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The risk of long-term care

By Jennie L. Phipps ·
Monday, November 15, 2010
Posted: 4 pm ET

Last week MetLife announced that it was no longer going to sell long-term care insurance. The company said that it would continue to service the policies of its current 600,000 insured individuals, but it wouldn't sell any new ones.

While long-term care insurance is an important retirement planning hedge against being old and barely surviving, the companies that sell it haven't been very good at making this product a comfortable and reassuring purchase. There are too many unknowns even from companies that are longtime sellers of life insurance, which seems like a similar business, but apparently isn't.

Substantial price increases on current policy holders are not unusual. Over the past five years, practically all major players in the long-term care insurance market have raised premiums as much as 25 percent, according to the California Department of Insurance. Those companies include John Hancock Life Insurance, Allianz, Bankers Life and Casualty Co., Genworth, Monumental Life, Mutual of Omaha, Transamerica, Prudential, UNUM and MetLife.

A report by California Insurance Commissioner Steve Poizner blames the increases on a number of factors including low initial pricing and loose medical underwriting, as well as policyholders living longer than expected and suffering more disabilities.

He said when insurers predicted how much money it would take to cover claims and costs, they guessed poorly, lowballing the cost side and overestimating their return on investments. Insurers also predicted that more people who bought policies would drop them than actually have been doing so. When people buy one of these policies, they wisely hold onto them.

In order to raise rates, insurers have to get state approval, but if they can make a good business case -- costs are up and profits are down -- the state insurance commissions almost always approve.

If you are considering buying long-term care insurance, it is especially important to consider these factors before you commit your retirement dollars:

  • Is the insurance company in sound financial shape? While it's hard to tell in a world where the largest insurance company in the world had to be bailed out by the U.S. government, generally, bigger is better, as well as a long history of financial stability.
  • Will the policy remain affordable even with increases? If you're stretched to the outer limits when you buy the policy, your finances may not get any better. Perhaps, you should explore other options.
  • What happens if you get 10 or 15 years into the policy and can't pay the bill? Is there a provision that allows you to freeze the policy and accept lower benefits? Could you extend the waiting period -- go from 90 days to 180 days and save a substantial sum?
  • Should you pay off the premium quickly? There are plans that allow you to pay off the premium in one or two lump sums. For some people with current high incomes or a financial windfall that might be the right choice.
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