Why Long-Term Care Insurance Cost Insurers Billions

Original article: GE’s Surprise $15 Billion Shortfall Was 14 Years in the Making (Bloomberg via IndustryWeek, January 25, 2018)

Long-term care insurance pays for help with daily living, such as nursing home care or an in-home aide. For years, it was one of the costliest mistakes in the insurance industry. In January 2018, the problem made front-page business news.

The Headlines

• GE’s $15 billion hole. General Electric still carried long-term care policies through its finance arm, even though it had written no new contracts since 2006. In January 2018 the company took a $6.2 billion charge and committed to putting $15 billion into reserves over seven years.
• An insurer that couldn’t survive. The year before, on March 1, 2017, a Pennsylvania court ordered the liquidation of Penn Treaty, a company whose business was more than 98% long-term care. State guaranty associations took over its policies, subject to coverage limits.
• A shrinking market. Industry sales fell from about 700,000 policies in 2000 to fewer than 70,000 in 2017, as many insurers stopped selling the coverage.

What Went Wrong

Insurers priced these policies decades ago using assumptions that turned out to be wrong. People lived longer, fewer policyholders dropped coverage, care costs rose faster than expected and interest rates stayed low for years, which cut the investment income insurers counted on. Claims came in far higher than premiums could support.

Lessons for Policyholders

• Expect possible rate increases on older long-term care policies. Many insurers have asked regulators for large premium increases on existing coverage. When an increase arrives, ask about options such as reducing benefits instead of dropping the policy.
• Look at the company, not just the price. A long-term care benefit may not be needed for 30 years, so a strong, long-standing insurer matters even more.
• Know the other options. Some people plan for long-term care through savings, and some use life insurance policies that include long-term care benefits. Each approach has trade-offs worth comparing.

For help evaluating an older long-term care policy, contact us.

Read the original articles: Bloomberg via IndustryWeek: GE’s Surprise $15 Billion Shortfall (January 25, 2018) · Insurance Journal: Pennsylvania Court Approves Liquidation of Two Insurance Companies (March 2, 2017) · InvestmentNews: GE’s long-term-care woes are symptomatic of ailing industry (February 9, 2018)
This post looks back at a historical event and is for general education. It isn’t personalized financial or legal advice.