Their Loss, Your Gain
Adam M. Grossman | Jun 27, 2021
LONG-TERM-CARE insurance policies are, in my opinion, both a blessing and a curse. They’re a blessing because they can help cover critical and costly care when a family might have no other financial options.
But they can also feel like a curse. That’s because of what many owners of traditional long-term-care (LTC) insurance refer to as “the letter.” This is the renewal letter that policyholders receive each year. These letters provide a menu of renewal options, each of which offers some combination of premium increases and benefit cuts. But unlike most insurance policies, which might impose a modest or at least manageable increase each year, it isn’t uncommon to see LTC premiums jump by 10%, 20% or more—sometimes much more.
As a result, the options in these letters generally range from unpalatable to unaffordable to downright depressing, plus the decision is often complicated. These letters frequently present a matrix of choices, with options along multiple dimensions, including:
- Cost
- Maximum daily benefit
- Inflation benefit
- Elimination period
- Benefit period
- Total lifetime benefit
- Cash payment to policyholder
Because there are so many variables, the renewal decision defies straightforward cost-benefit analysis, making it an agonizing annual dilemma for policyholders.
If you or a family member has one of these policies, how should you approach the decision? Before getting into the details, it’s important first to understand some background—in other words, why these letters are even necessary.
The fundamental problem in the LTC market isn’t difficult to grasp: When insurers created these products, they miscalculated and priced them far too low. There were three reasons for this:
- Health care costs have increased much faster than expected. Over the past 20 years, health care inflation has outpaced the overall inflation rate by almost 1½ percentage points a year. Compounded over time, the result has been a steep increase in the size of claims.
- Policyholders held on to policies much longer than expected. With a product like long-term-care insurance, the most profitable customer is the one who pays premiums for a period of years but then cancels before ever making a claim. LTC customers, however, didn’t cancel at nearly the expected rate. Genworth, the largest player in LTC coverage, expected a lapse rate around 5%. But the actual rate has been an order of magnitude lower—just 0.7%.
- Interest rates have been much lower than expected. Since insurance companies invest a large part of the premiums they receive in bonds, this has been an increasing problem. In fact, the timing couldn’t have been worse. Interest rates have been falling since the early 1980s, which is precisely when LTC policies started to become popular. More than any other kind of coverage, this has been a problem for LTC insurers because these policies are intended to be lifetime commitments, and yet the longest-term bond is just 30 years. Insurers weren’t able to fully protect themselves by matching assets and liabilities, as they normally do. This has spurred some insurers to offer a different type of LTC insurance—known as hybrid policies—which haven’t had these pricing problems.
Indeed, traditional LTC insurance has been a disaster for insurers. Genworth alone has incurred billions in losses on its LTC business. Losses there have averaged $425 million per year in recent years. To stop the bleeding, insurers are doing everything they can to fix the pricing on these policies. That explains the frequently brutal renewal terms.
As a consumer, if you’re on the receiving end of a renewal letter, how should you approach the decision? Here are three recommendations:
- Hold the line on benefits. All things being equal, a cut to benefits is more profitable to an insurer than an increase in premiums. That’s because claims can come in at any time, while premium increases are received only incrementally over time. Result: An insurer would much rather you accepted a reduction in benefits. As a consumer, then, this should be the last thing you do. If you can afford it, pay to retain your policy’s current maximum daily benefit.
- Take it one year at a time. Many renewal letters will include language along the lines of: “Please be aware that over the next X years, we intend to seek additional rate increases…” and they’ll often include a staggeringly high number. The operative words here are “intend to seek.” The reality is that rate increases must be approved by each state’s commissioner of insurance—and they don’t approve every increase that’s requested. The job of insurance regulators is to achieve a delicate balance: They want to protect consumers from rising rates. But if they squeeze insurers too much, they’ll become insolvent. The rate increases that your insurer seeks may not fully materialize, so don’t let the prospect of future increases scare you into dropping your policy. Instead, take it year by year.
- Read between the lines. Some letters will offer buyouts—literally paying a policyholder to cancel coverage or reduce benefits to a level that’s akin to canceling. I once saw a renewal letter that proposed cutting the total lifetime benefit of a policy to less than $5,000 in exchange for an upfront payment to the policyholder. It was an absurd option, but it was also very telling. If your insurance company’s actuaries are so eager to have you cancel, that likely means you’re getting the better end of the deal. The logical conclusion: In cases like this, you’re better off not accepting a buyout. If you can afford to keep up with the premiums, stick with it.
