Talk about getting caught between a rock and a hard place.

Long-term care expenses pose one of the greatest risks your clients will face in retirement. And unless your clients are wealthy enough to self-insure against that risk, long-term care insurance (LTCI) is the best way to mitigate it.

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Trouble is, LTCI is a tough market to navigate – for clients and planners alike. In the past year, current policyholders have been shocked by double-digit premium hikes from big underwriters, including John Hancock and Genworth. Meanwhile, MetLife announced late last year that it will stop writing new LTCI policies, and a smaller player—Guardian Life Insurance Co. of America—followed suit in February. In addition, Hancock recently suspended sales through employers who offer LTC insurance as an employee benefit.

Many LTCI providers went for years without raising rates at all. But the recent spate of huge increases is worrisome, because buying an LTCI policy should be a lifelong commitment. LTCI policies require that customers keep current on premium payments from the time of purchase up until the point when a claim is made, yet most policies come without any firm guarantee that rates won’t rise over time.

And some of the biggest carriers have been pushing through double-digit rate hikes on existing policies over the past year. John Hancock, for example, requested rate hikes of around 40 percent.

The current ultra-low interest rate environment is one driver of the rate hikes. Low rates make it difficult for insurance companies to earn an adequate return on the investment portfolios that help fund policy payouts.

But, oddly enough, smart consumer behavior has been another key factor driving the rate hike requests.

Once purchased, it makes sense to hold on to an LTCI policy-- and policyholders have been holding on to their coverage for dear life. Just 3.8 percent of policyholders allowed their coverage to lapse between 2005 and 2007, and the rate was just 1.5 percent on policies at least six years old, according to LIMRA, the industry research and consulting group.

That lapse rate is much lower than for other types of insurance—and it was much lower than the industry had expected. Since revenue from lapsed policies falls straight to underwriters' bottom lines, the low lapse rates have squeezed profits.

The case for insuring against long-term care risk remains compelling; the Center for Retirement Research at Boston College (CRR) says about one-third of Americans turning 65 this year will need at least three months of nursing home care sometime during their lives.

Medicare covers only a small portion of long-term care needs, and the cost of a semi-private room averages $79,000 per year. CRR calculates that the mean lifetime exposure to long-term care costs for a 65-year-old couple is $260,000, with a five percent risk of a $570,000 expense.

Medicaid remains the nation's largest LTC funder, paying for more than 40 percent of all care, But in most states, qualifying for Medicaid requires spending assets down to poverty levels, and the choices for care are limited.

Against that backdrop, how can you help clients cope with rate hikes?

--Don't drop coverage.
Annual LTCI premiums can run from about $1,500 to $3,000 or more, depending on the amount of coverage, beneficiary age and other factors. It probably won’t make sense to drop coverage in response to rising rates, especially for policies that were purchased many years ago. Even with a steep rate hike thrown in, the premium almost certainly is much lower than you’d find for that client on a new policy today at an older age.

And the policy’s benefit may have increased substantially ii it has an inflation rider; about 40 percent of LTC policies sold have this feature. If a 55-year-old couple bought a policy in 1995 with a $150-per-day LTC benefit and a five percent compound rider, the benefit would be worth about $400 by 2015, according to the American Association for Long Term Care Insurance.

What's more, older clients may have trouble qualifying for new coverage due to medical underwriting by carriers. “I find that clients who were told earlier to put this off until their seventies or even their eighties are surprised to see that they can't qualify,” says Wendy Namack, a certified financial planner based in North Port, Florida. “The insurance companies are getting tougher with their underwriting policies related to health problems.”

--Consider cutting benefits. If a client just can’t afford to pay more, cutting back coverage offers a an alternative route to controlling premiums. Industry sources say the largest price hikes are being sought on LTCI policies that provide unlimited lifetime coverage.

Three years of benefits will be enough to cover all but 13.1 percent of policyholders, according to a recent study of actual claims history from four large insurance companies by Milliman, an actuarial consulting firm that works with the LTC insurance industry; just 7.6 percent will need more than four years of benefits and only 4.5 percent require more than five years.

“I haven't recommended many unlimited coverage policies to my clients,” says Namack. “Usually, three years of coverage with a simple or compound annual increase in benefit levels is adequate.” If you're shopping for new coverage for a client who hasn't purchased LTCI, this is a time to proceed with caution.

The LTCI industry is struggling to improve its products and market share; LIMRA reports that overall market penetration is still under 5 percent of the total possible market. Experts say new products will be brought to market over the next couple of years as the insurance industry tries to come up with more attractive offerings.

Some insurance companies already are introducing less expensive policies with more limited benefits; others are introducing hybrid life-and-LTC products aimed at the affluent end of the market.

Financial advisors also should keep an eye on the federal government, which is preparing to launch a public option version of LTCI in 2013 under a little-noticed provision of the Affordable Care Act. The Community Living Assistance Services and Support plan (CLASS for short) aims offer modestly-priced LTC coverage that emphasizes more flexible, community-based care over nursing homes.

The details on CLASS are being hashed out in Washington. The law mandates that the plan be self-funded through enrollee premiums, but critics charge it won’t be financially sustainable and will create a long-term drag on the federal deficit. President Obama’s deficit commission recommended reform or repeal of CLASS last December; Republicans in Congress are pushing for the latter option.

Self-insurance may be an option for affluent clients. Dawn Helwig, a principal at Milliman, says clients should have $500,000 to $750,000 in retirement assets in order to have a 95 percent chance of having sufficient resources to self-fund an LTC need.

The risk, of course, is that a substantial portion of those assets could get eaten up by LTC expenses rather than used for other purposes or passed along in an estate. Spousal questions loom as well; if one spouse becomes ill and drains those assets for an LTC need before passing away, the surviving spouse would be left without adequate assets to fund living expenses.

Mark Miller is a journalist and author who writes about trends in retirement and aging. He has a special focus on how the baby boomer generation is revising its approach to money, careers and lifestyle after age 50.

Mark edits and publishes, featured as one of the best retirement planning sites on the web in the May 2010 issue of Money Magazine. He writes Retire Smart, a syndicated weekly newspaper column and also contributes weekly to He is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living (John Wiley & Sons, 2010).

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