Rethinking Long-Term Care Policies: Will Your Health-Care Insurer Outlast You?

One of the little-discussed consequences of low and negative rates is the impact they have on the viability of insurers, especially long-term care insurers.

Insurers sold policies long ago expecting to invest proceeds in high-grade corporate bonds yielding a respectable 7.5% or more. Thanks to central bank policies, bond yields are in the gutter.

In February, Standard & Poor’s downgraded Genworth’s life-insurance units to junk, citing reduced profitability. Met-Life stopped selling long-term care policies altogether.

Will your insurer even be in business when the time comes for you to collect?

Insurers and Insureds Tormented

The Wall Street Journal reports Low Rates Are Tormenting Insurers and Their Customers.

Life-insurance companies are scouring their policies to identify ways to raise rates and fees and lower the amount of interest they have to pay on savings products as low interest rates cut into their profits.

The bottom line for policyholders is they have to pay up or relinquish benefits.

The main culprit: the Federal Reserve’s seven-year-old campaign to boost the economy.

“We’ve been conducting a prolonged experiment in monetary stimulus, and the impact on savers is one of the great unintended consequences,” said MetLife Inc. Chief Executive Steven Kandarian.

Life insurers’ stock prices have suffered. Shares of 10 of the most prominent U.S. life insurers have lost 12% since 2008, wiping out nearly $30 billion in market value in a period when the broader market gained 40%, according to FactSet.

Long-term-care insurance is one of the products hardest hit by low interest rates, because insurers bank on investing customers’ premiums for 20-plus years before claims come due. Eight million Americans own the policies, and many face annual bills that are 50% higher than before the financial crisis, according to regulatory filings and interviews with financial advisers.

Many owners of “universal-life” insurance, a complicated type of coverage combining a tax-advantaged savings account with a death benefit, face unexpected bills of tens of thousands of dollars. That is because insurers credited less interest to the policies’ savings accounts as interest rates fell. Many buyers intended to use built-up interest to help pay the policies’ annual insurance charges as they got older.

Often in their 80s, these policyholders are struggling “to maintain their coverage just as they’re ready to utilize it,” said Henry Montag, a principal with TOLI Center East in Huntington Station, N.Y., which advises trusts on insurance issues. They are “in such an awkward powerless position where there are no good outcomes.”

At Genworth, long a leader in sales of long-term-care policies, shares are down nearly 90% since before the crisis.

Genworth tallies its losses on long-term-care policies, many dating to the 1970s, at more than $2 billion. “We’re trying to get these large premium increases…to get these policies just back to a break-even going forward,” said Thomas McInerney, the company’s CEO. “We’re never going to recover what we’ve lost.”