Ramona and Glenn Nelson, of Allison Park, face rising costs of long-term care insurance.
By Bill Toland Pittsburgh Post-Gazette
Actuarial science is also a bit of an art, as it turns out. The same goes with investing. And that's coming back to bite many of the millions of Americans who bought into long-term care insurance policies over the last few decades, only to see their premiums skyrocket of late.
Long-term care insurance is a policy that, in exchange for annual premiums, promises to cover a certain share of nursing home or assisted-living expenses -- should the need ever arise -- without draining consumers' savings accounts and forcing them into a Medicaid-funded care home. Fewer than 10 million Americans carry such coverage, by most estimates.
But Ramona Nelson, of Allison Park, is one of them. And when she saw the annual premium increase being proposed by her long-term-care insurance carrier -- a 63 percent hike, from $4,164 to $6,788, the first major increase since she and her husband, Glenn, obtained the policies -- she, like many others, began to wonder if the peace-of-mind value was worth the dollars-and-cents cost.
"When you see your insurance going up more than 50 percent in one year, [you] have to wonder, where do I cut my losses?" she said. "There's a point where you're paying more for the insurance than it's worth."
She's not sure if she and her husband, who bought the policies more than a decade ago, have reached that point yet. They renewed the policies for another year but at a lower price -- which comes with reduced compound interest and payout benefits.
They bought the policies when they were in their 50s, hoping "to avoid having our children have to deal with any kinds of problems. We were both reaching an age where this was a possibility," she said.
But there's also the possibility that the policies will never be needed.
Long-term care policies have always been a bit of a gamble -- unlike most health insurance, auto insurance or life insurance policies, there's a good chance a long-term care policy may never be used. If you're hit by a bus; if you die within 90 days of a severe illness; if a heart attack cuts you down, there's no need for long-term care.
In fact, the utilization rate, once individuals hit age 65, is only 50 percent. Meaning there's a 50-50 shot that coverage never kicks in.
That's why the product has been a tough sell, and it's one reason the long-term care niche sees such a high volume of complaints, relative to its market share. Though the products have been available since the 1970s, they weren't purchased in significant numbers until 1996, when the federal government gave small tax breaks to buyers.
Still, the policies have never fully taken off, and in the last few years, complaints -- mainly over premiums -- have been accelerating. The premium increases have been driven by a tepid, low-rate investment environment, the growing cost of care, bad projections on policy usage, policy lapse rates and customer longevity. In other words, people are living longer and requiring more care than anticipated.
The result? Sticker shock, with longtime policyholders being leveled with 30, 50, even 90 percent increases in their rates, in Pennsylvania and elsewhere, if they want to maintain current policy terms.
Carriers argue that without charging higher rates, they can't make money.
But given that long-term care insurance is already a niche product, many carriers are starting to wonder if the product has any kind of future.
In March, for example, Prudential Financial said it would stop selling new long-term care policies, because of the inherent financial challenges.
It's in good company -- a decade ago, there were more than 100 companies selling long-term care plans. Today, there are about two dozen.
Ms. Nelson's policy is administered by another industry giant, John Hancock, which is asking for rate increases of up to 90 percent in some states. In a letter to affected policyholders, the insurer's long-term care division says, "We sincerely regret having to take this action, and understand some policyholders may not be willing or able to pay the higher premium."
Meanwhile, the federal government has canceled plans for long-term care coverage aimed at low-income buyers, called the CLASS Act, which had been a major piece of the health care reform law -- this, after years of trying to convince the middle class to buy such policies, hoping to move the burden of care away from the public sector and into the private sector.
Both state and federal governments and their respective human services and welfare departments are concerned that aging baby boomers, as they enter care homes, will eat up an ever larger portion of government welfare budgets.
Such costs are consuming a larger portion of household budgets, too. Residential care can cost thousands of dollars a month ($50,000 a year, or much more), and isn't covered by Medicare or existing supplemental products.
That's why, for many, long-term care insurance seemed like an attractive hedge against the rising cost of nursing home care.
"I bought it on the hope that I'd never have to use it," said Bob Coleman, also of Allison Park. The premium has "gone up 100 percent in 11 years ... the insurance commissioner is more interested in protecting the insurance companies than the consumers," he said.
The insurance commissioner, through the state Department of Insurance, is responsible for reviewing and approving all insurance-related rate increase requests -- that includes health, auto and, in this case, long-term care insurance.
In Pennsylvania, according to a spokeswoman, the average annual rate increases among long-term care policies are around 15 percent.
Amy Pahl, a principal and actuary with Milliman Inc., a Minnesota consulting firm, said long-term care policies ran into a variety of problems over the last decade, but the biggest one might have been policy retention and lapse rate.
"What's really hurt the industry is the lapse assumption that we missed so badly on," she said. "We assumed a lot more people would give up their coverage and lapse, and their benefits would not be paid."
Companies that sell the polices -- like most other insurance companies -- invest the premium money until it's needed to pay out on claims. Weaker-than-expected investment returns, something that many investors experienced during the recent financial downturn, mean there's less money available to pay out.
"When you're talking about a 40-year time horizon, that is deadly to the viability of a block of business," Ms. Pahl said.