As more life insurers abandon long-term-care insurance, actuaries and financial advisers are questioning the viability of the product and arguing that if it remains unchanged, it eventually will serve just a tiny niche market.
“It's fair to say that this product will continue to shrink and give way to combination products,” said Cynthia J. Crosson, director of insurance at Fitch Ratings Ltd. “Claims are going up and people are living longer; it's a tough nut to crack.”
Recently, Unum Group dropped out of the group LTC business, and Prudential Financial Inc. said that it would cease offering individual LTC insurance, though it will continue to provide coverage through employer-based groups.
Other notable exits include Guardian Life Insurance Co. of America early last year, MetLife Inc. in late 2010 and Allianz Life Insurance Co. of North America in 2009. Meanwhile, even the largest providers of coverage have had to raise rates.
Long-term-care insurance, which was introduced in the 1980s and gained momentum in the 1990s, is being squeezed by three major forces:
• The increase in life expectancy of individuals buying the coverage.
• The underpricing of premiums on in-force policies.
• Low returns on the fixed-income portfolios that pay claims.
Miscalculations or overoptimistic assumptions about these issues prompted carriers to offer policies at lower prices, expecting to make money as of a result of having to pay fewer claims and getting higher returns on their investments.
The trough in returns on bonds and other fixed-income instruments has been particularly devastating to the carriers. Forty percent to 60% of the money insurers accumulate to cover future claims comes from investment returns, according to the American Association for Long-Term Care Insurance.
Another unexpected barrier is that the number of people who stop paying their premiums and let the policies expire — the so-called lapse rate — has gone down dramatically. That translates into more elderly policyholders' making claims for care.
“I've been saying for 15 years that long-term-care insurance is not viable. You could look at the combination of a lapse-supported product and low rates as being a problem,” said Joseph M. Belth, professor emeritus at Indiana University at Bloomington and editor of “The Insurance Forum.”
“If you buy it, prepare to be disappointed,” he said. “You're going to spend a lot of money, and if you have a financial catastrophe, it may not be fully covered. If you don't, then you spent all that money and didn't use the coverage.”
“We have low investment earnings and a block of business that builds sizable liabilities,” said Dawn Helwig, principal and consulting actuary at Milliman Inc. “The pricing assumes earning investment returns on the assets backing those liabilities; when you can't get them, that has implications on prices and rates.”
Changes in carrier assumptions have led to higher costs for new LTC insurance purchases. The prices of current policies are as much as 17% higher than last year, according to data from the AALTCI.
In addition, carriers are raising premiums on in-force business, which could lead to another problem — an increase in the number of healthy policyholders who drop coverage due to cost. This leaves those most likely to need care remaining in the pool, a so-called “death spiral,” according to Anthony Webb, a research economist at the Center for Retirement Research at Boston College.
But not all observers are so gloomy.
A shrinking LTC industry is, in fact, a good thing, according to Harley Gordon, president and founder of the Corporation for Long-Term Care Certification Inc.
“Fewer players means that those who are left are able to stabilize pricing, and if they're committed, they can charge more for premiums,” he said, adding that there will always be a place for stand-alone LTC insurance because of its inflation provisions and flexibility.
“The carriers that are doing well have priced it to reflect the actual risk,” Mr. Gordon said.
From a planning perspective, financial advisers acknowledge the reality of rising premiums and fewer insurers to provide LTC insurance, but opinions vary on whether the product is still viable.
“Companies haven't been selling it long enough to know what the claim rates will be,” said Scott Witt, a fee-only insurance consultant at Witt Actuarial Services LLC. “The industry is going into some strong head winds.”
Some think that hybrid products that combine life insurance or annuities with LTC benefits eventually will drive out traditional LTC insurance.
“[Traditional LTC insurance] is going to become extinct over the next two or three years,” said Henry Montag, an adviser at an eponymous practice in Uniondale, N.Y. “The new products will either be group LTC coverage or the hybrid products, which let insurers share risk [with the customer].”
Indeed, the risk profile of hybrid life/LTC policies is lower for insurers when compared with traditional LTC insurance. In hybrid products, customers pay for their coverage with one payment upfront, as opposed to making a series of payments over an undetermined period of time, as they do with traditional LTC insurance.
But there is a difference in coverage: The first benefit dollars out of a hybrid product are typically the clients' money, paid out by accelerating the death benefit, Ms. Helwig said.
Some insurers will offer additional coverage equal to several times the death benefit, she said.
But that is in sharp contrast to lifetime or extended coverage offered in traditional LTC insurance.
“I like the creativity of hybrids, but they only cover a fraction of the LTC need,” Mr. Witt said. “It's a lesser level of coverage, and you don't have the same capacity for handling a catastrophic event.”
Insurers themselves acknowledge that it is time to return to the LTC insurance drawing board.
“There needs to be greater predictability for carriers, distributors and policyholders than the current products allow,” said Marianne Harrison, president and general manager of John Hancock Long-Term Care Insurance.
“Carriers and advisers need to be open to change — it may be that in the future, these products are designed to be more adaptable and to cover some, but not all, of the LTC risk for an insured,” she said. “Those who are still looking for products that cover 100% of the risk are those most likely to be doubtful about the future of this product line.”