Posted on 17 December 2008
By Mark Miller
The decision by a major insurance company to spin off most of its long-term care policies earlier this month sends a clear warning to consumers of the importance of that old rule: Buyer beware.
Conseco Inc. struck a deal with Pennsylvania regulators to transfer 140,000 long-term care policies into an independent trust. The new non-profit trust will pay claims from a $175 million pool of capital contributed by Conseco, but it won’t have access to any additional capital from the company. That means policyholders could face cuts in benefits or big rate hikes in the future.
There’s no debating the need to finance long-term care for aging Americans. The Urban Institute estimates that 25 percent of people over 65 will need help at some point in their lives for an extended period with some aspect of basic personal care–bathing, eating, getting in or out of bed or dressing. Medicare doesn’t fund such costs, and long-term care policies were created to plug the gap.
The business got off to a rocky start in the late 1980s and early 1990s, the result of complicated policies and, in some cases, under-priced premiums that led to unforeseen rate hikes. The market has since matured and regulatory safeguards have been put in place. Today, a handful of major players offer fairly solid, reliable coverage.
Conseco was one of those early-wave companies that underwrote policies that became troubled. The deal worked out with the company in Pennsylvania, where Conseco’s long-term care business is based, “provides what many reasonable experts deemed the best of a lousy situation,” argues Jesse Slome, executive director of the American Association for Long-Term Care Insurance, the industry trade organization.
One of the primary issues here, Slome notes, is falling interest rates, since insurers rely heavily on fixed-rate investments to earn the returns they need to pay benefits. “When many of these policies were priced, interest rates were around eight percent,” he says. “They’ve declined steadily to the point where U.S. government treasuries are being sold at zero percent interest rates.”
According to Slome, for every one percentage point drop in rates, insurers would need a 10 percent premium increase back to the policy issue date to maintain its profit target.
Conseco defended its decision to cast off the long-term care business, arguing that it “reduced earnings volatility” for the company, while transferring the policies to a non-profit trust that will operate solely for the benefit of policy holders.
It’s not clear how Conseco policyholders will fare over time. If the trust were to become insolvent, policyholders would turn to Pennsylvania’s state guaranty association, which backs up claims up to certain legally mandated limits.
But the situation underscores the need for prospective buyers of long-term care policies to shop very carefully.
If you’re employed, check to see whether you can buy long-term care insurance at work. Your employer can’t subsidize the cost, but probably has selected a quality underwriter offering attractive group rates. This approach has been gaining in popularity, and 42 percent now offer policies to employees and/or spouses, according to a Hewitt Associates survey.
If you buy an individual policy, stick with one of the major carriers with solid financial ratings and responsible track records on premium increases. You can check underwriter ratings for free at the websites of A.M. Best, Moody’s, Standard & Poor’s. A company called Weiss Ratings sells reports on underwriters at its website.
Financial strength aside, it’s important to understand the varying features from policy to policy. These include the among of daily benefits provided, the length of coverage and the elimination period–the length of time you pay for care out-of-pocket before benefits kick in.
Earlier RetirementRevised coverage of long-term care insurance
ConsumerReports guide to buying long-term care coverage
AARP guide to long-term care insurance.
MarketWatch tips on buying long-term care coverage.
The American Association for Long-Term Care Insurance offers useful tools and calculators for long term care insurance.
Kiplinger’s website offers a Long Term Care Center that collects all of the magazine’s content and resources on this topic into a single, handy page.
Insurance underwriter ratings
Interview on long-term care insurance with Richard Johnson of the Urban Institute: