Premium Hikes Loom for Long-Term Care Insurance
One of the nation's largest providers of long-term care insurance is planning to raise premiums an average of 40% next year — a move that revives the longstanding question of whether the pitfalls of buying a long-term care policy outweigh the payoffs.
John Hancock — which, boasting more than a million LTC insurance clients, says it's the largest provider of employer-sponsored group LTC insurance in the country, and one of the largest carriers of individual LTC coverage — wants current customers to start paying higher rates starting next spring.
The planned rate increases, along with a sales freeze on new group policies, were first reported last month by the trade publication National Underwriter Life & Health, which calls John Hancock "one of the pillars" of the LTC insurance industry.
As of last year, more than seven million Americans were covered by LTC insurance under individual or group policies, according to the financial-services trade organization LIMRA.
The John Hancock news isn't the only recent report of sharply rising costs for LTC coverage, which helps people pay for nursing-home care or home health care should they become incapacitated. Late last month, Congressman Frank Pallone, Jr. (D-N.J.) said he was launching a probe of LTC premium hikes, starting with four companies — John Hancock wasn't among them — that he said had raised rates for New Jersey customers 25% to 35%.
Nor is it the first time that purchasers of LTC insurance have been rudely surprised by giant rate increases. Three years ago, in a story about the challenges of buying coverage, Money wrote about a customer who bought a long-term care policy — again, not from John Hancock — only to see his premium rise nearly 30% the following year. "It all smacks to me of a bait and switch," the customer said.
At the root of rate increases past and future is a pattern of seller's remorse in the LTC business. Collectively, LTC insurers have had a long history of selling coverage to thousands of people at particular prices, only to discover later that they underestimated the money they'd ultimately have to pay out in claims. One of the highest-profile consequences of that came two years ago, when LTC insurer Conseco, citing an LTC business it said was a financial drain on all of its insurance operations, got permission to spin off part of its business into an independent trust. The spun-off unit, it was reported this July, told California customers this year it would be raising their rates as much as 35%.
You would think by now that the insurance industry would have gotten its act together about LTC pricing. No such luck. John Hancock, a unit of Manulife Financial , says the rate increase comes in the wake of a 2010 study in which it found it was paying out more to customers than it had planned. "Our recent claims study found that the incidence and severity of claims are significantly higher than expected, and the duration of claims is longer than expected," a John Hancock spokewoman wrote in an email. "Mortality improvements observed throughout the LTC and Life insurance industry have also led to more people reaching the age where claims are more likely."
Here's the crazy part: The last time John Hancock says it conducted a claims study such as this one was in 2007. In other words, the company had problems projecting what its costs might look like just three years later.
That raises a thorny question for potential customers: If an insurer has that much trouble figuring out its business three years down the road, how much sense does it make to commit yourself to being a customer of the company for 20 or 30 years? There's a lot at stake here: The money you might need to stay in a nursing home without going broke, along with all the premium money you'd be paying in the interim.
And that money is indeed substantial. For all the underpricing that the industry appears to have done, LTC coverage isn't cheap. John Hancock says its average annual individual-plan premium amounts to $2,300. The proposed increases would bring that number to more than $3,200—an increase easily big enough to dent the budget of a worker or retiree with an LTC policy. Customers affected by the rate hike will most likely end up accepting a reduction in benefits in order to keep their premiums down, one insurance industry source told the trade magazine InvestmentNews.
So the promise of LTC insurance makes sense: The idea that you'll be protected in your old age should you need expensive day-to-day care. But will the actual product deliver the peace of mind it's supposed to? With rate increases like this one, it's hard to say.