Buried in all the post-election news was an item in the Boston Globe’s “Business” section of November 11, 2016 headlined “Hancock Leaving Long-Term Care.” You may have missed it, but its significance is great for our clients who consider long-term care insurance (LTCI) a significant option to pay for expensive care they might need. John Hancock Financial, now owned by Manulife Financial Corp, was one of the first major insurers of LTCI and currently enrolls more than 1.2 million LTCI policy-holders. Next month it will cease selling new policies. The company will continue to service its existing customers (collecting their premiums and paying out claims). But, just as more than a dozen competitors had already concluded, Hancock determined, even after considerable rate increases, that the business was not profitable.
Three decades ago John Hancock was one of the first insurers to offer policies to insure against potential costs for long-term care (mainly, in nursing homes) which in Massachusetts costs upwards of $15,000 a month. At that time, Hancock sponsored several talks I gave explaining to consumers how they might benefit from such insurance and how they could tailor policies to their needs and budgets. Unlike life insurance, which eventually has to pay claims for all policies in force at the time the insured dies, id, LTCI’s obligation arises only if a person requires nursing home care (about 30% of Americans over the age of 75 may at some time require such care) but, even if they do, the insurer’s obligation is lessened if the insured dies while receiving such care. It is actually in the insurer’s interest to offer LTCI policies to people with short life expectancies.
Underwriting such policies so that they are both attractive to consumers but profitable to insurers isn’t easy. We have abundant measures of mortality (establishing differentiation among genders, occupations, parents’ health, individual medical records, etc.), but it is far more difficult to predict morbidity (growing dependence for routine care) which is impacted by both physical health and dementia. The industry allows customers to customize their policies by raising or lowering premiums to reflect the daily amount of benefits (people with assured incomes don’t need to insure against the total cost of nursing home care), inflation protection (annual increases in benefits that match, more or less, anticipated inflation), the length of the initial period in a nursing home that would be self-insured, and even a discount for couples purchasing policies simultaneously, etc.
If you’ve ever wondered why term life insurance (which only provides death benefits) is so much less costly than “whole life” policies (which combines life insurance with the benefits of investment), the answer is that more than 95% of term policies lapse (because they are purchased to fund children through college, provide for a spouse, or to cover mortgage payments if a breadwinner dies). Once a term policy lapses (either because the children complete or drop out of college, the mortgage is paid in full, or the insured would rather spent the premium on more immediate benefits) funds reserved for future claims instantly represent profits to the insurer.
Insurers assumed, incorrectly, that, just as holders of term life insurance policies, many would allow LTCI policies to lapse. Few did. In fact, of course, as one gets older, maintaining a LTCI becomes increasingly valuable; to replace an existing policy one would have to pay higher premiums based on age. The result: insurers learned the hard way that owners of LTCI were far less likely to allow their policies to lapse than companies’ estimates had suggested. Insurers also bet on the fact that premiums could be invested in real estate or other ventures, which we know declined after 2007.
These miscalculations led a number of the major insurers, in the past decade, to exit the LTCI business altogether. Indeed, about 10 years ago, some 25 insurers were approved by the Massachusetts Commissioner of Insurance to sell individual LTCI. That number has dwindled to fewer than 15. John Hancock’s defection may lead others to abandon the product.
A further problem is that, while most policies sold to individuals deny companies the right to increase premiums unless they apply across-the-board rather than selectively, and then only when state Commissioners of Insurance approve rate increases. A number of our clients have been notified of significant rate increases (or to maintain the same premium to reduce benefits). That’s happened particularly when a company sells its “book” of LTCI customers to an existing insurer because Commissioners are pressured to grant rate increases to successor companies that can show that the previous insurer sold out because existing policies lost money. Even with rate increases, well-established companies, like John Hancock, are leaving the business.
Our clients can benefit not only from keeping their old policies (because coverage even after a rate increase, is likely to cost less than purchasing a new policy because premiums are age-based, i.e. a 40 year old might pay less than half what a 60 year old would pay to acquire similar policies. And, worse, as underwriting has improved (from the companies’ perspective), the older one is when applying the more likely it is that he or she would be rejected on medical criteria.
We still recommend that clients entering their 50s or 60s seriously consider LTCI, if they can afford it, so that long-term care can remain within their reach. In some cases, we’ve even urged children to pay for their parents’ policies, to protect their own legacies. Moreover, Massachusetts and other states offer a number of inducements. For example, the cost of LTCI premiums can be added to other “medical” expenses as deductions on one’s income tax. More importantly, in Massachusetts and some other states, people who have maintained a LTCI that pays as little as $125/day in benefits can pass on their homes Medicaid-lien free.
LTCI provides both peace of mind and the preservation of assets. A long stay in a nursing home can wipe out many couples’ savings depriving a spouse or children of financial security. There is no need to purchase “lifetime coverage” since, under present law, assets can be safely transferred as long as a person can count on insurance and personal savings to pay for as much as five years of nursing home care.
Finally, clients interested in adding to their life insurance may want to consider “hybrid” policies with riders enabling them to tap the death benefits of such policies should they need money to pay for long-term care. John Hancock’s departure from LTCI should not deter you from exploring ways to insure against such costs.
