After trying without success to collect what I think is about $10,000 still owed on my late mother's long-term care policy, I finally wrote to the chair of the board of the company that provided it. My question concerns the whereabouts of benefit checks that were processed, but never cashed back in early 2011. All I have asked for, repeatedly since March of this year, have been photocopies of those checks to see where they were deposited -- if cashed at all.
Meanwhile, the same company wasted no time sending me a letter noting that mom had died on Feb. 4 and that they had paid for the entire month. After prorating the four days, they asked that I return $2,500.
I had written a column back in 2007 questioning the wisdom of long-term care insurance and pointing out the alternatives. The basic rule of insurance is to never insure something you can afford to pay for yourself. Why trade dollars with an insurance company and pay for their profits, administration and commissions?
As an alternative, taking, say, the $2,000-per-year LTC premium for someone age 50 and investing it yourself and earning 8 percent a year in a balanced mutual fund could accumulate to $250,000 by the time someone was in their 80s and in need of long-term care. In the meantime, they have 100 percent assurance that at least some money will be available.
The concept of long-term care insurance looked good on paper. The idea of people paying premiums and receiving, in my mom's case, as much as $100,000 over three years if she required long-term care for that long was appealing. She actually paid about $30,000 in premiums over the years and received $36,000 in benefits, so she beat the system. If you had known my mother, you wouldn't be surprised to hear this. The fact that some people will buy policies, pay premiums and then die suddenly is what creates the pool of money for those who later receive their maximum LTC benefit. That's how insurance, or "pooled risk," works.
The calculation of what to charge in premiums for a specific LTC benefit was based on several factors. The starting point was the statistical dollar cost of long-term care coupled with when it could be expected to start and end.
Next was the expected rate of return on the money collected in premiums until such time as it would have to be paid out in benefits.
Then, there was the cynical expectation that 5 percent of all buyers of the product, while still alive, would give up and stop paying premiums for any number of reasons -- generating pure profit for the company. In fact, only 1 percent has bailed out.
Finally, the definition of long-term care had to remain constant -- it originally included only nursing home care, but now it includes home care and assisted living, which should have been the case in the first place.
Few of the initial expectations, then, have turned out the way they should have, and the result has been a rise in premiums for LTC consumers because of the following problems: Interest earnings on premium dollars are a fraction of what they were just five years ago. People qualify for LTC based on more liberal definitions of what that term covers. The 5 percent who were expected to bail out didn't cooperate.
As a result of this perfect storm, many insurance companies no longer offer the product, but those that still do are increasing premium costs dramatically -- from 40 to 90 percent over what had been charged at the inception of the policies.
State insurance commissions have been rubber-stamping rate increases, and this is where I would place the blame. If we agree that a flawed product is one whose cost/premium rises between inception and when the benefit is expected to be paid, then why should the consumer bear the brunt of that increase? A deal is a deal. Insurance companies may charge new customers a higher rate, but why should they be able to charge past customers for what has turned out to be a big mistake? Some of those people are least able to afford it and will be forced to bail out when they need the coverage the most. Where are the state regulators who have the power to protect the 8 million LTC consumers who are now stuck with this tar baby of insurance products?
My struggle with the company that provided my mother's policy is probably just symptomatic of their cash-flow problems. But these insurance companies have plenty of money. It's time for those still in the LTC business to reinvent their business model. In the meantime, they can use their excessive mutual fund profits to subsidize those victims of their failed insurance experiment. As for my case, it's time for the company to "show me the money!"