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.