A Surprise in the Fine Print
Charles F. Hinckley, Jr., thought he was doing the right thing in 1995 when, after months of careful study, he bought long-term care insurance for himself and his wife, Nancy.
The Hinckleys were looking for a way to make sure their children wouldn’t have to worry about how to provide them with nursing home or other custodial care — should they ever need it. Long-term care insurance seemed to fit the bill.
“We don’t want to lose our home and lose everything, because we want to leave something for the kids,” Hinckley says.
Things went fine for eight years. Then, last August, the Hinckleys were notified that the annual premiums on the two policies were suddenly increasing from $3,245 to $4,862 — a 50 percent hike.
At first the Hinckleys, who live in Shaker Heights, Ohio, were in disbelief. They remember the insurance agent who sold them the CNA policies, as well as a lawyer they consulted at the time, telling them that the premiums “can never go up.”
No one, apparently, had noticed a key provision buried in the fine print: While CNA promised purchasers that premiums could not be increased because of their age or individual claims history, it reserved the right to ask state insurance commissions for across-the-board increases based on total claims.
“It really upset me,” Hinckley says. “I was ready to drop it, but my wife said, ‘We can’t afford not to keep it.’ I don’t see how anybody on a fixed income could handle anything like this.”
Up, up and away?
The number of Americans buying long-term care insurance has grown dramatically in the past decade. More than 9 million policies have been sold over the years, and roughly three-quarters of them remain in force. (AARP offers two long-term care insurance plans underwritten by the Metropolitan Life Insurance Company.)
But many experts say that CNA and other companies underpriced the long-term care insurance they sold in the 1990s, and that policyholders like the Hinckleys are now paying for the companies’ miscalculations.
“They grossly underestimated their ability to get pools of policyholders large enough to spread the risks,” says Boston-based insurance broker Benjamin Lipson, the author of J.K. Lasser’s Choosing the Right Long-Term Care Insurance. “And they grossly underestimated the fact that nursing home costs have been rising so rapidly.”
Last year CNA asked state insurance commissions for premium increases of up to 50 percent on some older policies. An investigation by Consumer Reports, published in November 2003, found that 25 states approved CNA’s requests, with 18 granting the full 50 percent.
CNA did not respond to requests for information or interviews.
Most of the other insurers that write long-term care policies also asked for-and got-big premium increases last year. “Only three of the top 10 companies did not have fairly significant rate increases,” says Kansas Commissioner of Insurance Sandy Praeger. (MetLife did not request premium increases.)
A recent study by AARP’s Public Policy Institute cautioned that “unjustified rate increases” for long-term care insurance may be occurring in all states. “Only a small number of states exercise their regulatory authority to disapprove premium increases,” the study found.
Ohio regulators approved all five of CNA’s requests last year for premium increases on its long-term care policies — including the one that upped the Hinckleys’ bill.
Dennis Stapleton, an assistant director of the Ohio Department of Insurance, says few people have complained to him about the increases. “If you’re the one who got the 50 percent increase, absolutely it’s serious,” he says, “but as far as a widespread problem, I don’t see that at all.”
But others do — including Lipson. “It’s like a Ponzi game,” he says. “They’re using the new premiums, particularly from younger people, to pay for the claims in the older policies.”
Tough choices
Those hit with premium increases face a difficult set of choices: maintain the policy with its higher premiums, hoping that further increases aren’t around the corner; continue paying the same premiums by accepting scaled-back coverage; or walk away from the policy and all the money that’s been paid into it.
The Consumer Reports article said many policies “are packed with catches that can keep you from collecting” and concluded that “for most people, long-term care insurance is too risky and too expensive.”
Just ask Frank Rose, 97, of Grand Forks, N.D., who bought a long-term care policy in 1982 with a guaranteed renewable “total premium” of $418 a year. The premium on the policy — now held by Texas-based Standard Life — has since risen to more than $1,900 a year.
Rose has filed a class-action lawsuit against Standard Life, alleging that the company did not “disclose the known risk of premium increases.”
Standard Life argues that Rose waived his fraud claims by continuing to pay the premiums. AARP, siding with Rose, has filed a friend of the court brief in the case.
This article originally appeared in the April 2004 issue of the AARP Bulletin.
Bill Hogan