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."

The Recession's Impact
But there are other explanations for the industry's woes. Jesse Slome, executive director of the American Association for Long-Term Care Insurance, a trade organization in Westlake Village, Calif., says the biggest pressure on these companies actually comes from poor investment returns over the past few years.

"Forty percent to 60% of what an insurance company ultimately needs to pay future claims comes from investment returns," he insists. "For every one percentage point drop in long-term interest rates, an insurer needs a 10% to 15% premium increase to stay profitable."

Slome estimates some 8 million Americans currently own LTC insurance. The industry's target population-those between 55 and 65 years old who are in good health and have sufficient funds-comprises roughly 15 million. "Over the next five years, I expect we'll see greater penetration and significant growth," he says. "Reports of the industry's death are an exaggeration."

The departure of MetLife after two decades in the LTC insurance business is a shock, Slome concedes, but "not a seismic shift. ... Other companies are clearly active, engaged, committed to this marketplace and picking up the slack."

Indeed, MetLife's LTC sales last year amounted to $36 million-small compared with Hancock's $116 million and Genworth's $108 million, as measured by Broker World, an industry publication.

Beyond Dollars And Cents
Even if there is plenty of business to keep the industry going, there may still be a festering cancer within. "LTC providers never built their products correctly," holds Chris Cooper, a financial planner and president of Chris Cooper & Co. and ElderCare Advocates, in Toledo, Ohio, and San Diego.

The problem, he says, comes down to understanding the true risks involved in long-term care. "If you have Alzheimer's, it's not going to get better tomorrow," he points out. "The common maladies of aging can go on and on for decades, and only get worse."

What's more, there can be endless ancillary costs such as transportation to and from medical facilities, new wardrobes as people shed weight or become unable to control their bathroom functions, and a wide variety of medical equipment and medications. "This is the youngest form of insurance in the U.S., and we just don't have enough claims experience to understand what's needed," says Cooper. "The companies simply don't have adequate empirical data."

So what are financial advisors to do to help clients plan ahead? "They need to realize that an insurance policy is not the entire solution," stresses Cooper. "You still have to save and invest, and draw up a will, trust documents, powers of attorney, health-care directives and other items that are outside the financial advisor's purview."

Careful planning, in other words, requires input from attorneys and other experts-"a multidisciplinary tag-team approach," says Cooper.

New Prices, New Products
It would certainly take a crackerjack team to keep up with recent pricing trends and new product designs. For example, some traditional LTC insurance plans offer unlimited lifetime benefits while others are capped at a set dollar amount or number of years. There are also shared plans, which allow a husband and wife to save money by jointly purchasing a package with, say, a ten-year benefit; if one partner dies before receiving the whole benefit, the surviving spouse retains the balance.

Some carriers offer premium amortization so policyholders can pay off coverage completely within a set time-for instance, over ten years or by age 65. This requires heftier payments but saves money in the long run.

In addition, there are hybrid plans (sometimes called "combination" or "linked" products) that offer LTC benefits as a rider to a life insurance policy or an annuity. One example is Lincoln Financial Group's MoneyGuard Reserve account. A universal life policy with an LTC rider, it provides tax-qualified benefits if and when the policyholder suffers an LTC event. If the policyholder never uses the LTC coverage, a tax-free death benefit is paid to the heirs-or the principal can be returned in full if the owner changes his or her mind. Premium prices are locked in at the beginning.

LTC-linked annuities work in a similar way. If you never make an LTC claim, the initial investment isn't lost but passes to heirs, typically at double the original dollar amount. Usually, no health inspection is required to qualify. As appealing as this option may sound, it does oblige you to pony up at least $50,000 from the get-go, and benefits are usually capped at three times that original investment, which may not be enough to cover a protracted LTC crisis.

Custom Tailoring
Despite the array of options, there's still a compelling need for more and better LTC solutions. "It's clear the need for LTC insurance is growing, not shrinking, and therefore it will be critical for advisors to seek out a range of solutions," explains Mike Hamilton, Lincoln Financial Group's assistant vice president of Life Product Management.

Advisors might start by asking clients how much of their liquid net worth they are willing to reserve for potential future long-term care. "When clients better understand the true costs of care, the likelihood they will need it and the very difficult challenges the family will face in paying for it, LTC insurance is a far more cost-effective choice [than they may have realized]," asserts Glen Coral, director of advanced planning at CBIZ Special Risk Insurance Services, in Philadelphia. "Tax laws surrounding these products are continuing to evolve. How benefits are to be delivered in the future under the Pension Protection Act and health-care reform should point advisors to align themselves with organizations that specialize in this business."

A Wake-Up Call
Certainly the recent LTC commotion should be taken as a wake-up call, if nothing else. "It's not new exactly," observes Murray A. Gordon, CEO of Maga Ltd., a financial advisory firm in Riverwoods, Ill. "In the 35 years I've been in this business, I've seen many companies come and go, big ones and small ones."

Among the providers that have bolted: Aetna, American Express, CNA, TIAA-CREF, Transamerica and, in the past two years alone, Allianz, Conseco and Securian Financial Group's Minnesota Life Insurance Co.

Sometimes it's just bad management, says Gordon. "You often have people running divisions who are clueless in certain lines of insurance, and they run them into the ground," he says. "They may know life insurance, but that doesn't mean they understand long-term care."

Gordon notes that MetLife's departure came only after it raised rates and laid off staff. In other words, there were ample red flags. But, he says, it's important to remember that the company pledges to honor its existing obligations. "With a quality company like MetLife, you don't face the problem of defaulting," he says. "There's a big difference between a quality company and a substandard one."

Quality And Security
Undoubtedly, financial strength and longevity are key traits of the kind of quality advisors and their clients should seek. But is that easier or harder to find nowadays? Has the shake-up razed the unreliable purveyors, leaving only the best standing-or has it cast an indelible shadow upon the entire industry?

"Some of the bad news that's making the headlines is not happening throughout the industry," affirms Steven Sperka, a vice president at the Milwaukee-based Northwestern Mutual, a leading LTC provider that reports brisk sales growth and unchanging prices. "The sky is not falling everywhere."

Advisors who wait until the dust settles will probably be sorry. "We know that 70% of people over age 60 will require some kind of LTC services in their lifetime," says Sperka, "and with the aging population, this is becoming a bigger and bigger risk."

That risk is twofold. LTC insurance is intended to protect assets in the event of a sustained, expensive, life-shattering event, of course. But it also protects clients' independence and very quality of life, enabling policyholders to preserve a level of dignity and autonomy after becoming no longer able to perform two or more "activities of daily living," such as bathing, dressing or feeding themselves, emphasizes Sperka.

"Smart advisors are realizing they had better start to understand this because it's on clients' minds," he says. "They want their financial advisors to bring this up and ask the right questions-and if the advisors don't, they're missing a huge opportunity."
Part of that understanding, however, is knowing your limits. "This is a very specialized field," says Sperka. "If you're not sufficiently knowledgeable yourself, you should find people who are."

The Foreseeable Future
For LTC providers, the pressures may be far from over. But, says Gordon, the financial advisor in Illinois, "most carriers have a better handle now on pricing their products. They've gone through the learning curve, passed crawling and walking, and are ready to run."

Who makes it to the finish line, though-and in what order and why-remains to be seen. "I don't think the larger providers will go broke, but the pool of providers will surely shrink," says Walker, in Georgia. "Only the strongest will survive."