Davis resident John Rundin is outraged that his insurer wants to raise the premium for his long-term care coverage by 60 percent, and he’s convinced that this sharp increase, paired with the company’s admonition about more hikes in future, is a harbinger that long-term care insurance is on its last legs.
“The letter was quite clear in saying, ‘Oh, this is only our first bite at the apple. We tried to get more, but the state prohibited us from getting more,’” Rundin said. “I’m guessing that someone knew that this was all going to blow up. They knew this was going to be the result. I feel deeply ripped off. I was misled and was sold an exploding cigar.”
Consumers around the country have seen steep increases in their premiums on long-term care policies. In a 2016 survey, the consulting firm Milliman found that regulators approved rate increases of 40 percent or more on about half the requests that insurers made. A little more than a quarter of their requests secured premium increases of 20 to 39 percent. The Milliman survey’s 26 respondents had annual premiums that represented 73 percent of the long-term care industry.
Transamerica, the company that sold Rundin his policy, emailed a statement to The Sacramento Bee, saying that its leaders are committed to providing long-term care insurance products that are sustainable. They said the company works with regulators and policymakers to ensure there will be enough funds to make anticipated payouts.
When the company notifies customers of premium increases, Transamerica spokeswoman Julie Quinlan said, it offers them several options to help keep their premium within their insurance budget. Those options include reducing or dropping some benefits to lower the price.
The California Department of Insurance determines whether insurers can adjust premiums. Department spokeswoman Allison Castro said regulators conduct a rigorous actuarial review of all rate-change proposals that long-term care insurance carriers submit.
Many state regulations govern whether a carrier is entitled to raise rates, she said. For instance, an insurer won’t be allowed to raise its rates simply to increase its profit margins.
“An insurer must justify its request by identifying which of its initial pricing assumptions were inaccurate, and by demonstrating how they developed the new premium based on revised projections,” Castro said. “An insurer must submit an annual review to (the department) for three years after an approved rate increase, and must reduce the premium rate if the data show that the approved rate increase was excessive.”
So, why are big increases being allowed now?
Castro explained that, when long-term care insurance was introduced in the 1990s, insurers looked at consumer behavior with other insurance products when making projections on the number of policyholders who would make long-term care claims and when predicting the cost of claims.
“It turns out that those assumptions were overly optimistic,” Castro said, “and most companies’ long-term care rates were too low to keep up with the cost of claims that were made years later. People are living longer and submitting more claims – and more expensive claims – than expected. The combination of all these factors resulted in insurers needing more money to be able to pay future claims.”
The vast majority of long-term care insurance rate increases approved in California have been between 10 percent and 40 percent, Castro said.
Rundin, however, got a much heftier 60 percent increase on a policy he bought in 2012. Transamerica told him he would have to pay $5,879.85 in annual premiums, up from $3,674.85, to keep all the benefits he initially signed up to get.
According to a copy of the policy Rundin shared with The Bee, his benefits include a maximum payment of $300 a day for a nursing facility, homemaker services and personal care, respite care and hospice, and his care would be covered up to a maximum payout of $438,000.
Rundin also opted to purchase inflation protection as part of that policy: About $2,200 of his annual $3,674.85 premium paid for that. For that extra payment, Transamerica agreed to increase Rundin’s benefit payouts by 5 percent annually.
That option might well be one of the reasons why Rundin is seeing such a steep increase in his premiums, said long-term care insurance expert Jesse Slome. He said that many policies today carry an optional inflation clause promising 2 percent or 3 percent growth because a prolonged, low-interest-rate environment has made it difficult for insurers to generate the kinds of returns to pay 5 percent a year.
Rundin said he doesn’t understand why insurers are allowed to charge him more for something they should have seen when they sold him the policy. Interest rates were low in 2012 when he bought his coverage, he said.
“All the insurance companies do is calculate risk,” Rundin said. “That is their primary job. If they can’t be doing that, they shouldn’t be selling insurance.”
Not everything that affects future costs can be anticipated, said Cathryn Donaldson, the communications director with America’s Health Insurance Plans, an industry trade group. When calculating long-term care rates, she said, actuaries take into account factors such as the age of the insured, morbidity rates, the coverage choices, the types of provider options chosen by the policyholder, when the insurer will begin paying benefits, the benefit costs, inflation protection and the policy’s maximum payout.
As people live longer, the number of individuals with conditions such as dementia, Alzheimer’s, diabetes and obesity has exploded, and their care is more expensive. New types of care such as assisted living facilities, memory care and independent care have emerged.
“Few could have foreseen these changes and how they would lead to insurers taking on unanticipated levels of risk,” she said. “However, it is for this reason that long-term care insurance originated, and is regulated, as a product where premiums can be adjusted over time, if needed.”
