Bad Faith: The Shameful Legacy of Long Term Care InsuranceSubmitted by Financial Planning Hawaii on March 31st, 2014
Individual long term care insurance first gained acceptance with consumers in the 1990s as large, highly-rated insurance companies, including Met Life, John Hancock, GE (now Genworth), CNA, UNUM, and NY Life, began promoting standardized contract structures with less restrictive benefits eligibility than the earlier LTC policy iterations which had been introduced by less highly regarded carriers. Although the ratio of premiums relative to coverage benefits for LTC insurance has always been high compared to other risk management products (e.g., life insurance, liability coverage, homeowner’s insurance, etc.), many retirees and those approaching retirement were also keenly fearful of the exorbitant potential cost of round-the-clock home care and nursing home care and of the depletionary effect such costs could have on one’s retirement savings. For legions of consumers, the decision to purchase LTC coverage made sense, especially since, as the insurance companies implied, the initial premiums would remain fixed for the life of the contracts… except, as the fine print read, in the unlikely event that the insurance company decided it needed to raise premiums for the entire class of contract holders.
Fast-forward to 2013 and the LTC market is in shambles. As I have written in previous FPH client communications, at the heart of the problem is the simple fact that long term care does not lend itself well to insurability. In terms of risk management, the best insurance risks (from both the insurance company and consumer perspectives) are those with high potential costs but low probabilities of occurrence. While long term care can most certainly be costly, this risk also has a high probability of occurrence (by some estimates as many as one out of every two or three people over age 65 will require full-time custodial nursing care at home or in a professional care facility). As it turned out, in their great rush to gain market share, virtually all of the major carriers grossly underestimated both the pace at which custodial care costs would rise and the proclivity of policy holders to file benefit claims.
This dose of reality has had three dramatic effects on the consumer marketplace. First, many carriers have realized that LTC coverage is not a profitable business line and have stopped issuing new contracts. Second, the remaining carriers have jacked up the premiums on new contracts to levels that are not affordable to most consumers. Third, virtually every major player has raised premiums to legions of existing contract holders who were led to believe that cost would remain fixed. Of these, it is the latter that has my knickers in a twist and that provides the inspiration for the title of this piece. For the carriers did not raise premiums a little bit, they boosted them through the roof! As an example, a client who purchased an LTC policy from a Met Life agent in 2005 recently showed me a letter he received from Met Life informing him that the premiums on the policy he purchased in 2005 were going to be increased by a whopping 58%! To add insult to injury, the letter suggested that Met Life would have been justified in raising the premium even higher.
While it is true that most LTC policies contain language that allows the carriers to increase premiums in response to market factors, many consumers undoubtedly purchased policies under the implicit assurance that the initial premium would be fixed for life. Fine print or not, the notion that these companies can effectively get their losing policies off the books by raising premiums beyond affordability to long time policy holders is patently disingenuous and seems to me to meet the very definition of bad faith.
For more on the shameful legacy of Long Term Care insurance, see the following articles:
- How is a 90% Premium Hike Okay? - Chicago Sun Times
- Is Long Term Care Insurance Just a Ripoff? – Motley Fool
- What to do when long term care insurance premiums rise – Kiplinger’s
- Met Life Long Term Care Insruance Announces Important Pricing Changes – Met Life Press Release