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SHERIDAN — Sheridan resident and retiree Gene Davis thought he had planned well.
In 2004, he purchased a long-term care policy for himself and his wife from Prudential Financial Inc. He diligently paid the premiums for a “cadillac policy” over the last decade totaling more than $47,000.
But in the last few years, premium increases for Davis and many like him have increased nearly 80 percent. In addition, Prudential has informed Davis coverage rates of the policy are being curtailed.
“What’s happened is when they corralled all these people in the early 2000s as a class, I don’t think they were very careful with how they underwrited these policies,” Davis said. “If you could fog a mirror, they would write you a policy without fully understanding how long people are living now.”
This month, his policy premium jumped 56 percent, from $136 to $213 per month. At the same time, the company is proposing to cut the policy’s daily payout rate from $150 per day to $100 per day and eliminate possible claim durations from a lifetime limit to three or five years.
Both options significantly reduce financial risk for the insurer while proving only a modest break in premium for the insured. For example, the daily rate cut would save the company more than $29,000 per year if a claim were made, but Davis’ premium goes down by $1,200.
Davis said his frustration is compounded by the looming fact that his policy establishes an open-ended contract, meaning there’s not much of a cap on his potential premiums. While the state loosely oversees insurance rates, Wyoming companies are more deregulated than other states.
Davis said he had the chance to purchase a premium-stabilizing rider 10 years ago, when he first entered into the policy.
“At time we bought it, the agent said they hardly ever get rate increases, so we don’t need that option,” Davis said, recalling that he had declined the offer and now regrets the decision.
“My wife and I, for Prudential, are a huge outstanding liability,” Davis said.
He continued by saying that to the company, they represent a $7,500 per month potential payout if they need long-term care. “They want out of it. They’re offering people all these chump deals to get out of the policy.”
Far reaching impacts
One of the lesser-known consequences of the Great Recession of 2009 is that the long-term care insurance market was completely destabilized. The retiree population has seen skyrocketing premiums and coverage cutbacks for policies designed to pay for assisted living or nursing home care.
Long-term care insurance policies were created to mitigate the financial risk of an individual who can no longer live at home because of limitations associated with mental or physical disabilities. Medicare and traditional health insurance policies generally do not cover extended assisted living or nursing home care, which can range between $130 to nearly $300 per day in Sheridan. That means those who enter these facilities rely on insurance or their personal finances to foot the bill. Otherwise, the tab is passed to Medicaid, a federal program one must qualify for by being poor.
The target population for long-term care insurance was retirees who have accumulated at least a small nest egg they hope to keep within their families. By offsetting long-term living care costs via insurance, the family’s estate is retained to be used by a healthier spouse or to pass on to younger generations in the form of an inheritance.
A yearlong stint for a single person in a long-term care facility can easily exceed $80,000 per year. Many people who entered their retirement with a reasonably stable financial base find their savings are quickly spent down after they enter an assisted living or long-term care facility. To many, the reality of needing assisted living and the costs are a surprise.
Those without the insurance who are looking to bypass the seemingly inevitable option of delivering their hard-earned humble fortune to a retirement home are limited regarding how much money can be gifted to family each year. People found to have diverted a large inheritance before entering assisted living may be putting their family at risk of having the money recouped.
End of sales
Future consumers likely won’t be caught in a situation similar to Davis’. Prudential spokesperson Janet Gillespie has indicated the company no longer issues LTC policies, though existing ones are still being serviced.
Other national companies, including MetLife and Unum Group, have also discontinued selling long-term care insurance.
While it appears the insurance industry is moving in the direction of not making the mistakes again, customers stuck in an unviable long-term care agreements are in policy purgatory.
“They can keep cranking premiums as long as they want as long as they can go to the state insurance commission and say, ‘Our claims exceed our income,’” Davis said. “They’re pushing all their ignorant risks they took themselves back on the premium payer.”
Wyoming State Insurance Commissioner Tom Hirsig said Davis has the industry pegged.
“It’s not just Prudential doing this,” Hirsig said. “It’s the whole long-term care industry. They have increased their rates dramatically.”
Hirsig said the product of long-term care insurance started as long as 18 years ago, and at that time, the world was a much different place.
“The assumptions they made didn’t hold true,” Hirsig said, indicating the bursted housing bubble and subsequent recession of the late 2000s made for lower stock market yields for all businesses within the financial sector.
“The interest rates they projected weren’t there, and the other part is they expected a higher amount of people to drop their policies,” Hirsig said.
He also said that another compounding factor to the long-term care insurance crisis is that the price of skilled living care has grown beyond predictions.
“It’s hard, when you develop a new product with as much risk as this, to predict how many people are going to hang on to it,” Hirsig said.
He suggested that consumers who want to avoid the premium hike pitfalls of long-term care insurance avoid the policies altogether, and instead look at long-term care riders on established life insurance policies.
People already in a contract, like Davis, have a more restricted, tougher choice: either pay the premiums or drop the policy and lose a 10-year investment.
“My policy states they have the right to do this, and that’s the problem,” Davis said. “As long as they can go to the commission and say their judgement was poor and they didn’t really understand the risk and their claims are outrunning their premiums, they’ll be granted increases infinitum. It leaves people like us with very little choice.”
Davis said he plans to stick with his policy, even though he has bitter feelings about what he’s paying and what’s being offered in return.
“We either walk the contract or throw away 50-grand,” he said. “I’m not letting them out of this deal.”
Business as usual
Hirsig sees the situation as par for the course of doing insurance business.
“Why would this be any different from buying auto insurance and never having an accident? Thank God they never had to use it,” Hirsig said, indicating it’s flawed thinking to expect money back from an insurance policy if a claim-inducing event has not occurred. “If they gave everyone their money back, they would be out of business and then the people wouldn’t have anything.”
But, Davis isn’t satisfied with the easy out for his long-term care policy provider.
“One of the problems is it dumps the risks back on society,” he said, indicating the situation has made him aware of the limitations of corporate liability to consumers. “I think the only way to do this is to get enough people to understand what’s going on so we have some recourse.”
Some financial entities in Sheridan are working to educate insurance consumers about the crisis in long-term care insurance and the best ways to navigate the market. Shelley Born, a financial consultant at Thrivent Financial, is hosting a seminar April 30 at 6:30 p.m. at Emeritus Senior Living. The class is free and open to the public.
“One of the things I want people to know and to hear is insurance can be an important part of a plan, but it needs to be designed properly,” Born said. “I don’t want people to think insurance is bad because of this.”
“This is something a lot of people don’t talk about, but if people get more educated about their options they can get appropriate insurance,” she added.
Editor’s note: This story was amended at 12:07 p.m. April 16 to correctly attribute statements made by Prudential spokesperson Janet Gillespie.