Long-term care insurance was sold on a straightforward proposition. Pay a manageable premium from your fifties, and if you eventually need years of care the policy pays for it rather than your children's inheritance or your house. Millions of people bought it, and they bought it for exactly the right reason.
The insurers got the price wrong, and not by a little. Three assumptions underpinned the product and all three failed in the same direction.
Every assumption failed toward the insurer's loss
They assumed a meaningful share of holders would lapse — stop paying, walk away, and leave the premiums behind. Lapse rates came in far below projection, because people who buy this product are unusually determined to keep it.
They assumed a certain longevity. People lived longer, and the years added were disproportionately years of needing help.
And they assumed the reserves would earn a return that a long stretch of low rates did not deliver. A product priced on compounding that failed to compound leaves a hole no underwriting discipline closes.
Where it comes from is the holder, through rate increases that regulators approve because the alternative is an insurer that cannot pay anyone. Increases of a size that would be scandalous in any other consumer product arrive at people in their seventies who have paid for twenty years, and the choice offered is stark: pay it, accept a reduced benefit, or lapse and lose everything paid in.
The lapse option is the cruellest arithmetic in the sector. A holder who stops paying at seventy-eight surrenders two decades of premium at precisely the point the risk they insured against is becoming real — and every lapse improves the insurer's position, which is the uncomfortable structural fact underneath every rate filing.
New sales have largely stopped in the traditional form. What replaced it is the hybrid — a life policy or annuity with a care rider, which is more expensive, less generous, and priced so the insurer cannot be caught the same way. The market solved its own problem by withdrawing the product that had the problem.
What that leaves is a gap sitting directly on top of a sector already under strain. Care has to be paid for by somebody, and where the policy fails the money comes from savings, from family, or from public programmes that are the payer of last resort for facilities whose economics are fragile for their own reasons. It also quietly reshapes the great inheritance, because the estate that was going to pass is the same money now funding the care the policy was bought to cover.
