What’s Killing the Long-Term Care Insurance Industry

The long-term care insurance industry is in big trouble. Consumers aren’t buying. Carriers are dropping out of the market. And those that are staying are raising premiums, cutting discounts,  and eliminating products–all of which are discouraging even more consumers from buying.

What’s gone wrong? The industry has two fundamental problems. A long-standing one–buyers are dropping coverage less often than the industry predicted. And a more serious new one–historically low interest rates are sucking the profit out of the business.  

As a result, just about every LTC insurance company has raised premiums in recent years for both old policies and new ones. And now many have begun trimming their product lines and eliminating or reducing discounts.

For instance, Genworth, which dominates the LTC market, announced on Aug. 1 that it plans to raise premiums on pre-2003 policies by 50 percent over the next five years, and on newer policies by 25 percent over the period. It will tighten underwriting for new products, requiring, for the first time, blood tests for applicants. It will also stop selling lifetime benefit policies, reduce spousal discounts from 40 percent to 20 percent, end preferred health discounts, and stop selling products that allow consumers to pay premiums up-front rather than over their lifetimes.

Another big player, Transamerica, has announced similar cut-backs.

Finally, some household names are simply dropping LTC insurance entirely. In February, Unum stopped selling group policies (a product once thought to be the industry savior). In March, Prudential stopped selling individual coverage and on Aug. 1, it abandoned the group market as well.

For years, carriers underestimated how many consumers would let their insurance drop before they went to claim. The companies assumed that as premiums increased and buyers’ disposable income shrank, a certain percentage would drop coverage. The phenomenon, known as the lapse rate,  increased returns to insurers and allowed them to keep premiums under control. 

But as it turned out,  lapse rates have consistently been much lower than the companies figured (typically about 1 percent, compared to 5 percent for other insurance products). That squeezed their profits and forced them to raise rates which, in turn, made insurance less attractive to new potential buyers.

In recent years, the industry has adjusted its estimate for those drop-outs, and newer policies–with higher premiums– are more profitable than older ones. But carriers have had  much more trouble adjusting to the newer problem: How to survive in a nearly zero interest rate environment.

To oversimplify a bit, insurance companies earn revenue by collecting premiums and then investing that income. Because long-term care insurance companies typically do not pay claims for many years, they hold premium income for a long time and, thus, investment income is a very important part of their business model.

Those investments are limited by state insurance regulators to ultra-safe bonds. But ten-year Treasury bonds are returning just 1.6 percent. Five-year notes are paying a paltry 0.7 percent. That is far lower than overall inflation and significantly lower than the annual increase in long-term care costs, which is roughly 5 percent.

The math is brutal:  No insurance company can pay claims and make a profit when its costs are rising by 5 percent but its investment returns are in the neighborhood of 1 percent.

Keep in mind that long-term care insurers are almost all subsidiaries of much larger life insurance companies. And their parent firms, anxious to manage risk in what was already a very risky business, are not at all troubled by the decline in LTC sales. In fact, slashing sales may be exactly what they have in mind. 

Until a few years ago, carriers that stopped selling LTC insurance would sell their existing policies to other firms. But, today, in a reflection of the state of the industry, there are no buyers. In most cases, the large carriers will continue to cover their current customers, though policy-holders should not be surprised to see ongoing rate increases.

Overall, though, the decline of the private LTC market is a huge problem, especially since it is coming just as Washington is seeking ways to reduce Medicaid, the most important payer of long-term care costs. It is yet one more reason why it will be critical to find a workable solution to the problem of long-term care financing.



  1. Joseph Davidson August 30, 2012 at 12:58 am - Reply

    I have an inflation adjusted LTC policy, the benefits go up with inflation. Since inflation is very low, doesn’t that somewhat compensate for the low interest income?

  2. Howard Gleckman September 5, 2012 at 7:37 pm - Reply


    It does not help the insurer.Say your policy pays $100-a-day and carries a 5 percent inflation rider. Next year, the company must pay you $105. However, it is earning only 1 percent on its investments and not able to increase premiums. Unless your policy pays 100 percent of your daily LTC costs (and very few do), it would still pay out the full $105 dollars even if, say, nursing home care costs increased by only 3 percent.

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  8. Russell S Andrews, CLU ,ChFC November 16, 2014 at 9:04 pm - Reply

    I’m a 47 yr rep of Northwestern Mutual. You need to know Northwestern is still selling Long Term Care. We have never raised our rates and we are still paying dividends.

  9. Don Watson December 16, 2014 at 3:18 pm - Reply

    My wife and I bought LTC policies at age 44 from State Farm, We are now 56….. We have now seen a total (in 2 phases) of a 33% increase in the last 18 months… Now, those rates don’t bother me, What bothers me is that we could be 20-30 years away from needing these policies, and they have all that time to price us right out of these policies… We have the 5% compounded annual benefit with unlimited lifetime benefit, so AM I RIGHT in assuming that they will make sure I will have to eventually drop these policies by increasing the rates tremendously before we would ever have the chance to use them???

    • Howard Gleckman December 17, 2014 at 9:37 am - Reply

      Don: You have a generous policy that effectively cannot be purchased from any carrier any more. Even if you could buy one, the premiums are likely to be much more than what you are paying. It is likely that you will continue to see rate increases but keep it if you can. It is almost irreplaceable.

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