When Maura Carley's mother wasoffered guaranteed-issue, group long-term care insurance, shesnapped it up. That proved to be a good decision, Carley says, whenthe policy paid for her mother's care during the last seven weeksof her life.

Most people dread the day when they may be old or disabledenough to need care from a paid health professional or aide.Long-term care insurance gives them the peace of mind that comesfrom knowing that an insurance company will pay for at least someof their care.

It protects assets—whatever the family doesn't have to pay canbe passed along to heirs—and can reduce family stress during anillness or at the end of someone's life.

“When I recommend long-term care insurance, I am looking toprotect the well spouse, the couple's assets, their lifestyle, andtheir family and heirs,” says Doreen Haller, a certified financialplanner at Best Times Financial Planning in Rochester, N.Y.

As a group benefit option, long-term care insurance is lesscommon than it was, though it's still available. But it's harder toqualify for and often much more expensive, a victim of changingdemographics and low interest rates on the fixed-income investmentswhere insurance companies invest premiums.

Rising premiums

In the last five to 10 years, long-term care insurance premiumshave substantially increased. “Those costs have skyrocketed,”Haller says. “Over the last few years, I know that Genworth hasraised their premiums by 25 percent. MetLife raised theirs by about20 percent, and TIAA-Cref has raised theirs about 35 percent over atwo-year period. Seniors on a fixed income are stunned.”

Behind the steep price hike are a handful of reasons. One isthat insurance issuers guessed that long-term care policies wouldhave a lapse rate around 30 percent. That hasn't happened.

“Insurance companies are losing money because they totallymisjudged how many people would buy these policies and keep them,”says Andrea Graham, who is a brokerage manager for long-term careat Upstate Special Risk Services, Inc. in Rochester, N.Y. “Theyfigured that it would be like term life insurance, where verylittle is paid out in benefits.”

Insurers figured wrong, Graham says. “It's a careful, planningperson who buys long-term care insurance. They go through a lot toget it and then they hang on to it. Ninety-five percent keeplong-term care insurance once they have it.”

Insurance companies invest policy premiums, mostly infixed-income investments such as Treasury bills. In the currentlow-interest rate environment, they haven't made enough money oninvestments to keep premium increases lower or flat. Even a quarterof a percentage point makes a difference over 25 to 30 years, andrates have been down by much more than that over the past fiveyears.

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While interest rates have gone down, the cost of receivinglong-term care has headed up, to the tune of 8 to 10 percentannually. “Long-term policies have riders to keep up withinflation, but the insurance companies couldn't find theinvestments to keep up with that kind of inflation increase,”Haller says.

The care is more expensive, and people are living longer andusing more of it.

“These companies underestimated how long people would live,”says Carley, president and CEO of Healthcare Navigation, LLC inShelton, Conn. That's particularly true for women, who tend to livelonger than men.

“In the past, husband and wife policies were rated at the samepremium, and in many situations, the wife is the caregiver and noteven tapping the husband's long-term care policy. The survivingwife is more likely to use long-term care insurance.”

People also use more benefits when they're eligible for bothhome and institutional care, which many policies allow. Many yearsago, Haller says, long-term care policies paid only forinstitutional care. Then the policies began to include home healthcare benefits.

“Figure two home health care days to one nursing-home day,”Haller says, “or a couple of years of home health care beforenursing-home care.” Graham estimates that 70 percent of claimdollars are paid outside of a nursing home.

Last but probably not least, some carriers have left thelong-term care business. “They got out because the money doesn'twork,” Haller says. Fewer carriers means less competition—and lessdownward pressure on premiums.

Group LTCI: Harder to find

Because of these factors, Graham says, “it's tough to findguaranteed-issue group anymore. You can do that with other kinds ofinsurance, because most people don't use them to their maximumwhile they're employed. When they turn 65 and retire, theirlong-term care insurance is the only insurance benefit thatcontinues.”

Group coverage has usually been guaranteed issue, no matter whathealth conditions the insured might have. That's pushed adisproportionate number of disabled people to sign up for long-termcare insurance through work, Graham says, “because they're notmedically eligible for long-term care insurance outside aguaranteed issue environment, and they're a claim just waiting tohappen.”

Graham recalls a 2006 group plan for federal employees, offeredthrough John Hancock and MetLife to postal workers, members of themilitary, and other government staffers.

“They had guaranteed issue when you were active at work. Theliterature wasn't clear that retirees aren't eligible, so they hadto write policies for the medically eligible retirees. When it cameup for renewal, MetLife got out and Hancock raised the premiums andrefused to do it guaranteed issue,” she says.

The alternatives

For those who do want to offer long-term care insurance as agroup employment benefit, there are alternatives toguaranteed-issue group policies.

“Insurers are starting to offer individual long-term carepolicies, where the employer can participate in the premium, ornot,” says Barry J. Fisher, long-term care insurance brokeragegeneral agent at Barry J. Fisher Insurance Marketing, headquarteredin Dallas. “Voluntary plans have very low adoption rates, so wesuggest that the employer pay $10 a month to see adoption rates goup.” The policies aren't guaranteed issue. “Individual underwritingis really important in long-term care insurance,” Fisher says.

Another option is an individual multi-life policy. This kind ofpolicy isn't guaranteed issued, but it doesn't involve fullunderwriting, either, Fisher says. “They do simplified underwritingby asking gatekeeper questions about applicants' health.”