The key thing to understand here is that insurance companies have, in effect, been providing subsidies for years to LTC policyholders. And the fact that insurers are still taking losses on these policies tells you that these subsidies haven’t fully gone away. That’s thanks to regulators, who have been keeping a lid on price increases. If you’re a policyholder on the receiving end of a renewal letter, the increases probably seem jarring—and they are. But as aggravating as these increases are, the fact that insurers are still taking losses tells you that, as a policyholder, you’re still getting the better end of the bargain.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.
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Just before turning 51 in 2001 I purchased a LTCI policy now at MetLife, originally from TIAA. The type of pricing described in the article and comments was offered, but I didn’t want the uncertainty of future premium increases. I chose the simpler alternative, a considerably more expensive but fixed annual premium for 5-year coverage with 5% compound annual increase in daily and lifetime maximum benefits. No annual renewal letter, just the same premium year after year.
I knew that the nominal sum of 20 years’ fixed premiums before retiring in 2021 would be more than offset by my CCRC’s discount on the entry fee for having this LTCI coverage. With inflation in the years since, the fixed annual premium has felt less and less burdensome. As for claims, I haven’t needed the coverage (yet); how much hassle our CCRC’s insurance coordinator will encounter in getting authorization remains to be seen.
very timely as I just received “the letter” from MetLife.
40% increase spread over three years.
they offered: reduce inflation protection, reduce benefit amount, reduce benefit term.
is there a reason that these rate increases are occurring now, and across insurers? I have had my LTC policy for at least ten years now.
My wife and I have an LTC policy through Genworth. We both worked in insurance for 40+ years. We understand why the increases are taking place (we don’t like them any better than anyone else). I carefully analyze the infamous premium increase letter and usually opt to keep our current coverage limits and pay the increased premium. Regulators are in a tight spot too. They have to allow some increases so the company doesn’t go bankrupt but that has to be balanced with their obligation to protect policyholders. This little snippet caught my eye: Genworth Financial reports 2019 executive compensation In 2019, six executives at Genworth Financial received on average a compensation package of $5.3M, a 58% increase compared to previous year. Thomas J. McInerney, Chief Executive Officer, received $9.1M in total, which decreased by 2% compared to 2018.
Apparently there is good money in running a company that’s not very profitable.
Adam, what a timely article. I just received “the letter” from Genworth for my wife’s and my policies. Your article helped clarify my decision-making on their latest rate increase.
So, I once had LTC insurance, but stopped when the price got too high. However, given Medicaid, isn’t LTC as much a form of “legacy” insurance – for leaving assets to your survivors?
But, more importantly, I am wondering if any of the LTC experts here can refer me to individuals with expertise in tax-favored funding solutions, as well as LTC as a voluntary benefit.
Seems to me that most of the tax preferred LTC options are underutilized; and/or unknown – especially with respect to the options possible through employer benefit plans and/or arrangements.
This is a good article. I have worked in the insurance business for many years and the story summarizes many of the challenges I have heard faced by insurers. My wife and I purchased group LTC policies through my employer approximately 12 years ago we had our first increase last year at approximately 80%. It’s important after receiving an increase and having a policy for a period of time to request an inflated benefit schedule which summarizes today’s current benefits after the inflation indexing taking place over the years (assuming a policy has inflation indexing). I was surprised how much our benefit had increased and we made the decision to eat the increase while I am still working. In the future we may decide to drop future inflation compounding to hold the future costs down but will not lose what benefit we accrued to date. I agree that even with the high increases many people still have coverage they couldn’t obtain in today’s market and provisions unmatched by the newer generation of policies.
This article is poorly researched and filled with misleading statements.
I admit to having joined the self-insurance crowd. The variables in LTC agreements seem far beyond reasonable.
I looked into LTC insurance when I turned fifty. Between the bewildering array of benefit options and stories I’d heard from older friends about premium increases, I decided to increase my monthly investment amount instead of paying LTC premiums. Thirty years from now, I hope I’ll think it was a good decision.
There is something called a LTC partnership policy that is a collaboration between the state medicaid program and the insurer who is paying for LTC services. About 47 states avail consumers of these policies.
“An individual purchases an LTCI policy meeting the requirements of his state’s program. Usually, if he needs long-term care the benefits of the policy pay for it and the state Medicaid program does not have to cover the cost. However, in the event that he needs long-term care for such a long time that he uses up the benefits of his LTCI policy and is forced to apply to Medicaid, he is not obligated to spend all the assets he otherwise would. Generally, under what is called the dollar-for-dollar approach, he may keep assets equal in amount to the benefits he received under his partnership policy (in addition to any other assets he would have been entitled to keep). Moreover, these assets are exempt from Medicaid estate recovery and so are preserved for his heirs.”
