Long-Term Care Insurers Steering Through Tough Times

Most consumers shopping for long-term care insurance worry about whether they’re healthy enough to qualify for coverage—and whether they can afford it. But the recent failure of two long-term-care insurers highlights a third concern: Will the insurer still be around when you make a claim, perhaps 20 or 30 years down the road?

Penn Treaty Network America Insurance, a long-term-care insurer based in Allentown, Pa., and its subsidiary, American Network Insurance, were placed in liquidation in March, leaving many of their 76,000 policyholders uncertain about whether they’ll get all the benefits they paid for. Having initially underpriced their policies, the two companies now have assets of $468 million and liabilities of $4.6 billion, according to the Pennsylvania Insurance Department.

Whether you’re shopping for a long-term-care policy or already have coverage, it pays to keep an eye on insurers’ financial stability. Although state guaranty associations take over claims-paying responsibility when an insurance company goes belly-up, that coverage is subject to state caps, and policyholders with more generous plans may find that the guarantees fall short of filling the gap. By studying insurers’ financial-strength ratings and asking questions about their underwriting methods, you can boost your odds of finding an insurer that will stay afloat and keep premiums relatively stable.

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While failures such as Penn Treaty’s are rare, the long-term-care insurance business generally “has been an uphill battle on a number of fronts,” says Scott Witt, a fee-only insurance adviser in New Berlin, Wis. In many cases, insurers initially overestimated the number of policyholders who would drop coverage and underestimated the number who would make claims. Then years of ultra-low interest rates hammered investment returns.

The financial strains have led many long-term-care insurers to impose huge premium increases on policyholders, or to simply exit the business. John Hancock, one of the largest long-term-care insurers, retreated from the market late last year. Genworth Financial, which has struggled in recent years to turn a profit on its long-term-care business, agreed last year to be acquired by investment company China Oceanwide. The transaction will not have any impact on existing policies, and additional capital committed by China Oceanwide will allow Genworth to focus on reducing debt, a Genworth spokeswoman says.

The road ahead looks smoother for insurers and their policyholders, insurance experts say. Interest rates are likely to increase, boosting investment returns. And policies issued today are being priced with much more conservative assumptions than insurers used in the past, making the risk of future rate increases much lower, according to a recent study by the Society of Actuaries. That implies insurers’ future profitability will be more stable.

Even so, you should check how major rating agencies such as A.M. Best and Standard & Poor’s grade the financial strength of insurers you’re considering. (These sites require free registration.) The rating agencies’ different grading systems can spawn confusion, but you can simply focus on the insurers who receive one of the highest grades each agency awards. Insurers that earn consistently high ratings include New York Life, Northwestern Mutual and MassMutual.

Also ask your insurance agent which insurers have the most stringent standards for issuing policies and offering discounts to those in good health. What tests and medical documentation are required? While you don’t want to be denied coverage, you also don’t want to go with an insurer that has the loosest standards. Ideally, you want to be the least healthy person in the pool, says Claude Thau, a long-term-care insurance consultant in Overland Park, Kan. “If they draw the line behind you,” he says, “you’re in the company of people who are healthier, and the stability of your premium is improved.”

Keep Watch on Your Insurer

If you already have a long-term-care policy, keep an eye out for deterioration in your insurer’s financial-strength ratings—but don’t rush to dump your policy if your insurer is struggling. Depending on your age and health, it may be difficult or impossible to replace your policy.

In the worst-case scenario, when your insurer appears headed for insolvency, check your state guaranty association’s coverage limits. Links to state guaranty funds’ websites are available at www.nolhga.com. Most states cap long-term-care coverage at $300,000, but some caps are as low as $100,000 or as high as $500,000 or more. If your policy’s benefits are well above your state’s coverage limit, ask if you can reduce your benefit before the state guaranty kicks in, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance.

That way, you’ll avoid paying additional premiums for benefits you may never receive—a predicament now faced by thousands of Penn Treaty policyholders. They must continue paying premiums if they want to keep their coverage, and the state guaranty associations may seek approval from state regulators to hike their premiums. But about 50% of policyholders are expected to have claims in excess of what their state guaranty association will cover, according to the Pennsylvania Insurance Department. Ultimately, the Penn Treaty liquidator and the court will decide whether any of those excess claims can be paid from the companies’ remaining assets, the insurance department said.