The executive carve-out

Executive carve-outs are an alternative to full groupparticipation. In an executive carve-out, a firm offers long-terminsurance to one or more key people, not to every employee.Premiums are a tax-deductible business expense and benefits are taxfree. (The latter is true for every type of long-term carepolicy.)

“We've always done a great deal of corporate carve-out for keyemployees, where the employer pays 100 percent, the premiums aretax deductible, and the benefits are tax free,” Fisher says. “Wejust did policies for 16 employees of a venture capital firm. Theyhad money and they wanted to find a tax-free way to benefit theiremployees.”

The possibility of paying for coverage with pre-tax dollars isan appealing one. It's even more enticing when the firm cancondense years of payments into a single decade.

“This allows an employer to pull funds out of the business andbuy something for a few people: the partners who started and ownthe business, for example,” Graham says. “They can pay off thepolicy in 10 years, so if they know that they will sell the companyin ten years, they could leave with a huge benefit.” (Somecompanies have discontinued this option.) An employer-paid policycould also be an incentive, used to sweeten and strengthen a10-year contract with a valued worker.

Partnership policies

Medicare will pay for long-term care, but it requires thatindividuals and couples spend down their own assets first. “ForMedicaid to get involved, a couple needs to be down to $78,500 inassets, the house, and their car,” Haller says. “A singleindividual gets $14,400, no house, and no car.”

Partnership policies offer an exception. These policies offer astated benefit value: perhaps $100,000. If the insured couple orindividual uses up that benefit value and must switch to Medicarecoverage, the government lets that person keep the equivalentamount in cash or other assets. An individual who buys apartnership policy worth $100,000, for example, would be permittedto keep $100,000 in assets when Medicare begins paying for hercare.

This option gives purchasers some peace of mind, because theyknow that they will receive care and still have money to spend andan inheritance to give. They're also more affordable. Partnershippolicies are usually cheaper than regular policies, because theydon't typically offer enough benefit to pay for many years ofluxurious care.

Firms that consider offering a group partnership plan shouldinvestigate how much care is likely to cost in their region. Theyshould also find out how their state handles partnership policies.“In New York and Indiana, you could get unlimited assets protected.All the others protect a dollar amount, and all the states havereciprocal coverage,” Graham says.

Last but not least, companies should also decide whether theywill pay for a plan's inflation rider. “A younger person, perhapsin their forties, who doesn't take the inflation rider is going toend up with something that's of very little benefit,” Graham says.A company with many older workers may pay a smaller total for costof living riders, because people who are older than 70 no longerpay for inflation protection.

Buy partial coverage

A partnership policy is effectively partial coverage, with astate guarantee backing it up. A firm could also purchase lessinsurance on the open market.

“I think that too few people have too much insurance,” Fishersays. “Most claims are closed within four to five years” becausethe insured person dies. A policy that pays for more may be a wasteof funds.

“Agents need to sell it differently,” Fisher adds. “We'VE beenselling it as a catastrophic care product.” But a great many peoplewill need some kind of end-of-life nursing care, he says.

“At some point, providing someone with a couple hundred thousanddollars at the cost of a thousand dollars a month is a goodidea.”

Hybrid policies

Consumers who want to leave behind an inheritance are oftendrawn to hybrid policies, which combine long-term care coveragewith life insurance. If the insured doesn't use the long-term carebenefits, the policy pays a residual death benefit.

“These tend to make sense financially,” Haller says. “They'reabout the same or a little less in premiums, because this is a lifeinsurance contract with a longer anticipated contract and no costof living adjustment.”

Fisher says his firm has been trying to sell the hybrid productfor quite a while, and points out that the customer doesn't get asmuch benefit per premium dollar as with a traditional long-termcare policy. “I think they have their place, but I don't thinkthey're a replacement for traditional policies. I think we're stilltrying to find a niche for that product,” he says.

Reduce benefits

What about individuals and firms who already have group plans inplace and are staggering under the weight of premium increases?They have a few choices.

“If they can afford it, I suggest they keep paying the premiums.If not, we look at increasing the waiting period,” Haller says.

A firm or policy owner could also increase the eliminationperiod—the number of days before which the policy pays abenefit—reduce the number of years that the policy will pay, reducethe cost of living rider to 3 percent simple, or give up the costof living rider entirely. Haller says that the last option shouldbe just that: the last option. “To me, the cost of living is tooimportant to give up. We know the cost of care is going up by 8-10percent,” she says.

Instead, look at the elimination period. “A lot of policies havea 10- or 20-day waiting period. If you can increase that to 60 to90 days, that usually brings the premium even with last year. Mostfamilies can afford to pay that 60 to 90 days, especially if theyare deliberate about setting the money aside,” Haller says.

Drop coverage

It's no one's favorite solution, but sometimes droppingcoverage—or not buying it in the first place—is the right move.

Consider whether employees are likely to have substantial assetsat retirement. Anyone with a long-term care policy needs at least$300,000 in other assets, Haller estimates, for covering basicexpenses in retirement and paying the premium increases thatinevitably will come.

“I had a client come that had not even $150,000, and both thehusband and the wife had long-term care insurance. They couldn'teven cover a deductible period of 20 days, and they were strugglingto pay for 5 percent increase. I swallowed hard and told them todrop the policy,” Haller says. “If you can't afford a 5 percentincrease, you will qualify for Medicaid.” In those situations, anemployer is probably wise to offer a different benefit.