Long-Term-Care Insurance – The Final Frontier?

Mar 2012

Earlier in March, Prudential Financial announced they will stop taking applications as of March 30 for individual Long-Term-Care insurance policies, which pay for nursing-home, assisted-living and in home care. It is another sign of the times in the difficult market which has beset insurance companies who provide long-term-care insurance.

This brings to 10 the number of insurers in the top 20 ranked by sales to exit the market in the last 5 years according to Limra International, a research firm. Unum announced in February that they would exit the employer market and Metlife halted all of their Long-Term-Care insurance in 2010. As the number of insurance providers for this kind of insurance dwindle, it will likely result in higher ongoing premiums and a tougher approval process.

Why is this happening you might ask? Claims are going up and people are living longer, which is great for the person who purchased the insurance, but is making these kinds of policies less profitable or outright unprofitable for the insurance companies. Typically insurers would build reserves to pay the claims from investment income on high-quality bond portfolios, but the extremely low yields on bonds have broken the actuarial tables on which these policies were based. Like any business, insurance companies are responding in the best way they know how in order to look after their shareholders as they should; halting sales, raising premiums on existing policyholders or both!

Another problem is that the number of people who stop paying their premiums and let the policies expire (and never collect benefits) has gone down dramatically. However, with the increased premiums on existing policy holders it is expected that the number of healthy people letting their coverage lapse will increase leading to a remaining pool of policyholders made up only of those most likely to collect on benefits, which will put further pressure on the insurance companies to raise premiums.

Where does this leave the average policyholder? Fewer players may lead to a more stable market place for the remaining companies, but you should expect higher ongoing premiums. I think there is a possibility that traditional Long-Term-Care insurance could become all but extinct in the coming years and those who have it will need to find other alternatives to off-set this variable risk in their retirement plans. If you have an existing policy, it would be wise to review it and make sure it still makes sense and fits with your individual goals and objectives.

P.S. I wrote a blog in November addressing Charitable Giving. With the KONY 2012 campaign (raising awareness about African warlord Joseph Kony) going viral last week, and the resulting controversy surrounding Invisible Children (the charity behind the video) and their founder, I suggest you revisit my November advice on researching charities. I would love to see the people of Africa, especially the children, freed from the evil and destruction caused by warlords like Joseph Kony, but I want to make sure any money I give to a cause accomplishes my goals and does so in a cost effective and ethical manner.


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