By Robert Powell
Jan. 14, 2011, 12:01 a.m. EST
Retirement products: rising costs, fewer providers
As firms quit insurance products, hike rates, what’s a saver to do?
BOSTON (MarketWatch) — Retirement savers and retirees often are advised to buy products that aim to mitigate retirement risks and provide retirement income. But many of the companies that provide such products are leaving the business, or raising rates.
Genworth last week said it will stop selling variable annuities and MetLife late last year said it will stop selling long-term-care insurance policies. What’s a person to do, especially if these sorts of products make sense for you?
The short answer: Expect more firms to drop their retirement-income products, but don’t stop considering or buying such products. Do more due diligence than you might otherwise before making a purchase. What’s more, expect to see new and different players enter the market and introduce products with all sorts of bells and whistles. And if you already own a product being dropped, fret not. Most if not all firms say they will continue to service those products.
“As you prepare for retirement with the purchase of retirement-related products, you can expect to continue to see many changes in offerings in the marketplace,” said Christine S. Fahlund, a vice president and senior financial planner at T. Rowe Price Investment Services Inc.
Others agree. “From a business perspective, it's to be expected that when demand is low or profits become thin, as with long-term-care insurance and variable annuities respectively, that certain players will decide that the game is no longer worth the candle,” said Kerry Pechter, editor of the Retirement Income Journal. “Of course, industry consolidation can eventually lead to reduced competition and less attractive pricing — but that's a nebulous threat that no one needs to lose sleep over right now.”The fact that companies are leaving the business is good news according to Chuck Yanikoski, president of Still River Retirement Planning Software. “It would be nice to think that some big companies pulling away is a recognition that the current standard operating procedure is not working,” Yanikoski said. “That could potentially make room for a better approach.”
Long-term-care insurers got pricing wrong
With long-term-care insurance, we’ve witnessed a number of changes over the past few months.
Last year, Genworth and John Hancock announced plans to raise premiums for holders of existing long-term-care policies and MetLife announced plans to exit the business. According to experts, these firms have taken these steps for several reasons.
For one, firms are worried about the effect of the Community Living Assistance Services and Support program. Enacted last year as part of health reform, CLASS will provide a voluntary long-term-care insurance program for working individuals.
The other issue relates to the pricing of these policies. In developing policies, insurers attempt to gauge a number of factors, from lapse rates to the cost of long-term care. In some cases, insurers have simply guessed wrong about how fast costs would rise and how many people would let their policies lapse. According to MetLife’s studies, the cost of a private nursing-home room rose twice as fast as the average cost of living over the past six years. The room rate rose 20% from $192 per day in 2004 to $229 in 2010. By contrast, the consumer price index rose about 10%.
“A number of providers, in fact, have left the long-term-care insurance space due to unease around how to price their products,” said Fahlund. “On the other hand, others are coming in. For example, some providers are adding long-term-care riders to their annuity products.”
Given all changes with providers of long-term-care insurance, one might expect experts to suggest avoiding such policies till the dust settles. But that’s not necessarily the case. Fahlund said now rather later would be the time to purchase such policies, even if higher-than-expected rate hikes become a regular occurrence. For one, the premiums tend to be lower when you are younger. Plus, you’re less likely to be denied coverage when you’re younger. And, even with the rate hikes, the annual cost of these policies is still less than the cost of a nursing home.
The American Association of Long-Term Care Insurance reported last November that about 29% of long-term care insurance buyers under the age of 61 paid between $1,500 and $2,500 a year for their policies, with the remainder paying more, and nearly 7% paying $4,000 or more. By contrast, a private room in a nursing home costs $83,000 on average.
“The fact that pricing is a concern suggests that you may want to purchase long-term-care insurance while you are young (when premiums are lower) and in good health and while there are still choices available in the marketplace,” Fahlund said. “It is very difficult to self-insure for long- term care, since your expenses could potentially be catastrophic if you or your spouse needs care around the clock for more than one or two years.” Others also said they think buying long-term-care insurance is a good idea, but suggest that recent rate hikes make it more difficult to trust insurers. “This product is very important,” said Bill Meyer of Retiree Inc. “I am more cautious now of the trends in the long-term-care insurance marketplace. My clients in California who had guaranteed renewable contracts did not expect a rate increase as a result of a class action law suit by the insurance companies. This does not engender trust by baby boomers with insurance companies.”
Variable-annuity industry might consolidate
As for the variable-annuity market, experts are suggesting that Genworth is leaving the business mostly because of the need for scale, which it doesn’t have.
According to Morningstar, Genworth was the 17th largest seller of variable annuities in 2008, but it dropped to 25th in 2009. And its market share of new sales in 2009 was just 0.58%. By contrast, the top five sellers of variable annuities in 2009 (Prudential Financial, MetLife, TIAA-CREF, Jackson National, and Lincoln Financial) had 51.61% market share
As with long-term-care insurance, experts suggest you continue to consider and buy variable annuities if such products are right for you. But do consider buying such products from a company that has scale, or according to Pechter, one that is not publicly traded.
“MetLife, Genworth and others are publicly-held companies, and therefore more sensitive to short-term market weather and the wrath of Wall Street analysts,” said Pechter. “Mutual insurance companies are probably less likely to change strategy abruptly. People should be more alert to the differences between mutual and publicly-held insurance companies than they currently are.”
The need to be an educated consumer is even greater now that companies are raising rates and dropping business lines. “Today there are many, many variable-annuity product offerings to choose from, and you can purchase several variable annuities over a period of years, so the need to address variable purchases is less pressing at this time than making a decision about whether or not to buy long-term-care insurance protection,” said Fahlund. “This could be just the wake-up call you need to go out and investigate your options.”
Meyer, for instance, typically recommends that retirement savers avoid investing a large portion of assets with any one insurer or type of product. “For those that want the guarantee...make sure it is a small portion of the total income and underwritten by a high-quality, low-cost provider.”
In general, however, experts say retirement savers should worry less about the products and more about the process. “Insurance products are important, but consumers must understand what they are getting with the product they purchase, and the associated trade-off in mortality costs,” said Meyer. “Withdrawal strategies and developing an income plan should not be about product. A retiree needs a service or process in which advice is delivered and managed over time.”
Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News.
