Terry Savage, author, The Savage Number: How Much Money Do You Need to Retire
It's the right thing to do: I still recommend that you purchase long-term care insurance to avoid the dreaded outcome of being older, alone, and in need of everyday care that is not covered by Medicare or supplements.
That long-term custodial care -- at home or in assisted living or in a nursing home -- now costs $7,000 a month, and is rising yearly.
But today, many people who purchased long-term care insurance are getting a shock. The insurance companies that wrote these important policies are sending out notices of huge rate increases. In the case of John Hancock policies, the increases are as high as 90% annually!
These policies were originally sold as having "level" premiums, which would not increase based on your age or health situation. Premiums could only be raised if a state agreed that the insurer needed an increase to maintain their ability to cover the liabilities.
So what happened? The insurance companies miscalculated the true costs of providing the insurance. The states are almost powerless to stop increases. And you, the policyholder, are paying for the insurers' mistakes!
Here's what's going on-and what you can, and should, do if your premiums are increased.
Why the Increases?
Basically, the insurance companies got it wrong when they initially priced the policies:
First of all, they didn't realize that very few people would let this type of policy lapse once they purchased it.
Second, insurers made huge forecasting errors. Costs of custodial care are rising faster than they projected, and people are living longer than expected.
Third, more people are actually using their policies than they expected, since getting care in an assisted living facility is not as feared as the old-fashioned nursing home.
And finally -- though insurers say it's only a small factor -- their investments have had lower returns in recent years than they projected.
It all adds up to a losing proposition for long-term care insurance companies. Some have gotten out of the individual long-term care business altogether.
In fact, Prudential just announced its exit. MetLife stopped selling to individuals within the past year. And before that, CNAInsurance -- one of the early leaders -- exited, although they must still service the policies they sold, or hire servicers.
Most of the remaining major insurers have asked state commissioners for premium increases in varying degrees. Each company has made its own decision about how to handle the situation, with some such as Genworth asking for more moderate increases of about 18%, in consideration of their clients.
Clearly, John Hancock, a subsidiary of giant Canadian insurer Manulife, decided to take a different route. They increased premiums on some policies a shocking 90%.
Those largest increases came on policies that had been purchased with compound inflation coverage and/or lifetime coverage, where the company had its greatest future exposure to loss. Of course, the policyholders were paying higher premiums for this coverage all along, sensibly hoping to insure against future cost increases.
John Hancock denies that its parent company Manulife doesn't care about US policyholders, with president Marianne Harrison saying: "Manulife fully supports John Hancock's long-term care insurance business in the US. We...are investing in product development, and are undertaking this rate action rather than getting out of the business."
And in defense of the size of premium increases, Hancock says: "Our belief is that offering a substantial rate increase, rather than spreading out smaller increases, is better for consumers because it enables the company to offer alternatives to mitigate or eliminate the increase."
State Insurance Protection?
So why are the states letting the insurers get away with these increases?
Here's an eye-opener: In the case of long-term care insurance, the state insurance commissioner is not duty-bound to protect consumers, at least in a direct way. They're supposed to give insurers rate increases to keep them solvent!
Almost every state that has received a request for a premium increase in LTC policies has granted it for at least one category of policy. Some states give the insurance department some discretion in granting premium hikes, but In many states, including Illinois, as long as the insurance company can demonstrate projected loss ratios and actuarial assumptions, the increase must be granted!
What to Do
The largest premium increases are for policies that have either compound inflation benefits or lifetime protection. Those exposures offer the greatest risk to the insurance company. And of course, that is the risk that policy buyers were trying to cover when they purchased the insurance.
In each case, according to Hancock, the policyholder can lower the inflation protection and/or the benefit period to maintain coverage without a premium increase. And they generously offer to maintain coverage at the current level, which has already been adjusted upward for inflation if you've owned the policy for several years.
Brian Gordon of MAGA LTC (800-533-6242), an agency that deals solely with LTC insurance, says that one of his clients who received notice of a 75% premium increase was able to maintain the current premium by reducing the inflation protection from 5% compounded to 2.7%.
Her original coverage at time of purchase was $6,200 per month. But the inflation protection had already increased the benefit to $9,620 per month over the preceding years. Now, future inflation coverage would be limited from this higher base, but premiums would remain unchanged.
Industry consultant and actuary Claude Thau of Target Insurance Services (800-999-3026) says younger policyowners might want to think twice about giving up that 5% compound inflation protection.
Instead, they might reduce the daily benefit to avoid the premium increase. Over time, the compound inflation benefit might leave them better off if they need coverage in 25 or more years. He advises doing the math at a minimum projected 3.5% annual inflation rate in care costs.
Those who were smart enough to purchase LTC insurance when they were young and healthy now face some tough choices.
They are likely much older and won't be able to find new coverage, which in any case would cost more. So it comes down to paying the increase, reducing the daily benefit, reducing the number of years of coverage, or taking a lower inflation adjustment.
The insurance companies have the upper hand here. The consumer is paying the price. And it isn't pretty.
But think of the alternative. You and your family would go through a lot of money in a couple of years of custodial care. It's a cost that isn't covered by Medicare or supplements. And when you run out of money, the only choice is the state Medicaid nursing homes. They're already running out of money.
And here's a final thought: The insurers still in this business have learned an expensive lesson, and we are paying for it. But today's more appropriate pricing means less likelihood of future increases if you buy LTC insurance now.
And paying for the insurance is still a whole lot better than paying $75,000 a year for care -- if you need it. That's The Savage Truth.