 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 payout. This makes the business more profitable and sustainable.

While hybrid policies hold more promise than traditional LTC insurance, I’m hesitant to recommend them. The health care industry is too dynamic to be easily predictable, and these are still relatively new and unproven 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 maybe we just can’t resist buying a vacation home on the beach. We may live very long and healthy lives and need to provide for our own sustenance.

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

Sources:

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

(2) MetLife: MetLife will discontinue sale of new long-term care insurance coverage