Insurance: Is Yours Safe?

Creditors started meeting last week to divvy up Conseco, a large financial-services company. Conseco--yes, another hot, mid-'90s stock--missed some interest payments on its debts. If it can't restructure fast, you'll see it flopping around in bankruptcy court.

Why am I telling you this? Because Conseco owns 14 life- and health-insurance subsidiaries, with some 7 million policyholders. One of its companies specializes in coverage for long-term care, a type of policy that is just beginning to make its way in the marketplace. The status of big insurers hasn't been questioned since the early 1990s, when three major insolvencies came down. Conseco is your wake-up call.

I'm not trying to scare you (or not very much). Conseco's insurance subs, including Bankers Life and Casualty, are "solvent and adequately capitalized," says Texas Insurance Commissioner Jose Montemayor. "Policyholders are not at risk, " he adds. Conseco Insurance spokesperson Ellen Hostetler says that the companies are "doing business as usual, putting out new products and improving service." The restructuring affects only the parent, which--in true '90s style--overpaid for acquisitions, drenched its executives in cash and made a ton of bad loans through its consumer-finance arm.

Still, it's naive to think that Conseco's insurance companies can avoid the taint, says Standard & Poor's analyst Jayan Dhru. Sales are already down as competitors poach on Conseco's business. There's a risk that some policyholders will flee--especially those holding tax-deferred annuities.

You're protected by state insurance regulators, who can keep the parent company from draining its subsidiaries of cash. If the insurance subs can't go it alone, they'll be sold into stronger hands. In the worst case, state guaranty funds ensure that you'll be paid. Still, there's a lot of angst.

To my knowledge, this is the first time that a restructuring has involved long-term care (LTC) insurance. These kinds of policies help pay the bills for the frail or disabled elderly who move to a nursing home. They also cover special care for those who could stay in their own homes, if given aid. People start thinking about LTC in their 40s, but typically don't buy until their late 50s or early 60s--if they buy at all.

Whether to spring for LTC isn't an easy call. People who earn enough to afford the premiums might gamble that they can pay their own way. Others choose an unethical route: they give their money to their kids, then claim poverty and apply for help from Medicaid, a welfare program that covers nursing-home care.

But as the boomers age, Medicaid will be overwhelmed. The reach and quality of welfare services will decline. Even now, some nursing homes are reducing the number of Medicaid patients they'll take, and shuffling current residents into other facilities. Believe me: you're going to want to pay privately for care, and LTC insurance is one way of doing it.

For such a plan to work, however, your policy has to come from a successful company. Insurers with profit problems in LTC will probably raise premiums for its existing policyholders (as we've seen at Conseco Senior Health). These hikes get harder to pay the older you get. Stable insurers, by contrast, keep premiums stable, too.

You don't know in advance if any particular company will keep its high quality over 20 or 40 years. Your best guarantee is its current safety-and-soundness rating. You want top of the line--say, A++ or A+ from the independent insurance-rating firm A.M. Best, AAA or AA from Standard & Poor's, and Aaa or Aa from Moody's. Conseco's insurers haven't been rated higher than A, which lies in the middle of the acceptable range. Plenty of A-rated companies prosper but they're not gilt-edged.

Once you've chosen a company, you have to track its condition. Conseco's safety ratings began to erode two years ago and now hang at B (the "vulnerable" range) on most raters' scales. A.M. Best just lowered its rating because of the uncertainty surrounding restructuring, says Michael Albanese, a top exec. It's going to be tough for agents to make new sales. If these companies do indeed weaken, however, they could be sold without affecting your coverage, Montemayor says. So don't drop your policy or annuity if it costs you a penalty.

When you're shopping for a new policy, one from a high-rated company (say, John Hancock, State Farm or New York Life) might look more expensive. But if it gives you years of stable premiums, it's actually cheap. All good policies cover home care and some pay a family member to look after you. To hold your premium down, consider funding for, say, $100 a day ($165 is the national nursing-home average) and absorbing the rest of the cost yourself. Plan to pay for the first 90 days out of pocket, before the coverage kicks in. Also, limit the policy's term--say, to six years rather than a lifetime. But do include inflation coverage, so your benefit keeps up. For a 65-year-old, woman or man, John Hancock might charge $1,600 to $1,800 a year.

But please, bring me a boring company, not a hot stock. With any form of insurance, security always comes first.