In the past year, three of the big-gest long-term care insurance providers-John Hancock Financial, a division of Manulife Financial Corp.; Genworth Financial; and MetLife-applied to state regulators to raise premiums by as much as 40%. Then, in November, MetLife announced it would stop selling new LTC policies altogether, citing "financial challenges."
To some, this was the beginning of the end. Others dubbed these events business as usual for a relatively young, ever-tumultuous and rapidly evolving sector of the insurance industry. Yet for many financial advisors, the more urgent questions involve the practical impact of this turmoil. How does it affect long-term planning? What will be the reverberations for clients' peace of mind and asset protection? What can we expect in the year ahead?
Ominous Trends
"Something big is going on-a perfect storm in the wrong direction," says Peter D'Arruda, president of Capital Financial Advisory Group, in Cary, N.C.
Issue No. 1 is the aging population-baby boomers' reaching age 65 while their parents simultaneously enter their 90s-making an unprecedented pool of potential LTC claimants. Concomitant with that is a dramatic increase in life expectancy, never dreamed of when LTC insurance was launched in the 1970s. Add in the rapid rise of health-care costs, which consistently outstrip inflation, stirred with a surprisingly low lapse rate among LTC policyholders, and you have an explosive powder keg.
"The underwriters and actuaries back in the day didn't factor in all these things, so LTC insurance carriers underpriced their products," explains D'Arruda. "Now they are facing a tremendous liability, worse than many of them realize. Frankly, if I sold long-term care for a living, I'd be looking for another job."
That's not just hyperbole. "We've never been here before, with this many people facing long-term care needs," contends Lewis Walker, a financial advisor who specializes in estate planning, family care and special-needs issues at Norcross, Ga.-based Walker Capital Management Corp.
He says that between 2006 and 2009, daily LTC payouts doubled-and that's just the tip of the iceberg. "These claims will be going through the roof as the age wave moves along," cautions Walker.
Be Prepared
So to stay afloat, he expects LTC carriers will "keep raising rates and dropping policyholders, while simultaneously tightening up underwriting so it'll become tougher to get a policy," says Walker.
Those who already have LTC policies should hold onto them; those who don't should buy now, before it's too late. After all, the younger the applicant, the lower the premium and the greater the likelihood of passing the medical screens. "Apply long before you think you need it," Walker recommends.
In addition, financial advisors should make sure their clients maintain adequate liquid assets in case their LTC expenses outpace their insurance coverage. "Those that have the money are going to have to be prepared for private-pay options," warns Walker. "It's important to have enough liquidity to handle emergencies. There are always surprises in health-care costs."