Costs rising for vital long-term care insurance policies

The costs of long-term care for the elderly are a wild card that can make or break retirement.

"If people run out of money, it's often because of long-term care costs," Jack VanDerhei said at a pension conference this month in Philadelphia.

But only a smattering of Americans have long-term care insurance, or enough of the insurance, said VanDerhei, research director at the Employee Benefit Research Institute and an expert in the financial aspects of retirement.

Current forms of long-term care insurance provide a limited pool of money that can be used to pay for nursing homes and other forms of care that health insurance does not cover and that can quickly deplete retirement savings.

After a person can no longer independently perform a specified number of daily activities, such as bathing, dressing, and eating - followed by a waiting period - benefits start.

But fewer than 8 percent of Americans have long-term care insurance, and it paid for less than 12 percent of $220 billion in long-term care costs in 2012, the Robert Wood Johnson Foundation said.

Those with the relatively new form of insurance, especially those who bought policies a decade or more ago, have had a ringside seat to an unsettled industry, as companies fled the sector after failing to set sustainable prices early on and thus suffering significant losses.

"The long-term care industry has been in turmoil for probably the last 15 years, if not slightly longer," said Randy Rohrbaugh, executive deputy insurance commissioner of the Pennsylvania Insurance Department.

"With their products getting in trouble a decade and a half ago, the industry has been struggling with how to keep their customers happy, their products available, keep the company solvent, keep shareholders happy. It's been a tremendous uphill battle," Rohrbaugh said.

That turbulent history is evident in Pennsylvania, where Rohrbaugh's department lists 95 companies that once had the approval to sell long-term care insurance. Nowhere near that number remain in the market. About a dozen still sell the insurance nationally, experts said.

Even insurance giants, such as MetLife Inc. and Prudential Financial Inc., have stopped selling long-term care insurance in recent years.

Big insurers that remain in the long-term care insurance market include Genworth Financial Inc., John Hancock Life Insurance Co., and Mutual of Omaha Insurance Co., said Jesse Slome, executive director of the American Association for Long-Term Care Insurance.

Long-term care insurance policies issued in the 1990s and 2000s before the Great Recession were plagued by numerous problems, chief among them the fact that fewer policyholders dropped them than expected.

In the early 2000s, the expectation was that 5 percent of policyholders would let them lapse, Slome said. Instead, just 1 percent did so, he said.

"If an insurer predicted it would pay $100 million in claims with a 5 percent lapse rate, but the lapse rate actually averages 1 percent, the insurance company can now expect to pay $150 million in claims," Slome said.

Low interest rates have also forced insurance companies to seek significant price increases to maintain the financial wherewithal to pay claims.

In the 12 months ended May 8, long-term care insurance providers made 30 rate filings in Pennsylvania, with requests as high as 100 percent. Insurance regulators typically granted increases of no more than 15 percent to 20 percent.

As painful as those increases can be, it is likely that most policyholders would find it impossible to buy replacement insurance with comparable benefits for less, said Stuart H. Fine, a former hospital CEO and executive in residence at Temple University's Fox School of Business.

"In most cases, I expect that the prices to be charged for new policies being issued in the next few years will be even higher," Fine said.

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