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Retirees face fewer, more costly choices

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 recently 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."

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 percent from $192 per day in 2004 to $229 in 2010. By contrast, the consumer price index rose about 10 percent.

"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 the 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 than later would be the time to purchase such policies, even if higher-than-expected rate increases 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 increases, 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 percent 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 percent 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 increases 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 lawsuit by the insurance companies. This does not engender trust by baby boomers with insurance companies."

In general, 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," Meyer said. "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."

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