Long-Term-Care Policies No Panacea
Many Americans who bought long-term-care insurance as protection from the financial calamity of an extended late-life illness are finding to their chagrin that they may not be able to afford the insurance just when they need it most.
That’s coming as a shock to people who were sold long-term-care policies when they were younger, on the expectation that they were locking in affordable premium payments.
Just ask Oliver and Margaret Cromwell of Palm Beach, Fla., octogenarians who bought long-term-care policies a decade ago. They canceled them three years ago when Margaret’s premium soared to five times its original cost and Oliver’s premium rocketed 700%.
“We put a lot of money into this thing and we got back nothing,” said Oliver. “The fees just kept escalating every year. The last straw was when the premium rose 40% in just one year.”
The Cromwells are far from alone.
There are no statistics showing what percentage of policyholders get premium hikes on their long-term-care insurance, which are policies that promise to pay for care in nursing homes as well as for home-health aides for those who become incapable of taking care of themselves.
However, more than 150,000 consumers have sued their insurers for hiking long-term-care premiums between 25% and 700%, said New Orleans attorney Allan Kanner, who represents litigants in a half-dozen class-action suits.
Though consumers say the policies are often sold with the assurance of steady premiums, insurers do not contractually promise anything of the sort. Nearly every policy contains a boilerplate disclaimer that says future premiums may rise.
However, consumers may discount that warning because the policy also says that premiums “may not rise due to your age or health”--a promise that many take to mean their premium payments won’t go up as they age. But what insurers mean by this statement and what consumers think they mean are two different things.
“There is the concern regarding whether consumers, who may be told their rates cannot increase due to age or physical condition, understand that they are part of a class whose rates can increase,” Kathleen Sebelius, vice president of the National Assn. of Insurance Commissioners and the Kansas insurance commissioner, said in recent congressional testimony.
Translation: The insurer promises not to raise the premium on just your individual policy, but it can raise the rates for the entire group of which you are a part, industry insiders say. And though the insurance company promises it doesn’t consider the fact that you, the individual, are getting older and are more likely to file claims, they do care if your group as a whole ages and starts filing claims. (The nature of your “group” can vary, but it often includes all the people who bought similar policies.)
The end result is the same: Your rates--along with the rates of everyone in your group--can rise as you age, sometimes dramatically.
Examples of this aren’t hard to find, according to Kanner. Consider the case of Nellie McIlroy, who is 95 and suffers from Alzheimer’s disease. In 1987, she bought a long-term-care policy with an annual premium of $829.86. By 1997, her premium had soared to $6,638 a year. Already ill, she couldn’t get other insurance, so her kids continue to pay the premium on her behalf. Ironically, she has never used the insurance. She lives with her son, Carl, in North Dakota.
Harold Hanson, 96, of Reeder, N.D., has a similar story. He bought a policy in 1987 for $1,498 a year. By 1996, the annual cost had rocketed to $6,158 annually. He dropped the policy at age 92 because he no longer could afford the premium.
Hanson, McIlroy and the Cromwells were all members of class-action suits that were settled before trial. The insurers that sold the policies agreed to give partial refunds and cut future premiums for these litigants, without admitting or denying guilt.
Dozens of additional class-action suits filed across the country make similar allegations. In fact, the problem of rising premiums on long-term-care policies has become serious enough that Sen. Charles E. Grassley (R- Iowa), chairman of the Special Committee on Aging, held hearings in mid-September to explore the causes and potential solutions.
The problem won’t be easy to solve.
The reason is fairly complex, but boils down to this: Traditional insurance protects large numbers of people from a tiny risk that something horrible will happen--something so bad that no reasonable (or honest) person would consider triggering the policy just for the money. For instance, you won’t try to die just to collect on your life insurance; you won’t burn down your house to collect homeowner’s coverage.
Then, too, with traditional products such as life and homeowner’s insurance, the risk of loss is pretty easy to calculate.
The same can’t be said for long-term-care insurance. The policy coverages are relatively new and evolving, and the statistical data are slim. With many new and more popular policies you don’t necessarily need to do something as unpleasant as check into a nursing home to get coverage. Many policies pay for home-health aides and even housekeepers. That may ultimately boost usage, thus boosting costs for long-term-care insurers.
