Tom Flannery, 72, of Bedford, bought an insurance policy 17 years ago to cover the cost of care in case he or his wife (or both) became unable to care for themselves due to declining health.
It was called long-term-care insurance, a fairly new product in the insurance industry at the time, and it promised to pay for assisted living, nursing home, or at-home care.
But the peace of mind the Flannerys once enjoyed has been dashed by news that their annual premium may go up to $19,000 — almost four times what they paid when they bought the policy in 2004.
The long-term-care insurance industry as a whole has suffered gigantic losses due to pricing decisions made decades ago that proved to be far off the mark: Insurers underestimated how long policyholders would live and need nursing home care, while overestimating how many would drop plans before collecting benefits (few did).
Insurers are now raising rates to account for their past miscalculations. And in recent years, some of biggest names in the industry have gotten out of the business and no longer write individual long-term-care policies.
About half of Americans turning 65 will require long-term-care services. Most will need assistance for less than two years, but about one in seven will need it for more than five years. The average cost of care in a nursing home for a year in Massachusetts exceeds $125,000. The average cost of assisted living in Massachusetts is more than $65,000 a year.
The Flannerys are retired and on fixed incomes and say they cannot afford the higher premium.
What can they, and policyholders like them, do? And what other options are there for care down the road?
- What exactly is long-term-care insurance?
- Developed in the mid 1970s, it became a popular insurance product in the 1990s and early 2000s, when it was heavily marketed to aging baby boomers heading toward retirement. It provided policyholders a guarantee of quality care without forcing them to sell their houses or other assets to pay for it.
- How does it work?
- The Flannerys, when they were both 55, wanted a robust policy, one that would give them up to eight years of coverage between them. They bought their policy from Genworth, which helped pioneer long-term-care insurance (and was once owned by General Electric). Based on its actuarial calculations, Genworth in 2004 priced the policy at a little less than $5,000 year.
- Did Genworth guarantee the annual premium would remain fixed?
- No. What it did guarantee is that the Flannerys could renew it annually without fear of being dropped because of deteriorating health. Genworth also guaranteed there would be no automatic premium increases as they got older (as there are for many life insurance policies). But it did reserve the right to increase premiums.
- Are there limitations on the policy?
- Yes, most policies have a deductible of sorts — called the “elimination period.” For the Flannerys, it is 100 days. That means their policy won’t kick in until after they have paid out of pocket for the first 100 days of their care. After that, the policy pays a maximum of $250 per day.
The Flannerys’ policy includes an inflation protector, an expensive option that accounts for almost half of their premium. Since 2004 it has more than doubled their maximum per-day coverage to $545 and raised their lifetime benefit to $1.6 million.
- So, the Flannerys have invested about $80,000 in cumulative premiums for a lifetime benefit of $1.6 million. That sounds pretty good.
- Remember, it’s use it or lose it. No amount of their paid premiums or value of their coverage goes to their heirs when they die. But yes, it’s a pretty good deal.
As it turns out, too good of a deal.
In reply to me, Genworth called its long-term-care insurance business “extremely unprofitable,” noting it has lost $2 billion in the last five years alone.
“We are not seeking to recover those losses; we are just seeking to get closer to break-even going forward,” the company said of its premium hikes.
- How much has the Flannerys’ annual premium increased since 2004?
- For more than 15 years, Genworth never increased the premium on the Flannerys’ policy, which was in keeping with one of the main selling points touted by Genworth in the early 2000s. “We’re proud to tell you . . . we have not raised our premiums” in more than 25 years, one pamphlet from that period says. (Tom Flannery said it made an impression on him as he was shopping for a policy.)
Genworth is now implementing a previously state-approved 40 percent premium increase which, when completed next year, will hike the Flannerys’ premium to $6,900.
- Is that the only increase they can expect?
- No. The Flannerys were staggered by a letter they received two weeks ago from Genworth saying the company expects to ask state regulators to approve a 275 percent increase over the next three to six years.
In the letter, Genworth also cautioned that, based on its projections, an even larger rate increase was possible and “actuarially justified.”
- What would a 275 percent increase mean to the Flannerys’ budget?
- It would add $12,100 in annual premium costs, eating up a big chunk of their income.
- Whose approval is needed for rate increases?
- The state Division of Insurance reviews requests for rate increases with an eye toward keeping premiums tamped down for the benefit of consumers, but not so low that insurance companies lose money and pull out of the state.
Genworth hinted at the case it may make to the division in its recent letter to the Flannerys and other policyholders when it disclosed that its rating for financial strength had been recently downgraded by a credit rating agency and its ability to meet its ongoing insurance obligations described as “marginal.”
- What alternatives to paying the increase are being offered?
- The letter from Genworth, which has almost 28,000 long-term-care policies in Massachusetts, lays out four options for the Flannerys to reduce their future premium by reducing coverage, including two based on how much they have paid in premiums over the years. All of them represent substantial decreases in the value of their coverage.
- Are there alternatives to long-term-care insurance?
- You can self-insure by putting money aside in an investment fund. One new product is called “hybrid life insurance,” which you can purchase with a one-time lump-sum premium or over a number of years. It pays for long-term care (with certain limitations, of course). But if long-term care is not needed, a cash benefit is paid to a beneficiary upon death of the insured person, as with a traditional life insurance policy.