Not long ago, Lewis Walker of Walker Capital Management in Norcross, Ga., had a particularly irate client. The woman’s long-term-care insurance carrier was about to raise her annual premium a whopping 76%! What could she do?

There was no obvious reason for the price hike. She hadn’t made any claims or contracted any new infirmities. It was, in fact, the third increase in a decade, but the others—at 8% and 5%—had been manageable. This one seemed outrageous. Perhaps it was a mistake.

But it wasn’t. “The pricing has gone through the roof,” says Walker, author of the book Planning for the Challenges of Aging, Healthcare, and Special Needs. “They’re trying to intimidate people into reducing or dropping their coverage.”

Unfortunately, this has become an all-too-familiar scenario. Not only do rates keep rising, but now they’re soaring more for women than men. With a diminishing number of insurance companies offering LTC policies, and the federal government’s recent abandonment of a proposed LTC entitlement, what choices do clients have left?

Miscalculations
To be sure, LTC insurance has been troubled for years. MetLife and Allianz are among several companies that quit the business in the past five years. One oft-quoted difficulty is that people are living longer and actually using their benefits, so carriers have to pay out more money for longer periods of time than they had originally factored. “Insurers miscalculated the true costs of providing the coverage,” says Jeremy Kisner, president of SureVest Capital Management in Phoenix. “They overestimated how many policyholders would let their policies lapse [and] underestimated the cost of care and policyholder claims frequency.”

Another drag on profitability has been low bond yields. “The key component in the calculation of LTC insurance premiums is, how much can the insurance company expect to earn on the premiums it invests—and most invest in bonds,” says Jesse Slome, executive director of the American Association for Long-Term Care Insurance, an independent industry organization based in Westlake Village, Calif. “When interest rates produce very little return, premiums have to make up the difference.”

Old And New Business
Slome insists there’s a marked difference between new policies and renewals of old ones. Most people buy a new policy in their mid-50s; it’s important to apply while you are still healthy enough to qualify, especially since underwriters are growing increasingly stringent. On these new policies, says Slome, “rates are not growing any faster than they have for the past two years or so.”

That’s the good news. The older policies, on the other hand, are imposing heavy rate increases that catch clients by surprise. “It’s on the older blocks of business, where carriers are re-evaluating and playing catch-up, that people are subject to the kind of increases that make the headlines,” Slome says.

Last year, he says, the industry paid out $6.6 billion in aggregate benefits to 264,000 recipients. If carriers are playing catch-up, and underwriters are simultaneously becoming tougher, it’s largely because of past mistakes. “LTC insurance is still a relatively new product, [and] insurance companies are still trying to figure out how to properly write these policies to make financial sense over a long period of time,” says Derek Gabrielsen, an advisor with Strategic Wealth Partners in Seven Hills, Ohio. “Insurance companies need to figure out not only how long someone will live—i.e., mortality—but how well people will live—i.e., morbidity.”

To figure such unknowables, he explains, insurance companies rely on actuarial data. That data didn’t exist when LTC policies began, but now it is more plentiful, hence the re-evaluation. “Add in the fact that the cost of long-term care is increasing at an average of 4.7% to 6.6% a year,” says Gabrielsen, “and you can see why the insurance companies are increasing rates and [why] some have been dropping out of the LTC insurance business altogether.”

No Longer Gender Neutral
Still, why the gender differential? It, too, is an offshoot of the longer, deeper actuarial data. “Studies show that women are two to three times more likely than men to require LTC and, on average, require care for a longer period,” says Kisner at SureVest. “In the past, there was not much of a price differential, and LTC insurance was purchased almost equally by men and women. However, it was a much better deal for women. Now that the insurance companies have enough claims experience, they are adjusting the premiums to more accurately reflect their risk.”

Lest that seem unfair, consider that women typically pay less for life insurance than men because they live longer than men. “The statistics bear this out,” says Murray Gordon, CEO and founder of MAGA, an insurance broker in the Chicago suburb of Riverwoods, Ill. “In 2011, females accounted for two-thirds of new LTC claims and almost 71% of the dollars that insurers paid out. We recognized this years ago, but the industry kept going with unisex rates.”

Until now, that is. Genworth Financial, the No. 1 purveyor of LTC policies in the U.S., was the first to institute different rates for men and women, effective April 1, 2013. But other carriers plan to follow suit as soon as they gain approval from regulators. “There is a window of opportunity right now to lock in current unisex rates,” says Gordon.

Regulatory Approval
That’s because carriers can’t just raise rates arbitrarily. They have to apply to state regulators for across-the-board increases; that is, they can’t single out individual policyholders. Even once the authorities give approval, there’s a waiting period before the new rates can go into effect.

