When Your Insurer Goes Broke

We bought a long-term-care policy from Conseco. What can we do?

We won't comment on the specifics at Conceso, since the situation is changing rapidly. In general, however, this is how the scenario would play out if an insurer went out of business. Unlike a traditional savings account, the government doesn't guarantee insurance policies, and there are no federal laws that keep a policy in force. So if an insurer is suffering from severe financial distress, policyholders are indeed at risk of losing their coverage. Fortunately, this is a somewhat rare occurrence. More often than not, the local state insurance commissioner develops a contingency plan that involves selling the troubled company's policies to another insurer. Here's how the process works.

As you may know, insurance is regulated at the state level. As part of this regulation, state insurance commissioners monitor the capital reserve levels (which are used to pay claims) of the insurance companies operating in their state. Should the levels get dangerously low or should a company declare bankruptcy, the state insurance commissioner steps in. If it appears the company can't be saved, the state will most likely attempt to sell off the troubled insurer's existing policies to a competitor.

What does this mean for policyholders? Well, for those who currently have claims filed, the state's guarantee association -; which is set up to protect consumers from troubled companies -; should pay the bills, says Larry Akey, spokesman for the Health Insurance Association of America. Policyholders who own a nonforfeiture policy also have the option to cancel their coverage and get back all of the money that was already paid into the policy. "So even though the original company has gone out of business, the policyholder is not left holding the bag," he says.

As far as future claims are concerned, however, consumers who decide to keep a policy that's now administered by a new company should be prepared for sticker shock. Since these policies are often viewed as underpriced, most insurers will institute an across-the-board rate hike for those policies. Granted, policyholders won't have to undergo a new medical exam to qualify for coverage. But in the past, some of the price increases have been so high that many existing policyholders could no longer afford their long-term-care coverage, says Bonnie Burns, director of consumer education for California Health Advocates, an association of 24 California-based health-insurance counseling and advocacy programs.

There are times, however, when a troubled company's policies are so unprofitable that no other insurer is willing to buy them. In these cases the policy is cancelled and innocent consumers are left scrambling to find a way to pay for their long-term-care needs. Considering that the average cost for one year in a nursing home is currently $61,320, according to MetLife Mature Market Institute, this can be frightening business. For this reason, it's in consumers' best interest to start shopping around for a new policy as soon as information leaks out that their insurer is in trouble. In some cases, being forced to shop for a new policy isn't necessarily horrible news. "These policies have changed a lot over the years, and a newer one may be a better product," says California Health Advocates' Burns.

When shopping for a new plan, finding a policy from a financially stable company is obviously a main priority. Consumers can review a company's financial ratings by visiting such firms as Weiss Ratings, Standard & Poor's and Moody's. While a consumer doesn't necessarily need to purchase a policy with the highest ranked company, this clearly isn't the time to bargain shop. "We tell clients to look for at least a B+ rating or higher since this is a long-term product," says Melissa Gannon, a vice president with Weiss Ratings.

And, of course, financial stability is just the starting point. Other questions to consider are whether the plan is tax qualified (which means it adheres to the guidelines set by the Health Insurance Portability and Accountability Act of 1996, which includes some basic consumer protections). Finding a flexible plan is also important since the LTC industry is constantly changing -; and a consumer will benefit from a plan that can change with the times. And, of course, cost and coverage is always an issue. For more on what to look for in a policy, click here. For assistance with reviewing specific policies, check out our LTC Insurance Evaluators.

Unfortunately, older folks who find themselves back in the market for an LTC policy may find that a new one is simply too expensive to purchase. Insurers raise their rates considerably for long-term-care insurance as potential customers age and their health deteriorates. So just because a policy made sense five or 10 years ago, a new one at a considerably higher price may not. Fact is, a long-term-care policy is only right for people who can afford it without causing any hardship, says a spokeswoman for AARP. And keep in mind that if one does spend down all of his assets, the government's Medicaid program will kick in and cover costly nursing home stays. Those who find themselves shopping for a new policy later in life may want to sit down with a retirement planner for help in determining whether purchasing a LTC policy is the right way to go.

For more on long-term care, read our story.