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Why Long-Term-Care Insurance Premiums Are Soaring

long-term health insurance costs
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.

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Sydney Harper

Insurance companies failed to anticipate the said scenarios which in turn greatly affected long term care insurance cost. So now, those who will purchase ltc insurance will have to shell out a huge amount of money just to get covered. And what's worse is that those who already have coverage will be slapped with a huge increase in their premiums. There are some who are left with no other option but to drop their policy and look for other alternative ways to pay for their ltc needs. There is still a way to save your policy and that's only if you're willing to decrease your benefits. But before doing so, you should have your needs assessed first in order to find out if a smaller policy can still greatly benefit you in the future. Long term care insurance is still beneficial nowadays and the best protection you can have from the soaring cost of ltc. However, you have to explore your options carefully in order to find affordable policies that can still serve you well in the future. As for your guide, here are some resources that can explain the true cost of long term care insurance:

March 07 2014 at 9:57 PM Report abuse rate up rate down Reply
Clarisse Vasques

Genworth and Hancock are high trusted providers of long term care. the operate for many years and counting. Buying long term care insurance can be your best move if you want to ensure that you're taken care of during this phase. Before purchasing this policy, here are five questions that you should ask yourself

September 30 2013 at 10:39 PM Report abuse rate up rate down Reply

Caroben, It is important to work with a high quality broker that has access to companies that are A++ rated and have never raised rates. Mass Mutual, New York Life, Northwestern Mutual, for example. If people do their homework, rather than be marketed to by salesmen, AARP, their employer, etc., mistakes would not be made.

May 01 2013 at 9:19 PM Report abuse rate up rate down Reply

Sales Myth:
Buy LTC insurance while young. Rates will remain low.
LTC insurance is structured like health insurance. A policy group is marketed over a period of time. Then the group is closed and is treated as a block of business. As the group ages, the demand for benefit payout will increase. Insurance regulations guarantees the company a percentage of premiums for profit and overhead. A large rate increase creates “shock Lapse”, causing many to drop their coverage. When a policy lapses, the company retains paid in premiums and any future risk of paying benefits is eliminated.
The below link was posted on an insurance blog which involved a discussion between a retired senior that was hit with a 105% rate increase for a LTC policy. This senior was hit with a 105% rate increase 5 years after purchasing the policy. The rate increase was approved 2 years after purchasing the policy, but because of a standard 5 year price guarantee, the policyholder was not advised of the rate increase for another 3 years. The data indicates that the policy would require large future increases when it was approved by the state for marketing to seniors. This blog presents two interesting viewpoints.
See link

April 07 2013 at 6:47 PM Report abuse rate up rate down Reply

Here is an example: women complained about breast cancer so it was determined that women deserved special treatment concerning breast cancer and tumors. As a result medicaire will allow a doctor to perform breast removal on a 99 year old woman. Of course the woman would or might have survived another 4 years if she was left alone but the doctor wanted the money and preyed on the family. Breasts were removed and spread the cancer which then incurred chemo which killed her. Medicare needs to be looked at very closely

April 04 2013 at 10:34 PM Report abuse rate up rate down Reply

well it looks like we will all have to figure this out on our own. They could bring back cigarettes and selll them for .50 a pack and tout the benefits of smoking as much as you can now. Medicare can just cut back on procedures. As an example no treatment after age 90 for anything. However, healthcare can be regulated. Hospitals , big Pharma and doctors can be regulated. I am sure I will hear from some doctor that is starving to death. I know of a doctor who owned a house ( 10 million) and complained that he was going to quit because he could not make any money. It is all relative I guess

April 04 2013 at 10:29 PM Report abuse rate up rate down Reply

This is exactly why Medicare and SSI were created, because the private insurers didn't want to cover more risks. It shows you the prioritization of them would be the end of any care for the elderly and would put the burden back on the younger people to take care of them. These people are fools who are telling you that they are going broke and need to be privatized when the privately run health insurance industry isn't doing any better with cost containment.

April 04 2013 at 7:44 PM Report abuse -1 rate up rate down Reply

Bottom line....we can't get old and sick. Period. I've dealt with this nightmare with my mom. Luckily, she's living with me and my husband for now. But I'm afraid of what's coming down the pike. I've told my son to just take me out and shoot me when the time comes! You work your whole damn life, and this is what it comes down to. Sad, but true.

April 04 2013 at 7:33 PM Report abuse rate up rate down Reply

This should be obvious, as is the fact that Obamacare will raise insurance rates for everybody

April 04 2013 at 5:03 PM Report abuse +1 rate up rate down Reply

I took a Long Term Care Insurance policy out before I turned 50. That was over 8 years ago. For the cost I couldn't touch that policy today. I will go without something before I let it lapse. Well worth the little I pay each month.

April 04 2013 at 4:43 PM Report abuse rate up rate down Reply