All publicity is probably not good publicity in any case, the long-term care (LTC) insurance coverage business found final month.
The business named November “Nationwide Lengthy-Time period Care Insurance coverage Month” in hopes of elevating consciousness of the “want” for the product. Nonetheless, the majority of the month’s press highlighted LTC’s drawbacks because it targeted on the woes of two key insurers, MetLife and John Hancock.
In early November, MetLife introduced that it’ll cease promoting LTC insurance coverage as of Dec. 30. Though it is going to proceed to offer protection for present coverage holders, it is going to not write new insurance policies. It’ll additionally discontinue new enrollments in group insurance policies and multi-life plans beginning subsequent yr.
In the meantime, John Hancock requested state regulators for a mean fee enhance of 40 p.c on most of its current insurance policies. The insurer additionally plans to boost the value of recent insurance policies by 24 p.c in 2011. John Hancock has stopped promoting insurance policies to employers that provide the protection as an worker profit however, in contrast to MetLife, it is going to proceed to promote particular person insurance policies, as long as it could possibly discover anybody prepared to pay its new charges.
There was no single occasion in November that crumbled MetLife and John Hancock’s LTC enterprise. These two bulletins have been simply the newest indicators of the gradual decay of the LTC insurance coverage business as an entire. The issue just isn’t the financial system, or some other environmental issue; it’s that promoting LTC insurance coverage is an unprofitable enterprise.
The aim of insurance coverage is to unfold the price of a extremely unlikely and catastrophic (learn expensive) occasion throughout a bunch of individuals. As a substitute of risking a probably massive loss, the insured takes a small, recognized loss within the type of a premium. The hot button is that the occasion have to be unlikely. Whether it is too frequent, inexpensive premiums will be unable to cowl the price of the claims and nonetheless depart a revenue for the insurer.
As any insurance coverage salesperson would affirm, as we age our probability of needing long-term care approaches certainty. The chance not matches the “unlikely” class, and insurance coverage turns into an inefficient and inappropriate answer.
As claims enhance, the insurer passes the associated fee on to the policyholders within the type of greater premiums. Rising premiums is simply a short lived patch, nonetheless. As soon as premiums go up, those that are at decrease danger abandon their expensive insurance policies. This leaves an excellent greater danger pool to share the prices, exacerbating the funding issues.
Persistently low rates of interest expedited the business’s present deterioration. Insurers have been unable to earn enough charges on their funding portfolios to fund coverage payouts, and due to this fact have needed to rely much more on premiums. In accordance with the American Affiliation for Lengthy Time period Care Insurance coverage, insurers want to extend premiums 10 to fifteen p.c to make up for every 1 p.c drop in rates of interest.(1) It’s unlikely that rates of interest will rise sufficient within the close to future to ease the stress on insurers.
MetLife vows that its present long-term care coverage holders won’t be affected by the current choice. They are going to nonetheless be lined so long as they pay their premiums they usually might even be capable to change their protection phrases, relying on what their explicit insurance policies allow. Nonetheless, it’s unlikely that these presently insured shall be solely unscathed. And not using a youthful, more healthy group of insured people getting into the pool, it will likely be tough for MetLife to search out the money to cowl its claims. Consequently, the corporate will more than likely have to boost premiums on its remaining long-term care insurance policies to cowl its prices.
In its press launch, MetLife acknowledged that LTC insurance coverage in its present kind can’t steadiness financing claims with its enterprise targets.(2) That’s, the enterprise is unprofitable. Nonetheless, MetLife advised that it might return to the market if a worthwhile product is ever developed.
That worthwhile product may take the type of a hybrid coverage, one that mixes an annuity or life insurance coverage contract with a standard LTC coverage. A number of insurers are already starting to supply insurance policies of this kind. Hybrids usually tend to appeal to lower-risk clients as a result of, even when a policyholder by no means wants long-term care, she or he nonetheless will get a assured payout. This makes the enterprise extra prone to be worthwhile and sustainable.
Whereas hybrid insurance policies are extra promising than conventional LTC insurance coverage, I’m hesitant to suggest them. The well being care business is simply too dynamic to be simply predictable, and these are nonetheless comparatively new, untested merchandise.
All of us face numerous potential bills that we might or might not incur in our outdated age. We would want to assist help youngsters or grandchildren; we would must renovate a home that can be getting old; or we could be unable to withstand shopping for a trip dwelling on the seashore. We would simply stay very lengthy and wholesome lives and wish to offer for our personal help.
There isn’t any motive to deal with the opportunity of needing long-term care any otherwise from these different doable bills. In all these circumstances, one ought to acknowledge the necessity for funds and save and make investments appropriately all through one’s lifetime. Counting on a flawed insurance coverage product just isn’t going to assist.
(1) Reuters: Is The Lengthy-Time period Care Insurance coverage Market Sick?
(2) MetLife: MetLife Will Discontinue The Sale Of New Lengthy-Time period Care Insurance coverage Protection