With nearly 70 percent of Americans aged 65 or older expected to need long-term medical care at some point, millions of Americans have turned to long-term-care insurance to help them cover its high costs.
But rate hikes on long-term-care premiums are coming, meaning many of those who prudently planned for their long-term-care needs may not be able to afford to keep their coverage.
The largest public pension fund in the country, the California Public Employees' Pension Fund, runs one of the biggest long-term-care benefit programs in the country. But CalPERS now expects it will need to raise premiums by 85 percent within the next two years. Private insurance companies are seeing many of the same issues, with CNA Financial (CNA) and Manulife Financial (MFC) both having sought or gotten approval from the California Insurance Department to raise their long-term-care premiums by 40 percent to 45 percent.
What's Behind the Increases?
Insurance companies have faced a triple-whammy that has hit them especially hard in recent years.
Low interest rates and weak investment returns have hampered their ability to build up the loss reserves they need in order to pay out claims. And with long-term-care insurance often extending for decades, the assumptions that insurance companies make about what returns they'll be able to earn are even more important than on other types of policies, such as homeowners' insurance.
At the same time, health-care costs have continued to rise. The same factors that are making it problematic for the federal government to ensure Medicare's continued stability are hitting long-term-care insurance providers. Private insurers face the added handicap of having a smaller pool of available revenue and financial reserves to draw from.
Finally, insurance companies made poor assumptions about policyholder behavior, overestimating the number of people who would let their insurance policies lapse over the years. Ironically, that suggests that insurance companies did their jobs too well, convincing their customers of just how important long-term-care coverage is for their financial prospects in retirement.
Combine those three factors together, and it's no wonder why insurance companies are feeling burned.
Several companies, including MetLife (MET) and Prudential (PRU), have decided simply to stop selling long-term-care policies. They have likely found the challenges of getting regulators to approve the big premium increases that would be necessary to make them economically viable outweigh the potential profits from offering the coverage.
Looking at Your Limited Options
The worst thing about the rate increases is that long-term-care policyholders are essentially stuck without good alternatives.
Given the low priority that most insurance companies have given to offering long-term-care insurance, it's tough to shop around for better deals. If your health has gotten worse since you opened your policy, you may not even be able to get long-term-care coverage from another insurance company, let alone at a lower rate. Moreover, for long-term policyholders, extensive benefits like lifetime coverage are almost impossible to find among new policies.
Even if you can find alternative coverage, you'll see much more limited benefits, including time limits on payouts, longer waiting periods before coverage kicks in, and reduced maximum benefit amounts.
One of the biggest mistakes that the professionals at CalPERS made was in failing to fully take into account how rising life expectancies would affect the actual cost of coverage. CalPERS is now offering policy benefits that cover long-term-care payouts for between three and 10 years as a lower-cost alternative to lifetime coverage.
Some people will be able to accept less inclusive policies and still get by. But given the financial realities of being retired on a limited income, a substantial portion of the people who currently have long-term-care insurance coverage may be so soured on the experience that they'll stop paying their premiums and let their long-term-care policies go away entirely.
That will represent a sad end for those who paid tens of thousands of dollars over the years for coverage that they may now never have any opportunity to use.
Motley Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.
Your Insurance Doesn't Cover That: Hidden Dangers in the Fine Print
Why Long-Term-Care Insurance Premiums Are Soaring
When buying homeowners insurance, be sure that you're buying enough coverage to rebuild your home, if necessary. Don't look at market prices for homes, but rather at the replacement cost for your home, which would include removing what's left of your home, buying new building materials, and labor. "Guaranteed replacement" policies should cover the whole cost, while "replacement cost" coverage often covers less than the full amount. Check your policy to see what kind you have, and be sure that your home's value isn't being understated.
