As 2011 comes to a close, many will take the time to reflect on the year passed and the one just around the corner. Those at or near retirement age might be dwelling on the cost of their future long-term care. Young and vibrant, it's easy to forgo planning. Long-term care insurance premiums, however, continue to rise at a rapid rate, and any delay purchasing coverage where warranted could be costly to your future financial health. Not everyone needs long-term care insurance, mind you. Those with sufficient assets to cover future long-term care themselves likely should. But the rest of us might be in for a rude surprise as we move into our 80s without the funds necessary to cover those costs.

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The need for long-term care insurance is not going to go away and while the industry is in great flux at the moment, the opportunity from an investment standpoint is real. As such, I'll look at where those opportunities lie in 2012 and beyond.

Long-Term Care Insurance

Providers of long-term care insurance currently face a perfect storm in that interest rates are at record lows combined with the fact that people are living longer resulting in an underwriting nightmare. A couple of decades ago, insurers likely felt they could reinvest premiums with a reasonable expectation for 6 to 7% returns on that money. Low interest rates have scuttled those scenarios altogether. Furthermore, clients are hanging on to their policies far longer than anticipated, ratcheting up payouts. As a result, companies like Allianz Life and Ameriprise (NYSE:AMP) are getting out completely. There were 130 companies selling this type of insurance 10 years ago, and today there are 20 or so. Most are privately owned.(For related reading, see Understanding Your Insurance Contract.)

However, in an article I wrote in October 2010, I mention three publicly traded insurers who have an opportunity to weather the storm and come out the other side intact. Of those three, Genworth Financial (NYSE:GNW) appears to be doing the best. In the first nine months of 2011, it increased sales of long-term care insurance product by 46%. The resulting increase led to a 3% increase in net earned premiums to $1.5 billion, and an operating profit of $102 million despite higher claims. Considering how volatile the underwriting backdrop is at the moment, its margins on long-term care insurance are fairly close to those of its life insurance segment, which is far more stable. Genworth shareholders should be pleased.

Senior Living

In the previous section, I talked about the prohibitive cost of long-term care insurance. In this section, I'll talk about some of the companies competing for the insurance companies' claimants. As the old saying goes, "You have to live somewhere." The largest, in terms of market cap, of the publicly traded businesses is Brookdale Senior Living (NYSE:BKD), based in Brentwood, Tennessee. Brookdale currently operates more than 645 senior living facilities in the U.S. serving over 60,000 residents. The number of residents that are either living independently or with some assistance is 74%. Almost 80% of Brookdale residents pay for their living arrangements privately through long-term care insurance and personal assets. At its annual investor day in November, Brookdale management suggested its stock (Nov. 14, 2011, share price of $15.52) trades at a 52% discount to its net asset value, providing patient investors with significant upside potential.

Healthcare REITs

We've covered the insurance and health care providers, but there are also the owners of the actual real estate. In 2011, Ventas (NYSE:VTR) became one of the biggest owners of healthcare facilities in the U.S. through the acquisition of both Nationwide Health Properties and the real estate assets of Atria Senior Living Group. The $10.4 billion in acquisitions created a company with greater scale and size. As healthcare real estate continues to consolidate in the hands of fewer owners, Ventas is primed for tremendous growth. Its tenants include Brookdale, Sunrise (NYSE:SRZ), Kindred Healthcare (NYSE:KND) and Atria. For those investors who want long-term care exposure with less operational risk, Ventas is an excellent alternative.

Home Health Care

A more attractive solution for many elderly is receiving home health care as opposed to assisted living in a facility. If you've lived in a home for 40 years and can afford to stay; why wouldn't you? Home healthcare services are flourishing. In late November, Humana (NYSE:HUM) acquired SeniorBridge Eldercare, a New York company with $72 million in annual revenues. Humana figures it can reduce overall healthcare costs by providing quality home health care. They're 100% correct. In October, I wrote about Lincare Holdings (Nasdaq:LNCR), the biggest of the publicly traded home healthcare service providers, and the potential of its stock. Lincare provides in-home oxygen therapies to clients across the U.S. Despite the threat of Medicaid and Medicare Advantage payments dropping; the mere fact is that its CEO and CFO were buying big time in August and September is a clear indication its stock is worth exploring, as are many of the other home health care companies. The only caveat: most are micro-cap and small-cap companies. (For related reading, see How To Avoid Medical Debt.)

Bottom Line

The demographics don't lie. Americans are living longer, and those companies providing products and services to help seniors age more gracefully will continue to grow.

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
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