Indeed, some insurers that have raised rates maintain that they’re not making money on the business. They’re simply hiking premiums to keep up with their costs.
“They are just trying to break even,” said Scott Daniel, partner at the Galveston, Texas, law firm of Greer, Herz & Adams, which represents Standard Life & Accident Insurance and American National Insurance Co., which have been named in several class-action suits. “It’s the cost of care that’s rising.”
Then, too, the nature of caring for the elderly appears to be changing, and change is tricky for insurance companies to deal with. That’s because they price their policies on the basis of statistics--usually statistics that have shown relatively consistent trend lines for centuries.
Society is changing in ways that affect how we care for the elderly, however. In the past, if your parents or grandparents got sick, they’d move in with relatives and a stay-at-home spouse would care for them. Today, with a rising number of two-income families, there are fewer stay-at-home spouses. So care for a needy older person probably falls to a paid provider.
Meanwhile, Americans are living longer than ever, but it’s unclear whether they are any healthier. If they’re not, the need for long-term care could break records and bankrupt companies that underestimate the costs and need for these services.
The product already has changed a lot. Long-term-care insurance used to cover only care in nursing homes. It was generally used as fill-in-the-gap coverage because Medicare paid only for skilled nursing care following a hospital stay, and only for a relatively brief period.
The problem was that people with Alzheimer’s or dementia didn’t qualify for government health insurance programs because they didn’t require medical attention, just constant supervision and help with routine activities such as feeding, clothing and bathing. As a result, if a middle-income person with Alzheimer’s needed nursing-home care, which can easily cost $50,000 to $60,000 a year, they could quickly use up their savings and become impoverished.
At first, long-term-care insurance policies offered to pay a portion of that cost, say, $100 a day for care in a nursing home. In addition, coverage would kick in based on a less restrictive formula than with Medicare.
But policies that paid for something as unattractive as living in a nursing home proved to be a tough sell. Moreover, some buyers were concerned about whether the insurance reimbursement rate would keep up with the rate of inflation.
Insurers responded by creating policies with inflation riders that automatically adjust the allowable daily benefit to keep pace with the cost of living. They also began to offer coverage for home-health benefits, hospice care, medical equipment, caregiver training and even homemaker or chore services.
Many of these services are not only more cost-effective than providing care in nursing homes, but also more attractive--both a selling point and an incentive for increased usage. After all, few people want to end up in a nursing home, but if your policy will pay for someone to clean your house or make you meals, why not take advantage of it?
Hence the fluid nature of long-term-care insurance premiums. Insurers don’t know exactly how to price the policies and can’t guarantee that they won’t have to pass on rate increases to customers.
The insurance industry is greatly concerned about both the rate increases and the black eye the subsequent bad publicity is giving insurers. As a result, they helped the National Assn. of Insurance Commissioners cobble together a series of proposed rules that would penalize companies if they opted to raise rates on long-term-care policies. However, it remains to be seen whether these rules will have any positive effect.
In the meantime, it can be difficult for consumers to decide if they should buy long-term-care insurance. On the one hand, if you end up in a nursing home without insurance, you could easily spend the bulk of your savings before your income drops to the point at which government insurance kicks in. For those who want to leave an inheritance to their children, that can be a disadvantage.
On the other hand, if you buy a policy that has a lot of bells and whistles, you are certain to pay a substantial amount--probably considerably more than you would pay if you simply saved to pay the cost of having more household help when you needed it.
A possible compromise: Buy a bare-bones policy to guard against the slight chance that you will need to pay for nursing care for many years as a result of Alzheimer’s or other disease. If you think you’ll want home-health aides to help you buy groceries or make meals when you’re old, save some extra money in your retirement plan.
Although the premium for a bare-bones policy could rise too, it’s unlikely to rise as much as the premiums for the hybrid policies that probably will get much more use, said Stephen A. Moses, president of the Center for Long Term Care Financing in Bellevue, Wash.
“Insurance is not to protect you against a high probability of something happening. That’s what savings is for,” Moses said. “If you are not particularly financially savvy and you need an insurance company to hold your hand and make those contributions for you, that’s fine. But realize you pay for that. They take out overhead and profits and they will give you, frankly, a notoriously low rate of return on your money.”
