December 5, 2016

Long Term Care Insurance Industry Problems

 I've advocated that most people would be better off saving the amount of the premium and investing it for retirement expenses rather than buy LTC insurance. The Wall Street Journal reports (12/4/2016) widespread problems in the industry. "Collapse of Long-Term Care Insurer Reflects Deep Industry Woes: Actuarial miscalculations on long-term-care policies by two units of Penn Treaty American have proved fatal," by WSJ writer Leslie Scism. "A pair of small Pennsylvania insurers focused on long-term care could soon become one of the nation’s costliest insurance failures ever, highlighting the widespread problems that have plagued the industry niche for more than a decade." Scism explains:
"From the 1990s through the early part of the last decade, dozens of insurers sold long-term-care policies, viewing the then-new product as a growth engine that would address aging middle-class Americans’ worries about paying for care later in life. The policies pay for personal aides and extended nursing-home stays that Medicare, the federal health-insurance program for the elderly and disabled, doesn’t generally cover. The federal-state Medicaid program does pay for nursing homes, but is available only to the poor."
"But most actuaries badly underestimated costs, and the insurers then met resistance in many state insurance departments when trying to push the pricing miscalculation onto policyholders through steep rate increases. Some states did allow double-digit-percentage increases, distressing the often-elderly policyholders. Sales have collapsed amid the turmoil, and fewer than a dozen insurers sell any significant volume today." 
More than a dozen years ago Lance Palmer and I recommended an alternative to long term care insurance:

Lown, J. M., & Palmer, L. (2004). Long term care insurance purchase decisions: An alternative approach. Financial Counseling and Planning, 15(2), 1-11. Abstract:     
"Due to uncertain future income and premium increases as well as the negative ramifications of letting a policy lapse, educators and advisors should consider the advantages of the self insurance option for long term care. Self insurance offers the flexibility of using funds for long term care or basic living expenses if other funds are depleted, and allows assets to be passed onto heirs if no or little long term care is required. However, self insuring would provide only approximately one third of the insurance coverage provided by a competitive long term care insurance policy."  http://ssrn.com/abstract=2255137

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