How is a 90% long-term care rate hike OK?

Bob Levy, age 69, and his wife, Cheryl, age 64, each bought John Hancock long term care insurance policies 10 years ago. And every year since then they have paid a combined premium of $3893.40 per year. The couple live on a fixed income and the low interest they earn on their savings. So they were shocked when Cheryl received a notice of a 90 percent increase in the annual premium for the policy. Then Bob got a similar notice. It means they would now pay $7,385.52 a year.

“Needless to say I was shocked and disappointed. . . . what a waste of money!,” says Bob. “How can that kind of increase be approved by the State of Illinois? Why hasn’t there been any media coverage? And what should we be doing?”

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They did the right thing – hoping to avoid the dreaded outcome of being older, alone, and in need of everyday care that is not covered by Medicare or supplements. They knew that long-term custodial care – at home or in assisted living or in a nursing home – now costs $7,000 a month, and rising yearly.

So they purchased Long-term Care Insurance – something I have highly recommended to defray the future cost of care if it is needed.

But now, many people who purchased long-term care insurance are getting a shock. The insurance companies that wrote these important policies are sending out notices of huge rate increases. In the case of John Hancock LTC policies, the increases are as high as 90 percent annually.

These policies were originally sold as having “level” premiums, which would not increase based on your age or health situation. Premiums could only be raised if a state agreed that the insurer needed an increase to maintain their ability to cover the liabilities.

So what happened? The insurance companies miscalculated the true costs of providing the insurance. The states are almost powerless to stop increases. And the policyholders are paying for the insurers’ mistakes.

Here’s what’s going on – and what you can, and should, do if your premiums are increased

Why the increases?

Basically the insurance companies got it wrong when they initially priced the policies:

†First of all, they didn’t realize that very few people would let this type of policy lapse once they purchased it.

†Also, the costs of custodial care are rising faster than they projected and people are living longer than expected.

†Third, more people are actually using their policies than they expected, since getting care in an assisted living facility is not as feared as the old-fashioned nursing home.

†And finally, though insurers say it’s only a small factor, their investments have had lower returns in recent years than they projected.

It all adds up to a losing proposition for long-term care insurance companies. Some have gotten out of the individual long-term care business. Prudential just announced its exit. MetLife stopped selling to individuals within the past year. And before that, CNAInsurance, one of the early leaders, exited, although they must still service the policies they sold, or hire servicers.

Most of the remaining major insurers have asked state commissioners for premium increases in varying degrees. Each company has made its own decision about how to handle the situation, with some such as Genworth asking for more moderate increases of about 18 percent, in consideration of their clients.

Clearly, John Hancock, a subsidiary of giant Canadian insurer, Manulife, decided to take a different route. They increased premiums on some policies a shocking 90 percent. Those larger increases came on policies that had been purchased with compound inflation coverage and/or lifetime coverage, where the company had its greatest future exposure to loss. Of course, the policy holders were paying higher premiums for this coverage all along, sensibly hoping to insure against future cost increases.

John Hancock denies that its parent company Manulife doesn’t care about U.S. policyholders, with president Marianne Harrison saying: “Manulife fully supports John Hancock’s long-term care insurance business in the U.S. We . . . are investing in product development and are undertaking this rate action rather than getting out of the business.”

And in defense of the size of premium increases Hancock says: “Our belief is that offering a substantial rate increase, rather than spreading out smaller increases, is better for consumers because it enables the company to offer alternatives to mitigate or eliminate the increase.”

(John Hancock offers some alternatives to cut the coverage instead of paying the increases. More about that in Part 2, coming Tuesday, “What to Do?”)

State insurance protection?

So why are the states letting the insurers get away with these increases? Here’s an eye-opener. In the case of long-term care insurance, the state insurance commissioner is not duty-bound to protect consumers, at least in a direct way. They’re supposed to give insurers rate increase to keep them solvent.

Almost every state that has received a request for a premium increase in LTC policies has granted it, for at least one category of policy. Some states give the insurance department some discretion in granting premium hikes, but in many states, including Illinois, as long as the insurance company can demonstrate projected loss ratios and actuarial assumptions, the increase must be granted!

I confronted the Chief Life Actuary of the Illinois Insurance Department and also Robert Wagner, the General Counsel for the department. Clearly, they weren’t happy about having to grant the increases, noting that the regulators have no discretion to limit increases if the rate filing meets the actuarial standards.

Says, Gerald Lucht, the actuary who signed off on those rate increase requests: “If the filed rates do not satisfy regulatory requirements, DOI can tell the company that it cannot use those rates. The law does not, however, authorize this Department to “approve” or “deny” a particular rate, and specifically, to require the company to lower a particular rate.”

Coming Tuesday: What to do if you receive a rate increase, and some creative policy alternatives to lower costs.

But for today, here’s a final thought: The insurers have learned an expensive lesson, and we are paying for it. But today’s more appropriate pricing means less likelihood of future increases if you buy LTC insurance now. And paying for the insurance is still a whole lot better than paying $75,000 a year for care –if you need it. That’s The Savage Truth.

Terry Savage is the Chicago Sun-Times’ nationally syndicated financial columnist, and a registered investment adviser. Post personal finance questions on her blog at TerrySavage.com and blogs.suntimes.com/savage.