Providing For Your Own Care

Long-term care insurance is getting even more pricey, so shop carefully

You may think you have enough on your plate caring for your aging parents. But ponder this: If you are thinking about buying insurance to pay for care you might need yourself one day, it's getting more expensive and more complicated.

Long-term-care coverage, which pays for nursing homes and at-home health aides, has proven more costly to insurers than they expected when they first rolled out LTC policies 20 years ago. As a result, they've started to pass on their added burden to consumers in the form of higher premium prices and tougher underwriting terms that are boosting rates even more for the less-than-healthy.

In the past year they've raised premiums for new individual policies 5% to 10% on average, while typical group rates jumped 14%. Prices for some policies have grown even faster. For example, a 55-year-old single male living in Maryland would pay John Hancock Life Insurance $2,945 annually to buy top-of-the-line coverage today -- 40% more than for a comparable policy two years ago. Some companies, such as CNA Financial (CNA ), have even raised rates for existing policyholders. That's allowed under most contracts, though only across-the-board and not for individual customers. In the past, carriers had been reluctant to do it, fearing bad publicity and consumer backlash.

LOW LAPSE RATE

Why the rate hikes? Many companies deliberately underpriced policies to boost market share. Then a sagging stock market and low bond yields ruined their investment returns. Their biggest problem was that more seniors than expected actually filed claims. Insurers figured many customers would get tired of paying premiums after a number of years and drop the coverage before they needed it. As it happened, the percentage of policies customers let lapse fell from close to 10% a decade ago to roughly 1% today, says Peter Goldstein, executive vice-president of Long Term Care Group, an El Segundo (Calif.) consulting firm. That has forced carriers to increase cash reserves they must hold against future claims.

At the same time, insurers have learned more about who is likely to require care. The result: far tougher underwriting. Carriers used to ask just a handful of questions before selling a policy -- especially to younger people. Their main interest was in assessing your risk of dementia, especially from Alzheimer's disease. Now they want to know lots more about your health. And just being overweight or having a bad back can be enough to boost your initial premium. That 55-year-old from Maryland who would pay $2,945 as a low-risk customer would spend $520 a year more as a standard risk. Higher-risk patients, such as those taking insulin for diabetes, are often uninsurable. Some companies are considering new, high-risk policies -- with a lot stiffer premiums.

FEWER PLAYERS

Another worrisome trend is consolidation in the insurance industry, which has slashed competition in many markets. For instance, only three companies with safety ratings of B or better even offer insurance to that 55-year-old Marylander, according to Weiss Ratings of Jupiter, Fla. Overall, LTC carriers have fallen from about 140 three years ago to 120 or fewer today, estimates Thomas Day, founder of Web site LTC Link (ltclink.net). Among the players that have dropped out: Conseco (CNO ) and AIG (AIG ).

What can you do to soften the blow of higher premiums? To start, think about how much coverage you need. For instance, premiums for a policy that covers you for six years can be 50% higher than for a contract for four years of coverage. But so far, 83% of claims have been for three years or less, according to a study by Long Term Care Group.

If you are healthy, you should also think twice about buying group coverage through your employer or trade association. Unlike health insurance, in which your company picks up most of the cost, you'll usually pay the entire premium for long-term-care insurance. And because group policies don't screen out all higher-risk workers, premiums are more costly for everyone. "If group is the only way to get the coverage, that's where you go," says Thomas West, a McLean (Va.) financial planner. "But you might get the best deal on your own."

Before you buy any policy, check into whether the carrier has imposed big premium increases on existing customers. If it has, look elsewhere. It is a warning of potential financial problems -- and could mean future rate increases. But the best advice may be the most obvious: With a product as complex and costly as long-term-care insurance, it pays to do plenty of homework.

By Howard Gleckman

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