Why long-term care insurance may become extinct

(MoneyWatch) A recent article in Investment News, a publication for investment advisors, examines the possibility that long-term care (LTC) insurance may go the way of the dinosaur. The article notes the recent mass exodus of insurance companies offering the product.

Over the last three years, Unum Group, Guardian, MetLife (MET), and Allianz have all exited the business. And Prudential (PRU) said in March it would stop issuing individual LTC insurance.

The problem for insurance companies is that they had little idea of what they would actually need to pay out since they had so little experience. Insurance companies collect premiums for years before the vast majority of the insured will become old enough to need the care. That problem is compounded by the low fixed-income returns insurance companies are making on the premiums.

"I've been saying for 15 years that long-term care insurance is not viable," University of Indiana professor emeritus of insurance Joseph Belth told Investment News.

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Insurance companies that have stayed in the LTC business have had large rate increases. That naturally drives healthier plan members to drop coverage, making those who remain in pool more likely to need care. This happens year after year (the healthier leave and the sick stay) leading to an insurance phenomenon known as the "death spiral." Eventually, the product or insurance company collapses under its own weight.

Is LTC insurance right for you?

For years, I've been somewhat agnostic on LTC insurance because of the uncertainty over premium increases. My first advice is that, if you can self-insure, don't buy it. Yes, assisted living is expensive, but don't forget the costs you will save by not traveling, needing a car, etc. On the other hand, I also think you don't need such coverage even if you have little money set aside. Save the premiums and live a nicer lifestyle. If you ever need assisted living, just understand that Medicaid may not provide the most luxurious care.

If you do buy LTC insurance, buy a plan that allows fixed premiums over, say, 10 years that then fully pays all premiums. That way, the insurance company can't raise your rates later. Consider partial self-insurance by buying longer wait periods and even skipping the inflation rider. Make sure it's from a highly rated insurance company (although my confidence in ratings agencies such as S&P and Moody's (MCO) is shaken).

Years ago, I decided to self-insure. Now the recent exits of insurance companies from the business and large premium increases make me feel pretty good about the decision.