Long-Term Care Insurance Carriers Face Challenges

Many Americans have bought long-term care insurance to pay for nursing home care in later years. Unfortunately, many insurers underestimated the cost of providing long-term care benefits. As a result, many have increased premiums dramatically, and many stopped offering coverage altogether.

Penn Treaty American Corp. plans to liquidate two of its insurance units. The units have combined assets of $600 million and liabilities likely to reach $4 billion, which would make this the second-largest life/health insurer insolvency in the nation’s history.

Pennsylvanians who had Penn Treaty long-term care policies had to weather premium increases as high as 130 percent. Currently, Penn Treaty has about 79,000 long-term care policyholders. Although guarantee funds protect policyholders when insurers become insolvent, most states cap the amount payable. This means about 10 percent of Penn Treaty policyholders will not receive the full value of their promised benefits.

Past

Insurers began selling long-term care insurance in the 1990s. They intended the insurance to cover the cost of personal aides and extended nursing-home stays that Medicare, the federal health-insurance program for the elderly, wouldn’t cover. Medicaid programs only pay nursing home costs for the very poor.

But actuaries underestimated the costs of covering long-term care. In part, actuaries miscalculated life expectancy. The Wall Street Journal reported that in the 1990s, insurers thought the average 65-year-old male would live an additional 18.1 years. In reality, it’s more than 21 years. This means insurers have to cover nursing home costs longer than expected.

In addition, insurers calculated that 5 percent of policies would lapse before policyholders made a claim. Instead, only one percent of policyholders let their policies lapse. Customers believed their policies were valuable and kept them as an investment in the future.

Another problem: interest rates didn’t rise 7 percent as insurers expected, but only 3 percent. They stayed low mainly because the Federal Reserve kept rates near zero after 2008.

Insurers have tried to make up for their miscalculations by requesting higher premiums in recent years. Some states have allowed double-digit-percentage increases, but not all insurers have been able to increase rates enough to make the insurance line profitable. Many that stayed in business saw sales and renewals decrease. Often, only the unhealthiest people will continue to pay premiums when they increase dramatically, which leads to higher claim costs. Some insurers went out of business as a result.

Your Options

If you don’t have private long-term care insurance, don’t rely on Medicare. Medicare does not pay for ongoing long-term care. Instead, investigate these options:

• Short-term Care Insurance – This is similar to long-term care insurance, but usually caps benefits at one year. It is less expensive and easier to qualify for.
• Combined Life and Long-term Care Insurance – This coverage pays for nursing homes, assisted living or home health care. If you haven’t maxed out your benefit, it pays your survivors a partial death benefit. If you never use the policy to pay for care, the insurer will pay the entire benefit to survivors.
• Pensions – If your employer put money into an investment fund for your retirement, you can use it for long-term care.
• Social Security – Your monthly payments can be used for long-term care needs, but may not be enough to handle all the costs.
• Long-term Care Annuities – Money set aside in this type of annuity grows tax-free. To start one, you need a minimum of $50,000. You then choose the amount of long-term care coverage, usually 200 or 300 percent of the face value of the annuity. You also decide whether you want inflation coverage and how long you want coverage to last. You will have to pay taxes when you withdraw the money. If you don’t withdraw the money for long-term care, you can redeem it for its accumulated value when it matures at 20 years. When you die, your heirs will inherit any remaining value.
• Home Equity – If your home has gained in value, you can sell your house or take out a reverse mortgage, a loan on the equity of your home.
• Health Savings Accounts – If you’re employed and have high-deductible health insurance plan and a Health Savings Account, any money you contribute to the account can be used for medical expenses and long-term care.
• Medicaid – This is a last resort option available when you’ve depleted all your assets. The government will pay for nursing home care, but not assisted living. Any money left from your estate after you die will go to the government to reimburse your Medicaid costs.