Managing Changes in Long-Term Care Insurance

Changes have roiled the long-term care insurance market the last couple of years. The latest big changes came from the leading LTCI insurer, Genworth. The good news is that unlike other insurers, it plans to stay in the market.

Genworth eliminated unlimited lifetime benefits as a policy option and also the choice to fully pay a policy in 10 years. The firm also reduced the spousal discount from 40% to 20%. The moves followed more serious moves by some other insurers. MetLife is leaving the LTCI market, and Prudential is leaving the individual market but staying in the group employee plan market. MassMutual and Mutual of Omaha significantly increased premiums. AIG stopped selling all LTCI, and UNUM exited the group plan market.

There’s no secret to the forces behind the changes. Insurers are earning far less from investing premiums than expected. People are living longer, fewer are letting their policies lapse, and claims are higher than anticipated.

There are strategies to deal with the turbulence in LTCI. Rather than seek one magic bullet, consider using an array of tools to fund any long-term care costs you incur.

Traditional LTCI policies. Unlimited lifetime coverage is disappearing as an option, and is very expensive when available. Instead, consider two to five years of coverage.

It’s generally a good idea to buy a policy earlier than later, usually in your 50s. Premiums are lower, and you’re less likely to be denied coverage or pay higher premiums for health reasons. But policies are expensive now because of the prospect for low investment returns. In a few years, interest rates and returns. That means if you’re willing to take the risk that your health might disqualify you, consider waiting until interest rates rise.

Alternatively, consider policies issued by mutual insurers or other policies that provide for some participation to policyholders. Traditional stand-alone LTCI policies from non-mutual insurers don’t provide insureds a way to benefit in the future when rates rise and premiums decline. But other options might.

Employer and group policies. Premiums on group policies tend to be more attractive than individual policies, though you don’t have the flexibility of individual policies. Even small businesses that can get six or more employees to join the plan can offer attractive policies.

Combination policies. Longtime readers know I not a fan of life insurance policies and annuities that offer long-term care riders. The coverage is not as good as stand-alone policies. But it is better than no coverage, if you have a need for the annuity or life insurance.

You can use the combination policies two ways. You can supplement a stand-alone policy that might not meet all your needs. Another way is as a stop-gap to provide some coverage while you wait for premiums to stabilize.

Life insurance. When your concern is that lifetime long-term care will leave a spouse or other loved ones without a legacy from you, life insurance can help. It is much less expensive than LTCI for most people. You spend down your estate to pay for long-term care and count on the life insurance to take care of your spouse or other loved ones.

Self-insurance. Your assets and income round out the funding package. When you don’t own LTCI, this is your only plan to pay for any long-term care needs. As we’ve discussed in the past, most people can’t afford enough LTCI to pay for all LTC needs if they need it more than a few years. Personal income and assets make up the difference. Unless you have a major need for long-term care, combining self-insurance with the other funding sources should ensure you receive the care you need without impoverishing your loved ones.

For most people, LTCI is just one tool in a toolbox. The other tools are likely to be more important until the LTCI market improves.