The only good thing that can be said about aging is that it's better than the alternative. It's also more expensive, and as society ages, we're going to have to figure out how we pay for it.
Most Americans will not end up lingering on in a nursing home for years. But for those who do, the costs will be astronomical. That's largely not a problem for the bottom half of the income distribution, because Medicaid will pay the bill if you're destitute. But middle-class people who have been carefully hoarding resources for years in the hopes of passing something down to their children can instead see their entire legacy handed over to the nursing home; an affluent couple with a spouse still living in the community can see that spouse forced into a sharp reduction of both savings and income.
Enter the idea of long-term care insurance. Buy a policy when you're still relatively young and healthy, pay the premiums every year, and if you do end up needing intensive support services, you can go to a nursing home secure in the knowledge that your spouse and your legacy are protected. Personal-finance columnists have been solemnly recommending long-term care insurance for years, though in my experience, this advice is often just as solemnly ignored.
That's because the policies are now quite pricey. When long-term care policies were introduced a few decades ago, they seemed like an attractive deal. As it turns out, that's because they were underpricing the insurance. Insurers expected a significant portion of people to drop the insurance every year (meaning that their previously paid premiums would be all profit). Instead, only about 1 percent did. They also underestimated costs.
And while typical health insurers don't have to worry much about interest rates, because they generally pay this year's health care costs out of this year's premiums, long-term care insurers need to park the money between taking the premium in and paying the benefits out. The ultra-low interest rates of the last decade have made those investments less profitable, hurting them still further. And state regulators have proved resistant to efforts to raise premiums to make the insurance more actuarially sound.
Thanks to these factors, two small insurers in Pennsylvania "could soon become one of the nation's costliest insurance failures ever," according to The Wall Street Journal. And they are not the only ones who have had trouble with this insurance product. This raises the question of whether long-term care insurance can ever be an attractive product for the middle class — and if not, how the heck we're going to pay for the care we need when we get old.
What we want, as consumers, is a product that offers low, level premiums and will provide all the nursing-home care we need if we get sick. In other words, we want long-term care insurance to look something like life insurance, except with variable payouts like health insurance has.
Insurers, on the other hand, would probably prefer long-term care insurance to have a premium structure more like ordinary health insurance, where policies are re-rated every year. (Tom McInerney, chief executive officer of insurance company Genworth, recently said as much to Forbes). That's because death rates are relatively easy to predict but health care costs aren't; labor costs rise, new technologies emerge, and the standard of care changes as new discoveries are made and new regulations written.
Effectively, setting a long-term level premium asks insurers to guess what sort of care they might be required to pay for in a decade or so, and if they guess wrong, too bad. Only as Pennsylvania shows, it's not simply a question of insurers taking a nasty loss; people who faithfully paid their premiums for years may see their benefits cut if insurers go belly-up.