Also, know that in standard homeowners policies, many kinds of damage are typically excluded, such as that from earthquakes, floods, nuclear attacks. These days, mold damage is often excluded, too. If you're worried about any excluded risks, talk to your insurer. You can probably expand your coverage, for a price. You may also get it elsewhere, such as from the FEMA-administered National Flood Insurance Program, or the California Earthquake Authority.
You may know that dental or vision-related expenses are not covered by your health care insurance, but that's probably not all. Pre-existing conditions have long been excluded by many insurers, though President Obama's health care reform act is addressing that. A nose job or other cosmetic surgery, for example, is most likely excluded, too, no matter how much of an emergency you think your double chin is.
Your policy may also not cover ambulance services, maternity care, prosthetics, kidney dialysis, organ transplants, diabetes management, emergency-room visits, mental-health care, and care you receive outside the United States -- or any of a number of other expenses. Don't be overly alarmed -- policies vary widely, and you may be covered for many of the above costs, at least to some degree. Just be sure to find out what is and isn't covered, and when shopping for a policy, seek out the one that fits your needs and pocketbook best.
The main reason to get renters insurance is because many possible losses renters face are excluded from their landlords' insurance policies. If a roof leak destroys much of your collection of first-edition books, your landlord's insurance will likely fix the roof and any damage to your apartment's floor, but your book loss will probably be excluded. Thus, it's smart to get renters insurance, which is often rather inexpensive, as well.
When shopping for such policies, be sure you know whether losses will be insured for their replacement cost or their current, depreciated value. (The former is, of course, preferable.) Renters policies can include or exclude coverage if a guest is injured on your premises. If you'd like that coverage, ask for it. Know that in many renters policies, damage due to natural disasters or structural damage to the building may not be covered, too. If you're worried about those issues, including burst pipes, ask about it. You may need to add a rider to your policy.
There are coverage holes with car insurance, too. At a basic level, while most drivers carry liability coverage, many don't carry collision coverage, which will address damage to your car. Omitting it can make sense if you're driving a clunker that you'd just replace after an accident, but crunch some numbers before passing it up.
There are some tricky little car-insurance details, too. For example, a stolen car may not be covered if you left it running with the doors unlocked. Damage due to hitting an animal such as a deer, or damage from a lightning strike, tornado, or flood, may also be excluded or limited. Medical bills may also be off-limits unless you have medical coverage, and valuables stolen out of your car are also often excluded. (They may be covered via your homeowners policy, though.)
A key thing to understand about life insurance is that not everyone needs it. If no one is depending on your income, then sad though your demise will be, you need not protect against anyone's financial loss from it. But many people do have dependents, in the form of children, spouses, and even parents or others. So know that with life insurance, you may not be covered if the death is a suicide, if it happens as part of war-time combat or during the commission of a felony, or if it's due to a private-aircraft accident. (Deaths tied to commercial flights are typically covered.)
Also, if you regularly engage in dangerous activities such as car-racing, hang-gliding, or extreme mountain-climbing, a related death may not be covered -- unless you pay a premium for a rider to your policy. Lying on your insurance paperwork can also lead to a denied claim.
If you're an investor and you've got much of your retirement security resting on an account at a brokerage, you can take comfort that you're probably protected by the Securities Investor Protection Corporation. It's a bit like the Federal Deposit Insurance Corporation, which covers bank accounts, but it may not provide all the protection you expect it to. The SIPC protects the cash and securities such as stocks and bonds that you may have in your brokerage account -- in the event that the brokerage runs into deep trouble or fails, or if a broker steals your assets. It does not cover losses that occur if your stock or bond loses money or a company in which you're invested goes out of business.
Even FDIC protection has limits. It typically covers assets in bank accounts up to $250,000 for each person's accounts at each bank in each account ownership category. So if you have $350,000 in savings accounts at one bank, you may not be fully covered and you might want to divide the sum between two banks.
You're smart to look into insurance for all kinds of needs -- and smarter still to read the big and small print to be sure you understand what is and isn't covered. In many cases, you can add the extra protections you seek. That might come at a cost, but it might be worth it, too.