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How Is a 90 Percent Long-term Care Rate Hike OK?
By Terry Savage
Bob
Levy, age 69, and his wife, Cheryl, age 64, each bought John Hancock
long-term care insurance policies 10 years ago. And every year since
then, they have paid a combined premium of $3,893.40 per year. The
couple live on a fixed income and the low interest they earn on their
savings. So they were shocked when Cheryl received a notice of a
90 percent increase in the annual premium for the policy. Then Bob
got a similar notice. It means they would now pay $7,385.52 a year.
“Needless to say, I was shocked and disappointed. ... what a waste of money!” says
Bob. “How can that kind of increase be approved by the state? Why hasn’t
there been any media coverage? And what should we be doing?”
They did the right thing — hoping to avoid the dreaded outcome of being
older, alone and in need of everyday care that is not covered by Medicare or
supplements. They knew that long-term custodial care — at home or in assisted
living or nursing home — now costs $7,000 a month and rising yearly.
So they purchased long-term care insurance — something I have highly recommended
to defray the future cost of care if it is needed.
But now, 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 LTC policies, the increases
are as high as 90 percent 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 the policyholders
are paying for the insurers’ mistakes.
Here’s what’s going on — and what you can, and should, do if
your premiums are increased.
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.
• Also, the 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. 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 percent, in consideration of their clients.
Clearly, John Hancock, a subsidiary of giant Canadian insurer Manulife, decided
to take a different route. It increased premiums on some policies a shocking
90 percent. Those larger 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 doesn’t care about U.S. policyholders,
with President Marianne Harrison saying: “Manulife fully supports John
Hancock’s long-term care insurance business in the U.S. 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.”
(John Hancock offers some alternatives to cut the coverage instead of paying
the increases.)
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 increase 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, as long as the insurance company can demonstrate projected loss ratios
and actuarial assumptions, the increase must be granted!
I confronted the chief life actuary of the Illinois Insurance Department and
also Robert Wagner, the general counsel for the department. Clearly, they weren’t
happy about having to grant the increases, noting that the regulators have no
discretion to limit increases if the rate filing meets the actuarial standards.
Says, Gerald Lucht, the actuary who signed off on those rate increase requests: “If
the filed rates do not satisfy regulatory requirements, DOI can tell the company
that it cannot use those rates. The law does not, however, authorize this department
to ‘approve’ or ‘deny’ a particular rate, and specifically,
to require the company to lower a particular rate.”
The insurers 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.
This page and its contents ©2012
Metropolitan News Company, Inc.
