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How LTCI Companies Shoot Themselves in the Foot

By Harry S. Margolis

Probably the biggest drawback to buying long-term care insurance is that you cannot be certain that your company will not raise its premiums. If you’re paying $4,000 a year now, the company may raise this to $5,000, $6,000 or $7,000 a year in a decade or more. That may or may not be affordable when the time comes. You’ll have a choice at that point to (1) pay the higher premium, (2) decrease your benefit level under the policy, or (3) drop the policy all together. This is the choice my friend, John Lippitt, and his wife are facing. Here’s some of what he wrote to the Massachusetts Division of Insurance:

[M]y wife and I have had Long-term Care (LTC) Insurance policies through CNA for over 10 years. We recently got a premium increase (with no increase in insurance) of 70% on Sept. 1, 2016 with another 15% increase coming on Sept. 1, 2017. This means that our premiums on Sept. 1, 2017, will be almost double what they were in Aug. 2016.

We have contacted CNA and our only option to ameliorate the premium increase would be to substantially decrease our coverage.

If premiums continue to increase at anywhere near this rate, I fear our only option would be to cancel this insurance. As a result, we would lose all benefits, despite the substantial premiums we have paid over the last 10 years. This would make it much more likely that we would have to depend on Medicaid, at state and federal expense, should we ever end up needing long-term care. This is exactly what we had hoped to avoid by purchasing this insurance.

Increased Premiums Both Improve and Harm Insurance Solvency

The Division of Insurance permitted CNA to increase its rates in order to maintain the solvency of the insurance pool. Apparently, when CNA first issued its policies it miscalculated its payout rates and accordingly charged premiums that were too low. The problem now is that its increase in rates creates an increasingly steep downward spiral. Those who are healthy or who cannot afford the increase will drop their policies, reducing the pool of premiums, while those who need care now or are likely to in the not-too-distant future will maintain their policies, increasing the payout from the insurance fund. Lippitt addresses this as follows:

You mention the need [in prior correspondence] for the Division to balance consumer costs with maintenance of the solvency of the insurance companies. Given the LTC insurance they are selling, insolvency should be a very, very unlikely occurrence. Therefore, the Division should ensure that only companies with strong and stable financial positions are allowed to sell LTC insurance.

Furthermore, I hope the Division and Massachusetts law place long-term care insurance holders at the top of the list of creditors if an insolvency were to occur. Certainly, the debt the insurance company owes to those who have made premium payments over many years as an investment in financial security if long-term care were needed should take primacy over all other debts the company might have.

Is LTCI Annual or Permanent Insurance?

While we can debate whether CNA should be held responsible for its miscalculations, some argue that policyholders shouldn’t complain because almost all insurance is annual in nature. The fact that you paid your premium for house, auto or health insurance this year, does not guarantee you the same premium next year. I would respond that LTCI is different because it’s not purchased for this year’s coverage. Since you have to be healthy to buy LTCI, you’re extremely unlikely to to need it in the first year after purchase. Instead, you’re buying it because you may need it 10, 20 or 30 years. From that point of view, it’s more like life insurance. With certain exceptions, life insurance has fixed premiums, so you’ll keep paying same premium year after year.

That said, while no LTCI company will guarantee its premiums (except for certain hybrid policies), the industry knows a lot more than it did 10 or 20 years ago, so newer policies are less likely to see the premium increases faced by older policyholders. But there’s still no guarantee. Unfortunately, Northwestern Insurance Company, which came late to the LTCI business and therefore should have had a better understanding of the industry, recently announced that it would be seeking rate increases of 10 to 30 percent. 

The Decline of LTCI

As a result of the realities of long-term care needs and costs and the unreliability of LTCI, it is dwindling as a solution for today’s and tomorrow’s seniors. According to a report of the Federal Insurance Office of the U.S. Department of the Treasury  entitled “Failure in the Long-Term Care Insurance Market”:

The number of insurers offering individual LTC insurance declined from more than 100 in the early 2000s to only 12 as of year-end 2015. From 2013 through 2015, LTC insurance annual new premiums fell from $403 million to $261 million, and new lives covered fell from 171,000 to 104,000. In the employer-sponsored LTC insurance market, the number of participants added to group plans dropped by 65 percent between 2013 and 2014, and by another 55 percent in 2015.

Insurers continuing in the LTC insurance market have tightened underwriting standards and are offering new products with fewer benefits at higher prices. These changes likely dampen demand for LTC insurance. In addition, publicity regarding financial difficulties at several major LTC insurers adds to the constriction of the market.

What’s a Consumer to Do?

There are two major problems with the failure of the insurance industry to create reliable LTCI insurance solutions. First, it leaves seniors to their own resources or forces them to rely on public resources, such as MassHealth (Medicaid), which is a patchwork system. Second, those who can afford it should still consider LTCI, recognizing that the premiums they pay at the start are not fixed in stone. They should ask about each company’s history with premium increases. And they should consider alternatives, such as LTCI riders on life insurance and hybrid products that combine LTCI with life insurance. Of course, they can also lobby for a national solution that expands Medicare to cover long-term care.

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