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Is long-term care a sucker’s bet?

By Jay MacDonald ·
Friday, December 3, 2010
Posted: 10 am ET

If you've ever wondered how you might one day afford home health care or a nursing home, recent word from the long-term care insurance front was hardly encouraging: MetLife, the nation's largest life insurance company, is pulling out of the LTC game at year's end. The company will continue to honor all existing contracts however.

Why did MetLife retreat from long-term care insurance? Simple: it was and is a sucker's bet for a life insurance company.

As MetLife CEO Robert Henrikson admitted in a press conference, long-term care "does not allow you to have a necessary return on capital and still be competitively priced." The Spanish translation: "Mucho trabajo para poco dinero." Too much work (and risk) for too little money.

Consider the numbers: The cost of assisted living increased at an annual rate of 6.7 percent and a private room in a nursing home jumped 4.5 percent annually over the past five years, according to LTC underwriter Genworth. As premiums naturally escalated, the number of new individual policies plummeted 32 percent from 2005 to 2009, according to LIMRA.

Clearly, an increasing number of Americans now also consider long-term care insurance a sucker's bet as well.

It's deja vu all over again for Judith Hasenauer, JD, CLU, a Pompano, Fla.-based attorney and insurance company consultant who encouraged a similar exodus by life insurance companies from disability income, or "dis-income" insurance 20 years ago.

"For years we have asked our clients, what are you doing in the dis-income and LTC business? You're a life insurance company and those are so subjective and more casualty-oriented than they are life," she says.

Hasenauer says two human factors work against the LTC business model.

"People who are on long-term care and disability income policies tend to take advantage of the policy more frequently and are sicker than those who don't have policies," she says. "If you are in a facility and the average stay out there is 45 days, if you have an LTC policy, you will stay 90. So if your population is only those who have policies, you don't get the rule of large numbers because everybody is drawing in that pool, everybody is taking advantage of it. And you have more frequent users. So not only do you have the benefits extending beyond the average, you also have the greater incidence of use."

With nothing but aging baby boomers as far as the actuarial eye can see, it's little wonder that MetLife folded its LTC hand.

What do you think? Is long-term care insurance a sucker's bet? If so, how do you plan to pay for your caddy on life's back nine?

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Jay MacDonald
December 08, 2010 at 10:31 am

Hi, Steve. Thanks for sharing your experience. It's not an uncommon one these days when life expectancies make it increasingly likely that many of us will outlive our assets. What makes LTC such a difficult call is that, unlike property & casualty insurance, the time horizon is typically long and your options for obtaining another policy grow fewer as you age. LTC underwriters know that some percentage will ultimately use it, some percentage will die before using it, and increasingly, some will be forced to drop the coverage because they can't afford it any longer. That's dandy for the insurance company but a pretty bleak scenario for Mom and Dad. Or us. Surely there's a middle ground where LTC can be viable for both the insured and the insurer. Unfortunately, that's not where we're at today, which is why we see a growing number of folks choosing to self-insure, an unacceptable alternative in my view. As you say, market dynamics seem only to increase the cost of this product. Perhaps the only hope for affordable LTC is the unfortunate scenario we're seeing today, where consumers are essentially voting with their feet and not signing on for coverage at all. Nothing prompts new insurance products like a sales slump. Best of luck to both of us in our search for a solution to our golden years!

Steve Kalin
December 08, 2010 at 8:58 am

I have just about spent down all of my parents assets, over $2,000,000 over the last 18 years taking care of my parents needs. They did not have any long term care. How nice it would have been to have a program to offset their cost of care. At 90 the cost of care continues to rise.

The problem is that companies like Met Life and many others have priced their products to the MARKET and not to the RISK. In doing so they bought market share and are now stinging the consumer by raising rates. Some can go elsewhere if in good health but many now pay the price of a company getting the consumer in the door with no other choice.

The risk and exposure is so great without this type of planning. Our parents unintentionally disinherited one another as well as their children. How nice it would have been to have a plan in place. Would you define car or house insurance as a suckers bet. Many pay premiums for 50 years and never have an accident or have their homes burn down!

Steve Kalin

Weiwen Ng
December 07, 2010 at 8:18 am

On one hand, I agree with Olson's comment that MetLife's decision to exit the industry doesn't mean the death of the industry. They were a relatively small player in the LTCi field.

However, the LTC industry needs a dose of humility. I was at a conference on long-term care last year, and the industry folks kept saying that they had the information they needed to price policies appropriately. If so, why the continued rate hikes? These hikes pose a significant burden on policy holders. In addition, they push LTC insurance even further out of reach from the middle class.

The LTC industry also needs to start working with the government. Olson's site and others are full of disparaging remarks about Medicaid. The post he links to says that Medicaid and the CLASS Act aren't the solution. Then he goes on to talk about how the Partnerships are the solution - but the Partnerships work because Medicaid backs up a private policy. That way you can buy something like a three year policy, and not worry that you will have to exhaust your assets if it runs out. I can definitely see room for something like a government reinsurance fund that would insure insurers in certain circumstances, such as significant drops in bond yields. In addition, I think the CLASS Act should be done as a mandate, not as a voluntary program - it would provide a lot of relief to people who need home care, and if it were mandated, it would be a lot cheaper than the estimates that others have come up with. But of course the industry would probably complain bitterly.

Jay MacDonald
December 05, 2010 at 3:46 pm

Thanks for your thoughts, Raymond. Short answer: I wish I knew. Given what it took just to get a few much-needed health care reforms through Congress, I doubt that the political climate will allow the necessary legislative and regulatory pivot necessary to bring about affordable long-term care insurance in the foreseeable future. I absolutely believe that an affordable solution to LTC is out there. Unfortunately, at some point short of government mandate, it would require the buy-in of major insurers who are doing quite nicely with the present structure.

Jay MacDonald
December 05, 2010 at 3:23 pm

Thanks for your comments, George. I'm intrigued by your suggestion that insurers have underpriced LTC, given that consumers are staying away from it in droves primarily because of its steep price tag. Imagine how unpopular LTC would be if it were right-priced! I quite agree that self-funding makes no sense. Unfortunately, the middle class is currently far more focused on staying afloat than worrying about those quality nursing home years. Short of competition, I can't fathom how LTC prices will do anything but continue to climb beyond the reach of most Americans. Seeing a major insurer like MetLife pull out of the market entirely hardly instills confidence that affordable products will be forthcoming anytime soon.

George Airdale
December 04, 2010 at 12:14 pm

Jay, your well written article is very slanted and misses the point. For the consumer, LTCi is much less of a bet and more of a certainty. 70% according to studies, will need care. The insurers have underpriced the product. Even if the cost of insurance jumped 50%, it is still going to be cheaper than funding the whole cost out of your pocket. What you did not say was that there really is no alternative for a responsible individual. Self funding is very poor cash management. Annuities or life insurance hybrids do not compare and generally not as complete. I have the peace of mind to know that I have this issue covered for my family. Hope you do too!

Scott A Olson
December 04, 2010 at 11:30 am

Met Life’s decision will have about as much impact on the future of the long-term care insurance industry as IBM’s decision to stop selling personal computers had on the computer industry. In short, “zero impact”. You can read more here:

Raymond Lavine
December 04, 2010 at 10:54 am

If people do not want long term care insurance or if professional people believe that long term care insurance is not necessary for themselves or their clients.....what is the alternative?

Property and Casualty companies go in and out of various product lines. They also raise their premiums when needed.

We write about the problem....what are alternative solutions?

Raymond Lavine
Gig Harbor, Washington