These programs are intended to encourage people to buy LTC insurance that would otherwise be paid by the individual, practically speaking impoverishing the individual if the LTC is for a lengthy period. At that point Medicaid pays those costs that go beyond the individual’s personal capability.
Buying such a policy makes the yearly premium decisions a little easier because the individual can potentially be left with more assets at the end of the day.
These cost increases, the complexity and frankly my confusion over how the LTC insurance market works (or doesn’t work) have led to me to “self-insurance.” This means we both wait until 70 for social security, put extra money aside in our taxable account and hands off the Roth IRAs until our mid to late 70s.
My mother-in-law has a LTC policy from a big insurer. I feel it has not been what was advertised. Or as one of my friends put it, “A lot of smoke and mirrors.” When it comes time to make a payout, they have made my wife(the custodian) jump through what seems like never-ending hoops. Inventing acronyms, scheduling consultations, filling out forms, sending evaluations to doctors- some of which she has never been to.I am sure i am forgetting some of the hoops she has had to jump thru but i hope u get the idea. (When her primary doctor did get the evaluation that she needed to fill out, her doctor stated that in her 30 years of being a doctor, she had never seen a questionnaire like the one she was sent. So another 45 minute meeting with dr, patient, caregiver, custodian.
Sad to say, I feel its deceiving. How an 80 year old is going to make these phone calls, fill out these forms, continue these visits is beyond me?? My wife has been doing this on her behalf, and she is sharp woman and has a pretty flexible schedule, but she is almost to the point of giving up. I wish she didn’t have LTC – things would be some much easier, and straightforward. Here is what care costs- how are we going to pay for it.
I am wondering if any other HD readers have experienced any of these issues? If so would like to see more articles on LTC and benefit payout.
I also feel LTC insurance can give the policyholder a false sense of security. The policyholder feels that they are “all set” with LT care. That I’ve got this covered, that when we need the benefit,the benefit will be there. The benefit seems to be there but it is almost impossible to extract- or once u begin to extract another roadblock emerges.
It has opened my eyes tremendously.
Thank you so much for all of the accurate information about these rip off insurance companies. I have had the exact same experiences with them.
The insurance companies make you feel that they are the ones taking the gamble on whatever they are selling, but in the end they make sure it will cost you more (one way or the other) if they are going to lose the bet!
I take care of the paperwork for my mothers LTC policy. After several years of the evasions by the insurance company, i would have been much further ahead if i had taken the money out of my own pocket and paid for her care! The stress and aggravation they put someone thru is not worth it. I can’t wait for the end of this hell they have put me into.
I have learned a lot:
How to carefully construct letters so there is no wiggle room for them and they must give me a response. How to keep very accurate records of every single contact with them and organize them for quick reference when they try to confuse me with their lies. How to carefully dissect their responses to be able to use as rebuttal against them. How to verify, verify and then verify again with any communication with them. How to never ever trust anything any insurance company tells you!
Do not even begin to think of buying ANY type of policy (LTC, life, annuity, etc) from and insurance company, they will lie, cheat and steal your money and life away.
I’m here in the comments, knowing I’d find someone like Helpful Neighbor. My dear in-laws are 90yo. They started in assisted living, now in locked memory care. We started the LTC *claim* process a year before we actually began to get reimbursed, & then it was 6 months AFTER devastating health issues.
The very large insurance company they chose requires extensive updates every 6 mths from us, doctor & facility. I, too, am a college-educated accountant & have been baffled by the paperwork maze.
We’re estimating our folks paid about $120K in premiums over 20 years (minimum). So far, we’ve received $100K. Obviously, that’s a blessing, but the money could have just been invested over the years & easily paid these expenses.
I would NEVER ask my kids to do all this filing on my behalf. Instead, my dh and I plan to set aside the equity from our house sale to use for LTC.
LTC insurance is truly an ILLUSION of protection.
So glad for Helpful Neighbor’s post!
Adam, terrific article on a topic which many of us have little knowledge of. One question – Are newer policies less susceptible to massive rate increases? In other words have the insurance companies gotten better at pricing policies?
Be careful what you’re paying for…many LTC facilities have been caught providing inadequate care regardless of the price.
Your comment has nothing to do with the topic. LTC insurance is different than the facility.
As one of the recipients of the letter, with a 40% increase and telling me it will be another 27% this year, I appreciate this information. I’m trying to figure out if keeping the coverage is worth it.