Rundin said that, when he bought the policy, he thought he was doing the responsible thing. He knew Medicare would not cover his care indefinitely, and that he would have to burn through his own assets before Medi-Cal kicked in, he said. The long-term care policy seemed like a way to stretch his dollars.
Now, however, he said he feels snookered by a rigged industry because he may well have to cancel the policy because of rapidly rising premiums.
“This whole notion that private-insurance entities are going to be our saviors is just nonsense,” he said. “There are a lot of baby boomers about to retire and are facing long-term care issues. … I’m convinced that the whole notion of private insurance at this point is flawed.”
His skepticism, he said, is fueled by Transamerica’s answer to one of the frequently asked questions included in a notice that accompanied his premium letter. In part, the answer read: “We want you to understand it is very likely that your premiums will increase again and that the future increase in premiums could be higher than this premium increase.”
Rundin said he felt like the admonition was Transamerica’s way of trying to get him to cancel the policy. That way, he said, the company would have less liability and could keep whatever return it was making on investing his premiums. Like many long-term care policies, Rundin’s contract contains a provision that allows him to put any premiums he already paid toward covering a qualified long-term care event in future.
Insurers projected that more policyholders would cancel coverage than have actually done so, according to industry experts and regulators. Most insurers predicted that 4-5 percent of policyholders would drop their coverage each year, said Slome, executive director of the American Association for Long-Term Care Insurance.
That was considered conservative because consumers generally canceled other types of insurance policies at much higher rates, he said, but it turned out that long-term care policyholders hung onto their coverage, averaging voluntary cancellation rates of 1 percent or less.
“If the insurance companies are correct that their big error was to underestimate the number of people who would drop coverage, this strategy (of steep rate increases) makes perfect sense on their part,” Rundin said. “They will get tons of people to drop coverage with a letter like this. “
Although Rundin has concerns about the stability of the long-term care insurance industry, Donaldson said that more people than anticipated are successfully using policies. She pointed to a survey by industry consultant LifePlans Inc. in which nearly 90 percent of respondents expressed satisfaction with their coverage and experience. The survey posed questions to 1,291 individuals who were receiving home care (45 percent); in assisted living (31 percent); in nursing homes (17 percent); or in other settings (about 7 percent).
On average, survey respondents had been receiving benefits for two years, and the average value of total claims paid at the time the insurance companies pulled their data was $118,986 per person. When LifePlans released these data in September 2016, it said that more than 7 million people had long-term care insurance, and more than a quarter-million of them were receiving benefits.
In addition, she said, other studies have found that people who have long-term care insurance receive, on average, 35 percent more hours of care than those without coverage, and they cut their out-of-pocket costs by $3,000 to $5,000 a month compared with those without coverage.
Rundin’s lament now is that, if he goes ahead and forfeits his coverage but then never has a qualifying long-term care event, he will never get back the $25,000 or so he’s paid in premiums: “They essentially would run away with $25,000 of mine, and there’s nothing I could do about it.”
Slome disagreed. He said Rundin has gotten something. He had the peace of mind for the last seven years that if he needed long-term care because of an illness or accident, he would have had assistance from Transamerica.
Now 66 years old, Slome said he has two childhood friends whose families are benefiting from long-term care policies: “You may not be happy (with premium increases), but you’re actually very lucky that you have this coverage because … the policies pay benefits.”
Rundin said his sister-in-law in San Diego is facing a similar increase after 23 years of paying premiums on her policy, and she’s also contemplating what to do. Rundin said he’s leaning toward letting the policy lapse.
“I save for months in advance to have this nearly $4,000 payment, which is due in February, and here on Dec. 31, I get hit with a last-minute notice that I have to come up with another $2,000,” he said. “We could work that out, but I see this as a sign of them trying to get me to drop the coverage. … I don’t want to give these people one more cent of my money.”
Chuck Piacentini, associate general counsel of the American Council of Life Insurers, said companies would prefer not to have to seek rate increases because they’re aware of the hardships many policyholders face as a result. Carriers have an obligation, though, to seek rate increases to ensure they can deliver on promises to all policyholders, he said.
What to do if you’re faced with an increase
Jesse Slome, executive director of the American Association for Long-Term Care Insurance, said insurers will give consumers a number of options when they send them notices about adjustments in premium prices. Here are some of the choices that could reduce premium payments:
- Lower the maximum lifetime benefits.
- Lower the maximum daily benefits.
- Increase the amount of time between the onset of your qualifying long-term care event and the date on which your policy starts paying out.
- If you chose the inflation protection, also known as a benefit increase option, lower the rate of increase.
- Eliminate the inflation protection.
- Let the policy lapse. If you choose to do this, many plans will still allow you to collect the value of premiums you paid if you have a qualifying long-term care event.
- Discuss all options with your agent or insurer as soon as possible to ensure you have time to weigh your options.
- Learn more about long-term care insurance at www.rureadyca.org.