Skyrocketing cost of long-term-care insurance leaves a couple in a bind
The entire long-term care insurance industry has suffered gigantic losses due to pricing decisions made decades ago that have proven a long way off: insurers underestimated how long policyholders would live and need nursing home care, while overestimating how many of those plans would sink before collecting of achievements (few have).
Insurers are now increasing rates to accommodate their previous miscalculations. And in recent years, some of the biggest names in the industry have gone out of business and stopped writing individual long-term care guidelines.
About half of Americans age 65 will need long-term care services. Most will need help for less than two years, but about one in seven will need it for more than five years. The average cost of care in a nursing home for a year in Massachusetts exceeds $ 125,000. The average assisted living cost in Massachusetts is more than $ 65,000 per year.
The Flannerys are retired with a steady income and say they cannot afford the higher premium.
What can they and policyholders like them do? And what other options are there later for care?
Question: What exactly is long-term care insurance?
A. It was developed in the mid 1970s and became a popular insurance product in the 1990s and early 2000s when it was heavily marketed to aging baby boomers who were retiring. It gave policyholders a guarantee of quality care without forcing them to sell their homes or other assets to pay for them.
Question: how does it work?
A. The Flannerys when they were both 55 years old wanted a solid policy that would allow them up to eight years of coverage between them. They bought their policy from Genworth, which pioneered long-term care insurance (and was once owned by General Electric). Based on actuarial calculations, Genworth valued the policy in 2004 at a little less than $ 5,000 per year.
Question: Has Genworth guaranteed that the annual premium will remain fixed?
On a. It has guaranteed that the Flannerys can renew it annually without fear of being dropped due to poorer health. Genworth also guaranteed that there would be no automatic premium increases with age (as is the case with many life insurers). However, it reserves the right to increase the premiums.
Q. Are there any restrictions on the policy?
A. Yes, most policies have some type of deductible - the so-called "elimination period". For the Flannerys it's 100 days. This means that your policy will only take effect after you have paid out of pocket for the first 100 days of your care. Thereafter, the policy pays a maximum of $ 250 per day.
The Flannery's policy includes inflation protection, an expensive option that accounts for almost half of their premium. Since 2004, the maximum daily coverage has more than doubled to $ 545 and the lifetime benefit increased to $ 1.6 million.
Q. So the Flannerys invested roughly $ 80,000 in cumulative rewards for a lifetime benefit of $ 1.6 million. That sounds pretty good.
A. Remember, it is used or lost. No amount of their premiums paid or the value of their cover goes to their heirs when they die. But yeah, it's a pretty good deal.
Too good a deal, it turns out.
In response to me, Genworth called its long-term care insurance business "extremely unprofitable" and found it lost $ 2 billion in the past five years alone.
“We're not trying to make up for these losses. We just want to get closer to breakeven, ”the company said of its premium hikes.
Question: How much has the annual Flannery premium increased since 2004?
A. For more than 15 years, Genworth has never raised the premium on Flannerys policies, which was one of the main selling points Genworth touted in the early 2000s. “We are proud to tell you. . . We have not increased our premiums, ”says a brochure from that time. (Tom Flannery said he was impressed when he bought a policy.)
Genworth is now executing a previously federally approved 40 percent premium increase that will bring the Flannery's premium to $ 6,900 when it closes next year.
Question: Is that the only increase you can expect?
On a. The Flannerys were shocked by a letter they received from Genworth two weeks ago saying the company expected to ask state regulators to approve a 275 percent increase over the next three to six years.
In the letter, Genworth also warned that based on his projections, an even larger rate hike was possible and "actuarially justified".
Question: What would a 275 percent increase mean for the Flannery budget?
A. It would add $ 12,100 in annual premium costs and devour a large chunk of their income.
Q. Whose approval is required for rate increases?
A. The state insurance department reviews requests for rate increases with the aim of keeping premiums low for the benefit of consumers, but not so low that insurance companies lose money and withdraw from the state.
Genworth, in its most recent letter to the Flannery and other policyholders, pointed out the case it may have brought to the department when it announced that its financial strength rating was recently downgraded by a credit rating agency and that it is capable to meet its ongoing insurance obligations as follows, "Marginal."
Question: What alternatives to paying the increase are offered?
A. The letter from Genworth, who has nearly 28,000 long-term care insurance policies in Massachusetts, gives four options for the Flannerys to lower their future premium by reducing coverage, including two based on how much they've paid in premiums over the years to have . All of them represent a significant depreciation of your cover.
Q. Are there alternatives to long-term care insurance?
A. You can insure yourself by putting money in a mutual fund. A new product is called “hybrid life insurance”, which you can purchase with a one-off flat-rate premium or over several years. It pays off for long-term care (with certain limitations, of course). However, if long-term care is not required, a benefit will be paid to a beneficiary after the death of the insured person, as is the case with traditional life insurance.
Have a problem? Send your consumer problem to sean.murphy@globe.com. Follow him on Twitter @spmurphyboston.
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