By Elizabeth O'Brien

When Loren Penman and her husband were in their 50s, they bought long-term care insurance. The couple took comfort in the big names behind it: Genworth Life Insurance and AARP, which advertised the policy and handled their payments. After 16 years, the Batavia, N.Y., couple say they spent more than $94,600 on the insurance.

Now, they face a wrenching dilemma: Keep the insurance at much higher premiums or brace for potentially crippling bills on their own. Genworth is asking regulators to approve a 143% hike in premiums that would take the Penmans' annual cost to $25,800. If the Penmans, retired schoolteachers, don't pay up, the couple could keep the insurance without owing more premiums. But the benefits would be capped at far lower levels -- not even covering a year in a long-term care facility.

"We can't afford the increase, but we can't afford to walk away from the 15-plus years of premiums we've already paid," says Loren Penman, 71.

America spends lavishly on healthcare, reaching $4.5 trillion in 2022. Yet that outlay still leaves coverage holes. One of the biggest is long-term care. An estimated 70% of people turning 65 will need long-term care -- seven in 10 of the 11,200 baby boomers who reach that age every day -- from help at home with daily tasks to full-service nursing.

The country's patchwork system of eldercare isn't equipped to meet the moment. Medicare doesn't pay for the routine help that most older adults will eventually need, and most families don't have nearly enough saved to cover it. The system leans heavily on unpaid family and Medicaid as a safety net. Yet while Medicaid is the largest payer -- spending $207 billion in 2021 -- it is only available to people with low incomes and asset levels, based on state criteria.

The issue is getting some political attention. Vice President Kamala Harris has proposed expanding Medicare to help cover long-term care at home, but even if she prevails in the election and gets a cooperative Congress, it may not happen for years. Donald Trump's campaign has addressed the issue, saying it would shift resources to home care, fix worker shortages, and support unpaid family caregivers "through tax credits and reduced red tape."

Private insurance was supposed to be an answer to the country's inadequate system. Yet Americans who bought coverage decades ago -- counting on it for financial security in old age -- now face soaring premiums as insurers try to curb benefits and stabilize a product that was riddled with faulty actuarial assumptions when it was first sold, leading it to be drastically underpriced.

Insurers aren't the only ones bearing responsibility. Individual states, which regulate insurance, fumbled their job of vetting the actuarial models and were too slow in approving price increases as insurers got into financial trouble, resulting in today's exorbitant price hikes.

AARP, the organization for older adults with nearly 38 million members, also played a role. The nonprofit organization, through a commercial subsidiary, marketed long-term care policies issued by Genworth for years, earning royalties and profiting off the business. Those payments were disclosed in its financial statements and fine print but were hardly prominent enough for many consumers to notice. Some consumers say they had no idea AARP wasn't endorsing the insurance after a review of the options on the market.

AARP, in a statement to Barron's, said it "passively licenses its intellectual property to commercial benefit providers and receives royalty payments in return." AARP Services Incorporated, a subsidiary, manages those relationships and does some vetting for "quality and value, " an AARP spokesperson said. AARP added that insurers determine premiums and said, "We suggest directing any questions about Genworth premiums to Genworth."

Genworth made misjudgments, like the rest of the industry, on three key factors in early long-term care pricing: how many people would retain their policies, how many people would go on claim, and how severe those claims would be, says Nick Sheahon, leader of Genworth's active LTC insurance.

A Debacle With Many Causes

A robust long-term care insurance market could have supported the aging baby boomers and eased financial pressure on the government for their care. Yet the traditional product has largely collapsed: Insurers issued just 35,000 stand-alone policies in 2023, down from more than 585,000 in 2000. Premium revenue plummeted from $1 billion in 2002 to $143 million in 2023, according to data from Limra, an industry trade association.

Insurance is supposed to be built on layers of fail-safe mechanisms to protect consumers and keep the market stable. Almost every one of them failed for LTC insurance, whose initial pricing was based on models that didn't pan out. "It was a perfect storm, where a bunch of things went against assumptions," says Laurel Kastrup, a member of the American Academy of Actuaries' Long-Term Care Committee.

