NEW YORK - Thirty years ago, insurance companies had the answer to the soaring cost of caring for the elderly. Plan ahead and buy a policy that will cover your expenses.
Now, there's a new problem: Even insurers think it's unaffordable.
Life-insurance firms pitched long-term-care policies as the prudent way for Americans to shoulder the cost of staying in nursing homes. But those same companies have found that long-term-care policies are squeezing their profits. Earnings for life insurers slid 11 percent in the most recent quarter, according to Moody's Investors Service, and long-term care was the chief culprit.
"Insurers that sell these products lose money on them," says Vincent Lui, a life-insurance analyst at Morningstar. "So they're raising prices and also trying to get out of the business right and left."
Four of the five largest providers - including Manulife and MetLife - have either scaled back their business or stopped selling new policies, according to Moody's. The largest provider, Genworth Financial, continues to offer them, yet has struggled under the weight of rising costs.
The trends behind the industry's troubles sound like good news outside the world of insurance. Older Americans are healthier and living longer. But that makes it difficult for the industry to turn a profit. Stays in nursing homes tend to last longer, so insurers have to pay out more in benefits than they had planned.
For older Americans and their families, however, there are few options besides private insurance. Medicare doesn't cover nursing-home stays except in certain circumstances. The Obama administration had planned to make a long-term insurance program part of the Affordable Care Act but eventually abandoned it.
Sean Dargan, an analyst at Macquarie Group, an Australia-based investment bank, expects to see more people turning to Medicaid, the government's health insurance for the poor, to cover the costs of care.
"It could really blow a hole through state budgets," he says. "I think states and the federal government are going to need to think creatively to find a way out of this."
For insurance companies, long-term care has proven to be a tough business. When it began selling policies widely in the 1980s, the industry made a slew of assumptions about how long people would live, health-care costs, and interest rates. Nearly all of them turned out to be wrong, analysts say.
Take life spans. At nearly 79 years, overall life expectancy in the United States has never been higher, according to the Centers for Disease Control and Prevention. That's the biggest issue, analysts say, because it means more people who took out policies stick around to make claims, moving into nursing homes and asking insurance companies to help cover the steep bills.
To cope with mounting costs and faulty assumptions, insurers have been cutting benefits and raising their premiums year after year. Average premiums for new policies rose nearly 9 percent over the last year.
Prices range widely, depending on where you live, your age, level of benefits, and much else. In Tennessee, for instance, a 55-year old woman who is healthy enough to qualify for a policy can expect to pay $2,411 in the first year for $136,000 in benefits.
The expense climbs steadily as people age, and those holding policies typically don't make a claim until they reach their 80s.
Analysts who follow the industry think that insurers have learned from their missteps and probably figured out the right price to charge for long-term-care policies to turn a profit. The problem is, it might be too high for most people to pay.
"I'm of the opinion that it's appropriately priced today," says Macquarie Group's Dargan. "But it's also out of reach for most middle-income Americans. And that's who needs it the most."