The Savings Game: Older long-term care insurance policies lack premium protection

Consumers who purchased long-term care insurance policies several years ago have discovered that they did not have any protection from increases in premiums. State insurance departments in charge of regulating the industry have by and large allowed insurance companies to increase premiums for existing policies.

In many cases, consumers' premiums have more than doubled, and such trends seem likely to continue into the future. And when their increased premiums become unbearable, most consumers who purchased policies years ago only have access to poor alternatives.

At the heart of this problem is that insurance companies largely mispriced these policies. They underestimated the future costs associated with nursing homes and assisted-living facilities. In addition, they made unrealistic assumptions regarding future interest rates, which in many years were much lower than they anticipated, which lowered the income they received from their investments.

Rather than admit their mistakes in pricing and suffer losses, the insurance companies have pleaded their cases with the state regulators, who all too often have been inclined to protect the insurance companies rather than the consumers who purchased the long-term care policies. The insurance companies can only increase premiums with the approval of the state insurance department where the insurance company is registered.

I am not aware of any long-term care policies issued several years ago that protected the consumer and did not allow premium increases.

What options do long-term care insurance policyholders have? In general, after a state insurance department approves a premium increase, the insurance company offers the consumer three choices.

First, the consumer can stop paying premiums and cancel the policy; in that case, the consumer no longer has coverage and does not receive any refund for premiums already paid.

A second option is to continue to pay the same premium, but the coverage is reduced in proportion to the proposed increase in premium. So, assuming the approved new premium is increased 50%, if the consumer agrees to maintain the policy at the preexisting premium, he or she has lost approximately 33% of the coverage.

The third option is accepting the full increase in premium. Unfortunately, in most cases, to my knowledge, there is no guarantee that there cannot be additional premium increases.

Long-term care policyholders have initiated many class-action lawsuits, but to my knowledge none has succeeded in forcing the insurance companies to continue the same coverage with the initial premiums.

In a recent article in Barron's, Elizabeth O'Brien cited the example of a New York couple who purchased a policy issued by Genworth Long Term Care Insurance Co., which is still actively selling long-term care policies. In this case, after 16 years, the couple spent more than $94,600 in premiums. Genworth has asked regulators to approve a 143% increase in premiums, which would increase the annual cost to $25,800. Genworth would allow the couple to continue to pay the same premium, but their coverage would be decreased substantially, and their coverage would not cover even one year in a long-term facility.

Consumers could purchase new long-term care policies with current pricing, but insurance companies will only guarantee the coverage for a limited time frame, such as six years. If you are interested in comparison pricing for new policies, you can go to the American Association for Long-term Care Insurance (www.aaltci.org).

There is also a "hybrid" insurance option. Several insurance companies now offer policies that combine permanent life insurance with some long-term care coverage. If long-term care benefits are not paid during the life of the insured party, approximately the premiums paid for long-term care coverage will be returned to the beneficiaries. You can obtain more information regarding hybrid policies, as well as traditional long-term care policies from Jack Lenenberg, who specializes in long-term care policies (longtermcareinsurancepartner.com).