Launched in the 1970s, LTC insurance skyrocketed in popularity in the late 1990s as the oldest baby boomers turned 50 and began planning for retirement. Insurers priced it aggressively.

The market was ultracompetitive, says Jim Glickman, a former president of the Society of Actuaries and president and CEO of LifeCare Assurance Company, a long-term care reinsurer. Agents would conduct "fire sales" of policies when they knew a newer version would soon hit the market, unloading lower-price policies that would almost certainly need premium hikes on unsuspecting customers, Glickman says.

Genworth, one of the biggest issuers of the policies, hired celebrities to pitch the product. The company paid up to $25 million on a 2004 ad campaign featuring Steffi Graf and Andre Agassi, according to news reports at the time. An ad featured the married tennis stars at the kitchen table saying they didn't understand annuities or long-term care insurance; Genworth said it could "help figure it all out." Representatives for Graf and Agassi couldn't be reached.

For insurers, it looked like a win-win: Revenue could be plowed into bonds, earning interest income; and the liabilities, or payouts, wouldn't arise until far in the future. "Companies thought everything was rosy, because no one was filing claims," Glickman says. "People hadn't aged enough yet."

What's more, LTC policies didn't follow the same patterns as insurers' other products. Auto and home policies reprice every six months or year, allowing insurers to adjust premiums quickly to changing economic conditions. These policies can also be canceled by the carrier, whereas LTC insurance is guaranteed renewable as long as premiums are paid.

Moreover, with life insurance and annuities, there are far more-predictable outcomes -- a lump-sum payout on death or payouts when an annuity is converted into a revenue stream. "With life insurance, you have one thing that can happen," Kastrup says. "With long-term care insurance, there are more variables."

With LTC insurance, small and gradual shifts in usage wound up having big effects over time. In the early days, for instance, insurers commonly figured that 5% of policyholders would drop their policies every year, resulting in no claims. In reality, just 0.5%, or 1 in 200 people, dropped their insurance over at least the past 10 to 15 years, Glickman says.

"When people bought policies, they were like pit bulls -- they never let go of them," says Marc Cohen, co-director of the LeadingAge LTSS Center at University of Massachusetts Boston.

Consumers in many cases were doing the right thing by holding on to their policies. Dropping the insurance could mean losing thousands of dollars in sunk costs. And the benefits were rich: Many old policies paid out for an unlimited amount of time and had 5% inflation protection, increasing the value of services by an annualized 5% a year.

"It was described as the Cadillac," says Michael Hacker, 81, a New York policyholder who bought a Genworth policy in 2009 to cover his wife and, like Penman, is facing the prospect of a 143% increase.

Medical advances also raised costs for insurers. For one, cancer used to be more fatal than it is today. And as more people live longer, they develop dementia in greater numbers, extending the costs of care for many more years.

Furthermore, insurers' costs rose more than expected as people started using assisted living facilities, which didn't exist when the first policies came out. Those policies were basically nursing home insurance. And because nursing homes were often considered a last resort, they didn't result in too many claims, says Robert Eaton, principal and consulting actuary in Milliman's long-term care practice. As assisted living emerged as a more appealing alternative, costs for insurers ballooned.

The bond market didn't help matters. Insurers factor in the yields on their bond investments when pricing policies, counting on the income to pay claims. Yet nearly two decades of falling yields created holes in their models. In a simplified example, if a policy was priced at a 6% interest rate which then dropped to 4%, an insurer would need to boost the premium by 45% immediately to cover benefits for the duration of the policy, according to Glickman. Insurers eventually had to hike premiums sharply, partly to make up for the lost bond income.

Regulators, in some ways, allowed all this to happen. The biggest premium increases tend to be more concentrated in states with stronger consumer protections, such as New York and California, which were slower than peers to approve initial rate bumps that insurers sought, according to Douglas Baker, a director in Fitch Ratings' U.S. life insurance group. When insurers finally got their requests approved by regulators, they made up for lost time with steeper increases.

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October 24, 2024 00:30 ET (04:30 GMT)

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