And the gender difference cannot be retroactive. “The higher rates for women just applies to new policies,” Gordon says. “The companies can’t go back and alter rates on a gender basis for existing policies.” They also can’t drop existing policyholders or reduce coverage. “Unlike other types of insurance where the company can cancel you after the premium term expires, LTC policies are guaranteed renewable for life,” Gordon adds.

That doesn’t stop companies, however, from raising rates to try to make up past shortfalls or discouraging customers from renewing.

Inflation Protection
If higher rates for women only apply to new policies, why did Walker’s female client get socked with a 76% increase? It was almost entirely due to her 5% compounded inflation rider, a popular add-on. “What they really wanted her to drop was the rider,” Walker says. “The companies are petrified over the financial implications of these riders.”

Indeed, these riders represent a major liability. “How can an insurance company increase your benefit at 5% when interest rates are at half a percent?” Slome asks.

Gordon adds that a 5% compounded growth rate could “double your benefit in 14 and a half years.” Once upon a time, it made sense for carriers to offer this cheaply. “Back in the 1980s or early-’90s, I only had to pay 15% or 20% extra to add it to my own LTC policy,” says Gordon. “Now it’s much, much higher.”

Alternatives To The 5% Rider
Smart financial advisors should point their clients to more affordable inflation-protection methods. One option is simply to reduce coverage. Many carriers are offering a 3% compounded inflation rider, which is dramatically cheaper than the 5% version. Alternatively, clients could convert from a compounded rate to a simple inflation rate, which also reduces premiums. A new choice some carriers are offering is called the “Future Purchase Option,” which allows clients to add to their coverage periodically without having to jump through underwriting hoops or undergo additional health testing. According to Slome, it can cost about two-thirds of the 5% option and half the 3% add-on.

But avoid inflation riders tied to the Consumer Price Index, cautions Gordon, since health-care costs grow at a faster pace than the CPI. “It’s probably a better protection for the insurance companies than for clients,” he says.

If clients reduce their inflation protection, they should consider simultaneously increasing their daily benefit. “You might do better to take a $250 daily rate instead of $200, for example, while cutting the inflation rider, and see what that does to the cost,” suggests Walker.

Look At The Total Picture
Yet in all these cases your client will likely come up short because of the meteoric rise of health-care costs. So Walker advises planning accordingly. “You have to make sure that some part of the client’s portfolio is positioned in an inflation hedge,” he says.

His client with the 76% rate increase wasn’t happy with any option that slashed her inflation protection. So Walker reassessed her entire situation and was able to reinvest her savings to generate enough extra income to pay the higher premium with no reduction in her coverage. “We repositioned her assets, using alternative investments to increase yield,” says Walker, who cites a combination of variable annuities, conservative real estate investment trusts and real estate development companies that, in effect, had “an inflation hedge built in,” he says. “You have to look at where this coverage fits within the overall picture.”

Paying For It
How clients pay for their LTC insurance is another important consideration. Traditionally, choices included open-ended annual contracts, 10-year amortizations called “10 Pays,” or large lifetime up-front lump-sum payments. But fewer and fewer carriers are offering the 10 Pay or single pay anymore, leading many clients to move to the nontraditional hybrid or “linked” products.

For example, many prefer an LTC rider on a life insurance policy. “The LTC rider can provide a death benefit or be used for LTC,” explains Steve Williams, a senior vice president and head of financial planning, U.S., at BMO Private Bank in Chicago. This option satisfies a long-standing complaint about traditional LTC plans—namely, if the client dies before needing care, the insurer keeps the premiums while the client gets nothing. The drawback of this linked product, however, is that it typically requires a large payment from the outset.

Other clients fund LTC policies through direct transfers from an annuity or life insurance plan. “Individuals can leverage assets in an annuity or permanent life insurance policy to pay premiums for LTC on a tax-favored basis,” says Steve Sperka, a vice president at Northwestern Mutual in Milwaukee and head of its LTC business, referring to what’s called a 1035 exchange. Such transfers are not considered taxable events.

Of course, choosing the right funding option for your client depends on many factors. “Which one turns out to be the best deal depends on how long you live and what happens with interest rates and returns that you might have achieved on other investments,” says Kisner. “I find that what drives the funding decision is the client’s personal situation more than an analysis of what is the most profitable.”

Still, most LTC customers are sticking with traditional plans. That might be changing, though, as premiums rise. “My prediction is that the nontraditional LTC products will grow in popularity,” says BMO’s Williams, who also anticipates that price movements will settle down as the political fog surrounding health care clears and providers become “better able to quantify the risk.” If these things happen, he adds, “Some insurance companies [may] decide to get back in the LTC market.”